Table of Contents




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________ 
FORM 10-Q

(Mark One)
ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,September 30, 2019
OR
oTRANSITION 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
ivrmainimageinblacka07.jpg
Invesco Mortgage Capital Inc.
(Exact Name of Registrant as Specified in Its Charter)

Maryland 26-2749336
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
  
1555 Peachtree Street, N.E., Suite 1800,

Atlanta,Georgia 30309
(Address of Principal Executive Offices) (Zip Code)
(404) (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 Class Trading Symbol Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share IVR New York Stock Exchange
7.75% Series A Cumulative Redeemable Preferred Stock IVRpA New York Stock Exchange
7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock IVRpB New York Stock Exchange
7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock IVRpC New 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.    Yesý    No  o
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).    Yesý    No  o
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 Acceleratedaccelerated filer ý   Accelerated filer o
Non-Accelerated filer o   Smaller reporting company o
     Emerging growth company o
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o    No  ý
As of April 30,October 31, 2019, there were 128,588,493142,802,293 outstanding shares of common stock of Invesco Mortgage Capital Inc.



Table of Contents




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 1.
Item 1A.
Item 2.
Item 3.
Item 4.
   
Item 5.
   
Item 6.



Table of Contents




PART I
ITEM 1.FINANCIAL STATEMENTS
INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
  
As of
 $ in thousands except share amountsSeptember 30, 2019 December 31, 2018
ASSETS 
Mortgage-backed and credit risk transfer securities, at fair value (including pledged securities of $21,866,617 and $17,082,825, respectively)23,599,499
 17,396,642
Cash and cash equivalents125,888
 135,617
Restricted cash80,086
 
Due from counterparties10,284
 13,500
Investment related receivable72,959
 66,598
Derivative assets, at fair value4,127
 15,089
Other assets168,480
 186,059
Total assets24,061,323
 17,813,505
LIABILITIES AND EQUITY   
Liabilities:   
Repurchase agreements18,072,032
 13,602,484
Secured loans1,650,000
 1,650,000
Derivative liabilities, at fair value46,381
 23,390
Dividends and distributions payable66,974
 49,578
Investment related payable1,271,718
 132,096
Accrued interest payable29,831
 37,620
Collateral held payable1,096
 18,083
Accounts payable and accrued expenses2,477
 1,694
Due to affiliate9,782
 11,863
Total liabilities21,150,291
 15,526,808
Commitments and contingencies (See Note 14):

 

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; 142,802,293 and 111,584,996 shares issued and outstanding, respectively1,427
 1,115
Additional paid in capital2,869,650
 2,383,532
Accumulated other comprehensive income325,850
 220,813
Retained earnings (distributions in excess of earnings)(849,219) (882,087)
Total stockholders’ equity2,911,032
 2,286,697
Total liabilities and stockholders' equity24,061,323
 17,813,505
  
As of
 $ in thousands except share amountsMarch 31, 2019 December 31, 2018
ASSETS 
Mortgage-backed and credit risk transfer securities, at fair value (including pledged securities of $20,544,317 and $17,082,825, respectively)21,127,598
 17,396,642
Cash and cash equivalents78,482
 135,617
Restricted cash5,025
 
Due from counterparties13,000
 13,500
Investment related receivable70,789
 66,598
Derivative assets, at fair value26,580
 15,089
Other assets177,913
 186,059
Total assets21,499,387
 17,813,505
LIABILITIES AND EQUITY   
Liabilities:   
Repurchase agreements16,824,387
 13,602,484
Secured loans1,650,000
 1,650,000
Derivative liabilities, at fair value8,463
 23,390
Dividends and distributions payable60,433
 49,578
Investment related payable222,500
 132,096
Accrued interest payable47,100
 37,620
Collateral held payable2,273
 18,083
Accounts payable and accrued expenses2,384
 1,694
Due to affiliate10,133
 11,863
Total liabilities18,827,673
 15,526,808
Commitments and contingencies (See Note 14):
 
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; 128,267,497 and 111,584,996 shares issued and outstanding, respectively1,282
 1,115
Additional paid in capital2,642,050
 2,383,532
Accumulated other comprehensive income277,182
 220,813
Retained earnings (distributions in excess of earnings)(812,124) (882,087)
Total stockholders’ equity2,671,714
 2,286,697
Total liabilities and stockholders' equity21,499,387
 17,813,505

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 amounts2019 2018 2019 2018
Interest Income       
Mortgage-backed and credit risk transfer securities194,938
 160,416
 581,167
 456,967
Commercial and other loans1,353
 1,672
 4,419
 9,945
Total interest income196,291
 162,088
 585,586
 466,912
Interest Expense       
Repurchase agreements112,851
 81,763
 332,704
 210,737
Secured loans10,413
 9,490
 32,815
 24,888
Exchangeable senior notes
 
 
 1,621
Total interest expense123,264
 91,253
 365,519
 237,246
Net interest income73,027
 70,835
 220,067
 229,666
Other Income (loss)       
Gain (loss) on investments, net202,413
 (207,910) 772,977
 (404,657)
Equity in earnings (losses) of unconsolidated ventures403
 1,084
 1,797
 2,778
Gain (loss) on derivative instruments, net(177,244) 87,672
 (723,437) 288,208
Realized and unrealized credit derivative income (loss), net1
 4,975
 5,447
 8,875
Net loss on extinguishment of debt
 
 
 (26)
Other investment income (loss), net1,005
 1,068
 3,041
 2,010
Total other income (loss)26,578
 (113,111) 59,825
 (102,812)
Expenses       
Management fee – related party8,740
 10,105
 27,644
 30,428
General and administrative1,862
 1,673
 6,119
 4,954
Total expenses10,602
 11,778
 33,763
 35,382
Net income (loss)89,003
 (54,054) 246,129
 91,472
Net income (loss) attributable to non-controlling interest
 (681) 
 1,153
Net income (loss) attributable to Invesco Mortgage Capital Inc.89,003
 (53,373) 246,129
 90,319
Dividends to preferred stockholders11,107
 11,107
 33,320
 33,320
Net income (loss) attributable to common stockholders77,896
 (64,480) 212,809
 56,999
Earnings (loss) per share:       
Net income (loss) attributable to common stockholders       
Basic0.57
 (0.58) 1.66
 0.51
Diluted0.57
 (0.58) 1.65
 0.51
 Three Months Ended March 31,
$ in thousands, except share amounts2019 2018
Interest Income
 
Mortgage-backed and credit risk transfer securities185,492
 149,003
Commercial and other loans1,582
 4,222
Total interest income187,074
 153,225
Interest Expense   
Repurchase agreements101,875
 59,585
Secured loans11,144
 6,927
Exchangeable senior notes
 1,621
Total interest expense113,019
 68,133
Net interest income74,055
 85,092
Other Income (loss)
 
Gain (loss) on investments, net268,382
 (160,370)
Equity in earnings (losses) of unconsolidated ventures692
 896
Gain (loss) on derivative instruments, net(201,460) 133,367
Realized and unrealized credit derivative income (loss), net7,884
 3,165
Net loss on extinguishment of debt
 (26)
Other investment income (loss), net1,029
 3,102
Total other income (loss)76,527
 (19,866)
Expenses   
Management fee – related party9,534
 10,221
General and administrative2,258
 1,756
Total expenses11,792
 11,977
Net income138,790
 53,249
Net income attributable to non-controlling interest
 671
Net income attributable to Invesco Mortgage Capital Inc.138,790
 52,578
Dividends to preferred stockholders11,107
 11,107
Net income attributable to common stockholders127,683
 41,471
Earnings per share:  

Net income attributable to common stockholders  
Basic1.05
 0.37
Diluted1.05
 0.37

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 March 31,Three Months Ended September 30, Nine Months Ended September 30,
$ in thousands2019 20182019 2018 2019 2018
Net income138,790
 53,249
Net income (loss)89,003
 (54,054) 246,129
 91,472
Other comprehensive income (loss):          
Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net52,349
 (132,317)14,482
 (40,554) 114,019
 (220,800)
Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net10,147
 9,237
(954) 134,280
 9,072
 153,406
Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense(5,851) (6,539)(5,981) (6,422) (17,748) (19,859)
Currency translation adjustments on investment in unconsolidated venture(276) 312
290
 (1,126) (306) (328)
Total other comprehensive income (loss)56,369
 (129,307)7,837
 86,178
 105,037
 (87,581)
Comprehensive income (loss)195,159
 (76,058)96,840
 32,124
 351,166
 3,891
Less: Comprehensive (income) loss attributable to non-controlling interest
 959

 (405) 
 (48)
Less: Dividends to preferred stockholders(11,107) (11,107)(11,107) (11,107) (33,320) (33,320)
Comprehensive income (loss) attributable to common stockholders184,052
 (86,206)85,733
 20,612
 317,846
 (29,477)


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 EQUITY
For the three months ended March 31, 2019; June 30, 2019 and 2018September 30, 2019
(Unaudited)
 
             
        
Additional
Paid in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
(Distributions
in excess of
earnings)
 Total
Stockholders’
Equity
        
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
   
Series A
Preferred Stock
 
Series B
Preferred Stock
 Series C
Preferred Stock
   
$ in thousands
except share amounts
 Common Stock  Common Stock 
Shares Amount Shares Amount Shares Amount Shares Amount 
Additional
Paid in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
(Distributions
in excess of
earnings)
Shares Amount Shares Amount Shares Amount Shares Amount 
Additional
Paid in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
(Distributions
in excess of
earnings)
Balance at December 31, 20185,600,000
 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
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

 
 
 
 
 
 
 
 

138,790
138,790
Other comprehensive income
 
 
 
 
 
 
 
 
56,369

56,369

 
 
 
 
 
 
 
 
56,369

56,369
Proceeds from issuance of common stock, net of offering costs
 
 
 
 
 
 16,672,000
 167
 258,386
 
 
 258,553

 
 
 
 
 
 16,672,000
 167
 258,386
 
 
 258,553
Stock awards
 
 
 
 
 
 10,501
 
 
 
 
 

 
 
 
 
 
 10,501
 
 
 
 
 
Common stock dividends
 
 
 
 
 
 
 
 
 
 (57,720) (57,720)
 
 
 
 
 
 
 
 
 
 (57,720) (57,720)
Preferred stock dividends
 
 
 
 
 
 
 
 
 
 (11,107) (11,107)
 
 
 
 
 
 
 
 
 
 (11,107) (11,107)
Amortization of equity-based compensation
 
 
 
 
 
 
 
 132
 
 
 132

 
 
 
 
 
 
 
 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
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, 20195,600,000
 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, 20195,600,000
 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.










 4 



Table of Contents




INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Continued)
For the three months ended March 31, 20192018; June 30, 2018 and September 30 2018
(Unaudited)
          Attributable to Common Stockholders                Attributable to Common Stockholders      
        
Additional
Paid in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
(Distributions
in excess of
earnings)
 Total
Stockholders’
Equity
 
Non-
Controlling
Interest
          
Additional
Paid in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
(Distributions
in excess of
earnings)
 Total
Stockholders’
Equity
 
Non-
Controlling
Interest
  
Series A
Preferred Stock
 
Series B
Preferred Stock
 Series C
Preferred Stock
    
Series A
Preferred Stock
 
Series B
Preferred Stock
 Series C
Preferred Stock
    
$ in thousands
except
share amounts
 Common Stock 
Non-
Controlling
Interest
  Common Stock 
Non-
Controlling
Interest
 
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount 
Balance at December 31, 20175,600,000
 135,356
 6,200,000
 149,860
 11,500,000
 278,108
 111,624,159
 1,116
 2,384,356
 261,029
 (579,334) 2,630,491
 26,387
 5,600,000
 135,356
 6,200,000
 149,860
 11,500,000
 278,108
 111,624,159
 1,116
 2,384,356
 261,029
 (579,334) 2,630,491
 26,387
 
Net income
 
 
 
 
 
 
 
 
 
 52,578
 52,578
 671
 

 
 
 
 
 
 
 
 
 
 52,578
 52,578
 671
 
Other comprehensive loss
 
 
 
 
 
 
 
 
 (127,677) 
 (127,677) (1,630) (129,307)
 
 
 
 
 
 
 
 
 (127,677) 
 (127,677) (1,630) (129,307)
Stock awards
 
 
 
 
 
 12,564
 
 
 
 
 
 
 

 
 
 
 
 
 12,564
 
 
 
 
 
 
 
Common stock dividends
 
 
 
 
 
 
 
 
 
 (46,887) (46,887) 
 (46,887)
 
 
 
 
 
 
 
 
 
 (46,887) (46,887) 
 (46,887)
Common unit dividends
 
 
 
 
 
 
 
 
 
 
 
 (599) (599)
 
 
 
 
 
 
 
 
 
 
 
 (599) (599)
Preferred stock dividends
 
 
 
 
 
 
 
 
 
 (11,107) (11,107) 
 (11,107)
 
 
 
 
 
 
 
 
 
 (11,107) (11,107) 
 (11,107)
Amortization of equity-based compensation
 
 
 
 
 
 
 
 127
 
 
 127
 2
 129

 
 
 
 
 
 
 
 127
 
 
 127
 2
 129
Rebalancing of ownership percentage of non-controlling interest
 
 
 
 
 
 
 
 143
 
 
 143
 (143) 

 
 
 
 
 
 
 
 143
 
 
 143
 (143) 
Balance at March 31, 20185,600,000
 135,356
 6,200,000
 149,860
 11,500,000
 278,108
 111,636,723
 1,116
 2,384,626
 133,352
 (584,750) 2,497,668
 24,688
 2,522,356
5,600,000
 135,356
 6,200,000
 149,860
 11,500,000
 278,108
 111,636,723
 1,116
 2,384,626
 133,352
 (584,750) 2,497,668
 24,688
 2,522,356
Net income
 
 
 
 
 
 
 
 
 
 91,114
 91,114
 1,163
 92,277
Other comprehensive loss
 
 
 
 
 
 
 
 
 (43,891) 
 (43,891) (561) (44,452)
Stock awards
 
 
 
 
 
 6,465
 
 
 
 
 
 
 
Common stock dividends
 
 
 
 
 
 
 
 
 
 (46,890) (46,890) 
 (46,890)
Common unit dividends
 
 
 
 
 
 
 
 
 
 
 
 (598) (598)
Preferred stock dividends
 
 
 
 
 
 
 
 
 
 (11,106) (11,106) 
 (11,106)
Amortization of equity-based compensation
 
 
 
 
 
 
 
 135
 
 
 135
 1
 136
Rebalancing of ownership percentage of non-controlling interest
 
 
 
 
 
 
 
 141
 
 
 141
 (141) 
Balance at June 30, 20185,600,000
 135,356
 6,200,000
 149,860
 11,500,000
 278,108
 111,643,188
 1,116
 2,384,902
 89,461
 (551,632) 2,487,171
 24,552
 2,511,723
Net Loss
 
 
 
 
 
 
 
 
 
 (53,373) (53,373) (681) (54,054)
Other comprehensive loss
 
 
 
 
 
 
 
 
 85,092
 
 85,092
 1,086
 86,178
Stock awards
 
 
 
 
 
 9,473
 
 
 
 
 
 
 
Common stock dividends
 
 
 
 
 
 
 
 
 
 (46,895) (46,895) 
 (46,895)
Common unit dividends
 
 
 
 
 
 
 
 
 
 
 
 (599) (599)
Preferred stock dividends
 
 
 
 
 
 
 
 
 
 (11,107) (11,107) 
 (11,107)
Amortization of equity-based compensation
 
 
 
 
 
 
 
 174
 
 
 174
 3
 177
Rebalancing of ownership percentage of non-controlling interest
 
 
 
 
 
 
 
 142
 
 
 142
 (142) 
Balance at September 30, 20185,600,000
 135,356
 6,200,000
 149,860
 11,500,000
 278,108
 111,652,661
 1,116
 2,385,218
 174,553
 (663,007) 2,461,204
 24,219
 2,485,423
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,Nine Months Ended September 30,
$ in thousands2019 20182019 2018
Cash Flows from Operating Activities      
Net income138,790
 53,249
246,129
 91,472
Adjustments to reconcile net income to net cash provided by operating activities:      
Amortization of mortgage-backed and credit risk transfer securities premiums and (discounts), net3,185
 12,663
28,471
 37,263
Realized and unrealized (gain) loss on derivative instruments, net205,969
 (145,479)747,186
 (307,594)
Realized and unrealized (gain) loss on credit derivatives, net(2,534) 2,468
10,399
 8,034
(Gain) loss on investments, net(268,382) 160,370
(772,977) 404,657
(Gain) loss from investments in unconsolidated ventures in excess of distributions received(692) (352)(1,797) 320
Other amortization(5,719) (6,265)(17,356) (19,332)
Net loss on extinguishment of debt
 26

 26
(Gain) loss on foreign currency transactions, net
 (1,800)
 1,038
Changes in operating assets and liabilities:      
(Increase) decrease in operating assets(10,015) 1,334
(13,578) (1,140)
Increase in operating liabilities7,758
 562
Increase (decrease) in operating liabilities(8,591) 6,974
Net cash provided by operating activities68,360
 76,776
217,886
 221,718
Cash Flows from Investing Activities      
Purchase of mortgage-backed and credit risk transfer securities(4,340,536) (298,859)(7,980,486) (4,996,460)
(Contributions to) distributions from investments in unconsolidated ventures, net299
 (1,532)2,198
 1,107
Change in other assets1,154
 
9,866
 (41,094)
Principal payments from mortgage-backed and credit risk transfer securities300,222
 488,123
1,392,097
 1,597,052
Proceeds from sale of mortgage-backed and credit risk transfer securities734,834
 
2,387,143
 2,836,065
Settlement (termination) of futures, currency forwards and interest rate swaps, net(232,387) 113,578
(713,233) 249,492
Net change in due from counterparties and collateral held payable(14,060) 14,853
Net change in due from counterparties and collateral held payable on derivative instruments(8,909) 13,980
Principal payments from commercial loans held-for-investment7,128
 10,042
7,394
 160,809
Origination and advances of commercial loans, net of origination fees
 (698)
 (1,677)
Net cash (used in) provided by investing activities(3,543,346) 325,507
Net cash used in investing activities(4,903,930) (180,726)
Cash Flows from Financing Activities      
Proceeds from issuance of common stock258,966
 
486,506
 
Proceeds from repurchase agreements28,316,732
 35,711,164
94,974,385
 108,342,902
Principal repayments of repurchase agreements(25,094,829) (35,880,828)(90,504,837) (108,044,996)
Net change in due from counterparties and collateral held payable on repurchase agreements(3,612) 
Extinguishment of exchangeable senior notes
 (143,433)
 (143,433)
Payments of deferred costs(21) (76)(176) (167)
Payments of dividends and distributions(57,972) (58,587)(195,865) (175,776)
Net cash provided by (used in) financing activities3,422,876
 (371,760)4,756,401
 (21,470)
Net change in cash, cash equivalents and restricted cash(52,110) 30,523
70,357
 19,522
Cash, cash equivalents and restricted cash, beginning of period135,617
 89,001
135,617
 89,001
Cash, cash equivalents and restricted cash, end of period83,507
 119,524
205,974
 108,523
Supplement Disclosure of Cash Flow Information      
Interest paid109,392
 73,811
391,153
 248,824
Non-cash Investing and Financing Activities Information      
Net change in unrealized gain (loss) on mortgage-backed and credit risk transfer securities62,496
 (123,080)123,091
 (67,394)
Dividends and distributions declared not paid60,433
 50,199
66,974
 50,205
Net change in investment related payable (receivable)(95,250) 80,688
Increase in unsettled to-be-announced ("TBA") securities and related payable1,124,815
 
Net change in investment related receivable (payable) excluding TBA securities(19,598) (100,061)
Offering costs not paid(413) 
(468) 
Net change in repurchase agreements, not settled
 (189)
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", "we") is a Maryland corporation primarily focused on investing in, financing and managing residential and commercial mortgage-backed securities 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 one1 operating segment. Prior to November 30, 2018, a wholly-owned subsidiary of Invesco owned 1.3% of the Operating Partnership. See Note 15 - "Non-Controlling Interest - Operating Partnership" of our Annual Report on Form 10-K for the year ended December 31, 2018 for information regarding redemption of Operating Partnership Units ("OP Units") previously held by Invesco.
We primarily invest 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”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 commencing with our taxable year ended December 31, 2009. 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.
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, 2018.
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.
Reclassifications
Our condensed consolidated balance sheet for the year ended December 31, 2018 presented in this Form 10-Q includes a reclassification of Commercial Loans, held-for-investment to Other assets to conform to our current period presentation. See Note 5 - "Other Assets" for further information. 



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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

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accompanying notes. Examples of estimates include, but are not limited to, estimates of the fair values of financial instruments, interest income on mortgage-backed and credit risk transfer securities, provision for loan losses and other-than-temporary impairment charges. 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, 2018 except for the implementation of new accounting guidance for stock-based payments to non-employees discussed below.
Accounting Pronouncements Recently Adopted
Effective January 1, 2019, we adopted the accounting guidance that aligns the measurement and classification for stock-based payments to non-employees with the guidance for stock-based payments to employees. Under the new guidance, the measurement of equity-classified non-employee awards is fixed at the grant date. The implementation of the guidance did not have a material impact on our financial statements.
Pending Accounting Pronouncements
In June 2016, new accounting guidance was issued for reporting credit losses for assets measured at amortized cost and available-for-sale securities. The new guidance significantly changes how entities will 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 requirerequires entities to record credit allowances for available-for-sale debt securities rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. The new guidance also simplifies the accounting model for purchased credit-impaired debt securities and loans. We are required to adopt the new guidance in the first quarter of 2020 by recording a cumulative effect adjustment to retained earnings as of January 1, 2020.
We are currently evaluating the potential impacts of the new guidance and proposed amendments to the new guidance on our consolidated financial statements. The new guidance specifically excludes available-for-sale securities measured at fair value through net income. The Company 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 will be limited to those securities purchased prior to election of the fair value option that the Company continues to hold on January 1, 2020. As of September 30, 2019, we hold approximately $4.6 billion of MBS and GSE CRT securities that were purchased prior to election of the fair value option that will be assessed for impairment under the new guidance.
We have one commercial loan as of September 30, 2019 that is measured at amortized cost. We intend to implement the new guidance for this loan by electing the fair value option. The new guidance for this loan will be implemented on a modified retrospective basis by recording a cumulative effect adjustment to retained earnings on January 1, 2020. The loan is due in February 2021, and we do not expect the new guidance to have a material impact on our accounting for this loan.
Note 3 – Variable Interest Entities ("VIEs")
Our maximum risk of loss in VIEs in which we are not the primary beneficiary at March 31,September 30, 2019 is presented in the table below.
$ in thousandsCarrying Amount Company's Maximum Risk of Loss
Non-Agency CMBS3,851,552
 3,851,552
Non-Agency RMBS1,018,511
 1,018,511
Investments in unconsolidated ventures23,305
 23,305
Total4,893,368
 4,893,368
$ in thousandsCarrying Amount Company's Maximum Risk of Loss
Non-Agency CMBS3,455,806
 3,455,806
Non-Agency RMBS1,186,896
 1,186,896
Investments in unconsolidated ventures24,129
 24,129
Total4,666,831
 4,666,831

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
The following tables summarize our mortgage-backed securities ("MBS") and GSE CRT portfolio by asset type as of March 31,September 30, 2019 and December 31, 2018.
March 31, 2019           
September 30, 2019           
$ in thousands
Principal/ Notional
Balance
 
Unamortized
Premium
(Discount)
 
Amortized
Cost
 
Unrealized
Gain/
(Loss), net
 
Fair
Value
 
Period-
end
Weighted
Average
Yield (1)
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-rate343,116
 2,595
 345,711
 6,391
 352,102
 3.34%296,708
 1,873
 298,581
 10,689
 309,270
 3.33%
30 year fixed-rate12,264,517
 386,145
 12,650,662
 65,974
 12,716,636
 3.66%11,381,340
 366,162
 11,747,502
 297,405
 12,044,907
 3.66%
ARM*
6,215
 184
 6,399
 5
 6,404
 3.64%
Hybrid ARM*170,397
 3,602
 173,999
 (478) 173,521
 3.11%
Hybrid ARM*
60,551
 654
 61,205
 1,444
 62,649
 3.58%
Total Agency RMBS pass-through12,784,245
 392,526
 13,176,771
 71,892
 13,248,663
 3.64%11,738,599
 368,689
 12,107,288
 309,538
 12,416,826
 3.65%
Agency-CMO (2)
913,574
 (585,878) 327,696
 (545) 327,151
 3.65%930,836
 (500,625) 430,211
 17,181
 447,392
 3.48%
Agency CMBS1,898,205
 35,961
 1,934,166
 67,387
 2,001,553
 3.48%
Non-Agency CMBS (3)
4,127,880
 (737,241) 3,390,639
 65,167
 3,455,806
 5.08%
Non-Agency RMBS (4)(5)(6)
2,774,428
 (1,700,612) 1,073,816
 113,080
 1,186,896
 6.89%
GSE CRT (7)
823,578
 19,823
 843,401
 64,128
 907,529
 3.16%
Agency CMBS(3)
4,597,320
 77,442
 4,674,762
 261,421
 4,936,183
 3.00%
Non-Agency CMBS (4)
4,446,232
 (778,004) 3,668,228
 183,324
 3,851,552
 5.23%
Non-Agency RMBS (5)(6)(7)
2,467,994
 (1,565,995) 901,999
 116,512
 1,018,511
 6.72%
GSE CRT (8)
862,797
 22,387
 885,184
 43,851
 929,035
 2.88%
Total23,321,910
 (2,575,421) 20,746,489
 381,109
 21,127,598
 4.01%25,043,778
 (2,376,106) 22,667,672
 931,827
 23,599,499
 3.86%
* Adjustable-rate mortgage ("ARM")
 
(1)Period-end weighted average yield is based on amortized cost as of March 31,September 30, 2019 and incorporates future prepayment and loss assumptions.
(2)Agency collateralized mortgage obligation ("Agency-CMO") includes interest-only securities ("Agency IO"), which represent 67.8%57.2% of principal/notional balance, 10.3%6.7% of amortized cost and 9.7%6.6% of fair value.
(3)Includes approximately $1.3 billion of to-be-announced ("TBA") securities that will primarily settle in the fourth quarter of 2019.
(4)Non-Agency CMBS includes interest-only securities which represent 14.6%13.3% of principal/notional balance, 0.4%0.3% of amortized cost and 0.4%0.3% of fair value.
(4)(5)Non-Agency RMBS is 54.9%57.8% fixed rate, 39.7%37.0% variable rate, and 5.4%5.2% floating rate based on fair value. Coupon payments on variable rate investments are based upon changes in the underlying ARM and Hybrid ARM loan coupons, while coupon payments on floating rate investments are based upon a spread to a reference index.
(5)(6)Of the total discount in non-Agency RMBS, $140.8$128.9 million is non-accretable calculated(calculated using the principal/notional balance andbalance) based on estimated future cash flows of the securities.
(6)(7)Non-Agency RMBS includes interest-only securities ("non-Agency IO") which represent 54.6%56.3% of principal/notional balance, 2.2% of amortized cost and 2.1%1.9% of fair value.
(7)(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.





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December 31, 2018December 31, 2018          December 31, 2018          
$ in thousands
Principal/Notional
Balance
 
Unamortized
Premium
(Discount)
 
Amortized
Cost
 
Unrealized
Gain/
(Loss), net
 
Fair
Value
 
Period-
end
Weighted
Average
Yield (1)
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-rate417,233
 5,077
 422,310
 1,944
 424,254
 3.27%417,233
 5,077
 422,310
 1,944
 424,254
 3.27%
30 year fixed-rate9,599,301
 298,693
 9,897,994
 (125,225) 9,772,769
 3.55%9,599,301
 298,693
 9,897,994
 (125,225) 9,772,769
 3.55%
ARM105,453
 350
 105,803
 (56) 105,747
 2.74%
Hybrid ARM548,133
 13,425
 561,558
 (7,357) 554,201
 2.80%653,586
 13,775
 667,361
 (7,413) 659,948
 2.79%
Total Agency RMBS pass-through10,670,120
 317,545
 10,987,665
 (130,694) 10,856,971
 3.49%10,670,120
 317,545
 10,987,665
 (130,694) 10,856,971
 3.49%
Agency-CMO (2)
907,862
 (631,180) 276,682
 (8,991) 267,691
 3.61%907,862
 (631,180) 276,682
 (8,991) 267,691
 3.61%
Agency CMBS973,122
 15,058
 988,180
 14,330
 1,002,510
 3.54%973,122
 15,058
 988,180
 14,330
 1,002,510
 3.54%
Non-Agency CMBS (3)
4,024,715
 (727,307) 3,297,408
 (10,949) 3,286,459
 5.05%4,024,715
 (727,307) 3,297,408
 (10,949) 3,286,459
 5.05%
Non-Agency RMBS (4)(5)(6)
2,800,335
 (1,748,223) 1,052,112
 111,570
 1,163,682
 7.24%2,800,335
 (1,748,223) 1,052,112
 111,570
 1,163,682
 7.24%
GSE CRT (7)
738,529
 21,259
 759,788
 59,541
 819,329
 3.10%738,529
 21,259
 759,788
 59,541
 819,329
 3.10%
Total20,114,683
 (2,752,848) 17,361,835
 34,807
 17,396,642
 4.00%20,114,683
 (2,752,848) 17,361,835
 34,807
 17,396,642
 4.00%
 
(1)Period-end weighted average yield is based on amortized cost as of December 31, 2018 and incorporates future prepayment and loss assumptions.
(2)
Agency collateralized mortgage obligation ("Agency-CMO") includes interest-only securities ("Agency IO"), which represent 73.6% of principal (notional) balance, 13.5%of amortized cost and 12.4% of fair value.
(3)Non-Agency CMBS includes interest-only securities which represent 15.0% of principal/notional balance, 0.4% of amortized cost and 0.5% of fair value.
(4)Non-Agency RMBS is 43.5% variable rate, 50.7% fixed rate, and 5.8% floating rate based on fair value. Coupon payments on variable rate investments are based upon changes in the underlying ARM and Hybrid ARM loan coupons, while coupon payments on floating rate investments are based upon a spread to a reference index.
(5)Of the total discount in non-Agency RMBS, $145.6 million is non-accretable calculated(calculated using the principal/notional balance andbalance) based on estimated future cash flows of the securities.
(6)Non-Agency RMBS includes interest-only securities, which represent 55.4% of principal/notional balance, 2.3% of amortized cost and 2.4% of fair value.
(7)GSE CRT weighted average yield excludes coupon interest associated with embedded derivatives not accounted for under the fair value option that is recorded as realized and unrealized credit derivative income (loss), net.
The following table presents the fair value of our available-for-sale securities and securities accounted for under the fair value option by asset type as of March 31,September 30, 2019 and December 31, 2018. We have elected the fair value option for all of our RMBS IOs,interest-only securities, our MBS purchased on or after September 1, 2016 and our GSE CRTs purchased on or after August 24, 2015. As of March 31,September 30, 2019 and December 31, 2018, approximately 76%81% and 67%, respectively, of our MBS and GSE CRTs are accounted for under the fair value option.
 September 30, 2019 December 31, 2018
$ in thousandsAvailable-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-rate106,216
 203,054
 309,270
 204,347
 219,907
 424,254
30 year fixed-rate788,483
 11,256,424
 12,044,907
 1,093,070
 8,679,699
 9,772,769
Hybrid ARM34,319
 28,330
 62,649
 626,946
 33,002
 659,948
Total RMBS Agency pass-through929,018
 11,487,808
 12,416,826
 1,924,363
 8,932,608
 10,856,971
Agency-CMO156,447
 290,945
 447,392
 168,385
 99,306
 267,691
Agency CMBS
 4,936,183
 4,936,183
 
 1,002,510
 1,002,510
Non-Agency CMBS2,174,951
 1,676,601
 3,851,552
 2,153,403
 1,133,056
 3,286,459
Non-Agency RMBS759,701
 258,810
 1,018,511
 961,445
 202,237
 1,163,682
GSE CRT530,506
 398,529
 929,035
 586,231
 233,098
 819,329
Total4,550,623
 19,048,876
 23,599,499
 5,793,827
 11,602,815
 17,396,642

 March 31, 2019 December 31, 2018
$ in thousandsAvailable-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-rate135,169
 216,933
 352,102
 204,347
 219,907
 424,254
30 year fixed-rate918,778
 11,797,858
 12,716,636
 1,093,070
 8,679,699
 9,772,769
ARM6,404
 
 6,404
 105,747
 
 105,747
Hybrid ARM141,320
 32,201
 173,521
 521,199
 33,002
 554,201
Total RMBS Agency pass-through1,201,671
 12,046,992
 13,248,663
 1,924,363
 8,932,608
 10,856,971
Agency-CMO166,730
 160,421
 327,151
 168,385
 99,306
 267,691
Agency CMBS
 2,001,553
 2,001,553
 
 1,002,510
 1,002,510
Non-Agency CMBS2,144,187
 1,311,619
 3,455,806
 2,153,403
 1,133,056
 3,286,459
Non-Agency RMBS916,158
 270,738
 1,186,896
 961,445
 202,237
 1,163,682
GSE CRT579,142
 328,387
 907,529
 586,231
 233,098
 819,329
Total5,007,888
 16,119,710
 21,127,598
 5,793,827
 11,602,815
 17,396,642


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The components of the carrying value of our MBS and GSE CRT portfolio at March 31,September 30, 2019 and December 31, 2018 are presented below.
March 31, 2019September 30, 2019
$ in thousandsMBS and GSE CRT Securities Interest-Only Securities TotalMBS and GSE CRT Securities Interest-Only Securities Total
Principal/ notional balance20,734,762
 2,587,148
 23,321,910
Principal/notional balance22,530,430
 2,513,348
 25,043,778
Unamortized premium488,161
 
 488,161
505,323
 
 505,323
Unamortized discount(545,248) (2,518,334) (3,063,582)(429,027) (2,452,402) (2,881,429)
Gross unrealized gains (1)
447,903
 5,613
 453,516
948,663
 4,109
 952,772
Gross unrealized losses (1)
(67,022) (5,385) (72,407)(17,431) (3,514) (20,945)
Fair value21,058,556
 69,042
 21,127,598
23,537,958
 61,541
 23,599,499
December 31, 2018December 31, 2018
$ in thousandsMBS and GSE CRT Securities Interest-Only Securities TotalMBS and GSE CRT Securities Interest-Only Securities Total
Principal/ notional balance17,442,367
 2,672,316
 20,114,683
Principal/notional balance17,442,367
 2,672,316
 20,114,683
Unamortized premium395,907
 
 395,907
395,907
 
 395,907
Unamortized discount(549,988) (2,598,767) (3,148,755)(549,988) (2,598,767) (3,148,755)
Gross unrealized gains (1)
238,579
 7,448
 246,027
238,579
 7,448
 246,027
Gross unrealized losses (1)
(204,664) (6,556) (211,220)(204,664) (6,556) (211,220)
Fair value17,322,201
 74,441
 17,396,642
17,322,201
 74,441
 17,396,642
(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 March 31,September 30, 2019 and 2018 is provided below within this Note 4.
The following table summarizes our MBS and GSE CRT portfolio according to estimated weighted average life classifications as of March 31,September 30, 2019 and December 31, 2018
$ in thousandsMarch 31, 2019 December 31, 2018September 30, 2019 December 31, 2018
Less than one year49,768
 110,020
87,420
 110,020
Greater than one year and less than five years5,188,229
 3,508,100
10,071,194
 3,508,100
Greater than or equal to five years15,889,601
 13,778,522
13,440,885
 13,778,522
Total21,127,598
 17,396,642
23,599,499
 17,396,642




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The following tables present the estimated fair value and gross unrealized losses of our MBS and GSE CRTs by length of time that such securities have been in a continuous unrealized loss position at March 31,September 30, 2019 and December 31, 2018.
March 31,September 30, 2019
Less than 12 Months 12 Months or More TotalLess 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
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-rate8,398
 (28) 21
 35,070
 (165) 25
 43,468
 (193) 46
3
 
 1
 1,067
 (5) 7
 1,070
 (5) 8
30 year fixed-rate1,286
 (11) 4
 4,448,849
 (50,925) 146
 4,450,135
 (50,936) 150
704,840
 (1,584) 7
 56,531
 (349) 7
 761,371
 (1,933) 14
ARM
 
 
 2,760
 (60) 2
 2,760
 (60) 2
Hybrid ARM3,059
 (6) 1
 101,210
 (1,595) 24
 104,269
 (1,601) 25
438
 (1) 1
 1,629
 (50) 4
 2,067
 (51) 5
Total Agency RMBS pass-through (1)
12,743
 (45) 26
 4,587,889
 (52,745) 197
 4,600,632
 (52,790) 223
705,281
 (1,585) 9
 59,227
 (404) 18
 764,508
 (1,989) 27
Agency-CMO (2)
9,749
 (3,276) 16
 109,177
 (3,380) 20
 118,926
 (6,656) 36
45,278
 (2,237) 17
 4,656
 (641) 9
 49,934
 (2,878) 26
Agency CMBS (3)
768,675
 (7,331) 31
 
 
 
 768,675
 (7,331) 31
Non-Agency CMBS (3)(4)
94,622
 (538) 9
 478,174
 (10,226) 41
 572,796
 (10,764) 50
83,184
 (426) 6
 105,329
 (7,165) 7
 188,513
 (7,591) 13
GSE CRT (4)(5)
62,965
 (381) 4
 
 
 
 62,965
 (381) 4
25,467
 (198) 1
 
 
 
 25,467
 (198) 1
Non-Agency RMBS (5)(6)
63,102
 (1,225) 13
 93,291
 (591) 15
 156,393
 (1,816) 28
19,653
 (733) 11
 21,506
 (225) 4
 41,159
 (958) 15
Total243,181
 (5,465) 68
 5,268,531
 (66,942) 273
 5,511,712
 (72,407) 341
1,647,538
 (12,510) 75
 190,718
 (8,435) 38
 1,838,256
 (20,945) 113
(1)Includes Agency RMBS with a fair value of $4.2 billion$730.8 million for which the fair value option has been elected. SuchThese securities have unrealized losses of $47.0$1.7 million.
(2)Includes Agency IO and Agency-CMO with fair value of $13.9$11.9 million and $17.9 million, respectively, for which the fair value option has been elected. These Agency IO and Agency-CMO securities have unrealized losses of $4.6 million and $64,000, respectively.$2.7 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 $323.9$83.2 million for which the fair value option has been elected. SuchThese securities have unrealized losses of $3.1 million.$426,000.
(4)(5)Fair value option has been elected for all GSE CRT that are in an unrealized loss position.
(5)(6)Includes non-Agency RMBS and non-Agency IO with a fair value of $6.1$6.2 million and $4.9$4.0 million, respectively for which the fair value option has been elected. SuchThese securities have unrealized losses of $223,000$1,000 and $821,000,$645,000, respectively.




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December 31, 2018
Less than 12 Months 12 Months or More TotalLess 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
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-rate86,241
 (814) 50
 16,660
 (189) 22
 102,901
 (1,003) 72
86,241
 (814) 50
 16,660
 (189) 22
 102,901
 (1,003) 72
30 year fixed-rate3,966,347
 (49,182) 158
 2,846,090
 (94,716) 95
 6,812,437
 (143,898) 253
3,966,347
 (49,182) 158
 2,846,090
 (94,716) 95
 6,812,437
 (143,898) 253
ARM2,632
 (28) 1
 49,954
 (785) 10
 52,586
 (813) 11
Hybrid ARM6,758
 (59) 2
 453,463
 (8,390) 71
 460,221
 (8,449) 73
9,390
 (87) 3
 503,417
 (9,175) 81
 512,807
 (9,262) 84
Total Agency RMBS pass-through (1)
4,061,978
 (50,083) 211
 3,366,167
 (104,080) 198
 7,428,145
 (154,163) 409
4,061,978
 (50,083) 211
 3,366,167
 (104,080) 198
 7,428,145
 (154,163) 409
Agency-CMO (2)
152,962
 (6,315) 34
 101,705
 (5,100) 19
 254,667
 (11,415) 53
152,962
 (6,315) 34
 101,705
 (5,100) 19
 254,667
 (11,415) 53
Non-Agency CMBS (3)
1,214,691
 (17,778) 94
 659,298
 (25,381) 52
 1,873,989
 (43,159) 146
1,214,691
 (17,778) 94
 659,298
 (25,381) 52
 1,873,989
 (43,159) 146
Non-Agency RMBS (4)
87,850
 (1,152) 19
 89,265
 (1,138) 16
 177,115
 (2,290) 35
87,850
 (1,152) 19
 89,265
 (1,138) 16
 177,115
 (2,290) 35
GSE CRT(5)
9,639
 (193) 1
 
 
 
 9,639
 (193) 1
9,639
 (193) 1
 
 
 
 9,639
 (193) 1
Total5,527,120
 (75,521) 359
 4,216,435
 (135,699) 285
 9,743,555
 (211,220) 644
5,527,120
 (75,521) 359
 4,216,435
 (135,699) 285
 9,743,555
 (211,220) 644
(1)Includes Agency RMBS with a fair value of $6.1 billion for which the fair value option has been elected. SuchThese securities have unrealized losses of $130.2 million.
(2)Includes Agency IO and Agency-CMO with fair value of $21.8 million and $66.0 million, respectively, for which the fair value option has been elected. These Agency IO and Agency-CMO securities have unrealized losses of $6.3 million and $845,000, respectively.
(3)Includes non-Agency CMBS with a fair value of $831.3 million for which the fair value option has been elected. SuchThese securities have unrealized losses of $26.3 million.
(4)Includes non-Agency RMBS and non-Agency IO with a fair value of $6.2 million and $3.7 million for which the fair value option has been elected. SuchThese securities have unrealized losses of $79,000 and $269,000, respectively.
(5)Fair value option has been elected for all GSE CRT that are in an unrealized loss position.
Gross unrealized losses on our Agency RMBS, Agency CMBS GSE CRT and CMO were $55.3$9.5 million at March 31,September 30, 2019 (December 31, 2018: $159.3 million). Due to the inherent credit quality of Agency RMBS, Agency CMBS and Agency-CMO, we determined that at March 31,September 30, 2019 and December 31, 2018, any unrealized losses on these securities are not other than temporary.
Gross unrealized losses on our Agency IO, non-Agency RMBS, GSE CRT and non-Agency CMBS were $17.1$11.5 million at March 31,September 30, 2019 (December 31, 2018: $51.9 million). We did not consider these unrealized losses to be credit related, but rather due to non-credit related factors such as interest rates, prepayment speeds, and market fluctuations. These investment securities are included in our assessment for other-than-temporary impairment ("OTTI").
We assess our investment securities for OTTI on a quarterly basis. When the fair value of an investment is less than its amortized cost at the balance sheet date of the reporting period for which impairment is assessed, the impairment is designated as either "temporary" or "other-than-temporary." This analysis includes 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 include, but are not limited to, delinquency status, loan-to-value ratios, borrower credit scores, occupancy status and geographic concentration.
The following table summarizes OTTI included in earnings for the three and nine months ended March 31,September 30, 2019 and 2018:
Three Months Ended March 31,Three Months Ended September 30, Nine Months Ended September 30,
$ in thousands2019 20182019 2018 2019 2018
RMBS interest-only securities1,463
 4,309
1,826
 702
 3,778
 7,100
Non-Agency RMBS (1)
313
 50

 35
 1,024
 85
Total1,776
 4,359
1,826
 737
 4,802
 7,185
(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.


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OTTI on RMBS interest-only securities was recorded as a reclassification from an unrealized to realized loss within gain (loss) on investments, net on the condensed consolidated statements of operations because we account for these securities under the fair value option. As of March 31,September 30, 2019, we did not intend to sell the securities and determined that it was not more likely than not that we will be required to sell the securities.
The following table summarizes the components of our total gain (loss) on investments, net for the three and nine months ended March 31,September 30, 2019 and 2018.
 Three Months Ended September 30, Nine Months Ended September 30,
$ in thousands2019 2018 2019 2018
Gross realized gains on sale of investments4,022
 739
 9,181
 774
Gross realized losses on sale of investments(1,485) (141,454) (15,730) (162,251)
Other-than-temporary impairment losses(1,826) (737) (4,802) (7,185)
Net unrealized gains and losses on MBS accounted for under the fair value option202,876
 (66,831) 787,607
 (236,967)
Net unrealized gains and losses on GSE CRT accounted for under the fair value option(1,174) 377
 (3,279) 993
Net unrealized gains and losses on trading securities
 (4) 
 (21)
Total gain (loss) on investments, net202,413
 (207,910) 772,977
 (404,657)

 Three Months Ended March 31,
$ in thousands2019 2018
Gross realized gains on sale of investments1,202
 
Gross realized losses on sale of investments(12,317) (9,237)
Other-than-temporary impairment losses(1,776) (4,359)
Net unrealized gains and losses on MBS accounted for under the fair value option280,039
 (147,195)
Net unrealized gains and losses on GSE CRT accounted for under the fair value option1,234
 434
Net unrealized gains and losses on trading securities
 (13)
Total gain (loss) on investments, net268,382
 (160,370)
The following tables present components of interest income recognized on our MBS and GSE CRT portfolio for the three and nine months ended March 31,September 30, 2019 and 2018. GSE CRT interest income 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.
For the three months ended March 31,September 30, 2019
$ in thousands
Coupon
Interest
 
Net (Premium
Amortization)/Discount
Accretion
 
Interest
Income
Coupon
Interest
 
Net (Premium
Amortization)/Discount
Accretion
 
Interest
Income
Agency RMBS and Agency CMBS130,197
 (12,725) 117,472
Agency RMBS122,725
 (21,526) 101,199
Agency CMBS25,434
 (1,395) 24,039
Non-Agency CMBS38,830
 3,031
 41,861
41,972
 3,957
 45,929
Non-Agency RMBS14,267
 3,922
 18,189
12,746
 2,725
 15,471
GSE CRT8,596
 (1,178) 7,418
9,913
 (2,369) 7,544
Other552
 
 552
756
 
 756
Total192,442
 (6,950) 185,492
213,546
 (18,608) 194,938
For the three months ended March 31,September 30, 2018
$ in thousands
Coupon
Interest
 
Net (Premium
Amortization)/Discount
Accretion
 
Interest
Income
Agency RMBS111,893
 (20,598) 91,295
Agency CMBS3,936
 (252) 3,684
Non-Agency CMBS37,938
 1,470
 39,408
Non-Agency RMBS14,106
 4,831
 18,937
GSE CRT7,513
 (731) 6,782
Other310
 
 310
Total175,696
 (15,280) 160,416

$ in thousands
Coupon
Interest
 
Net (Premium
Amortization)/Discount
Accretion
 
Interest
Income
Agency RMBS and Agency CMBS108,317
 (23,222) 85,095
Non-Agency CMBS37,293
 1,426
 38,719
Non-Agency RMBS14,012
 5,177
 19,189
GSE CRT6,525
 (697) 5,828
Other172
 
 172
Total166,319
 (17,316) 149,003


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For the nine months ended September 30, 2019
$ in thousands
Coupon
Interest
 
Net (Premium
Amortization)/Discount
Accretion
 
Interest
Income
Agency RMBS374,208
 (50,873) 323,335
Agency CMBS53,767
 (2,835) 50,932
Non-Agency CMBS121,417
 10,338
 131,755
Non-Agency RMBS40,890
 9,447
 50,337
GSE CRT27,935
 (5,399) 22,536
Other2,272
 
 2,272
Total620,489
 (39,322) 581,167
For the nine months ended September 30, 2018
$ in thousands
Coupon
Interest
 
Net (Premium
Amortization)/Discount
Accretion
 
Interest
Income
Agency RMBS325,599
 (66,094) 259,505
Agency CMBS3,977
 (253) 3,724
Non-Agency CMBS113,332
 4,091
 117,423
Non-Agency RMBS41,313
 15,167
 56,480
GSE CRT21,218
 (2,124) 19,094
Other741
 
 741
Total506,180
 (49,213) 456,967

Note 5 – Other Assets
The following table summarizes our other assets as of March 31,September 30, 2019 and December 31, 2018.
$ in thousandsSeptember 30, 2019 December 31, 2018
FHLBI stock74,250
 74,250
Loan participation interest45,115
 54,981
Commercial loans, held-for-investment24,188
 31,582
Investments in unconsolidated ventures23,305
 24,012
Prepaid expenses and other assets1,622
 1,234
Total168,480
 186,059
$ in thousandsMarch 31, 2019 December 31, 2018
FHLBI stock74,250
 74,250
Loan participation interest53,827
 54,981
Commercial loans, held-for-investment24,454
 31,582
Investments in unconsolidated ventures24,129
 24,012
Prepaid expenses and other assets1,253
 1,234
Total177,913
 186,059

IAS Services LLC, our wholly-owned captive insurance subsidiary, is required to purchase and hold Federal Home Loan Bank of Indianapolis ("FHLBI") stock as a condition of membership in the FHLBI. The stock is recorded at cost.
In August 2018, we acquired a participation interest in a secured loan collateralized by mortgage servicing rights. The secured loan has a two year term subject to a one year extension at the borrower's option. The participation interest bears interest at a floating rate based on LIBOR plus a spread. The weighted average asset yield for the participation interest was 6.14%5.72% as of March 31,September 30, 2019 and 6.06% as of December 31, 2018. We elected to account for the investment using the fair value option. Refer to Note 14 - "Commitments and Contingencies" for additional details regarding our unfunded commitment on this loan participation interest.
As of March 31,September 30, 2019, our commercial loan portfolio consisted of one1 commercial loan with a weighted average maturity of 1.91.4 years (December 31, 2018: two2 commercial loans with a weighted average maturity of 1.7 years). The loans had a weighted average coupon rate of 10.99%10.60% as of March 31,September 30, 2019 and 10.69% as of December 31, 2018. The loans were not impaired, and we have not recorded an allowance for loan losses as of March 31,September 30, 2019 and December 31, 2018 based on our analysis of credit quality factors as described in Note 2 - "Summary of Significant Accounting Policies" included in the consolidated financial statements of our Annual Report on Form 10-K for the year ended December 31, 2018.
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.




 15 



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Note 6 – Borrowings
We finance the majority of our investment portfolio through repurchase agreements and secured loans. The following tables summarize certain characteristics of our borrowings at March 31,September 30, 2019 and December 31, 2018. Refer to Note 7 - "Collateral Positions" for collateral pledged and held under our repurchase agreements and secured loans.
$ in thousandsSeptember 30, 2019
    Weighted
  Weighted Average
  Average Remaining
Amount Interest Maturity
Outstanding Rate (days)
Repurchase Agreements:     
Agency RMBS11,124,901
 2.34% 21
Agency CMBS3,306,244
 2.35% 30
Non-Agency CMBS2,018,542
 3.04% 15
Non-Agency RMBS828,535
 2.97% 17
GSE CRT759,973
 3.04% 15
Loan participation interest33,837
 3.68% 332
Total Repurchase Agreements18,072,032
 2.48% 22
Secured Loans1,650,000
 2.37% 1679
Total Borrowings19,722,032
 2.47% 161


$ in thousandsDecember 31, 2018
    Weighted
  Weighted Average
  Average Remaining
Amount Interest Maturity
Outstanding Rate (days)
Repurchase Agreements:     
Agency RMBS9,529,352
 2.56% 36
Agency CMBS810,450
 2.53% 31
Non-Agency CMBS1,616,473
 3.56% 19
Non-Agency RMBS923,959
 3.60% 26
GSE CRT681,014
 3.48% 21
Loan participation interest41,236
 4.09% 605
Total Repurchase Agreements13,602,484
 2.80% 34
Secured Loans1,650,000
 2.68% 1952
Total Borrowings15,252,484
 2.79% 242



16
$ in thousandsMarch 31, 2019
    Weighted
  Weighted Average
  Average Remaining
Amount Interest Maturity
Outstanding Rate (days)
Repurchase Agreements:     
Agency RMBS11,868,925
 2.68% 67
Agency CMBS1,639,097
 2.67% 72
Non-Agency CMBS1,642,106
 3.57% 18
Non-Agency RMBS887,186
 3.46% 25
GSE CRT746,703
 3.49% 20
Loan participation interest40,370
 4.09% 515
Total Repurchase Agreements16,824,387
 2.85% 59
Secured Loans1,650,000
 2.76% 1862
Total Borrowings18,474,387
 2.84% 220


Table of Contents


$ in thousandsDecember 31, 2018
    Weighted
  Weighted Average
  Average Remaining
Amount Interest Maturity
Outstanding Rate (days)
Repurchase Agreements:     
Agency RMBS9,529,352
 2.56% 36
Agency CMBS810,450
 2.53% 31
Non-Agency CMBS1,616,473
 3.56% 19
Non-Agency RMBS923,959
 3.60% 26
GSE CRT681,014
 3.48% 21
Loan participation interest41,236
 4.09% 605
Total Repurchase Agreements13,602,484
 2.80% 34
Secured Loans1,650,000
 2.68% 1952
Total Borrowings15,252,484
 2.79% 242


The following table shows the aggregate amount of maturities of our outstanding borrowings:
$ in thousandsAs of
Borrowings maturing within:March 31,September 30, 2019
4/10/1/2019 - 3/31/9/30/202017,084,01718,372,032

4/10/1/2020 - 3/31/9/30/2021140,370100,000

4/10/1/2021 - 3/31/9/30/2022

4/10/1/2022 - 3/31/9/30/2023

4/10/1/2023 - 3/31/9/30/2024

Thereafter(1)
1,250,000

Total18,474,38719,722,032




(1)16Amounts represent FHLBI secured loans maturing in 2025.




Repurchase Agreements
Our repurchase agreements generally bear interest at a contractually agreed upon rate and have maturities ranging from one month to sixfour months. Our repurchase agreement that is collateralized by a loan participation interest bears interest at a floating rate based on LIBOR plus a spread and matures on August 27, 2020. Repurchase agreements are accounted for as secured borrowings since we maintain effective control of the financed assets. Repurchase agreements are subject to certain financial covenants. We were in compliance with these covenants at March 31,September 30, 2019.
Our repurchase agreement collateral pledged ratio (MBS, GSE CRTs and a loan participation interest pledged as collateral/Amount Outstanding)amount outstanding) was 110%109% as of March 31,September 30, 2019 (December 31, 2018: 111%).
Secured Loans
Our wholly-owned captive insurance subsidiary, IAS Services LLC, is a member of the FHLBI. As a member of the FHLBI, IAS Services LLC has borrowed funds from the FHLBI in the form of secured loans.
As of March 31,September 30, 2019, IAS Services LLC had $1.65 billion in outstanding secured loans from the FHLBI. These secured loans have floating rates that are based on the three-month FHLB swap rate plus a spread. For the threenine months ended March 31,September 30, 2019, IAS Services LLC had weighted average borrowings of $1.65 billion with a weighted average borrowing rate of 2.70%2.65% and a weighted average maturity of 5.14.6 years.
The Federal Housing Finance Agency’s ("FHFA") final rule governing Federal Home Loan Bank membership (the "FHFA Rule") became effective on February 19, 2016. The FHFA Rule permits existing captive insurance companies, such as IAS Services LLC, to remain members until February 2021. New advances or renewals that mature after February 2021 are prohibited. The FHLBI has indicated it will honor the contractual maturity dates of existing advances to IAS Services LLC that were made prior to February 19, 2016 and extend beyond February 2021. We do not expect there to be any impact to our existing FHLBI borrowings under the FHFA rule. The ability to borrow from the FHLBI is subject to our continued creditworthiness, pledging of sufficient eligible collateral to secure advances, and compliance with certain agreements with FHLBI and FHFA rules.
As discussed in Note 5 - "Other Assets," IAS Services LLC is required to purchase and hold a certain amount of FHLBI stock, which is based, in part, upon the outstanding principal balance of secured loans from the FHLBI.




 17 







Note 7 - Collateral Positions
The following table summarizes the fair value of collateral that we have pledged and held under our repurchase agreements, secured loans, interest rate swaps, futures contracts and currency forward contracts as of March 31,September 30, 2019 and December 31, 2018. 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, 2018 for a description of how we determine fair value. RMBS, CMBS and GSE CRT collateral pledged is included in mortgage-backed and credit risk transfer securities on our condensed consolidated balance sheets. Loan participation interest collateral pledged is included in other assets on our condensed consolidated balance sheets. Cash collateral pledged on secured loans, centrally cleared swaps, bilateral interest rate swaps and currency forward contracts is classified as restricted cash on our condensed consolidated balance sheets. Cash collateral pledged on repurchase agreements, futures contracts and TBA securities that are accounted for as derivatives is classified as due from counterparties on our condensed consolidated balance sheets. TBA securities 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 $1.3 billion and $131.8 million of these securities as of September 30, 2019 and December 31, 2018, respectively.
Cash collateral held on bilateral swaps and repurchase agreements that is not restricted for use is included in cash and cash equivalents on our condensed consolidated balance sheets and the liability to return the collateral is included in collateral held payable. Non-cash collateral held is only recognized if the counterparty defaults or if we sell the pledged collateral. As of March 31,September 30, 2019 and December 31, 2018, we did not recognize any non-cash collateral held.held on the condensed consolidated balance sheets.
$ in thousandsAs of
Collateral PledgedMarch 31, 2019 December 31, 2018
Repurchase Agreements:   
Agency RMBS12,575,947
 10,158,404
Agency CMBS1,763,779
 870,702
Non-Agency CMBS2,072,829
 2,016,202
Non-Agency RMBS1,079,223
 1,127,911
GSE CRT907,529
 819,328
Loan participation interest53,827
 54,981
Total repurchase agreements collateral pledged18,453,134
 15,047,528
Secured Loans:   
Agency RMBS686,656
 702,952
Non-Agency CMBS1,260,396
 1,227,412
Total secured loans collateral pledged1,947,052
 1,930,364
Interest Rate Swaps, Futures Contracts and Currency Forward Contracts:   
Agency RMBS197,958
 159,914
Cash (1)
18,025
 13,500
Total interest rate swaps, futures contracts and currency forward contracts collateral pledged215,983
 173,414
    
Total collateral pledged:   
Mortgage-backed and credit risk transfer securities20,544,317
 17,082,825
Loan participation interest53,827
 54,981
 Cash18,025
 13,500
Total collateral pledged20,616,169
 17,151,306
    
 As of
Collateral HeldMarch 31, 2019 December 31, 2018
Interest Rate Swaps:   
Cash2,273
 18,083
Non-cash collateral
 
Total collateral held2,273
 18,083
(1) Includes restricted cash of $5,025,000 pledged as collateral on centrally cleared swaps.


 18 







$ in thousandsAs of
Collateral PledgedSeptember 30, 2019 December 31, 2018
Repurchase Agreements:   
Agency RMBS11,737,505
 10,158,404
Agency CMBS3,531,512
 870,702
Non-Agency CMBS2,543,887
 2,016,202
Non-Agency RMBS993,103
 1,127,911
GSE CRT899,144
 819,328
Loan participation interest45,115
 54,981
Cash4,209
 
Total repurchase agreements collateral pledged19,754,475
 15,047,528
Secured Loans:   
Agency RMBS633,350
 702,952
Non-Agency CMBS1,276,599
 1,227,412
Total secured loans collateral pledged1,909,949
 1,930,364
Interest Rate Swaps, Futures Contracts and Currency Forward Contracts:   
Agency RMBS251,517
 159,914
Cash6,075
 13,500
Restricted cash80,086
 
Total interest rate swaps, futures contracts and currency forward contracts collateral pledged337,678
 173,414
    
Total collateral pledged:   
Mortgage-backed and credit risk transfer securities21,866,617
 17,082,825
Loan participation interest45,115
 54,981
Cash10,284
 13,500
Restricted cash80,086
 
Total collateral pledged22,002,102
 17,151,306
    
 As of
Collateral HeldSeptember 30, 2019 December 31, 2018
Repurchase Agreements:   
Cash597
 
Non-cash collateral10,549
 
Total repurchase agreements collateral held11,146
 
Interest Rate Swaps:   
Cash499
 18,083
Non-cash collateral
 
Total interest rate swap collateral held499
 18,083
    
Total collateral held:   
Cash1,096
 18,083
Non-cash collateral10,549
 
Total collateral held11,645
 18,083


19




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 as determined by a pricing service agreed to by the respective lender and us. 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.
Secured Loans
The ability to borrow from the FHLBI is subject to our continued creditworthiness, pledging of sufficient eligible collateral to secure advances, and compliance with FHLBI and FHFA rules. Collateral pledged with the FHLBI is held in trust for the benefit of the FHLBI and is not commingled with our other assets. The FHLBI does not have the right to resell or repledge collateral posted unless an event of default occurs. The FHLBI retains the right to mark the underlying collateral for FHLBI advances to fair value as determined by the FHLBI in its sole discretion. IAS Services LLC would be required to provide additional collateral or fund margin calls if the value of pledged assets declines.
Interest Rate Swaps
Collateral pledged with our interest rate swap counterparties is segregated in our books and records. We have two types of interest rate swap agreements: bilateral interest rate swaps that are governed by an International Swaps and Derivatives Association ("ISDA") agreement and interest rate swaps that are centrally cleared by a registered clearing organization such as the Chicago Mercantile Exchange ("CME") and LCH Limited ("LCH") through a Futures Commission Merchant ("FCM"). Interest rate swaps that are governed by an ISDA agreement provide for bilateral collateral pledging based on the counterparties' market value. The counterparties have the right to repledge the collateral posted, but have the obligation to return the pledged collateral, or substantially the same collateral, if agreed to by us, as the market value of the interest rate swaps change.
We are required to pledge initial margin and daily variation margin for our interest rate swaps that are centrally cleared. The FCM determines the fair value of our centrally cleared swaps, including daily variation margin. The daily variation margin payment for centrally cleared interest rate swaps is characterized as settlement of the derivative itself rather than collateral. Accordingly, cash collateral pledgedand is recorded as gain (loss) on derivative instruments, net in our centrally cleared interest rate swaps is settled against the fair valuecondensed consolidated statement of these swaps.operations.


Futures Contracts
We are required to pledge initial margin and daily variation margin for our futures contracts that is based on the fair value of our contracts as determined by our FCM. The daily variation margin payment for our futures contracts is characterized as settlement of the futures contract itself rather than collateral. Accordingly, cash collateral pledgedand is recorded as gain (loss) on derivative instruments, net in our futures contracts is settled against the fair valuecondensed consolidated statement of these contracts.operations.


Currency Forward Contracts
Collateral pledged with our currency forward counterparty is segregated in our books and records. Our currency forward contract provides for bilateral collateral pledging based on market value as determined by the counterparty and can be in the form of cash or securities. Our counterparty has the right to repledge the collateral posted, but has the obligation to return the pledged collateral, or substantially the same collateral, if agreed to by us, as the market value of the currency forward contract changes.






 1920 







Note 8 – Derivatives and Hedging Activities
The following table summarizes changes in the notional amount of our derivative instruments during 2019:
$ in thousandsNotional Amount as
of December 31, 2018
 Additions Settlement,
Termination,
Expiration
or Exercise
 Notional Amount as
of September 30, 2019
Interest Rate Swaps12,370,000
 20,550,000
 (18,495,000) 14,425,000
Futures Contracts1,689,900
 3,625,800
 (4,821,400) 494,300
Currency Forward Contracts23,149
 81,577
 (75,268) 29,458
Credit Derivatives526,912
 
 (39,963) 486,949
Total14,609,961
 24,257,377
 (23,431,631) 15,435,707
$ in thousandsNotional Amount as
of December 31, 2018
 Additions Settlement,
Termination,
Expiration
or Exercise
 Notional Amount as
of March 31, 2019
Interest Rate Swaps12,370,000
 4,575,000
 (4,050,000) 12,895,000
Futures Contracts1,689,900
 1,586,400
 (1,689,900) 1,586,400
Currency Forward Contracts23,149
 25,534
 (23,149) 25,534
Credit Derivatives526,912
 
 (9,378) 517,534
Total14,609,961
 6,186,934
 (5,772,427) 15,024,468

Refer to Note 7 - "Collateral Positions" for further information regarding our collateral pledged to and received from our interest rate swap counterparties.
Interest Rate Swaps
Our repurchase agreements are usually settled on a short-term basis ranging from one to twelve months. At each settlement date, we typically refinance each repurchase agreement at the market interest rate at that time. In addition, our secured loans have floating interest rates. As such, we are exposed to changing interest rates. Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposures to interest rate movements. To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps involve making fixed-rate payments to a counterparty in exchange for the receipt of variable-rate amounts over the life of the agreements without exchange of the underlying notional amount.
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 $5.9$6.0 million as a decrease (March 31,(September 30, 2018: $6.5$6.4 million as a decrease) and $17.7 million as a decrease (September 30, 2018: $19.9 million as a decrease) to interest expense for the three and nine months ended March 31, 2019.September 30, 2019, respectively. During the next 12 months, we estimate that $23.8 million will be reclassified as a decrease to interest expense, repurchase agreements. As of March 31,September 30, 2019, $93.8$81.9 million (December 31, 2018: $99.6 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.




 2021 







As of March 31,September 30, 2019 and December 31, 2018, we had the following interest rate swaps with the following maturities outstanding:
$ in thousands As of March 31, 2019 As of September 30, 2019
Maturities 
Notional Amount(1)
 Weighted Average Fixed Pay Rate Weighted Average Receive Rate Weighted Average Years to Maturity 
Notional Amount(1)
 Weighted Average Fixed Pay Rate Weighted Average Receive Rate Weighted Average Years to Maturity
2020 1,000,000
 2.72% 2.50% 1.4 1,900,000
 1.67% 2.09% 0.9
2021 2,800,000
 2.49% 2.54% 2.2 3,700,000
 1.56% 2.06% 1.7
2022 2,550,000
 2.13% 2.61% 3.2 2,350,000
 1.99% 2.11% 2.7
2023 1,500,000
 2.21% 2.48% 4.3 1,400,000
 1.85% 2.03% 4.0
2024 1,600,000
 2.27% 2.65% 4.8
Thereafter 3,445,000
 2.46% 2.52% 7.8 5,075,000
 1.58% 2.07% 8.2
Total 12,895,000
 2.37% 2.55% 4.4 14,425,000
 1.68% 2.07% 4.3
$ in thousands As of December 31, 2018
Maturities 
Notional Amount(2)
 Weighted Average Fixed Pay Rate Weighted Average Receive Rate Weighted Average Years to Maturity
2019 1,500,000
 2.70% 2.47% 0.9
2020 1,500,000
 2.78% 2.51% 1.7
2021 2,300,000
 2.51% 2.58% 2.5
2022 2,550,000
 2.13% 2.65% 3.4
2023 1,600,000
 2.39% 2.47% 4.7
Thereafter 2,920,000
 2.47% 2.55% 6.8
Total 12,370,000
 2.46% 2.55% 3.7
(1)Notional amount includes $8.4$11.6 billion of interest rate swaps that receive variable payments based on 1-month LIBOR and $4.5$2.8 billion of interest rate swaps that receive variable payments based on 3-month LIBOR as of March 31,September 30, 2019.
(2)Notional amount includes $6.7 billion of interest rate swaps that receive variable payments based on 1-month LIBOR and $5.7 billion of interest rate swaps that receive variable payments based on 3-month LIBOR as of December 31, 2018.
TBAs, Futures and Currency Forward Contracts
We purchase or sell certain TBAs and 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 of TBAs and U.S. Treasury futures contracts in gain (loss) on derivative instruments, net in our condensed consolidated statements of operations.
We use currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates on our investments denominated in foreign currencies. We recognize realized and unrealized gains and losses associated with the purchases or sales of currency forward contracts in gain (loss) on derivative instruments, net in our condensed consolidated statements of operations. As of March 31,September 30, 2019, we had $25.5$29.5 million (December 31, 2018: $23.1 million) of notional amount of currency forward contracts related to an investment in an unconsolidated venture denominated in Euro.
Credit Derivatives
Our GSE CRTs purchased prior to August 24, 2015 are accounted for as hybrid financial instruments consisting of a debt host contract and an embedded credit derivative. Embedded derivatives associated with GSE CRTs are recorded within mortgage-backed and credit risk transfer securities, at fair value, on the condensed consolidated balance sheets. At March 31,September 30, 2019 and December 31, 2018, terms of the GSE CRT embedded derivatives are:
$ in thousandsSeptember 30, 2019 December 31, 2018
Fair value amount12,372
 22,771
Notional amount486,949
 526,912
Maximum potential amount of future undiscounted payments486,949
 526,912

$ in thousandsMarch 31, 2019 December 31, 2018
Fair value amount25,305
 22,771
Notional amount517,534
 526,912
Maximum potential amount of future undiscounted payments517,534
 526,912


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Tabular Disclosure of the Effect of Derivative Instruments on the Balance Sheet
The table below presents the fair value of our derivative financial instruments, as well as their classification on the condensed consolidated balance sheets as of March 31,September 30, 2019 and December 31, 2018.
$ in thousands
Derivative Assets Derivative Liabilities
  As of September 30, 2019 As of December 31, 2018   As of September 30, 2019 As of December 31, 2018
Balance
Sheet
 Fair Value Fair Value 
Balance
Sheet
 Fair Value Fair Value
Interest Rate Swaps Asset 3,384
 15,089
 Interest Rate Swaps Liability 46,381
 15,382
Currency Forward Contracts 589
 
 Currency Forward Contracts 
 172
Futures Contracts 154
 
 Futures Contracts 
 7,836
Total Derivative Assets 4,127
 15,089
 Total Derivative Liabilities 46,381
 23,390
Derivative Assets Derivative Liabilities
  
As of
March 31, 2019
 As of December 31, 2018   
As of
March 31, 2019
 As of December 31, 2018
Balance
Sheet
 Fair Value Fair Value 
Balance
Sheet
 Fair Value Fair Value
Interest Rate Swaps Asset 21,161
 15,089
 Interest Rate Swaps Liability 8,463
 15,382
Currency Forward Contracts 311
 
 Currency Forward Contracts 
 172
Futures Contracts 5,108
 
 Futures Contracts 
 7,836

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 March 31,September 30, 2019 and 2018.
$ in thousands Three months ended March 31, 2019 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 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 
 5,350
 2,534
 7,884
 
 5,196
 (5,195) 1
$ in thousands Three months ended March 31, 2018 Three months ended September 30, 2018
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 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 
 5,633
 (2,468) 3,165
 
 5,638
 (663) 4,975
$ 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
$ in thousands Nine months ended September 30, 2018
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 
 16,909
 (8,034) 8,875

 23


Table of Contents


The following table summarizes the effect of interest rate swaps, futures contracts and currency forward contracts reported in gain (loss) on derivative instruments, net on the condensed consolidated statements of operations for the three and nine months ended March 31,September 30, 2019 and 2018:
$ in thousands Three Months Ended March 31, 2019 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 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 (165,884) 4,509
 12,991
 (148,384) (137,346) 11,715
 (15,772) (141,403)
Futures Contracts (66,688) 
 12,944
 (53,744) (36,633) 
 (464) (37,097)
Currency Forward Contracts 185
 
 483
 668
 372
 
 884
 1,256
Total (232,387) 4,509
 26,418
 (201,460) (173,607) 11,715
 (15,352) (177,244)

$ in thousands Three Months Ended September 30, 2018
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 68,953
 (2,763) (178) 66,012
Futures Contracts 27,136
 
 (5,548) 21,588
Currency Forward Contracts 3,569
 
 (3,480) 89
TBAs (17) 
 
 (17)
Total 99,641
 (2,763) (9,206) 87,672

$ 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)

$ in thousands Nine Months Ended September 30, 2018
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 225,499
 (19,386) 65,181
 271,294
Futures Contracts 22,499
 
 (8,204) 14,295
Currency Forward Contracts 1,512
 
 1,124
 2,636
TBAs (17) 
 
 (17)
Total 249,493
 (19,386) 58,101
 288,208









 2224 



Table of Contents



$ in thousands Three Months Ended March 31, 2018
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 122,273
 (12,112) 32,374
 142,535
Futures Contracts (5,277) 
 (1,612) (6,889)
Currency Forward Contracts (3,418) 
 1,139
 (2,279)
Total 113,578
 (12,112) 31,901
 133,367

Credit-risk-related Contingent Features
We have agreements with each of our bilateral derivative counterparties. Some of those agreements contain a provision whereby if we default on any of our indebtedness, including default whereby repayment of the indebtedness has not been accelerated by the lender, we could be declared in default on our derivative obligations.
At March 31,September 30, 2019, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for non-performance risk related to bilateral interest rate swap agreements, was $8.4$46.5 million. We have minimum collateral posting thresholds with certain of our bilateral derivative counterparties and were required to pledge $12.1pledged securities with a fair value of $41.4 million and restricted cash of collateral$8.4 million with these counterparties as of March 31,September 30, 2019. If we had breached any of these provisions at March 31,September 30, 2019, we could have been required to settle our obligations under these agreements at their termination value.
We also have an agreement with a clearing counterparty for our interest rate swaps that includes cross default provisions. The fair value of our centrally cleared interest rate derivative contracts, which includes accrued interest and variation margin but excludes any adjustment for non-performance risk, was a net asset of $17.8$3.4 million as of March 31,September 30, 2019.
We were in compliance with all of the financial provisions of these counterparty agreements as of March 31,September 30, 2019.
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 March 31,September 30, 2019 and December 31, 2018. The daily variation margin payment for centrally cleared interest rate swaps is characterized as settlement of the derivative itself rather than collateral. As of March 31,September 30, 2019, our derivative asset of $17.8$3.4 million (December 31, 2018: derivative liability of $13.2 million) related to centrally cleared interest rate swaps is not included in the table below as a result of this characterization of daily variation margin.
Offsetting of Derivative Assets
As of March 31,September 30, 2019
       Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets  
$ in thousands
Description
Gross
Amounts of
Recognized
Assets
 
Gross
Amounts
Offset in the Condensed Consolidated
Balance
Sheets
 
Net Amounts
of Assets
presented in
the Condensed
Consolidated
Balance Sheets
 
Financial
Instruments
 
Cash Collateral
Received
 Net Amount
Derivatives (1) (3)
743
 
 743
 
 (346) 397

       Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets  
$ in thousands
Description
Gross
Amounts of
Recognized
Assets
 
Gross
Amounts
Offset in the Condensed Consolidated
Balance
Sheets
 
Net Amounts
of Assets
presented in
the Condensed
Consolidated
Balance Sheets
 
Financial
Instruments
 
Cash Collateral
Received
 Net Amount
Derivatives (1) (3)
8,742
 
 8,742
 
 (2,201) 6,541
Offsetting of Derivative Liabilities, Repurchase Agreements and Secured Loans

As of September 30, 2019
       Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets  
$ in thousands
Description
Gross
Amounts of
Recognized
Liabilities
 
Gross
Amounts
Offset in the Condensed Consolidated
Balance
Sheets
 
Net Amounts
of Liabilities
presented in
the Condensed
Consolidated
Balance Sheets
 
Financial
Instruments (2)
 

Cash Collateral
Pledged
 Net Amount
Derivatives (3)
46,381
 
 46,381
 (38,471) (7,910) 
Repurchase Agreements (4)
18,072,032
 
 18,072,032
 (18,072,032) 
 
Secured Loans (5)
1,650,000
 
 1,650,000
 (1,650,000) 
 
Total19,768,413
 
 19,768,413
 (19,760,503) (7,910) 


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Offsetting of Derivative Liabilities, Repurchase Agreements and Secured Loans
As of March 31, 2019
       Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets  
$ in thousands
Description
Gross
Amounts of
Recognized
Liabilities
 
Gross
Amounts
Offset in the Condensed Consolidated
Balance
Sheets
 
Net Amounts
of Liabilities
presented in
the Condensed
Consolidated
Balance Sheets
 
Financial
Instruments (2)
 

Cash Collateral
Pledged
 Net Amount
Derivatives (3)
8,463
 
 8,463
 (8,463) 
 
Repurchase Agreements (4)
16,824,387
 
 16,824,387
 (16,824,387) 
 
Secured Loans (5)
1,650,000
 
 1,650,000
 (1,650,000) 
 
Total18,482,850
 
 18,482,850
 (18,482,850) 
 

Offsetting of Derivative Assets
As of December 31, 2018
       Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets  
$ in thousands
Description
Gross
Amounts of
Recognized
Assets
 
Gross
Amounts
Offset in the Condensed Consolidated
Balance
Sheets
 
Net Amounts
of Assets
presented in
the Condensed
Consolidated
Balance Sheets
 
Financial
Instruments
 
Cash Collateral
Received
 Net Amount
Derivatives (1) (3)
15,089
 
 15,089
 (433) (14,656) 

       Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets  
$ in thousands
Description
Gross
Amounts of
Recognized
Assets
 
Gross
Amounts
Offset in the Condensed Consolidated
Balance
Sheets
 
Net Amounts
of Assets
presented in
the Condensed
Consolidated
Balance Sheets
 
Financial
Instruments
 
Cash Collateral
Received
 Net Amount
Derivatives (1) (3)
15,089
 
 15,089
 (433) (14,656) 

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Offsetting of Derivative Liabilities and Repurchase Agreements
As of December 31, 2018
       Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets  
$ in thousands
Description
Gross
Amounts of
Recognized
Liabilities
 
Gross
Amounts
Offset in the Condensed Consolidated
Balance
Sheets
 
Net Amounts
of Liabilities
presented in
the Condensed
Consolidated
Balance Sheets
 
Financial
Instruments (2)
 

Cash Collateral
Pledged
 Net Amount
Derivatives (3)
10,239
 
 10,239
 (2,058) (7,836) 345
Repurchase Agreements (4)
13,602,484
 
 13,602,484
 (13,602,484) 
 
Secured Loans (5)
1,650,000
 
 1,650,000
 (1,650,000) 
 
Total15,262,723
 
 15,262,723
 (15,254,542) (7,836) 345
(1)
Amounts represent derivatives in an asset position which could potentially be offset against derivatives in a liability position at March 31,September 30, 2019 and December 31, 2018,, subject to a netting arrangement.
(2)Amounts represent collateral pledged that is available to be offset against liability balances associated with repurchase agreements, secured loans and derivatives.
(3)
The fair value of securities pledged against our derivatives was $198.0$251.5 million (December 31, 2018: $159.9 million) at March 31,September 30, 2019, of which $164.8$200.2 million (December 31, 2018: $158.3 million) relates to initial margin pledged on centrally cleared interest rate swaps. Centrally cleared interest rate swaps are excluded from the tables above. Cash collateral received on our derivatives was $2.3 million$499,000 and $18.1 million at March 31,September 30, 2019 and December 31, 2018, respectively. Cash collateral pledged by us on our futures contracts and interest rate swaps were $18.0$86.2 million and $13.5 million at March 31,September 30, 2019 and December 31, 2018,, respectively. Cash collateral pledged on our centrally cleared interest rate swaps is settled against the fair value of these swaps and therefore excluded from the tables above at March 31,September 30, 2019 and December 31, 2018, respectively.
(4)The fair value of securities pledged against our borrowing under repurchase agreements was $18.5$19.8 billion and $15.0 billion at March 31,September 30, 2019 and December 31, 2018, respectively. We pledged cash collateral of $4.2 million and held cash collateral of $597,000 under repurchase agreements as of September 30, 2019.
(5)
The fair value of securities pledged against IAS Services LLC's borrowings under secured loans was $1.9 billion at March 31,September 30, 2019 and December 31, 2018,, respectively.
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.
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.


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The following tables present our assets and liabilities measured at fair value on a recurring basis.
March 31, 2019  September 30, 2019  
Fair Value Measurements Using:  Fair Value Measurements Using:  
$ in thousandsLevel 1 Level 2 Level 3 
NAV as a practical expedient (3)
 
Total at
Fair Value
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)

 21,102,293
 25,305
 
 21,127,598

 23,587,127
 12,372
 
 23,599,499
Derivative assets5,108
 21,472
 
 
 26,580
154
 3,973
 
 
 4,127
Other assets (4)

 
 53,827
 24,129
 77,956

 
 45,115
 23,305
 68,420
Total assets5,108
 21,123,765
 79,132
 24,129
 21,232,134
154
 23,591,100
 57,487
 23,305
 23,672,046
Liabilities:                  
Derivative liabilities
 8,463
 
 
 8,463

 46,381
 
 
 46,381
Total liabilities
 8,463
 
 
 8,463

 46,381
 
 
 46,381
December 31, 2018  December 31, 2018  
Fair Value Measurements Using:  Fair Value Measurements Using:  
$ in thousandsLevel 1 Level 2 Level 3 
NAV as a practical expedient (3)
 Total at
Fair Value
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)

 17,373,871
 22,771
 
 17,396,642

 17,373,871
 22,771
 
 17,396,642
Derivative assets
 15,089
 
 
 15,089

 15,089
 
 
 15,089
Other assets (4)

 
 54,981
 24,012
 78,993

 
 54,981
 24,012
 78,993
Total assets
 17,388,960
 77,752
 24,012
 17,490,724

 17,388,960
 77,752
 24,012
 17,490,724
Liabilities:                  
Derivative liabilities7,836
 15,554
 
 
 23,390
7,836
 15,554
 
 
 23,390
Total liabilities7,836
 15,554
 
 
 23,390
7,836
 15,554
 
 
 23,390
(1)For more detail about the fair value of our MBS and GSE CRTs, refer to Note 4 - "Mortgage-Backed and Credit Risk Transfer Securities."
(2)Our GSE CRTs purchased prior to August 24, 2015 are accounted for as hybrid financial instruments with an embedded derivative. The hybrid financial instruments consist of debt host contracts classified as Level 2 and embedded derivatives classified as Level 3. As of March 31,September 30, 2019, the net embedded derivative asset position of $25.3$12.4 million includes $30.2$21.6 million of embedded derivatives in an asset position and $4.9$9.2 million of embedded derivatives in a liability position. As of December 31, 2018, the net embedded derivative asset position of $22.8 million includes $28.8 million of embedded derivatives in an asset position and $6.0 million of embedded derivatives in a liability position.
(3)Investments in unconsolidated ventures are valued using the net asset value ("NAV") as a practical expedient and are not subject to redemption, although investors may sell or transfer their interest at the approval of the general partner of the underlying funds. As of March 31,September 30, 2019 and December 31, 2018, the weighted average remaining term of our investments in unconsolidated ventures is 2.8 andwas 2.6 years respectively.for both periods.
(4)Includes $53.8$45.1 million and $55.0 million of a loan participation interest as of March 31,September 30, 2019 and December 31, 2018, respectively. The loan participation interest is transferable and bears interest at a variable rate based on LIBOR plus a spread and resets daily. As a result, the cost of the loan participation interest approximates its fair value.




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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 thousands2019 2018 2019 2018
Beginning balance17,567
 38,029
 22,771
 45,400
Unrealized credit derivative gains (losses), net(5,195) (663) (10,399) (8,034)
Ending balance12,372
 37,366
 12,372
 37,366
 Three Months Ended March 31,
$ in thousands2019 2018
Beginning balance22,771
 45,400
Unrealized credit derivative gains (losses), net2,534
 (2,468)
Ending balance25,305
 42,932

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 thousands2019 2018 2019 2018
Beginning balance47,885
 
 54,981
 
Purchases/Advances5,192
 45,058
 5,769
 45,058
Repayments(7,962) 
 (15,635) 
Ending balance45,115
 45,058
 45,115
 45,058
Three Months Ended March 31,
$ in thousands2019
Beginning balance54,981
Advances577
Repayments(1,731)
Ending balance53,827

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 thousandsMarch 31,September 30, 2019 Technique Input Range Average
GSE CRT Embedded Derivatives25,30512,372

 Market Comparables, Vendor Pricing Weighted average life 2.51.3 - 5.64.6 years 4.03.1 years
 Fair Value at Valuation Unobservable   Weighted
$ in thousandsDecember 31, 2018 Technique Input Range Average
GSE CRT Embedded Derivatives22,771

 Market Comparables, Vendor Pricing Weighted average life 2.9 - 5.9 years 4.3 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.


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The following table presents the carrying value and estimated fair value of our financial instruments that are not carried at fair value on the condensed consolidated balance sheets at March 31,September 30, 2019 and December 31, 2018:
 September 30, 2019 December 31, 2018
$ in thousands
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Assets       
Commercial loans, held-for-investment24,188
 24,478
 31,582
 31,826
FHLBI stock74,250
 74,250
 74,250
 74,250
Total98,438
 98,728
 105,832
 106,076
Financial Liabilities       
Repurchase agreements18,072,032
 18,072,733
 13,602,484
 13,602,050
Secured loans1,650,000
 1,650,000
 1,650,000
 1,650,000
Total19,722,032
 19,722,733
 15,252,484
 15,252,050
 March 31, 2019 December 31, 2018
$ in thousands
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Assets       
Commercial loans, held-for-investment24,454
 24,732
 31,582
 31,826
FHLBI stock74,250
 74,250
 74,250
 74,250
Total98,704
 98,982
 105,832
 106,076
Financial Liabilities       
Repurchase agreements16,824,387
 16,825,642
 13,602,484
 13,602,050
Secured loans1,650,000
 1,650,000
 1,650,000
 1,650,000
Total18,474,387
 18,475,642
 15,252,484
 15,252,050

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 commercial loans held-for-investment, included in "Other assets" on our condensed consolidated balance sheets, is a Level 3 fair value measurement. Subsequent to the origination or purchase, commercial loan investments are valued on a monthly basis by an independent third party valuation agent using a discounted cash flow technique.
The estimated fair value of FHLBI stock, included in "Other assets" on our condensed consolidated balance sheets, is a Level 3 fair value measurement. FHLBI stock may only be sold back to the FHLBI at its discretion at par. As a result, the cost of the FHLBI stock approximates its fair value.
The estimated fair value of 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. The secured loans have floating rates based on an index plus a spread and the spread is typically consistent with those demanded in the market. Accordingly, the interest rates on these secured loans are at market, and thus the carrying amount approximates fair value.

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 March 31,September 30, 2019, we reimbursed our Manager $183,000 (March 31,$250,000 (September 30, 2018: $214,000)$168,000) and $646,000 (September 30, 2018: $599,000), respectively, for costs of support personnel that are fully dedicated to our business.
We have invested $62.0$120.4 million as of March 31,September 30, 2019 (December 31, 2018: $131.9 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.sheets as they are highly liquid and have original or remaining maturities of three months or less when purchased.
Management Fee Expense
We pay our Manager a management fee equal to 1.50% of our stockholders’ equity per annum. The fee is calculated and payable quarterly in arrears. For purposes of calculating the management fee, stockholders’ equity is equal to the sum of the net proceeds from all issuances of equity securities since inception including proceeds from the issuance of operating partnership units to an affiliate of our Manager, plus retained earnings at the end of the most recently completed calendar quarter (without taking into account any non-cash equity compensation expense incurred in current or prior periods), less any amount paid to repurchase common stock since inception. Stockholders equity excludes (i) any unrealized gains, losses or other items that do not affect realized net income (regardless of whether such items are included in other comprehensive income or loss, or in net income); (ii) cumulative net realized losses that are not attributable to permanently impaired investments and that relate to the investments for which market movement is accounted for in other comprehensive income; provided, however, that such adjustment shall not exceed cumulative unrealized net gains in other comprehensive income; (iii) one-time events pursuant to


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changes in U.S. GAAP; and (iv) certain non-cash items after discussions between our Manager and our independent directors and approval by a majority of our independent directors.
We do not pay any management fees on our investments in unconsolidated ventures that are managed by an affiliate of our Manager.
Expense Reimbursement
We are required to reimburse our Manager for our 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 March 31,September 30, 2019 and 2018.
 Three Months Ended September 30, Nine Months Ended September 30,
$ in thousands2019 2018 2019 2018
Incurred costs, prepaid or expensed2,186
 2,133
 5,399
 4,925
Incurred costs, charged against equity as a cost of raising capital236
 
 680
 167
Total incurred costs, originally paid by our Manager2,422
 2,133
 6,079
 5,092
 Three Months Ended March 31,
$ in thousands2019 2018
Incurred costs, prepaid or expensed1,604
 1,492
Incurred costs, charged against equity as a cost of raising capital320
 165
Total incurred costs, originally paid by our Manager1,924
 1,657

Termination Fee
If we terminate our management agreement, we owe our Manager a termination fee equal to three3 times the sum of our average annual management fee during the 24-month period before termination, calculated as of the end of the most recently completed fiscal quarter.
Note 12 – Stockholders’ Equity
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 27, 2017, we had the option to redeem shares of 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 Series B Preferred Stock after December 27, 2024 and shares of Series C Preferred Stock after September 27, 2027 for $25.00 per share, plus any accumulated and unpaid dividends through the date of the redemption. Shares of Series B and Series C Preferred Stock are not redeemable, convertible into or exchangeable for any other property or any other securities of the Company prior to those times, except under circumstances intended to preserve our qualification as a REIT or upon the occurrence of a change in control.
In March 2019, we entered into an equity distribution agreement with a placement agent under which we may sell up to 7,000,000 shares of our preferred stock from time to time in at-the-market or privately negotiated transactions. These shares are registered with the SEC under our automatic shelf registration statement (as amended and/or supplemented). As of March 31,September 30, 2019, we have not sold any shares of preferred stock under the equity distribution agreement.


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Common Stock
On February 7, 2019, we completed a public offering of 16,100,000 shares of common stock at the price of $15.73 per share. Total net proceeds were approximately $249.5 million after deducting estimatedoffering costs.
On August 16, 2019, we completed a public offering of 14,000,000 shares of common stock at the price of $15.86 per share. Total net proceeds were approximately $219.3 million after deducting offering costs.
In March 2019, we amended our equity distribution agreement, dated December 18, 2017, with a placement agent under which 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. These shares are registered with the SEC under our automatic shelf registration statement (as amended and/or supplemented). During the threenine months ended March 31,September 30, 2019, we issued 572,0001,093,136 shares of common stock under the equity distribution agreement for proceeds of $9.1$17.2 million, net of approximately $193,000$363,000 in commissions and fees. We did 0t issue any common stock under the equity distribution agreement during the three months ended September 30, 2019.
Share Repurchase Program
During the three and nine months ended March 31,September 30, 2019 and 2018, we did not0t repurchase any shares of our common stock. As of March 31,September 30, 2019, we had authority to purchase 18,239,08218,163,982 shares of our common stock through our share repurchase program.
Share-Based Compensation
We established the 2009 Equity Incentive Plan for grants of common stock and other equity based awards to our independent directors and officers and employees of our Manager and its affiliates (the "Incentive Plan"). Under the Incentive Plan, a total of 1,000,000 shares of common stock are authorized for issuance. As of March 31, 2019, 748,492 shares of common stock remain available for future issuance under the Incentive Plan. The Incentive Plan was scheduled to terminate on June 30, 2019 but was amended and restated as of May 3, 2019 extendingto extend the term an additional ten years. See Note 15 - "Subsequent Events" for a description of the amendedplan until 2029 and to reduce the number of shares of common stock available for issuance under the Incentive Plan terms.to 200,000.
We recognized compensation expense of approximately $113,000 (March 31,(September 30, 2018: $93,000)$107,000) and $338,000 (September 30, 2018: $306,000) for shares issued to our independent directors under theour Incentive Plan for the three and nine months ended March 31, 2019.September 30, 2019, respectively. During the three months ended March 31,September 30, 2019 and 2018, we issued 7,0656,765 shares and 7,1776,620 shares of common stock, respectively, to our independent directors. During the nine months ended September 30, 2019 and 2018, we issued 20,725 and 20,262 shares of common stock, respectively, to our independent directors. The fair market value of the shares granted was determined by the closing stock market price on the date of the grant. The grants vested immediately.
We recognized compensation expense of approximately $19,000 (March 31,$17,000 (September 30, 2018: $14,000)$71,000) and $54,000 (September 30, 2018: $115,000) for the three and nine months ended March 31,September 30, 2019, respectively for restricted stock units awarded to employees of our Manager and its affiliates under theour Incentive Plan. Our Manager reimburses us for the cost of these restricted stock awards under the terms of our management agreement. At March 31,September 30, 2019, there was approximately $185,000$149,000 of total unrecognized compensation cost related to restricted stock unit awards that is expected to be recognized over a period of up to 4842 months, with a weighted-average remaining vesting period of 2418 months.
The following table summarizes the activity related to restricted stock units awarded to employees of our Manager and its affiliates for the three and nine months ended March 31,September 30, 2019.
Three Months Ended March 31,Three Months Ended September 30, Nine Months Ended September 30,
20192019 2019
Restricted Stock Units 
Weighted Average Grant Date Fair Value (1)
Restricted Stock Units 
Weighted Average Grant Date Fair Value (1)
 Restricted Stock Units 
Weighted Average Grant Date Fair Value (1)
Unvested at the beginning of the period11,051
 $14.55
12,520
 $15.25
 11,051
 $14.55
Shares granted during the period6,189
 15.92

 
 6,189
 15.92
Shares vested during the period(4,720) 14.48

 
 (4,720) 14.48
Unvested at the end of the period12,520
 $15.25
12,520
 $15.25
 12,520
 $15.25
(1)The grant date fair value of restricted stock awards is based on the closing market price of our common stock at the grant date.


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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 March 31,September 30, 2019 and 2018. The tables exclude gains and losses on MBS and GSE CRTs that are accounted for under the fair value option.
Three Months Ended March 31, 2019Three Months Ended September 30, 2019
$ in thousandsEquity method investments Available-for-sale securities Derivatives and hedging TotalEquity 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
 52,349
 
 52,349

 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
 10,147
 
 10,147

 (954) 
 (954)
Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense
 
 (5,851) (5,851)
 
 (5,981) (5,981)
Currency translation adjustments on investment in unconsolidated venture(276) 
 
 (276)290
 
 
 290
Total other comprehensive income (loss)(276) 62,496
 (5,851) 56,369
290
 13,528
 (5,981) 7,837
              
AOCI balance at beginning of period513
 120,664
 99,636
 220,813
(83) 230,227
 87,869
 318,013
Total other comprehensive income (loss)(276) 62,496
 (5,851) 56,369
290
 13,528
 (5,981) 7,837
AOCI balance at end of period237
 183,160
 93,785
 277,182
207
 243,755
 81,888
 325,850
 Three Months Ended September 30, 2018
$ in thousandsEquity 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
 (40,554) 
 (40,554)
Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net
 134,280
 
 134,280
Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense
 
 (6,422) (6,422)
Currency translation adjustments on investment in unconsolidated venture(1,126) 
 
 (1,126)
Total other comprehensive income (loss)(1,126) 93,726
 (6,422) 86,178
        
AOCI balance at beginning of period1,736
 (22,901) 110,626
 89,461
Total other comprehensive income (loss)(1,126) 93,726
 (6,422) 86,178
Other comprehensive income/(loss) attributable to non-controlling interest13
 (1,181) 82
 (1,086)
AOCI balance at end of period623
 69,644
 104,286
 174,553

 Three Months Ended March 31, 2018
$ in thousandsEquity 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
 (132,317) 
 (132,317)
Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net
 9,237
 
 9,237
Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense
 
 (6,539) (6,539)
Currency translation adjustments on investment in unconsolidated venture312
 
 
 312
Total other comprehensive income (loss)312
 (123,080) (6,539) (129,307)
        
AOCI balance at beginning of period947
 136,188
 123,894
 261,029
Total other comprehensive income (loss)312
 (123,080) (6,539) (129,307)
Other comprehensive income/(loss) attributable to non-controlling interest(4) 1,552
 82
 1,630
AOCI balance at end of period1,255
 14,660
 117,437
 133,352

 
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 Nine Months Ended September 30, 2019
$ in thousandsEquity 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 period513
 120,664
 99,636
 220,813
Total other comprehensive income/(loss)(306) 123,091
 (17,748) 105,037
AOCI balance at end of period207
 243,755
 81,888
 325,850
 Nine Months Ended September 30, 2018
$ in thousandsEquity 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
 (220,800) 
 (220,800)
Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net
 153,406
 
 153,406
Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense
 
 (19,859) (19,859)
Currency translation adjustments on investment in unconsolidated venture(328) 
 
 (328)
Total other comprehensive income/(loss)(328) (67,394) (19,859) (87,581)
        
AOCI balance at beginning of period947
 136,188
 123,894
 261,029
Total other comprehensive income/(loss)(328) (67,394) (19,859) (87,581)
Other comprehensive income/(loss) attributable to non-controlling interest4
 850
 251
 1,105
AOCI balance at end of period623
 69,644
 104,286
 174,553

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.


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Dividends
We declared the following dividends during the threenine months ended March 31,September 30, 2019 and 2018:
$ in thousands, except per share amountsDividends DeclaredDividends Declared
Series A Preferred StockPer Share In Aggregate Date of PaymentPer Share In Aggregate Date of Payment
2019        
September 16, 20190.4844
 2,713
 October 25, 2019
June 17, 20190.4844
 2,712
 July 25, 2019
March 18, 20190.4844
 2,713
 April 25, 20190.4844
 2,713
 April 25, 2019
2018        
September 14, 20180.4844
 2,713
 October 25, 2018
June 15, 20180.4844
 2,712
 July 25, 2018
March 15, 20180.4844
 2,713
 April 25, 20180.4844
 2,713
 April 25, 2018
$ in thousands, except per share amountsDividends DeclaredDividends Declared
Series B Preferred StockPer Share In Aggregate Date of PaymentPer Share In Aggregate Date of Payment
2019        
August 1, 20190.4844
 3,003
 September 27, 2019
May 3, 20190.4844
 3,004
 June 27, 2019
February 14, 20190.4844
 3,003
 March 27, 20190.4844
 3,003
 March 27, 2019
2018        
August 2, 20180.4844
 3,003
 September 27, 2018
May 2, 20180.4844
 3,004
 June 27, 2018
February 15, 20180.4844
 3,003
 March 27, 20180.4844
 3,003
 March 27, 2018
$ in thousands, except per share amountsDividends DeclaredDividends Declared
Series C Preferred StockPer Share In Aggregate Date of PaymentPer Share In Aggregate Date of Payment
2019        
August 1, 20190.46875
 5,391
 September 27, 2019
May 3, 20190.46875
 5,390
 June 27, 2019
February 14, 20190.46875
 5,391
 March 27, 20190.46875
 5,391
 March 27, 2019
2018        
August 2, 20180.46875
 5,391
 September 27, 2018
May 2, 20180.46875
 5,390
 June 27, 2018
February 15, 20180.46875
 5,391
 March 27, 20180.46875
 5,391
 March 27, 2018
$ in thousands, except per share amountsDividends DeclaredDividends Declared
Common StockPer Share In Aggregate Date of PaymentPer Share In Aggregate Date of Payment
2019        
September 16, 20190.45
 64,261
 October 28, 2019
June 17, 20190.45
 57,958
 July 26, 2019
March 18, 20190.45
 57,720
 April 26, 20190.45
 57,720
 April 26, 2019
2018        
September 14, 20180.42
 46,895
 October 26, 2018
June 15, 20180.42
 46,890
 July 26, 2018
March 15, 20180.42
 46,887
 April 26, 20180.42
 46,887
 April 26, 2018




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Note 13 – Earnings per Common Share
Earnings per share for the three and nine months ended March 31,September 30, 2019 and 2018 is computed as follows:
 Three Months Ended September 30, Nine Months Ended September 30,
In thousands except per share amounts2019 2018 2019 2018
Numerator (Income)       
Basic Earnings:       
Net income (loss) available to common stockholders77,896
 (64,480) 212,809
 56,999
Effect of dilutive securities:       
Income (loss) allocated to non-controlling interest
 (681) 
 1,153
Dilutive net income (loss) available to stockholders77,896
 (65,161) 212,809
 58,152
Denominator (Weighted Average Shares)       
Basic Earnings:       
Shares available to common stockholders135,799
 111,647
 128,574
 111,639
Effect of dilutive securities:       
Restricted stock awards13
 
 12
 16
Non-controlling interest OP units
 1,425
 
 1,425
Dilutive Shares135,812
 113,072
 128,586
 113,080
Earnings (loss) per share:       
Net income (loss) attributable to common stockholders       
Basic0.57
 (0.58) 1.66
 0.51
Diluted0.57
 (0.58) 1.65
 0.51
 Three Months Ended March 31,
In thousands except per share amounts2019 2018
Numerator (Income)   
Basic Earnings:   
Net income available to common stockholders127,683
 41,471
Effect of dilutive securities:   
Income allocated to exchangeable senior notes
 1,621
Income allocated to non-controlling interest
 671
Dilutive net income available to stockholders127,683
 43,763
Denominator (Weighted Average Shares)   
Basic Earnings:   
Shares available to common stockholders121,098
 111,629
Effect of dilutive securities:   
Restricted stock awards12
 20
Non-controlling interest OP units
 1,425
Exchangeable senior notes
 4,803
Dilutive Shares121,110
 117,877
Earnings per share:   
Net income attributable to common stockholders   
Basic1.05
 0.37
Diluted1.05
 0.37

 


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 as of March 31,September 30, 2019 are discussed below.
As discussed in Note 5 - "Other Assets", we have invested in unconsolidated ventures that are sponsored by an affiliate of our Manager. The unconsolidated ventures are structured as partnerships, and we invest in the partnerships as a limited partner. The entities are structured such that capital commitments are to be drawn down over the life of the partnership as investment opportunities are identified. As of March 31,September 30, 2019 and December 31, 2018, our undrawn capital and purchase commitments were $7.6$6.4 million and $10.0 million, respectively.
As discussed in Note 5 - "Other Assets", we have funded our portion of a commitment in a loan participation. The remainder of our commitment will be funded over the two yearremaining term of the loan based upon the financing needs of the borrower. As of March 31,September 30, 2019, we have an unfunded commitment of $21.2$29.9 million.
As discussed in Note 12 - "Stockholders' Equity", we have programs under which we may sell shares of our common and preferred stock from time to time in at-the-market or privately negotiated transactions. As of March 31, 2019, we had committed to sell 90,000 shares of common stock at an average price of $15.83 per share for total proceeds of $1.4 million, net of approximately $30,000 in commissions and fees that settled in April 2019.
We have entered into agreements with financial institutions to guarantee certain obligations of our subsidiaries. We would be required to perform under these guarantees in the event of certain defaults. We have not had prior claims or losses pursuant to these contracts and expect the risk of loss to be remote.
Note 15 – Subsequent Events
On May 3,Dividends
We declared the following dividends on our Series B and Series C Preferred Stock on November 5, 2019 to our shareholders approved the 2009 Equity Incentive Plan (the "Incentive Plan")stockholders of record as amendedof December 5, 2019: a Series B Preferred Stock dividend of $0.4844 per share payable on December 27, 2019 and restated. Under the amended and restated Incentive Plan, the numbera Series C Preferred Stock dividend of shares of common stock available for issuance to$0.46875 per share payable on December 27, 2019.




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Amendment to Management Agreement
On November 6, 2019, we entered into a Third Amendment to the management agreement, dated July 1, 2009 and amended on May 24, 2011 and July 1, 2015, between the Company, the Operating Partnership, IAS Asset I LLC and our Manager (the “Amendment”). Under the Amendment, effective October 1, 2019, our management fee will be equal to 1.50% of our stockholders’ equity per annum. For purposes of calculating the management fee, stockholders’ equity will be 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 and officers and employeesdirectors. The Amendment also clarified language in the management agreement regarding the pass through of certain costs incurred by our Manager and its affiliates was reducedin providing services to 200,000, and the termCompany. The full text of the Incentive Plan was extended for an additional ten years.Amendment is attached as Exhibit 10.1 to this report on Form 10-Q.











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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
In this quarterly report on Form 10-Q, or this “Report,” we refer to Invesco Mortgage Capital Inc. and its consolidated subsidiaries as “we,” “us,” “our Company,” or “our,” unless we specifically state otherwise or the context indicates otherwise. We refer to our external manager, Invesco Advisers, Inc., as our “Manager,” and we refer to the indirect parent company of our Manager, Invesco Ltd. together with its consolidated subsidiaries (which does not include us), as “Invesco.”
The following discussion should be read in conjunction with our condensed consolidated financial statements and the accompanying notes to our condensed consolidated financial statements, which are included in Item 1 of this Report, as well as the information contained in our most recent Form 10-K filed with the Securities and Exchange Commission (the “SEC”).


Forward-Looking Statements
We make forward-looking statements in this Report and other filings we make with the SEC within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and such statements are intended to be covered by the safe harbor provided by the same. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. These forward-looking statements include information about possible or assumed future results of our business, investment strategies, financial condition, liquidity, results of operations, plans and objectives. When we use the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may”"project," "forecast" or similar expressions and future or conditional verbs such as “will,” “may,” “could,” “should,” and “would,” and any other statement that necessarily depends on future events, we intend to identify forward-looking statements. Factors that could cause actual results to differ from those expressed in our forward-looking statements include, but are not limited to:
our business and investment strategy;
our investment portfolio;
our projected operating results;
general volatility of financial markets and effects of governmental responses, including actions and initiatives of the U.S. governmental agencies and changes to U.S. government policies, mortgage loan modification programs, actions and initiatives of foreign governmental agencies and central banks, monetary policy actions of the Federal Reserve, including actions relating to its agency mortgage-backed securities portfolio and the continuation of re-investment of principal payments, and our ability to respond to and comply with such actions, initiatives and changes;
the availability of financing sources, including our ability to obtain additional financing arrangements and the terms of such arrangements;
financing and advance rates for our target assets;
changes to our expected leverage;
our expected investments;
our expected book value per common share;
interest rate mismatches between our target assets and our borrowings used to fund such investments;
the adequacy of our cash flow from operations and borrowings to meet our short-term liquidity needs;
our ability to maintain sufficient liquidity to meet any margin calls;
changes in the credit rating of the U.S. government;
changes in interest rates and interest rate spreads and the market value of our target assets;
changes in prepayment rates on our target assets;
the impact of any deficiencies in foreclosure practices of third parties and related uncertainty in the timing of collateral disposition;
our reliance on third parties in connection with services related to our target assets;
effects of hedging instruments on our target assets;
rates of default or decreased recovery rates on our target assets;


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modifications to whole loans or loans underlying securities;
the degree to which our hedging strategies may or may not protect us from interest rate volatility;
the degree to which derivative contracts expose us to contingent liabilities;
counterparty defaults;
compliance with financial covenants in our financing arrangements;
changes in governmental regulations, zoning, insurance, eminent domain and tax law and rates, and similar matters and our ability to respond to such changes;
our ability to maintain our qualification as a real estate investment trust for U.S. federal income tax purposes;
our ability to maintain our exception from the definition of “investment company” under the Investment Company Act of 1940, as amended (the “1940 Act”);
availability of investment opportunities in mortgage-related, real estate-related and other securities;
availability of U.S. Government Agency guarantees with regard to payments of principal and interest on securities;
the market price and trading volume of our capital stock;
availability of qualified personnel of our Manager;
the relationship with our Manager;
estimates relating to taxable income and our ability to continue to make distributions to our stockholders in the future;
estimates relating to fair value of our target assets and loan loss reserves;
our understanding of our competition;
changes to generally accepted accounting principles in the United States of America (“U.S. GAAP”);
the adequacy of our disclosure controls and procedures and internal controls over financial reporting; and
market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy.
The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. You should not place undue reliance on these forward-looking statements. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these factors are described under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
The following discussion should be read in conjunction with our condensed consolidated financial statements and the accompanying notes to our condensed consolidated financial statements, which are included in this Report.
Overview
We are a Maryland corporation primarily focused on investing in, financing and managing residential and commercial mortgage-backed securities ("MBS") and mortgage loans. Our objective is to provide attractive risk-adjusted returns to our investors, primarily through dividends and secondarily through capital appreciation. To achieve this objective, we primarily invest in the following:
Residential mortgage-backed securities (“RMBS”("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”("CMBS") that are guaranteed by a U.S. government agency such as Ginnie Mae or a federally chartered corporation such as Freddie Mac or Fannie Mae (collectively "Agency CMBS");




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RMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation (“("non-Agency RMBS”RMBS");
CMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation (“("non-Agency CMBS”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 arrangements.
We elected to be taxed as a real estate investment trust (“REIT”("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 our exclusion from the definition of “Investment Company”"Investment Company" under the 1940 Act. We are externally managed and advised by Invesco Advisers, Inc., our Manager, which is an indirect, wholly-owned subsidiary of Invesco Ltd.
Capital Activities
On February 7, 2019, we completed a public offering of 16,100,000 shares of common stock at the price of $15.73 per share. Total net proceeds were approximately $249.5 million after deducting estimated offering expenses.
In MarchOn August 16, 2019, we amended our equity distribution agreement, dated December 17, 2019, withcompleted a placement agent under which wepublic offering of 14,000,000 shares of common stock at the price of $15.86 per share. Total net proceeds were approximately $219.3 million after deducting offering expenses.
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.transactions under our equity distribution agreement. These shares are registered with the SEC under our automatic shelf registration statement (as amended and/or supplemented). During the threenine months ended March 31,September 30, 2019, we issued 572,0001,093,136 shares of common stock under theour equity distribution agreement for proceeds of $9.1$17.2 million, net of approximately $363,000 in commissions and fees.
On March 18,September 16, 2019, we declared the following dividends:
a dividend of $0.45 per share of common stock paid on April 26,October 28, 2019 to stockholders of record as of the close of business on March 29,September 27, 2019; and
a dividend of $0.4844 per share of Series A Preferred Stock paid on AprilOctober 25, 2019 to stockholders of record as of the close of business on AprilOctober 1, 2019.
On February 14,August 1, 2019, we declared the following dividends:
a dividend of $0.4844 per share of Series B Preferred Stock paid on MarchSeptember 27, 2019 to stockholders of record as of the close of business on MarchSeptember 5, 2019; and
a dividend of $0.46875 per share of Series C Preferred Stock paid on MarchSeptember 27, 2019 to stockholders of record as of the close of business on MarchSeptember 5, 2019.
During the threenine months ended March 31,September 30, 2019, we did not repurchase any shares of our common stock.
Factors Impacting Our Operating Results
Our operating results can be affected by a number of factors and primarily depend on the level of our net interest income and the market value of our assets. Our net interest income, which includes the amortization of purchase premiums and accretion of purchase discounts, varies primarily as a result of changes in market interest rates and prepayment speeds, as measured by the constant prepayment rate (“CPR”) on our target assets. Interest rates and prepayment speeds vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. The market value of our assets can be impacted by credit spread premiums (yield advantage over U.S. Treasury notes) and the supply of, and demand for, target assets in which we invest.
Market Conditions
Macroeconomic factors that affect our business include interest rates, interest rate spread premiums, governmental policy initiatives, residential and commercial real estate prices, credit availability, consumer personal income and spending, corporate earnings, employment conditions, financial conditions and inflation.
Financial conditions eased significantlywere slightly tighter during the firstthird quarter of 2019 sharply reversingas volatility measures increased, and the tightening trend we experienced during the final monthsperformance of 2018.equity markets and credit spreads were mixed. Volatility fellincreased across the fixed income and equity markets as investors became

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more supportive of risk assetsuncertainty around trade policy and financial markets rebounded from the lows of late December 2018. Equity markets hadfuture Federal Reserve policy actions continued. After a strong start to 2019, asthe year, equity performance moderated during the quarter, with the S&P 500 Index returned over 13%returning 1% and the NASDAQ losing 0.1% during the first quarter, whilethird quarter. This brought the NASDAQ returned over 16%. Investor sentiment was bolstered as the Federal Open Market Committee (“FOMC”) signaled that they likely would not raise the Federal Funds rate in the coming quarters.year-to-date total return of these indices to 18.7% and 20.6%, respectively. Commodity prices rebounded along with equities,declined during the third quarter, as the CRB Commodity Price Index increaseddecreased by 8.2% during the first quarter3.9% and WTI Crude increaseddecreased by 29.3%7.1%.
The U.S. economy appearsappeared to be growing at a moderate pace, and the labor market remainsremained positive. Monthly gains in Nonfarm Payrollsnon-farm payrolls averaged 180,000157,000 for the firstthird quarter, slowingup slightly from the 2018152,000 average of 223,000.the second quarter. The unemployment rate remained close tohit a multi-year lowslow at 3.8%3.5%. The consensus forecast for GDP growth in 2019 is 2.4%2.3%, with the consensus estimates for 2020 and 2021 at 1.9%1.7% and 1.8%, respectively.
Inflation remained subdued during the third quarter, with the U.S. Personal Consumption Expenditure Core Price Index remaining below the Federal Reserve’s inflation target of 2% in January.. Implied breakeven rates on Treasury Inflation Protected securities, which reflect the markets'market's expectation of future inflation rates, rose during the quarter,remained low, with the implied 2-two and 5-yearfive-year inflation rates ending the firstsecond quarter at 1.83%1.30% and 1.79%1.35%, respectively. The FOMC did not take any action duringFederal Open Market Committee ("FOMC") lowered the benchmark Federal Funds rate by 25 basis points at its JanuarySeptember 18 meeting and March meetings, and communication outhave signaled that further interest rate cuts may be warranted. As of the central bank caused market expectations for further FOMC policy action to readjust once again. Over the course of the first quarter end, the pricing of federal funds futures contracts went from implying no policy action during 2019 to implying oneimplied that the FOMC will cut in eachthe Federal Funds rate approximately three more times over the course of 2019 and 2020. This caused Treasury rates to fall across the maturity spectrum, with the 2-yeartwo-year Treasury rate ending the first quarter down 25falling 13 basis points at 2.26%during the third quarter to 1.62% and 10-yearthe 10 year Treasury ratesrate falling 2834 basis points to 2.41%.
Mortgage-backed securities performed well1.66% as of September 30, 2019. The market for repurchase agreements underwent a period of volatility during the firstquarter due to a number of technical factors, prompting the Federal Reserve to intervene and restore order. The Federal Reserve has subsequently addressed this issue through open market operations and communicating a plan to increase reserve levels by purchasing Treasury Bills.
The performance of structured securities was mixed during the third quarter of 2019. Lower coupon Agency RMBS mortgages outperformedunderperformed similar duration Treasuries during the quarter, with agencywhile higher coupon Agency RMBS mortgages outperformed similar duration Treasuries. Agency RMBS pools backed by collateral that offered protection against prepayment risk performing particularly well. The outlook for Agency RMBS is mixed,performed well, as prepayment riskactivity is expected to increaseremain elevated in the coming quarters due to the seasonal impact of housing activity and the increase in refinance activity given lower mortgage rates. However, the shift in monetary policy by the Federal Reserve has reduced volatility and funding costs, providing a favorable environment for the sector. Beginning in October of this year, the Federal Reserve will begin reinvesting paydowns from the MBS portion of their balance sheet into Treasuries, which should produce a modest headwind for the sector as the balance sheet slowly shifts into an all-Treasury portfolio.quarters.
During the firstthird quarter, spreads (defined as the yield in excess of risk-free rates) on Agency CMBS, non-Agency CMBS and GSE CRT securities tightened steadily as volatility fell and investor’s risk appetites returned.were mixed, while spreads on Agency CMBS were slightly wider. Fundamentals in both commercial and residential housing remain on solid footing, lending further support to asset prices. Financing markets remained accommodative and repurchase agreement rates settled down after experiencing typical year end bank balance sheet pressures.
We expect the U.S. will continue to experience moderate, albeit slowing, economic growth, and that core inflation will remain close to the Federal Reserve’s policy objective of 2%. Other concerns includeInvestors remained focused on the actions of central banks, and their impact on the global economy, the sustainability of China's economic growth, and the potential impact of thetrade tensions and onging Brexit process and resulting stress in the European banking system.negotiations.
In addition, the regulatory landscape for our repurchase agreement counterparties continues to evolve, which may affect their funding methods and lending practices. While we are not directly subject to compliance with the implementation of rules regardinggoverning financial institutions, the effect of these regulations and others could impact our ability to finance our assets in the future.
Proposed Changes to LIBOR
On July 27, 2017, the Chief Executive of the U.K. Financial Conduct Authority (the "FCA" ), which regulates LIBOR, announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of the LIBOR benchmark after 2021. This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021, and it appears likely that LIBOR will be phased out or the methodology for determining LIBOR will be modified by 2021. The Alternative Reference Rates Committee ("ARRC") has proposed that the Secured Overnight Financing Rate ("SOFR") is the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR, and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR.
We have material contracts that are indexed to USD-LIBOR and are monitoring this activity and evaluating the related risks. However, it is not possible to predict the effect of any of these developments, and any future initiatives to regulate, reform or change the manner of administration of LIBOR could result in adverse consequences to the rate of interest payable and receivable on, market value of and market liquidity for LIBOR-based financial instruments.

Our Manager is finalizing its global assessment of exposure in relation to our LIBOR-based instruments and benchmarks and is prioritizing the mitigation of risks associated with the forecasted changes to financial instruments and performance benchmarks referencing existing LIBOR rates.

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Centrally cleared swaps are among our LIBOR-based material contracts that may be impacted. The Chicago Mercantile Exchange ("CME") announced a high-level proposal for transitioning price alignment interest (used to determine interest paid on cash collateral) and the discount rate for USD centrally cleared swaps from the daily effective federal funds rate (EFFR) to SOFR. Their goal in publishing the proposal is to facilitate discussion on how this transition will be implemented. They propose that after the close of business on October 16, 2020, the CME would conduct a standard end-of-day valuation cycle using EFFR discounting to determine variation margin and price alignment interest. Upon completion of this initial cycle, CME would then conduct a special cycle in which positions will be valued using SOFR as the discount rate. In an effort to neutralize the value transfer attributed to the change in the discounting rate, CME proposes making a cash adjustment that is equal to the change in each cleared swap's net present value. To mitigate hedging costs associated with this transition and sensitivity to closing curve markets on October 16, 2020, CME would book a series of EFFR/SOFR basis swaps to participants’ accounts. They propose that this will restore participants back to their original risk profiles and be booked at the October 16, 2020 closing curve levels. 
LCH Limited ("LCH") also proposed plans to switch from using EFFR to SOFR as both the discount rate used to value USD centrally cleared swaps and the rate used to determine price alignment interest. Similar to CME, LCH proposes compensation for valuation and risk adjustment will be provided in the form of cash and compensating basis swaps.
In October, the IRS and Treasury proposed regulations that are expected to provide taxpayers relief from adverse impacts resulting from the transition away from LIBOR to an alternative reference rate. The proposed regulations make clear that a change in the reference rate (and associated alterations to payment terms) of a financial instrument is generally not considered a taxable event, provided the fair value of the modified instrument is substantially equivalent to the fair value of the unmodified instrument.

Investment Activities
The table below shows the allocation of our equity as of March 31,September 30, 2019, December 31, 2018 and March 31,September 30, 2018:
As ofAs of
$ in thousandsMarch 31, 2019 December 31, 2018 March 31, 2018September 30, 2019 December 31, 2018 September 30, 2018
Agency RMBS and Agency CMBS50% 49% 44%
Agency RMBS44% 46% 50%
Agency CMBS14% 3% 1%
Commercial Credit (1)
32% 33% 36%29% 33% 31%
Residential Credit (2)
18% 18% 20%13% 18% 18%
Total100% 100% 100%100% 100% 100%
(1)Commercial credit includes non-Agency CMBS, commercial loans and investments in unconsolidated ventures.
(2)Residential credit includes non-Agency RMBS, GSE CRTs and a loan participation interest.



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The table below shows the breakdown of our investment portfolio as of March 31,September 30, 2019, December 31, 2018 and March 31,September 30, 2018:
As ofAs of
$ in thousandsMarch 31, 2019 December 31, 2018 March 31, 2018September 30, 2019 December 31, 2018 September 30, 2018
Agency RMBS:          
30 year fixed-rate, at fair value12,716,636
 9,772,769
 7,662,038
12,044,907
 9,772,769
 10,499,050
15 year fixed-rate, at fair value352,102
 424,254
 2,609,552
309,270
 424,254
 602,159
Hybrid ARM, at fair value173,521
 554,201
 1,623,538
62,649
 659,948
 1,155,101
ARM, at fair value6,404
 105,747
 227,666
Agency CMO, at fair value327,151
 267,691
 253,954
447,392
 267,691
 224,150
Agency CMBS, at fair value2,001,553
 1,002,510
 
4,936,183
 1,002,510
 584,688
Non-Agency CMBS, at fair value3,455,806
 3,286,459
 3,189,281
3,851,552
 3,286,459
 3,270,768
Non-Agency RMBS, at fair value1,186,896
 1,163,682
 1,194,952
1,018,511
 1,163,682
 1,158,712
GSE CRT, at fair value907,529
 819,329
 861,253
929,035
 819,329
 842,197
Loan participation interest, at fair value53,827
 54,981
 
45,115
 54,981
 45,058
Commercial loans, at amortized cost24,454
 31,582
 184,255
24,188
 31,582
 31,707
Investments in unconsolidated ventures24,129
 24,012
 28,168
23,305
 24,012
 24,217
Total Investment portfolio21,230,008
 17,507,217
 17,834,657
Total investment portfolio23,692,107
 17,507,217
 18,437,807
During the threenine months ended March 31,September 30, 2019, we purchased $4.1$4.7 billion of newly issued fixed rate Agency RMBS, $3.7 billion of Agency RMBS and Agency CMBS, $143.9$432.8 million of non-Agency CMBS, $75.6$99.1 million of non-Agency RMBS and $94.6$209.8 million of GSE CRT. We funded these purchases withby leveraging the proceeds fromof our February 2019 and August 2019 common stock issuances and with cash proceeds from paydowns and sales of securities. During the threenine months ended March 31,September 30, 2019, we continued to actively manage our investment portfolio, sellingsold most of our ARM and Hybrid ARM securities. We primarily reinvested the proceeds into fixed rate Agency RMBS and Agency CMBS.
As of March 31,September 30, 2019 our holdings of 30 year fixed-rate Agency RMBS representrepresented approximately 60%51% of our total investment portfolio versus 56% as of December 31, 2018 and 43%57% as of March 31,September 30, 2018. Most of our holdings of 30 year fixed-rate Agency RMBS are in specified pools with attractive prepayment characteristics. We have continued to increase our holdings ofpurchased newly issued 30 year fixed-rate Agency RMBS over the past 12 months as the return on equity profile for these securities remained attractive. Return on equityis attractive as valuations have been impacted by higher interest rate volatility, reduced Federal Reserve demand and expectations for 30 year fixed-rate Agency RMBS remained accretive dueincreased supply, in addition to lower funding costs given changes in the outlook for short-term interest rates. We have focused our purchases on 30 year specified pools priced at modest pay-ups to generic Agency RMBS because those securities have characteristics that reduce prepayment risk.

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September 30, 2019 our holdings of Agency CMBS represented approximately 21% of our total investment portfolio versus 6% as of December 31, 2018 and 3% as of September 30, 2018. Our Agency CMBS holdings as of September 30, 2019 include approximately $1.3 billion of to-be-announced ("TBA") securities that will primarily settle in the fourth quarter of 2019. We began investing in Agency CMBS issued by Freddie Mac and Fannie Mae late in the second quarter of 2018 and began investing in Agency CMBS issued by Ginnie Mae in the third quarter of 2019. We have continued to investincreased our holdings of Agency CMBS in 2019 because these securities in 2019. We purchased these securities because we believe theybenefit from prepayment protection characteristics and have an attractive convexity and return on equity profile. They offer targeted exposure to multi-family loans andAgency CMBS benefit from a guarantee of principal and interest payments from governmental agencies and federally chartered corporations. Further, the hedging costs related to these holdings are economical as they are less sensitive to interest rate risk given limited extension beyond initial expected maturity dates and underlying loan prepayment protection.
Our portfolio of investments that have credit exposure includesinclude non-Agency CMBS, non-Agency RMBS, GSE CRTs, a commercial real estate loan, and a loan participation interest. Rather than relying on the rating agencies, we utilize proprietary models as well as third party applications to quantify and monitor the credit risk associated with our portfolio holdings. Our analysis generally begins at the underlying asset level, where we gather detailed information on loan, borrower, and property characteristics that inform our expectations for future performance. In addition to base case cash flow projections, we perform a range of scenario stresses to gauge the sensitivity of returns to potential deviations in underlying asset behavior. We perform this detailed credit analysis at the time of initial purchase and regularly throughout the holding period of each investment.
OurAs of September 30, 2019 our holdings of non-Agency CMBS portfolio generally consists of assets originated during and after 2010. These assets continue to benefit from rating agency upgrades, property price appreciation and limited supply. Non-Agency CMBS investments representrepresented approximately 16% of our total investment portfolio versus 19% as of MarchDecember 31, 2019.2018 and 18% as of September 30, 2018. Our non-Agency CMBS portfolio is collateralized by loans secured by various property types located across the United States. Property types include but are not limited to office, retail, multi-family, industrial warehouse and hotel. The largest property geographic locations include New
With respect to
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York, California, Texas, Florida and Illinois. The majority of our non-Agency CMBS portfolio is comprised of fixed rate credits that are rated investment grade or higher by a nationally recognized statistical rating organization. Over 80% of our non-Agency CMBS portfolio is collateralized by loans originated after 2009 and before 2017. These seasoned investments generally benefit from property price appreciation, growing credit enhancement and, in some instances, rating agency upgrades. The remainder of our assets were originated during and after 2017. We continue to identify attractive opportunities in this sector given our expectation for commercial real estate property rent growth, further property price appreciation and strong loan performance. 
As of September 30, 2019 our holdings of non-Agency RMBS represented approximately 4% of our total investment portfolio weversus 7% as of December 31, 2018 and 6% as of September 30, 2018. We primarily invest in non-Agency RMBS securities collateralized by prime and Alt-A loans. In addition, we have invested in re-securitizations of real estate mortgage investment conduit ("Re-REMIC") RMBS and securitizations of reperforming mortgage loans that we expect to provide attractive risk adjusted returns. We also invest in GSE CRTs which have the added benefit of paying a floating rate coupon reducingand reduce our need to hedge interest rate risk. The majority of our GSE CRT holdings are concentrated in 2013 and 2014 vintages, where reference loans have significant embedded home price appreciation. From a fundamental perspective, we continue to view GSE CRT as an attractive asset class based on the strength of the U.S. housing market and the strong performance of reference mortgage loans to date.
During the third quarter of 2018, we acquired a participation interest in a secured loan collateralized by mortgage servicing rights associated with Fannie Mae, Freddie Mac, and Ginnie Mae loans. The secured loan has a two year term subject to a one year extension at the borrower's option. We funded $53.8$45.1 million of the loan as of March 31,September 30, 2019 and have committed to fund up to an additional $21.2$29.9 million.
As of March 31,September 30, 2019, ourwe have invested in one commercial real estate loan portfolio consists of one mezzanine loan that we originated with a weighted average maturity of approximately two yearsmatures in 2021 and has a loan-to-value ratio of approximately 74.2%73.4%. The commercial real estate loan had an average earning asset yield of 10.89% during the three months ended September 30, 2019 and continued to benefit from favorable fundamentals. One commercial loan was repaid during the threenine months ended March 31,September 30, 2019. The commercial real estate loan had a weighted average yield of 11.08% during the three months ended March 31, 2019 and continued to benefit from favorable fundamentals.
We have also invested in two joint ventures that invest in our target assets.
Portfolio Characteristics
The table below illustrates the vintage distribution of our non-Agency RMBS, GSE CRT and non-Agency CMBS portfolio as of March 31,September 30, 2019 as a percentage of the fair value:
2003-2007 2008-2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total2003-2007 2008-2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total
Prime18.1% 0.6% —%
 —%
 12.5% 10.0% 2.4% 0.3% —%
 15.1% 6.2% 65.2%17.6% 0.7% % % 13.8% 6.9% % 0.4% % 16.3% 7.8% 63.5%
Alt-A26.2% —%
 —%
 —%
 —%
 —%
 —%
 —%
 —%
 —%
 —%
 26.2%27.9% % % % % % % % % % % 27.9%
Re-REMIC (1)
0.6% 4.2% 1.7% 1.4% 0.6% —%
 —%
 —%
 —%
 —%
 —%
 8.5%0.6% 4.3% 1.7% 1.3% 0.6% % % % % % % 8.5%
Subprime/RPL0.1% —%
 —%
 —%
 —%
 —%
 —%
 —%
 —%
 —%
 —%
 0.1%0.1% % % % % % % % % % % 0.1%
Total Non-Agency45.0% 4.8% 1.7% 1.4% 13.1% 10.0% 2.4% 0.3% % 15.1% 6.2% 100.0%
Total Non-Agency RMBS46.2% 5.0% 1.7% 1.3% 14.4% 6.9% % 0.4% % 16.3% 7.8% 100.0%
GSE CRT—%
 —%
 —%
 —%
 27.4% 31.8% 5.7% 20.3% 3.3% 6.2% 5.3% 100.0%% % % % 24.0% 29.3% 4.7% 18.6% 3.2% 5.8% 14.4% 100.0%
Non-Agency CMBS—%
 2.5% 16.4% 10.9% 12.0% 31.9% 7.8% 3.2% 8.2% 4.8% 2.3% 100.0%% 2.2% 14.7% 9.9% 12.0% 29.2% 7.2% 5.6% 8.7% 5.6% 4.9% 100.0%
(1)
Reflects the year in which the re-securitizations were issued. The vintage distribution of the securities that collateralize our Re-REMIC investments is 4.5%4.6% for 2005, 1.8%0.9% for 2006, and 93.7%94.5% for 2007.


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The following table summarizes the credit enhancement provided to our non-Agency RMBS Re-REMIC holdings as of March 31,September 30, 2019 and December 31, 2018.
Percentage of Re-REMIC 
Holdings at Fair Value
Percentage of Re-REMIC 
Holdings at Fair Value
Re-REMIC Subordination(1)
March 31, 2019 December 31, 2018September 30, 2019 December 31, 2018
0% - 10%52.3% 49.8%56.3% 49.8%
10% - 20%3.4% 3.4%3.1% 3.4%
20% - 30%17.3% 16.9%18.9% 16.9%
30% - 40%12.9% 14.9%10.7% 14.9%
40% - 50%1.3% 1.8%0.6% 1.8%
50% - 60%12.4% 12.5%10.4% 12.5%
60% - 70%0.4% 0.7%% 0.7%
Total100.0% 100.0%100.0% 100.0%
(1)Subordination refers to the credit enhancement provided to the Re-REMIC tranche held by us by any junior Re-REMIC tranche or tranches in a resecuritization. This figure reflects the percentage of the balance of the underlying securities represented by any junior tranche or tranches at the time of resecuritization. Generally, principal losses on the underlying securities in excess of the subordination amount would result in principal losses on the Re-REMIC tranche held by us. As of March 31,September 30, 2019, 71.5%74.8% of our Re-REMIC holdings are not senior tranches.


The tables below represent the geographic concentration of the underlying collateral for our non-Agency RMBS, GSE CRT and non-Agency CMBS portfolio as of March 31,September 30, 2019:
Non-Agency RMBS
State
 Percentage 
GSE CRT
State
 Percentage 
Non-Agency CMBS
State
 Percentage Percentage 
GSE CRT
State
 Percentage 
Non-Agency CMBS
State
 Percentage
California 46.0% California 18.4% California 15.2% 44.9% California 18.2% New York 15.1%
New York 8.5% Texas 6.2% New York 14.7% 8.3% Texas 6.4% California 14.9%
Florida 6.0% Florida 4.6% Texas 9.0% 6.2% Florida 4.8% Texas 8.7%
New Jersey 3.8% New York 4.4% Florida 6.5% 4.0% New York 4.5% Florida 6.2%
Massachusetts 3.3% Virginia 4.2% Illinois 4.1%
Virginia 2.9% Illinois 3.9% Pennsylvania 3.7% 3.1% Virginia 4.0% Illinois 4.5%
Washington 2.8% Washington 3.4% Ohio 3.1% 3.0% Illinois 3.8% Pennsylvania 3.6%
Maryland 2.6% Massachusetts 3.3% Virginia 3.1% 2.7% Washington 3.5% New Jersey 3.6%
Massachusetts 2.7% New Jersey 3.2% Ohio 3.1%
Colorado 2.6% New Jersey 3.3% Georgia 3.0% 2.7% Massachusetts 3.2% Michigan 3.0%
Illinois 2.4% Pennsylvania 3.1% New Jersey 3.0% 2.5% Colorado 3.2% Virginia 3.0%
Other 19.1% Other 45.2% Other 34.6% 19.9% Other 45.2% Other 34.3%
Total 100.0% Total 100.0% Total 100.0% 100.0% Total 100.0% Total 100.0%
Financing and Other Liabilities
We enter into repurchase agreements to finance the majority of our target assets. These agreements are secured by our mortgage-backed and credit risk transfer securities and an investment in a loan participation interest. Repurchase agreements are generally settled on a short-term basis, usually from one to twelve months, and bear interest at rates that have historically moved in close relationship to LIBOR. At each settlement date, we refinance each repurchase agreement at the market interest rate at that time. As of March 31,September 30, 2019, we had entered into repurchase agreements totaling $16.8$18.1 billion (December 31, 2018: $13.6 billion).
Our wholly-owned captive insurance subsidiary, IAS Services, is a member of the Federal Home Loan Bank of Indianapolis ("FHLBI"). As a member of the FHLBI, IAS Services has borrowed funds from the FHLBI in the form of secured loans. As of March 31,September 30, 2019, IAS Services had $1.65 billion in outstanding secured loans. For the threenine months ended March 31,September 30, 2019, IAS Services had weighted average borrowings of $1.65 billion with a weighted average borrowing rate of 2.70%2.65% and a weighted average maturity of 5.14.6 years.


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The following table presents the amount of collateralized borrowings outstanding under repurchase agreements and secured loans as of the end of each quarter, the average amount outstanding during the quarter and the maximum balance outstanding during the quarter:
$ in thousandsCollateralized borrowings under repurchase agreements and secured loans
Quarter EndedQuarter-end balance Average quarterly balance Maximum balance of any quarter-end
March 31, 201815,561,137
 15,536,093
 15,561,137
June 30, 201815,352,321
 15,275,972
 15,352,321
September 30, 201816,028,518
 15,973,428
 16,078,388
December 31, 201815,252,484
 15,836,597
 16,144,062
March 31, 201918,474,387
 17,229,809
 18,474,387
In 2013, our wholly-owned subsidiary, IAS Operating Partnership LP, issued $400.0 million in aggregate principal amount of Exchangeable Senior Notes (the "Notes"). We retired a portion of the Notes prior to their maturity and fully retired the Notes upon their maturity on March 15, 2018. We utilized proceeds from repurchase agreement borrowings to retire the Notes.
$ in thousandsCollateralized borrowings under repurchase agreements and secured loans
Quarter EndedQuarter-end balance Average quarterly balance Maximum balance
September 30, 201816,028,518
 15,973,428
 16,078,388
December 31, 201815,252,484
 15,836,597
 16,144,062
March 31, 201918,474,387
 17,229,809
 18,474,387
June 30, 201918,725,065
 19,019,503
 19,365,413
September 30, 201919,722,032
 19,535,263
 19,898,863
We have invested in and partially funded our portion of a commitment in a loan participation. The remainder of our commitment under the agreement will be funded over the two yearremaining term of the loan based upon the financing needs of the borrower. As of March 31,September 30, 2019, we havehad unfunded commitments of $21.2$29.9 million.
We have also committed to invest up to $122.5$125.1 million in unconsolidated ventures that are sponsored by an affiliate of our Manager. As of March 31,September 30, 2019, $114.9$118.7 million of our commitment to these unconsolidated ventures has been called. We are committed to fund $7.6$6.4 million in additional capital to fund future investments and cover future expenses should they occur.
Hedging Instruments.
As of March 31,September 30, 2019, we havehad entered into interest rate swap agreements designed to mitigate the effects of increases in interest rates for a portion of our borrowings. Under these swap agreements, we pay fixed interest rates and receive floating interest rates indexed off of one- or three-month LIBOR, effectively fixing the floating interest rates on $12.9$14.4 billion (December 31, 2018: $12.4 billion) of borrowings. As of March 31,September 30, 2019, we received interest based on one-month LIBOR on $8.4$11.6 billion of our swaps and interest based on three-month LIBOR on $4.5$2.8 billion of our swaps.
During the threenine months ended March 31,September 30, 2019, we terminated existing swaps with a notional amount of $4.1$18.5 billion and entered into new swaps with a notional amount of $4.6$20.6 billion to hedge repurchase agreement debt associated with purchases of Agency RMBS and Agency CMBS securities duringsecurities. We actively manage our swap portfolio by terminating and entering into new swaps as the quarter.size and composition of our investment portfolio changes. As of September 30, 2019, our interest rate swap portfolio had a weighted average fixed pay rate of 1.68% (December 31, 2018: 2.46%) and a weighted average years to maturity of 4.3 years (December 31, 2018: 3.7 years). Daily variation margin payment for interest rate swaps is characterized as settlement of the derivative itself rather than collateral and is recorded as a realized gain or loss in our condensed consolidated statement of operations. We realized a net loss of $165.9$545.1 million on interest rate swaps during the threenine months ended March 31,September 30, 2019 primarily due to falling interest rates in the first quarter of 2019.
As of March 31,September 30, 2019, we held $1.6 billion$494.3 million (December 31, 2018: $1.7 billion) in notional amount of futures contracts. During the threenine months ended March 31,September 30, 2019, we settled futures contracts with a notional amount of $1.7$4.8 billion and realized a net loss of $66.7$169.3 million due to falling interest rates in the first quarter of 2019. Daily variation margin payment for futures is characterized as settlement of the derivative itself rather than collateral and is recorded as a realized gain or loss in our condensed consolidated statement of operations.
We enter into currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates on investments denominated in foreign currencies. During the threenine months ended March 31,September 30, 2019, we settled currency forward contracts of $23.1$75.3 million (March 31,(September 30, 2018: $76.9$233.6 million) in notional amount and realized a net gain of $185,000 (March 31,$1.1 million (September 30, 2018: $3.4$1.5 million net loss)gain). As of March 31,September 30, 2019, we had $25.5$29.5 million (December 31, 2018: $23.1 million) of notional amount of forward contracts denominated in Euro related to our investment in an unconsolidated venture.



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Book Value per Common Share
We calculate book value per common share as follows:

As ofAs of
In thousands except per share amountsMarch 31, 2019 December 31, 2018September 30, 2019 December 31, 2018
Numerator (adjusted equity):      
Total equity2,671,714
 2,286,697
2,911,032
 2,286,697
Less: Liquidation preference of Series A Preferred Stock(140,000) (140,000)(140,000) (140,000)
Less: Liquidation preference of Series B Preferred Stock(155,000) (155,000)(155,000) (155,000)
Less: Liquidation preference of Series C Preferred Stock(287,500) (287,500)(287,500) (287,500)
Total adjusted equity2,089,214
 1,704,197
2,328,532
 1,704,197
      
Denominator (number of shares):      
Common stock outstanding128,267
 111,585
142,802
 111,585
      
Book value per common share16.29
 15.27
16.31
 15.27
Our book value per common share increased 6.7%6.8% as of March 31,September 30, 2019 compared to December 31, 2018 primarily due to interest rate spread tightening in both Agency and credit assets. Refer to Item 3. "Quantitative and Qualitative Disclosures About Market Risk" for interest rate risk and its impact on fair value.

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Critical Accounting Policies
Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment and use of assumptions as to future uncertainties. Accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they involve significant judgments and uncertainties. All of these estimates reflect our best judgment about current, and for some estimates, future economic and market conditions and their effects based on information available as of the date of these financial statements. If conditions change from those expected, it is possible that the judgments and estimates described below could change, which may result in a change in valuation of our investment portfolio, future impairments of our MBS and GSE CRTs, change in our interest income recognition, allowance for loan losses, and a change in our tax liability among other effects.
There have been no significant changes to our critical accounting policies that are disclosed in our most recent Form 10-K for the year ended December 31, 2018.
Recent Accounting Standards
See Part I, Item 1, Financial Statements Note 2 - "Accounting Pronouncements Recently Adopted" and "Pending Accounting Pronouncements".




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Results of Operations
The table below presents certain information from our condensed consolidated statements of operations for the three and nine months ended March 31,September 30, 2019 and 2018.
Three Months Ended March 31,Three Months Ended September 30, Nine Months Ended September 30,
$ in thousands, except share data2019 20182019 2018 2019 2018
Interest Income          
Mortgage-backed and credit risk transfer securities185,492
 149,003
194,938
 160,416
 581,167
 456,967
Commercial and other loans1,582
 4,222
1,353
 1,672
 4,419
 9,945
Total interest income187,074
 153,225
196,291
 162,088
 585,586
 466,912
Interest Expense          
Repurchase agreements101,875
 59,585
112,851
 81,763
 332,704
 210,737
Secured loans11,144
 6,927
10,413
 9,490
 32,815
 24,888
Exchangeable senior notes
 1,621

 
 
 1,621
Total interest expense113,019
 68,133
123,264
 91,253
 365,519
 237,246
Net interest income74,055
 85,092
73,027
 70,835
 220,067
 229,666
Other Income (loss)          
Gain (loss) on investments, net268,382
 (160,370)202,413
 (207,910) 772,977
 (404,657)
Equity in earnings (losses) of unconsolidated ventures692
 896
403
 1,084
 1,797
 2,778
Gain (loss) on derivative instruments, net(201,460) 133,367
(177,244) 87,672
 (723,437) 288,208
Realized and unrealized credit derivative income (loss), net7,884
 3,165
1
 4,975
 5,447
 8,875
Net loss on extinguishment of debt
 (26)
 
 
 (26)
Other investment income (loss), net1,029
 3,102
1,005
 1,068
 3,041
 2,010
Total other income (loss)76,527
 (19,866)26,578
 (113,111) 59,825
 (102,812)
Expenses          
Management fee – related party9,534
 10,221
8,740
 10,105
 27,644
 30,428
General and administrative2,258
 1,756
1,862
 1,673
 6,119
 4,954
Total expenses11,792
 11,977
10,602
 11,778
 33,763
 35,382
Net income138,790
 53,249
Net income attributable to non-controlling interest
 671
Net income attributable to Invesco Mortgage Capital Inc.138,790
 52,578
Net income (loss)89,003
 (54,054) 246,129
 91,472
Net income (loss) attributable to non-controlling interest
 (681) 
 1,153
Net income (loss) attributable to Invesco Mortgage Capital Inc.89,003
 (53,373) 246,129
 90,319
Dividends to preferred stockholders11,107
 11,107
11,107
 11,107
 33,320
 33,320
Net income attributable to common stockholders127,683
 41,471
Earnings per share:   
Net income (loss) attributable to common stockholders77,896
 (64,480) 212,809
 56,999
Earnings (loss) per share:       
Net income (loss) attributable to common stockholders          
Basic1.05
 0.37
0.57
 (0.58) 1.66
 0.51
Diluted1.05
 0.37
0.57
 (0.58) 1.65
 0.51
Weighted average number of shares of common stock:          
Basic121,097,686
 111,629,105
135,799,499
 111,647,456
 128,573,412
 111,639,132
Diluted121,109,259
 117,876,995
135,812,019
 113,072,456
 128,585,623
 113,079,666


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Interest Income and Average Earning Asset Yields
The table below presents information related to our average earning assets and earning asset yields for the three and nine months ended March 31,September 30, 2019 and 2018.
Three Months Ended March 31,Three Months Ended September 30, Nine Months Ended September 30,
$ in thousands2019 20182019 2018 2019 2018
Average Balances (1):
          
Agency RMBS:          
15 year fixed-rate, at amortized cost371,228
 2,879,696
312,603
 1,613,967
 342,003
 2,376,050
30 year fixed-rate, at amortized cost11,780,005
 7,830,802
11,837,640
 9,362,170
 12,062,635
 8,338,593
ARM, at amortized cost19,355
 231,303
Hybrid ARM, at amortized cost224,458
 1,666,890
66,671
 1,484,791
 153,731
 1,731,512
Agency - CMO, at amortized cost291,914
 273,884
420,889
 242,133
 364,005
 256,770
Agency CMBS, at amortized cost1,129,227
 
2,796,732
 516,992
 1,961,730
 190,951
Non-Agency CMBS, at amortized cost3,361,132
 3,193,575
3,607,381
 3,236,226
 3,480,642
 3,202,556
Non-Agency RMBS, at amortized cost1,084,721
 1,084,584
946,446
 1,055,671
 1,016,835
 1,056,962
GSE CRT, at amortized cost808,296
 776,742
905,062
 762,235
 855,501
 769,546
Loan participation interest54,763
 
45,465
 29,875
 50,501
 10,068
Commercial loans, at amortized cost27,375
 193,540
24,233
 55,607
 25,313
 137,028
Average earning assets19,152,474
 18,131,016
20,963,122
 18,359,667
 20,312,896
 18,070,036
Average Earning Asset Yields (2):
          
Agency RMBS:          
15 year fixed-rate3.50% 2.04%3.32% 2.59% 3.35% 2.15%
30 year fixed-rate3.38% 2.96%3.19% 2.96% 3.34% 2.96%
ARM3.70% 2.32%
Hybrid ARM3.47% 2.24%3.22% 2.56% 3.26% 2.36%
Agency - CMO3.56% 2.51%3.40% 3.20% 3.38% 2.90%
Agency CMBS3.52% %3.44% 2.85% 3.46% 3.34%
Non-Agency CMBS4.98% 4.85%5.09% 4.88% 5.05% 4.89%
Non-Agency RMBS6.71% 7.08%6.54% 7.17% 6.60% 7.12%
GSE CRT (3)
3.67% 3.00%3.33% 3.56% 3.51% 3.31%
Loan participation interest6.14% %6.18% 5.87% 6.14% 5.87%
Commercial loans11.08% 8.85%10.89% 10.05% 11.04% 9.45%
Average earning asset yields3.91% 3.38%3.75% 3.53% 3.84% 3.45%
(1)Average balances for each period are based on weighted month-end average earning assets.
(2)Average earning asset yields for the period were calculated by dividing interest income, including amortization of premiums and discounts, by the 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.
Our primary source of income is interest earned on our investment portfolio. We had average earning assets of approximately $19.2$21.0 billion for the three months ended March 31,September 30, 2019 (March 31,(September 30, 2018: $18.4 billion) and $20.3 billion for the nine months ended September 30, 2019 (September 30, 2018: $18.1 billion). Average earning assets increased for the three and nine months ended March 31,September 30, 2019 primarily because we invested $258.6and leveraged $486.0 million in net proceeds from 2019 common stock issuances and $168.1$168.3 million in proceeds from commercial loan repayments insince the beginning of 2018 and the first quarter of 2019 into newly issued 30 year fixed-rate Agency RMBS and Agency CMBS securities.


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We earned total interest income of $187.1$196.3 million (March 31,(September 30, 2018: $153.2$162.1 million) and $585.6 million (September 30, 2018: $466.9 million) for the three and nine months ended March 31,September 30, 2019. Our interest income includes coupon interest and net premium amortization on MBS and GSE CRTs as well as interest income on commercial and other loans as shown in the table below.
Three Months Ended March 31,Three Months Ended September 30, Nine Months Ended September 30,
$ in thousands2019 20182019 2018 2019 2018
Interest Income          
MBS and GSE CRT - coupon interest192,442
 166,319
213,546
 175,696
 620,489
 506,180
MBS and GSE CRT - net premium amortization(6,950) (17,316)(18,608) (15,280) (39,322) (49,213)
MBS and GSE CRT - interest income185,492
 149,003
194,938
 160,416
 581,167
 456,967
Commercial and other loans1,582
 4,222
1,353
 1,672
 4,419
 9,945
Total interest income187,074
 153,225
196,291
 162,088
 585,586
 466,912
MBS and GSE CRT interest income increased $36.5$34.5 million and $124.2 million, respectively, for the three and nine months ended March 31,September 30, 2019 compared to 2018 primarily due to higher coupon interest rates on higher average earnings assets and lower net premium amortization. Net premium amortization decreased $10.4 million for the three months ended March 31, 2019 compared to 2018 primarily due to slower prepayment speeds on 30 year fixed-rate Agency RMBS and purchases of non-Agency CMBS securities at a discount over the last twelve months.assets.
Interest income on our commercial and other loans decreased $2.6$319,000 and $5.5 million, respectively, during the three and nine months ended March 31,September 30, 2019 primarily due to commercial loan repayments overtotaling $168.3 million since the past twelve months. The balancebeginning of our commercial loans held-for-investment decreased to $24.5 million as of March 31, 2019 compared to $184.3 million as of March 31, 2018.
Our average earning asset yields increased 5322 and 39 basis points, respectively, during the three and nine months ended March 31,September 30, 2019 compared to 2018 primarily due to purchases of new securities at higher yields slower prepayment speeds and higher index rates on floating and adjustable assets.
Prepayment Speeds
Our RMBS and GSE CRT portfolio is subject to inherent prepayment risk primarily driven by changes in interest rates, which impacts the amount of premium and discount on the purchase of these securities that is recognized into interest income. Expected future prepayment speeds on our RMBS and GSE CRT portfolio are estimated on a quarterly basis. Generally, in an environment of falling interest rates, prepayment speeds will increase as homeowners are more likely to prepay their existing mortgage and refinance into a lower borrowing rate. If the actual prepayment speed during the period is faster than estimated, the amortization on securities purchased at a premium to par value will be accelerated, resulting in lower interest income recognized. Conversely, for securities purchased at a discount to par value, interest income will be reduced in periods where prepayment speeds were slower than expected. The standard measure of prepayment speeds is the constant prepayment rate, also known as the conditional prepayment rate or "CPR". CPR measures prepayments as a percentage of the current outstanding loan balance and is expressed as a compound annual rate. The table below provides the three month constant prepayment rate for our RMBS and GSE CRTs as of March 31,September 30, 2019, December 31, 2018,June 30, 2019, September 30, 2018 and June 30, 2018.
As ofAs of
March 31, 2019 December 31, 2018 September 30, 2018 June 30, 2018September 30, 2019 June 30, 2019 September 30, 2018 June 30, 2018
15 year fixed-rate Agency RMBS7.1
 8.8
 10.9
 10.6
12.3
 11.1
 10.9
 10.6
30 year fixed-rate Agency RMBS4.9
 6.2
 7.4
 8.2
13.8
 8.5
 7.4
 8.2
ARM/ Hybrid ARM Agency RMBS15.7
 13.8
 16.6
 15.7
Hybrid ARM Agency RMBS29.2
 18.2
 16.6
 15.7
Non-Agency RMBS8.3
 9.1
 10.5
 12.0
16.1
 11.4
 10.5
 12.0
GSE CRT6.6
 8.7
 10.9
 9.8
15.0
 9.8
 10.9
 9.8
Weighted average CPR5.7
 7.3
 8.9
 10.2
14.1
 9.0
 8.9
 10.2


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The following table presents net premium amortization recognized on our MBS and GSE CRT portfolio for the three and nine months ended March 31,September 30, 2019 and 2018.
Three Months Ended March 31,Three Months Ended September 30, Nine Months Ended September 30,
$ in thousands, except share data2019 20182019 2018 2019 2018
Agency RMBS and Agency CMBS(12,725) (23,222)
Agency RMBS(21,526) (20,598) (50,873) (66,094)
Agency CMBS(1,395) (252) (2,835) (253)
Non-Agency CMBS3,031
 1,426
3,957
 1,470
 10,338
 4,091
Non-Agency RMBS3,922
 5,177
2,725
 4,831
 9,447
 15,167
GSE CRT(1,178) (697)(2,369) (731) (5,399) (2,124)
Net (premium amortization) discount accretion(6,950) (17,316)(18,608) (15,280) (39,322) (49,213)
Net premium amortization decreasedincreased $3.3 million for the three months ended September 30, 2019 compared to the same period in 2018 primarily due to slowerfaster prepayment speeds on 30 year fixed-rate Agency RMBS, in the three months ended March 31, 2019non-Agency RMBS and GSE CRTs. Higher premium amortization was partially offset by discount accretion on purchases of non-Agency CMBS securities at a discount over the last 12twelve months. Net premium amortization decreased $9.9 million for the nine months ended September 30, 2019 compared to 2018 primarily due to changes in the composition of our Agency RMBS portfolio.
Our interest income is subject to interest rate risk. Refer to Item 3. "Quantitative and Qualitative Disclosures about Market Risk" for more information relating to interest rate risk and its impact on our operating results.
Interest Expense and the Cost of Funds
The table below presents the components of interest expense for the three and nine months ended March 31,September 30, 2019 and 2018:
Three Months Ended March 31,Three Months Ended September 30, Nine Months Ended September 30,
$ in thousands2019 20182019 2018 2019 2018
Interest Expense          
Interest expense on repurchase agreement borrowings107,726
 66,124
118,832
 88,185
 350,452
 230,596
Amortization of net deferred (gain) loss on de-designated interest rate swaps(5,851) (6,539)(5,981) (6,422) (17,748) (19,859)
Repurchase agreements interest expense101,875
 59,585
112,851
 81,763
 332,704
 210,737
Secured loans11,144
 6,927
10,413
 9,490
 32,815
 24,888
Exchangeable senior notes
 1,621

 
 
 1,621
Total interest expense113,019
 68,133
123,264
 91,253
 365,519
 237,246
We enter into repurchase agreements to finance the majority of our target assets. These agreements are secured by our mortgage-backed and credit risk transfer securities. These agreements are generally settled on a short-term basis, usually from one to twelve months, and bear interest at rates that have historically moved in close relationship to LIBOR. At each settlement date, we typically refinance each repurchase agreement at the market interest rate at that time.
Our interest expense on repurchase agreement borrowings rose $41.6$30.6 million and $119.9 million for the three and nine months ended March 31,September 30, 2019, respectively, compared to 2018 due to higher average borrowings and increasesa higher average cost of funds in the federal funds rate over the past twelve months.2019 period. We increased our average borrowings in the first quarter of 2019 after investing $258.6and leveraging $486.0 million in net proceeds from 2019 common stock issuances and $168.1$168.3 million in proceeds from commercial loan repayments insince the beginning of 2018 and the first quarter of 2019primarily into newly issued 30 year fixed-rate Agency RMBS and Agency CMBS securities.CMBS.
Our repurchase agreement interest expense as reported in our condensed consolidated statement of operations includes amortization of net deferred gains and losses on de-designated interest rate swaps as summarized in the table above. Amortization of net deferred gains on de-designated interest rate swaps decreased our total interest expense by $5.9$6.0 million and $17.7 million, respectively, during the three and nine months ended March 31,September 30, 2019 and $6.5$6.4 million and $19.9 million, respectively, during the three and nine months ended March 31,September 30, 2018. 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 life of the interest rate swap agreements. During the next twelve months, we estimate that $23.8 million of net

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deferred gains on de-designated interest rate swaps will be reclassified from other comprehensive income and recorded as a decrease to interest expense.
During the three and nine months ended March 31,September 30, 2019, interest expense for our secured loans increased $4.2$923,000 and $7.9 million, respectively, compared to the same period in 2018 due to higher borrowing rates. Borrowing rates on our secured loans are based on the three-month FHLB swap rate plus a spread. For the threenine months ended March 31,September 30, 2019, the weighted average borrowing rate on our secured loans was 2.70%2.65% as compared to 1.68%2.01% for the threenine months ended March 31,September 30, 2018.

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During the threenine months ended March 31,September 30, 2019, interest expense on exchangeable senior notes (the "Notes") decreased $1.6 million compared to the same period in 2018 because the Notes were retired on March 15, 2018.
Our total interest expense during the three months ended March 31,September 30, 2019 increased $44.9$32.0 million from the same period in 2018 primarily due to the $45.8$31.6 million increase in interest expense on repurchase agreements borrowings and secured loans in the 2019.
Our total interest expense during the nine months ended September 30, 2019 increased $128.3 million from the same period in 2018 primarily due to the $127.8 million increase in interest expense on repurchase agreements borrowings and secured loans in the 2019 period offset by a $1.6 million decrease in interest expense on the Notes as discussed above.
The table below presents information related to our borrowings and cost of funds for the three and nine months ended March 31,September 30, 2019 and 2018:
Three Months Ended March 31,Three Months Ended September 30, Nine Months Ended September 30,
$ in thousands2019 20182019 2018 2019 2018
Average Borrowings(1):
          
Agency RMBS (2)
11,664,156
 11,427,614
11,808,241
 11,326,323
 11,996,851
 11,299,625
Agency CMBS
1,074,917
 
2,794,691
 472,011
 1,923,397
 173,727
Non-Agency CMBS (2)
2,663,941
 2,542,722
3,047,334
 2,575,504
 2,844,764
 2,558,317
Non-Agency RMBS886,554
 891,202
865,961
 895,504
 884,580
 882,784
GSE CRT717,482
 674,555
776,555
 681,079
 748,856
 674,560
Exchangeable senior notes
 116,176

 
 
 38,300
Loan participation interest41,072
 
34,099
 22,406
 37,876
 7,551
Total average borrowings17,048,122
 15,652,269
19,326,881
 15,972,827
 18,436,324
 15,634,864
Maximum borrowings during the period (3)
18,474,387
 15,674,202
19,898,863
 16,078,387
 19,898,863
 16,078,387
Average Cost of Funds (4):
          
Agency RMBS (2)
2.59% 1.65%2.54% 2.24% 2.62% 1.96%
Agency CMBS2.64% %2.54% 2.26% 2.59% 2.22%
Non-Agency CMBS (2)
3.24% 2.28%3.00% 2.88% 3.14% 2.61%
Non-Agency RMBS3.54% 2.91%3.26% 3.40% 3.42% 3.17%
GSE CRT3.49% 2.87%3.22% 3.26% 3.39% 3.10%
Exchangeable senior notes% 5.58%% % % 5.58%
Loan participation interest4.15% %4.03% 3.83% 4.10% 3.83%
Cost of funds2.65% 1.74%2.55% 2.29% 2.64% 2.02%
Effective cost of funds (non-GAAP measure) (5)
2.68% 2.22%2.43% 2.52% 2.60% 2.36%
(1)Average borrowings for each period are based on weighted month-end balances.
(2)Agency RMBS and non-Agency CMBS average borrowings and average 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 our average borrowings.
(5)For a reconciliation of cost of funds to effective cost of funds, see "Non-GAAP Financial Measures."

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Total average borrowings rose $1.4$3.4 billion and $2.8 billion, respectively, in the three and nine months ended March 31,September 30, 2019 compared to 2018 primarily because we entered into repurchase agreements to finance our increased holdings of 30 year fixed-rate Agency RMBS, Agency CMBS and non-Agency CMBS. The increase in ourOur average cost of funds rose 26 basis points and 62 basis points, respectively, for three and nine months ended March 31,September 30, 2019 versus 2018 was primarily due to increases in the federal funds rate over the past twelve months.throughout 2018.

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Net Interest Income
The table below presents the components of net interest income for the three and nine months ended March 31,September 30, 2019 and 2018:
Three Months Ended March 31,Three Months Ended September 30, Nine Months Ended September 30,
$ in thousands2019 20182019 2018 2019 2018
Interest Income          
Mortgage-backed and credit risk transfer securities185,492
 149,003
194,938
 160,416
 581,167
 456,967
Commercial and other loans1,582
 4,222
1,353
 1,672
 4,419
 9,945
Total interest income187,074
 153,225
196,291
 162,088
 585,586
 466,912
Interest Expense          
Interest expense on repurchase agreement borrowings107,726
 66,124
118,832
 88,185
 350,452
 230,596
Amortization of net deferred (gain) loss on de-designated interest rate swaps(5,851) (6,539)(5,981) (6,422) (17,748) (19,859)
Repurchase agreements interest expense101,875
 59,585
112,851
 81,763
 332,704
 210,737
Secured loans11,144
 6,927
10,413
 9,490
 32,815
 24,888
Exchangeable senior notes
 1,621

 
 
 1,621
Total interest expense113,019
 68,133
123,264
 91,253
 365,519
 237,246
Net interest income74,055
 85,092
73,027
 70,835
 220,067
 229,666
Net interest rate margin1.26% 1.64%1.20% 1.24% 1.20% 1.43%
Our net interest income, which equals interest income less interest expense, totaled $74.1$73.0 million (March 31,(September 30, 2018: $85.1$70.8 million) and $220.1 million (September 30, 2018: $229.7 million) for the three and nine months ended March 31, 2019.September 30, 2019, respectively. The decreaseincrease in net interest income for the three months ended March 31,September 30, 2019 was primarily due to an increase in interest income driven by higher average earnings assets exceeding the increase in interest expense on higher average borrowings. The decrease in net interest income for the nine months ended September 30, 2018 was primarily due to an increase in interest expense driven by higher average borrowings and borrowing rates exceeding the increase in interest income on higher average earning assets.
Our net interest rate margin, which equals the yield on our average assets for the period less the average cost of funds for the period, was 1.26% (March 31,1.20% (September 30, 2018: 1.64%1.24%) and 1.20% (September 30, 2018: 1.43%) for the three and nine months ended March 31,September 30, 2019. The decrease in net interest rate margin for the three and nine months ended March 31,September 30, 2019 compared to the same periods in 2018 was primarily due to increases in the federal funds rate inthroughout 2018 that had a greater impact on our average cost of funds than on our average earning asset yields. Our cost of funds on all of our borrowings is influenced by changes in short term interest rates, whereas approximately 91%92% of the Company’s investments were fixed rate assets as of March 31,September 30, 2019.

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Gain (Loss) on Investments, net
The table below summarizes the components of gain (loss) on investments, net for the three and nine months ended March 31,September 30, 2019 and 2018:
Three Months Ended March 31,Three Months Ended September 30, Nine Months Ended September 30,
$ in thousands2019 20182019 2018 2019 2018
Net realized gains (losses) on sale of investments(11,115) (9,237)2,537
 (140,715) (6,549) (161,477)
Other-than-temporary impairment losses(1,776) (4,359)(1,826) (737) (4,802) (7,185)
Net unrealized gains (losses) on MBS accounted for under the fair value option280,039
 (147,195)202,876
 (66,831) 787,607
 (236,967)
Net unrealized gains (losses) on GSE CRT accounted for under the fair value option1,234
 434
(1,174) 377
 (3,279) 993
Net unrealized gains (losses) on trading securities
 (13)
 (4) 
 (21)
Gain (loss) on investments, net268,382
 (160,370)202,413
 (207,910) 772,977
 (404,657)
As part of our investment process, our mortgage-backed and credit risk transfer securities are continuously reviewed to determine if they continue to meet our risk and return targets. This process involves looking at changing market assumptions and the impact those assumptions will have on the individual securities. During the threenine months ended March 31,September 30, 2019, we continued to actively manage our investment portfolio and sold most of our ARM15 year fixed-rate Agency and Hybrid ARM securities. WeDuring the three months ended September 30, 2019, we sold $745.9$714.2 million of mortgage-backed securities (March 31,(September 30, 2018: $198.5$3.0 billion) and realized net gains of $2.5 million (September 30, 2018: net losses of $140.7 million). During the nine months ended September 30, 2019, we sold $2.4 billion of mortgage-backed securities (September 30, 2018: $3.5 billion) and realized net losses of $11.1$6.5 million (March 31,(September 30, 2018: net losses of $9.2$161.5 million).

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We assess our investment securities for other-than-temporary impairment on a quarterly basis. Our determination of whether a security is other-than-temporarily impaired involves judgment and assumptions based on subjective and objective factors. We consider (i) whether we intend to sell the security and whether it is more likely than not that we will be required to sell the security before recovery of its amortized cost and (ii) the financial condition and near-term prospects of recovery in fair value of the security. This includes a determination of estimated future cash flows through an evaluation of the characteristics of the underlying loans and the structural features of the investment. When the fair value of an investment is less than its amortized cost at the balance sheet date of the reporting period for which impairment is assessed, the impairment is designated as either "temporary" or "other-than-temporary." For additional information regarding our assessment analysis of other-than temporary impairment on our investment securities, refer to Note 4 – “Mortgage-Backed and Credit Risk Transfer Securities” of our condensed consolidated financial statements.
We have elected the fair value option for all of our RMBS IOs,interest-only securities, our MBS purchased on or after September 1, 2016 and our GSE CRTs purchased on or after August 24, 2015. Under the fair value option, changes in fair value are recognized in income in the condensed consolidated statements of operations and are reported as a component of gain (loss) on investments, net. As of March 31,September 30, 2019, $16.1$19.0 billion (December 31, 2018: $11.6 billion) or 76%81% (December 31, 2018: 67%) of our MBS and GSE CRT are accounted for under the fair value option. We recorded net unrealized gains on our MBS portfolio accounted for under the fair value option of $280.0$202.9 million in the three months ended March 31,September 30, 2019 compared to net unrealized losses of $147.2$66.8 million in the three months ended March 31,September 30, 2018. We recorded net unrealized gains on our MBS portfolio accounted for under the fair value option of $787.6 million in the nine months ended September 30, 2019 compared to net unrealized losses of $237.0 million in the nine months ended September 30, 2018. Net unrealized gains in the three and nine months ended March 31,September 30, 2019 reflect lower interest rates, tighter interest rate spreads acrosson the Company's credit assets and Agency CMBS, and valuation gains in the Company's specified pool Agency RMBS. Most of our holdings of 30 year fixed-rate Agency RMBS are in specified pools with attractive prepayment characteristics.
Equity in Earnings (Losses) of Unconsolidated Ventures
For the three months ended March 31,September 30, 2019, we recorded equity in earnings of unconsolidated ventures of $692,000 (March 31,$403,000 (September 30, 2018: equity in earnings of $896,000)$1.1 million). For the nine months ended September 30, 2019, we recorded equity in earnings of unconsolidated ventures of $1.8 million (September 30, 2018: equity in earnings of $2.8 million). We recorded equity in earnings for the three and nine months ended March 31,September 30, 2019 and 2018 primarily due to realized and unrealized gains on the underlying portfolio investments.

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Gain (Loss) on Derivative Instruments, net
Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements on our floating rate repurchase agreements and secured loans. To accomplish these objectives, we primarily use interest rate derivative instruments, including interest rate swaps, interest rate swaptions, U.S. Treasury futures contracts and TBAs as part of our interest rate risk management strategy.
We also use currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates on our investments denominated in foreign currencies.
The tables below summarize our realized and unrealized gain (loss) on derivative instruments, net for the following periods:
$ in thousandsThree months ended March 31, 2019Three 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, netRealized gain (loss) on derivative instruments, net  Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net
Interest Rate Swaps(165,884) 4,509
 12,991
 (148,384)(137,346) 11,715
 (15,772) (141,403)
Futures Contracts(66,688) 
 12,944
 (53,744)(36,633) 
 (464) (37,097)
Currency Forward Contracts185
 
 483
 668
372
 
 884
 1,256
Total(232,387) 4,509
 26,418
 (201,460)(173,607) 11,715
 (15,352) (177,244)
$ in thousandsThree months ended March 31, 2018Three months ended September 30, 2018
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, netRealized gain (loss) on derivative instruments, net  Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net
Interest Rate Swaps122,273
 (12,112) 32,374
 142,535
68,953
 (2,763) (178) 66,012
Futures Contracts(5,277) 
 (1,612) (6,889)27,136
 
 (5,548) 21,588
Currency Forward Contracts(3,418) 
 1,139
 (2,279)3,569
 
 (3,480) 89
TBAs(17) 
 
 (17)
Total113,578
 (12,112) 31,901
 133,367
99,641
 (2,763) (9,206) 87,672
$ in thousandsNine 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 Contracts1,110
 
 760
 1,870
Total(713,233) 23,749
 (33,953) (723,437)
$ in thousandsNine Months Ended September 30, 2018
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 Swaps225,499
 (19,386) 65,181
 271,294
Futures Contracts22,499
 
 (8,204) 14,295
Currency Forward Contracts1,512
 
 1,124
 2,636
TBAs(17) 
 
 (17)
Total249,493
 (19,386) 58,101
 288,208


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As of March 31,September 30, 2019 and December 31, 2018, we held the following interest rate swaps whereby we receive interest at a one-month and three-month LIBOR rate:
$ in thousandsAs of March 31, 2019 As of December 31, 2018As of September 30, 2019 As of December 31, 2018
Derivative instrumentNotional Amounts Average Fixed Pay Rate Average Receive Rate Average Maturity (Years) Notional Amounts Average Fixed Pay Rate Average Receive Rate Average Maturity (Years)Notional Amounts Average Fixed Pay Rate Average Receive Rate Average Maturity (Years) Notional Amounts Average Fixed Pay Rate Average Receive Rate Average Maturity (Years)
Interest Rate Swaps12,895,000
 2.37% 2.55% 4.4 12,370,000
 2.46% 2.55% 3.714,425,000
 1.68% 2.07% 4.3 12,370,000
 2.46% 2.55% 3.7


During the threenine months ended March 31,September 30, 2019, we terminated existing swaps with a notional amount of $4.1$18.5 billion and entered into new swaps with a notional amount of $4.6$20.6 billion to hedge repurchase agreement debt associated with purchases of Agency RMBS and Agency CMBS securities during the quarter.securities. Daily variation margin payment for interest rate swaps is characterized as settlement of the derivative itself rather than collateral and is recorded as a realized gain or loss in our condensed consolidated statement of operations. We realized a net loss of $165.9$137.3 million and $545.1 million for the three and nine months ended September 30, 2019, respectively, on interest rate swaps during the three months ended March 31, 2019 primarily due to falling interest rates in the first quarter of 2019.
As of March 31,September 30, 2019 we held $1.6 billion$494.3 million (December 31, 2018: $1.7 billion) in notional amount of futures contracts. During the threenine months ended March 31,September 30, 2019, we settled futures contracts with a notional amount of $1.7 billion and$4.8 billion. We realized a net loss of $66.7$36.6 million and $169.3 million on the settlement of futures contracts for the three and nine months ended September 30, 2019, respectively, due to falling interest rates in the first quarter of 2019. Daily variation margin payment for futures is characterized as settlement of the derivative itself rather than collateral and is recorded as a realized gain or loss in our condensed consolidated statement of operations.


Realized and Unrealized Credit Derivative Income (Loss), net
The table below summarizes the components of realized and unrealized credit derivative income (loss), net for the three and nine months ended March 31,September 30, 2019 and 2018.
Three Months Ended March 31,Three Months Ended September 30, Nine Months Ended September 30,
$ in thousands2019 20182019 2018 2019 2018
GSE CRT embedded derivative coupon interest5,350
 5,633
5,196
 5,638
 15,846
 16,909
Change in fair value of GSE CRT embedded derivatives2,534
 (2,468)(5,195) (663) (10,399) (8,034)
Total realized and unrealized credit derivative income (loss), net7,884
 3,165
1
 4,975
 5,447
 8,875
In the three and nine months ended March 31,September 30, 2019, we recorded an increasea decrease of $4.7$5.0 million and $3.4 million, respectively, in realized and unrealized credit derivative income (loss), net compared to the same periodperiods in 2018 because the increasesdecreases in the valuation of the GSE CRT debt host contracts exceeded the increasesdecreases in valuation of the hybrid financial instruments.



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Net Loss on Extinguishment of Debt
We fully retired our Exchangeable Senior Notes (the "Notes") upon their maturity on March 15, 2018 and recognized a net loss on extinguishment of debt of $26,000.
Other Investment Income (Loss), net
Our other investment income (loss), net during the three and nine months ended March 31,September 30, 2019 consists primarily of quarterly dividends from FHLBI stock. Our other investment income (loss), net during the three and nine months ended March 31,September 30, 2018 consisted of (i) quarterly dividends from FHLBI stock and an investment in an exchange-traded fund, and (ii) foreign exchange rate gains and losses related to a commercial loan investment denominated in a foreign currency. The table below summarizes the components of other investment income (loss), net for the three and nine months ended March 31,September 30, 2019 and 2018.
Three Months Ended March 31,Three Months Ended September 30, Nine Months Ended September 30,
$ in thousands2019 20182019 2018 2019 2018
Dividend income1,029
 1,288
1,019
 853
 3,055
 2,947
Gain (loss) on foreign currency transactions, net
 1,814
(14) 215
 (14) (937)
Total1,029
 3,102
1,005
 1,068
 3,041
 2,010
We are required to purchase and hold a certain amount of FHLBI stock, which is based, in part, upon the outstanding principal balance of secured advances from the FHLBI. We earn dividend income on our investment in FHLBI stock, and the amount of our dividend income varies based upon the number of shares that we are required to own and the dividend declared per share.
We incurred foreign exchange gains on the revaluation of a commercial loan investment (notional amount of £34.5 million) for the three and nine months ended March 31,September 30, 2018 due to the fluctuation in the Pound Sterling/ U.S. Dollar foreign exchange rate. The loan was repaid in the third quarter of 2018. We enter into currency forward contracts as an economic hedge against our foreign currency exposure. Changes in the fair value of our currency forward contracts are recognized in gain (loss) derivative instruments, net in the condensed consolidated statements of operations. During the three and nine months ended March 31,September 30, 2018, we recognized net lossesgains of $2.3$89,000 and $2.6 million, respectively, on our currency forward contracts.
Expenses
We incurred management fees of $9.5$8.7 million (March 31,(September 30, 2018: $10.2$10.1 million) for the three months ended March 31,September 30, 2019 and $27.6 million (September 30, 2018: $30.4 million) for the nine months ended September 30, 2019. Management fees decreased for the three and nine months ended March 31,September 30, 2019 compared to the same periodsperiod in 2018 primarily due to a lower shareholders' equity management fee base in 2019. Refer to Note 11 – "Related Party Transactions" of our condensed consolidated financial statements for a discussion of our relationship with our Manager and a description of how our fees are calculated.
Our general and administrative expenses not covered under our management agreement amounted to $2.3$1.9 million (March 31,(September 30, 2018: $1.8$1.7 million) for the three months ended March 31,September 30, 2019 and $6.1 million (September 30, 2018: $5.0 million) for the nine months ended September 30, 2019. General and administrative expenses not covered under our management agreement primarily consist of directors and officers insurance, legal costs, accounting, auditing and tax services, filing fees, and miscellaneous general and administrative costs. General and administrative costs were higher for the three and nine months ended March 31,September 30, 2019 versuscompared to the same period in 2018 primarily due to higher fees for derivative transactions in the 2019 period and the write-off of previously deferred costs associated with the Company's at-the-market program.program in the first quarter of 2019.


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Net Income (Loss) attributable to Common Stockholders
For the three months ended March 31,September 30, 2019, our net income attributable to common stockholders was $127.7$77.9 million (March 31,(September 30, 2018: $41.5$64.5 million net incomeloss attributable to common stockholders) or $1.05$0.57 basic and diluted net income per average share available to common stockholders (March 31,(September 30, 2018: $0.37$0.58 basic and diluted net loss per average share available to common stockholders). The change in net income (loss) attributable to common stockholders was primarily due to (i) a net gain on investments of $202.4 million in the 2019 period compared to a net loss on investments of $207.9 million in the 2018 period, (ii) a net loss on derivative instruments of $177.2 million in the 2019 period compared to a net gain on derivative instruments of $87.7 million in the 2018 period, (iii) credit derivative net income of $1,000 in the 2019 period compared to credit derivative net income of $5.0 million in the 2018 period and (iv) a $2.2 million increase in net interest income.
For the nine months ended September 30, 2019 our net income attributable to common stockholders was $212.8 million (September 30, 2018: $57.0 million net income attributable to common stockholders) or $1.66 basic and $1.65 diluted net income per average share available to common stockholders (September 30, 2018: $0.51 basic and diluted net income per average share available to common stockholders). The change in net income attributable to common stockholders was primarily due to (i) a net gain on investments of $268.4$773.0 million in the 2019 period compared to a net loss on investments of $160.4$404.7 million in the 2018 period, (ii) a net loss on derivative instruments of $201.5$723.4 million in the 2019 period compared to a net gain on derivative instruments of $133.4$288.2 million in the 2018 period, (iii) credit derivative net income of $7.9$5.4 million in the 2019 period compared to credit derivative net income of $3.2$8.9 million in the 2018 period and (iv) a $11.0$9.6 million decrease in net interest income.
For further information on the changes in net gain (loss) on investments, net gains (loss) on derivative instruments, realized and unrealized credit derivative income (loss), net and net interest income, see preceding discussion under "Gain (Loss) on Investments, net," "Gain (Loss) on Derivative Instruments, net," "Realized and Unrealized Credit Derivative Income (Loss), net," and "Net Interest Income."
Non-GAAP Financial Measures
We use the following non-GAAP financial measures to analyze the Company's operating results and believe these financial measures are useful to investors in assessing our performance as further discussed below:
core earnings (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 non-GAAP financial measures used by 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 our peer companies.

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Core Earnings
We calculate 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; net loss on extinguishment of debt; and cumulative adjustments attributable to non-controlling interest. We may add and have added additional reconciling items to our core earnings calculation as appropriate.
We believe the presentation of core earnings provides a consistent measure of operating performance by excluding the impact of gains and losses described above from operating results. We exclude the impact of gains and losses because gains and losses are not accounted for consistently under U.S. GAAP. Under U.S. GAAP, certain gains and losses are reflected in net income whereas other gains and losses are reflected in other comprehensive income. For example, a portion of our mortgage-backed securities are classified as available-for-sale securities, and we record changes in the valuation of these securities in other comprehensive income on our condensed consolidated balance sheets. We elected the fair value option for our mortgage-backed securities purchased on or after September 1, 2016, and changes in the valuation of these securities are recorded in

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other income (loss) in our condensed consolidated statements of operations. In addition, certain gains and losses represent one-time events.
We believe that providing transparency into core earnings enables our investors to consistently measure, evaluate and compare our operating performance to that of our peers over multiple reporting periods. However, we caution that core earnings should not be considered as an alternative to net income (determined in accordance with U.S. GAAP), or as an indication of our cash flow from operating activities (determined in accordance with U.S. GAAP), a measure of our liquidity, or as an indication of amounts available to fund our cash needs, including our ability to make cash distributions.
The table below provides a reconciliation of U.S. GAAP net income (loss) attributable to common stockholders to core earnings for the following periods:
Three Months Ended March 31,Three Months Ended September 30, Nine Months Ended September 30,
$ in thousands, except per share data2019 20182019 2018 2019 2018
Net income attributable to common stockholders127,683
 41,471
77,896
 (64,480) 212,809
 56,999
Adjustments:          
(Gain) loss on investments, net(268,382) 160,370
(202,413) 207,910
 (772,977) 404,657
Realized (gain) loss on derivative instruments, net (1)
232,387
 (113,578)173,607
 (99,641) 713,233
 (249,493)
Unrealized (gain) loss on derivative instruments, net (1)
(26,418) (31,901)15,352
 9,206
 33,953
 (58,101)
Realized and unrealized (gain) loss on GSE CRT embedded derivatives, net (2)
(2,534) 2,468
5,195
 663
 10,399
 8,034
(Gain) loss on foreign currency transactions, net (3)

 (1,814)14
 (215) 14
 937
Amortization of net deferred (gain) loss on de-designated interest rate swaps(4)
(5,851) (6,539)(5,981) (6,422) (17,748) (19,859)
Net loss on extinguishment of debt
 26

 
 
 26
Subtotal(70,798) 9,032
(14,226) 111,501
 (33,126) 86,201
Cumulative adjustments attributable to non-controlling interest
 (114)
 (1,405) 
 (1,087)
Core earnings attributable to common stockholders56,885
 50,389
63,670
 45,616
 179,683
 142,113
Basic income per common share1.05
 0.37
0.57
 (0.58) 1.66
 0.51
Core earnings per share attributable to common stockholders (5)
0.47
 0.45
0.47
 0.41
 1.40
 1.27

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(1)U.S. GAAP gain (loss) on derivative instruments, net on the condensed consolidated statements of operations includes the following components:
Three Months Ended March 31,Three Months Ended September 30, Nine Months Ended September 30,
$ in thousands2019 20182019 2018 2019 2018
Realized gain (loss) on derivative instruments, net(232,387) 113,578
(173,607) 99,641
 (713,233) 249,493
Unrealized gain (loss) on derivative instruments, net26,418
 31,901
(15,352) (9,206) (33,953) 58,101
Contractual net interest income (expense) on interest rate swaps4,509
 (12,112)11,715
 (2,763) 23,749
 (19,386)
Gain (loss) on derivative instruments, net(201,460) 133,367
(177,244) 87,672
 (723,437) 288,208
(2)U.S. GAAP realized and unrealized credit derivative income (loss), net on the condensed consolidated statements of operations includes the following components:
 Three Months Ended March 31,
$ in thousands2019 2018
Realized and unrealized gain (loss) on GSE CRT embedded derivatives, net2,534
 (2,468)
GSE CRT embedded derivative coupon interest5,350
 5,633
Realized and unrealized credit derivative income (loss), net7,884
 3,165

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 Three Months Ended September 30, Nine Months Ended September 30,
$ in thousands2019 2018 2019 2018
Realized and unrealized gain (loss) on GSE CRT embedded derivatives, net(5,195) (663) (10,399) (8,034)
GSE CRT embedded derivative coupon interest5,196
 5,638
 15,846
 16,909
Realized and unrealized credit derivative income (loss), net1
 4,975
 5,447
 8,875
(3)U.S. GAAP other investment income (loss) net on the condensed consolidated statements of operations includes the following components:
Three Months Ended March 31,Three Months Ended September 30, Nine Months Ended September 30,
$ in thousands2019 20182019 2018 2019 2018
Dividend income1,029
 1,288
1,019
 853
 3,055
 2,947
Gain (loss) on foreign currency transactions, net
 1,814
(14) 215
 (14) (937)
Other investment income (loss), net1,029
 3,102
1,005
 1,068
 3,041
 2,010
(4)U.S. GAAP repurchase agreements interest expense on the condensed consolidated statements of operations includes the following components:
Three Months Ended March 31,Three Months Ended September 30, Nine Months Ended September 30,
$ in thousands2019 20182019 2018 2019 2018
Interest expense on repurchase agreements borrowings107,726
 66,124
118,832
 88,185
 350,452
 230,596
Amortization of net deferred (gain) loss on de-designated interest rate swaps(5,851) (6,539)(5,981) (6,422) (17,748) (19,859)
Repurchase agreements interest expense101,875
 59,585
112,851
 81,763
 332,704
 210,737
(5)Core earnings per share attributable to common stockholders is equal to core earnings divided by the basic weighted average number of common shares outstanding.
The components of core income for the three and nine months ended March 31,September 30, 2019 are:

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Three Months Ended March 31,Three Months Ended September 30, Nine Months Ended September 30,
$ in thousands2019 20182019 2018 2019 2018
Effective net interest income(1)
78,063
 72,074
83,957
 67,288
 241,914
 207,330
Dividend income1,029
 1,288
1,019
 853
 3,055
 2,947
Equity in earnings (losses) of unconsolidated ventures692
 896
403
 1,084
 1,797
 2,778
Total expenses(11,792) (11,977)(10,602) (11,778) (33,763) (35,382)
Total core earnings67,992
 62,281
74,777
 57,447
 213,003
 177,673
Dividends to preferred stockholders(11,107) (11,107)(11,107) (11,107) (33,320) (33,320)
Core earnings attributable to non-controlling interest
 (785)
 (724) 
 (2,240)
Core earnings attributable to common stockholders56,885
 50,389
63,670
 45,616
 179,683
 142,113
(1)See below for a reconciliation of net interest income to effective net interest income, a non-GAAP measure.


Core earnings increased $6.5$18.1 million in the three months ended March 31,September 30, 2019 compared to the same period in 2018 primarily due to a $6.0$16.7 million increase in effective net interest income driven by lowerincome. Core earnings increased $37.6 million in the nine months ended September 30, 2019 compared to the same period in 2018 primarily due to a $34.6 million increase in effective net interest expense. income.
See below for a discussion of the increase in effective net interest income in the three and nine months ended March 31,September 30, 2019 compared to the same period in 2018.



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Effective Interest Income / Effective Yield / Effective Interest Expense / Effective Cost of Funds / Effective Net Interest Income / Effective Interest Rate Margin
We calculate 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. We include our GSE CRT embedded derivative coupon interest in effective interest income because GSE CRT coupon interest is not accounted for consistently under U.S. GAAP. We account for GSE CRTs purchased prior to August 24, 2015 as hybrid financial instruments, but we have 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). We add back GSE CRT embedded derivative coupon interest to our total interest income because we consider GSE CRT embedded derivative coupon interest a current component of our total interest income irrespective of whether we elected the fair value option for the GSE CRT or accounted for the GSE CRT as a hybrid financial instrument.
We calculate 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 our 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. We view our interest rate swaps as an economic hedge against increases in future market interest rates on our floating rate borrowings. We add back the net payments we make on our interest rate swap agreements to our total U.S. GAAP interest expense because we use interest rate swaps to add stability to interest expense. We exclude the amortization of net deferred gains (losses) on de-designated interest rate swaps from our calculation of effective interest expense because we do not consider the amortization a current component of our borrowing costs.
We calculate effective net interest income (and by calculation, effective interest rate margin) as U.S. GAAP net interest income adjusted for net interest income (expense) on our 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.
We believe 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 our 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,Three Months Ended September 30,
2019 20182019 2018
$ in thousandsReconciliation Yield/Effective Yield Reconciliation Yield/Effective YieldReconciliation Yield/Effective Yield Reconciliation Yield/Effective Yield
Total interest income187,074
 3.91% 153,225
 3.38%196,291
 3.75% 162,088
 3.53%
Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net5,350
 0.11% 5,633
 0.12%5,196
 0.09% 5,638
 0.12%
Effective interest income192,424
 4.02% 158,858
 3.50%201,487
 3.84% 167,726
 3.65%
 Nine Months Ended September 30,
 2019 2018
$ in thousandsReconciliation Yield/Effective Yield Reconciliation Yield/Effective Yield
Total interest income585,586
 3.84% 466,912
 3.45%
Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net15,846
 0.11% 16,909
 0.13%
Effective interest income601,432
 3.95% 483,821
 3.58%
Our effective interest income increased in the three and nine months ended March 31,September 30, 2019 versus the same periods in 2018 primarily due to higher average earning assets and higher effective yield. Our average earning assets increased to $19.2$21.0 billion and $20.3 billion for the three month periodand nine months ended March 31,September 30, 2019, respectively, from $18.4 billion and $18.1 billion for the same periodperiods in 2018 primarily because we invested $258.6and leveraged $486.0 million in net proceeds from 2019 common stock issuances and $168.1$168.3 million in proceeds from commercial loan repayments insince the beginning of 2018 and the first quarter of 2019primarily into newly issued 30 year fixed-rate Agency RMBS and Agency CMBS securities. The increase in effective yield for the three and nine months ended March 31,September 30, 2019 compared to the same period in 2018 was primarily due to slower prepayment speedsthe purchase of new securities at higher yields and higher index rates on floating and adjustable rate assets.

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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,Three Months Ended September 30,
2019 20182019 2018
$ in thousandsReconciliation Cost of Funds / Effective Cost of Funds Reconciliation Cost of Funds / Effective Cost of FundsReconciliation Cost of Funds / Effective Cost of Funds Reconciliation Cost of Funds / Effective Cost of Funds
Total interest expense113,019
 2.65 % 68,133
 1.74%123,264
 2.55 % 91,253
 2.29%
Add (Less): Amortization of net deferred gain (loss) on de-designated interest rate swaps5,851
 0.14 % 6,539
 0.17%5,981
 0.12 % 6,422
 0.16%
Add (Less): Contractual net interest expense (income) on interest rate swaps recorded as gain (loss) on derivative instruments, net(4,509) (0.11)% 12,112
 0.31%(11,715) (0.24)% 2,763
 0.07%
Effective interest expense114,361
 2.68 % 86,784
 2.22%117,530
 2.43 % 100,438
 2.52%

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 Nine Months Ended September 30,
 2019 2018
$ in thousandsReconciliation Cost of Funds / Effective Cost of Funds Reconciliation Cost of Funds / Effective Cost of Funds
Total interest expense365,519
 2.64 % 237,246
 2.02%
Add (Less): Amortization of net deferred gain (loss) on de-designated interest rate swaps17,748
 0.13 % 19,859
 0.17%
Add (less): Contractual net interest expense (income) on interest rate swaps recorded as gain (loss) on derivative instruments, net(23,749) (0.17)% 19,386
 0.17%
Effective interest expense359,518
 2.60 % 276,491
 2.36%
Our effective interest expense increased during the three months ended September 30, 2019 compared to the same period in 2018 primarily due to increased borrowings to finance our higher asset base. Our effective cost of funds decreased 9 basis points during the three months ended September 30, 2019 primarily due to contractual net interest income on interest rate swaps of $11.7 million during the three months ended September 30, 2019 compared to contractual net interest expense on interest rate swaps of $2.8 million for the same period in 2018. Our effective interest expense and effective cost of funds increased during the threenine months ended March 31,September 30, 2019 compared to the same period in 2018 primarily due to increased borrowings and higher interest rates.increases in the federal funds rate throughout 2018. See the preceding caption "Interest Expense and Cost of Funds" for further discussion of these variances.interest expense and cost of funds.

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The following tables reconcile 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,Three Months Ended September 30,
2019 20182019 2018
$ in thousandsReconciliation Net Interest Rate Margin / Effective Interest Rate Margin Reconciliation Net Interest Rate Margin / Effective Interest Rate MarginReconciliation Net Interest Rate Margin / Effective Interest Rate Margin Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin
Net interest income74,055
 1.26 % 85,092
 1.64 %73,027
 1.20 % 70,835
 1.24 %
Add (Less): Amortization of net deferred (gain) loss on de-designated interest rate swaps(5,851) (0.14)% (6,539) (0.17)%(5,981) (0.12)% (6,422) (0.16)%
Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net5,350
 0.11 % 5,633
 0.12 %5,196
 0.09 % 5,638
 0.12 %
Add (Less): Contractual net interest income (expense) on interest rate swaps recorded as gain (loss) on derivative instruments, net4,509
 0.11 % (12,112) (0.31)%11,715
 0.24 % (2,763) (0.07)%
Effective net interest income78,063
 1.34 % 72,074
 1.28 %83,957
 1.41 % 67,288
 1.13 %
 Nine Months Ended September 30,
 2019 2018
$ in thousandsReconciliation Net Interest Rate Margin / Effective Interest Rate Margin Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin
Net interest income220,067
 1.20 % 229,666
 1.43 %
Add (Less): Amortization of net deferred (gain) loss on de-designated interest rate swaps(17,748) (0.13)% (19,859) (0.17)%
Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net15,846
 0.11 % 16,909
 0.13 %
Add (Less): Contractual net interest income (expense) on interest rate swaps recorded as gain (loss) on derivative instruments, net23,749
 0.17 % (19,386) (0.17)%
Effective net interest income241,914
 1.35 % 207,330
 1.22 %
Effective net interest income and effective interest rate margin for the three and nine months ended March 31,September 30, 2019 increased primarily due to higher effective net interest expense. We earnedearning contractual net interest income on interest rate swaps of $4.5$11.7 million and $23.7 million in the three and nine months ended March 31,September 30, 2019, respectively, compared to incurring contractual net interest expense of $12.1$2.8 million and $19.4 million in the three and nine months ended March 31,September 30, 2018 primarily as a result of higher LIBOR rates in 2019.
Effective interest rate margin increased for the three months ended March 31, 2019 compared to the same periods in 2018 primarily due to increases in the federal funds rate over the past twelve months that had a greater impact on our average earning asset yields than on our average cost of funds.


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Repurchase Agreement Debt-to-Equity Ratio
The tables below show the allocation of our equity to our target assets, our debt-to-equity ratio, and our repurchase agreement debt-to-equity ratio as of March 31,September 30, 2019 and December 31, 2018. Our debt-to-equity ratio is calculated in accordance with U.S. GAAP and is the ratio of total debt (sum of repurchase agreements and secured loans and exchangeable senior notes)loans) to total equity. We present a repurchase agreement debt-to-equity ratio, a non-GAAP financial measure of leverage, because the mortgage REIT industry primarily uses repurchase agreements, which typically mature within one year, to finance investments. We believe that presenting our repurchase agreement debt-to-equity ratio, when considered together with our U.S. GAAP financial measure of debt-to-equity ratio, provides information that is useful to investors in understanding our refinancing risks, and gives investors a comparable statistic to those other mortgage REITs who almost exclusively borrow using short-term repurchase agreements that are subject to refinancing risk.
March 31,September 30, 2019
$ in thousandsAgency RMBS and Agency CMBS
Commercial Credit (1)
Residential Credit (2)
TotalAgency RMBSAgency CMBS
Commercial Credit (1)
Residential Credit (2)
Total
Mortgage-backed and credit risk transfer securities15,577,369
3,455,805
2,094,424
21,127,598
12,864,217
4,936,184
3,851,552
1,947,546
23,599,499
Cash and cash equivalents (3)
39,708
25,869
12,905
78,482
56,122
17,226
37,536
15,004
125,888
Restricted cash(4)5,025


5,025
57,878
22,208


80,086
Derivative assets, at fair value (4)
26,268
312

26,580
2,557
981
589

4,127
Other assets91,933
109,886
59,883
261,702
76,417
13,452
111,501
50,353
251,723
Total assets15,740,303
3,591,872
2,167,212
21,499,387
13,057,191
4,990,051
4,001,178
2,012,903
24,061,323
  
Repurchase agreements13,508,022
1,642,106
1,674,259
16,824,387
11,124,901
3,306,244
2,018,542
1,622,345
18,072,032
Secured loans (5)
581,896
1,068,104

1,650,000
547,149

1,102,851

1,650,000
Derivative liabilities, at fair value (4)
8,463


8,463
33,519
12,862


46,381
Other liabilities300,843
28,468
15,512
344,823
56,160
1,272,761
40,999
11,958
1,381,878
Total liabilities14,399,224
2,738,678
1,689,771
18,827,673
11,761,729
4,591,867
3,162,392
1,634,303
21,150,291
  
Total equity (allocated)1,341,079
853,194
477,441
2,671,714
1,295,462
398,184
838,786
378,600
2,911,032
Adjustments to calculate repurchase agreement debt-to-equity ratio:  
Net equity in unsecured assets (6)

(48,583)
(48,583)

(47,493)
(47,493)
Collateral pledged against secured loans(686,656)(1,260,396)
(1,947,052)(633,350)
(1,276,599)
(1,909,949)
Secured loans581,896
1,068,104

1,650,000
547,149

1,102,851

1,650,000
Equity related to repurchase agreement debt1,236,319
612,319
477,441
2,326,079
1,209,261
398,184
617,545
378,600
2,603,590
Debt-to-equity ratio (7)
10.5
3.2
3.5
6.9
9.0
8.3
3.7
4.3
6.8
Repurchase agreement debt-to-equity ratio (8)
10.9
2.7
3.5
7.2
9.2
8.3
3.3
4.3
6.9
(1)Investments in non-Agency CMBS, commercial loans and investments in unconsolidated joint ventures are included in commercial credit.
(2)Investments in non-Agency RMBS, GSE CRT and a loan participation interest are included in residential credit.
(3)Cash and cash equivalents are allocated based on a percentage of equity for each asset class.
(4)DerivativeRestricted cash, derivative assets and derivative liabilities are allocated based on the hedging strategy for each asset class.
(5)Secured loans are allocated based on amount of collateral pledged.
(6)Net equity in unsecured assets includes commercial loans, investments in unconsolidated joint ventures and other.
(7)Debt-to-equity ratio is calculated as the ratio of total debt (sum of repurchase agreements and secured loans) to total equity.
(8)Repurchase agreement debt-to-equity ratio is calculated as the ratio of repurchase agreements to equity related to repurchase agreement debt.




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December 31, 2018
$ in thousandsAgency RMBS and Agency CMBS
Commercial Credit (1)
Residential Credit (2)
TotalAgency RMBSAgency CMBS
Commercial Credit (1)
Residential Credit (2)
Total
Mortgage-backed and credit risk transfer securities12,127,173
3,286,459
1,983,010
17,396,642
11,124,663
1,002,510
3,286,459
1,983,010
17,396,642
Cash and cash equivalents (3)
68,689
45,632
21,296
135,617
64,908
3,781
45,632
21,296
135,617
Derivative assets, at fair value (4)
15,089


15,089
13,842
1,247


15,089
Other assets88,517
115,908
61,732
266,157
84,452
4,065
115,908
61,732
266,157
Total assets12,299,468
3,447,999
2,066,038
17,813,505
11,287,865
1,011,603
3,447,999
2,066,038
17,813,505
  
Repurchase agreements10,339,802
1,616,473
1,646,209
13,602,484
9,529,352
810,450
1,616,473
1,646,209
13,602,484
Secured loans (5)
600,856
1,049,144

1,650,000
600,856

1,049,144

1,650,000
Exchangeable senior notes



Derivative liabilities, at fair value (4)
23,219
171

23,390
21,300
1,919
171

23,390
Other liabilities212,057
25,819
13,058
250,934
74,162
137,895
25,819
13,058
250,934
Total liabilities11,175,934
2,691,607
1,659,267
15,526,808
10,225,670
950,264
2,691,607
1,659,267
15,526,808
    
Total equity (allocated)1,123,534
756,392
406,771
2,286,697
1,062,195
61,339
756,392
406,771
2,286,697
Adjustments to calculate repurchase agreement debt-to-equity ratio:  
Net equity in unsecured assets (6)

(55,594)
(55,594)

(55,594)
(55,594)
Collateral pledged against secured loans(702,952)(1,227,412)
(1,930,364)(702,952)
(1,227,412)
(1,930,364)
Secured loans600,856
1,049,144

1,650,000
600,856

1,049,144

1,650,000
Equity related to repurchase agreement debt1,021,438
522,530
406,771
1,950,739
960,099
61,339
522,530
406,771
1,950,739
Debt-to-equity ratio (7)
9.7
3.5
4.0
6.7
9.5
13.2
3.5
4.0
6.7
Repurchase agreement debt-to-equity ratio (8)
10.1
3.1
4.0
7.0
9.9
13.2
3.1
4.0
7.0
(1)Investments in non-Agency CMBS, commercial loans and investments in unconsolidated joint ventures are included in commercial credit.
(2)Investments in non-Agency RMBS and GSE CRT are included in residential credit.
(3)Cash and cash equivalents are allocated based on a percentage of equity for each asset class.
(4)Derivative assets and liabilities are allocated based on the hedging strategy for each asset class.
(5)Secured loans are allocated based on amount of collateral pledged.
(6)Net equity in unsecured assets includes commercial loans, investments in unconsolidated joint ventures and other.
(7)Debt-to-equity ratio is calculated as the ratio of total debt (sum of repurchase agreements and secured loans) to total equity.
(8)Repurchase agreement debt-to-equity ratio is calculated as the ratio of repurchase agreements to equity related to repurchase agreement debt.


Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, fund investments, repayment of borrowings and other general business needs. Our primary sources of funds for liquidity consist of the net proceeds from our common and preferred equity offerings, net cash provided by operating activities, proceeds from repurchase agreements and other financing arrangements and future issuances of equity and/or debt securities.
We currently believe that we have sufficient liquidity and capital resources available for the acquisition of additional investments, repayments on borrowings, margin requirements and the payment of cash dividends as required for continued qualification as a REIT. We generally maintain liquidity to pay down borrowings under repurchase arrangements to reduce borrowing costs and otherwise efficiently manage our long-term investment capital. Because the level of these borrowings can be adjusted on a daily basis, the level of cash and cash equivalents carried on our condensed consolidated balance sheets is significantly less important than our potential liquidity available under borrowing arrangements. However, there can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls.
We held cash, cash equivalents and restricted cash of $83.5$206.0 million at March 31,September 30, 2019 (March 31,(September 30, 2018: $119.5$108.5 million). Our cash, cash equivalents and restricted cash increased due to normal fluctuations in cash balances related to the timing of


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timing of principal and interest payments, repayments of debt, and asset purchases and sales. Our operating activities provided net cash of $68.4$217.9 million for the threenine months ended March 31,September 30, 2019 (March 31,(September 30, 2018: $76.8$221.7 million).
Our investing activities used net cash of $3.5$4.9 billion in the threenine months ended March 31,September 30, 2019 compared to net cash providedused by investing activities of $325.5$180.7 million in the threenine months ended March 31,September 30, 2018. We invested $4.3$8.0 billion in mortgage-backed and credit risk transfer securities during the threenine months ended March 31,September 30, 2019 compared to investments of $298.9 million$5.0 billion in mortgage-backed and credit risk transfer securities in the threenine months ended March��31,September 30, 2018. We generated $300.2 million$1.4 billion from principal payments of mortgage-backed and credit risk transfer securities during the threenine months ended March 31,September 30, 2019 (March 31,(September 30, 2018: $488.1 million)$1.6 billion) and $734.8 million$2.4 billion (September 30, 2018: $2.8 billion) from sales of mortgage-backed and credit risk transfer securities. We used cash of $232.4$713.2 million to settle derivative contracts in the threenine months ended March 31,September 30, 2019 compared to cash provided on settlement of $113.6derivative contracts of $249.5 million in the threenine months ended March 31,September 30, 2018. We also generated $7.1$7.4 million in proceeds from commercial loan repayments in the threenine months ended March 31,September 30, 2019 (March 31,(September 30, 2018: $10.0$160.8 million).
Our financing activities provided net cash of $3.4$4.8 billion for the threenine months ended March 31,September 30, 2019 compared to net cash used by financing activities of $371.8$21.5 million in the threenine months ended March 31,September 30, 2018. Proceeds from issuance of common stock provided $259.0$486.5 million for the threenine months ended March 31,September 30, 2019. Repurchase agreement borrowings provided net proceeds of $3.2$4.5 billion (March 31,(September 30, 2018: net use of $169.7$297.9 million). We used cash of $143.4 million to retire our exchangeable senior notes in the threenine months ended March 31,September 30, 2018. We also used cash of $58.0$195.9 million for the threenine months ended March 31,September 30, 2019 (March 31,(September 30, 2018: $58.6$175.8 million) to pay dividends.
As of March 31,September 30, 2019, our wholly-owned subsidiary, IAS Services, had $1.65 billion in outstanding secured loans from the FHLBI. As of March 31, 2019, theThe FHLBI secured loans were collateralized by non-Agency CMBS and Agency RMBS with a fair value of $1.3 billion and $686.7$633.4 million, respectively.
As of March 31,September 30, 2019, the average margin requirement (weighted by borrowing amount), or the percentage amount by which the collateral value must exceed the loan amount (also refer to as the "haircut") under our repurchase agreements was 5.0% for Agency RMBS, 5.2%5.3% for Agency CMBS, 18.1%17.9% for non-Agency RMBS, 18.3%19.2% for GSE CRT and 19.0%20.0% for non-Agency CMBS. Across our repurchase agreement facilities, the haircuts range from a low of 3.0% to a high of 20.0% for Agency RMBS, a low of 5%5.0% to a high of 10%10.0% for Agency CMBS, a low of 8.0% to a high of 35.0% for non-Agency RMBS, a low of 15%15.0% to a high of 25%30.0% for GSE CRT and a low of 10.0% to a high of 30.0%40.0% for non-Agency CMBS. Declines in the value of our securities portfolio can trigger margin calls by our lenders under our repurchase agreements. An event of default or termination event would give some of our counterparties the option to terminate all repurchase transactions existing with us and require any amount due by us to the counterparties to be payable immediately.
Effects of Margin Requirements, Leverage and Credit Spreads
Our securities have values that fluctuate according to market conditions and, as discussed above, the market value of our securities will decrease as prevailing interest rates or credit spreads increase. When the value of the securities pledged to secure a repurchase loan or a secured loan decreases to the point where the positive difference between the collateral value and the loan amount is less than the haircut, our lenders may issue a margin call, which means that the lender will require us to pay the margin call in cash or pledge additional collateral to meet that margin call. Under our repurchase facilities and secured loans, our lenders have full discretion to determine the value of the securities we pledge to them. Most of our lenders will value securities based on recent trades in the market. Lenders also issue margin calls as the published current principal balance factors change on the pool of mortgages underlying the securities pledged as collateral when scheduled and unscheduled paydowns are announced monthly.
We experience margin calls and increased collateral requirements in the ordinary course of our business. In seeking to effectively manage the margin requirements established by our lenders, we maintain a position of cash and unpledged securities. We refer to this position as our liquidity. The level of liquidity we have available to meet margin calls is directly affected by our leverage levels, our haircuts and the price changes on our securities. If interest rates increase as a result of a yield curve shift or for another reason or if credit spreads widen, then the prices of our collateral (and our unpledged assets that constitute our liquidity) will decline, we will experience margin calls, and we will use our liquidity to meet the margin calls. There can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls or increased collateral requirements. If our haircuts increase, our liquidity will proportionately decrease. In addition, if we increase our borrowings, our liquidity will decrease by the amount of additional haircut on the increased level of indebtedness.
We intend to maintain a level of liquidity in relation to our assets that enables us to meet reasonably anticipated margin calls and increased collateral requirements but that also allows us to be substantially invested in securities. We may misjudge the appropriate amount of our liquidity by maintaining excessive liquidity, which would lower our investment returns, or by maintaining insufficient liquidity, which would force us to liquidate assets into unfavorable market conditions and harm our results of operations and financial condition.


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We are subject to financial covenants in connection with our lending, derivatives and other agreements we enter into in the normal course of our business. We intend to continue to operate in a manner which complies with all of our financial covenants. Our lending and derivative agreements provide that we may be declared in default of our obligations if our leverage ratio exceeds certain thresholds and we fail to maintain stockholders’ equity or market value above certain thresholds over specified time periods.
Forward-Looking Statements Regarding Liquidity
Based upon our current portfolio, leverage rate and available borrowing arrangements, we believe that cash flow from operations and available borrowing capacity will be sufficient to enable us to meet anticipated short-term (one year or less) liquidity requirements to fund our investment activities, pay fees under our management agreement, fund our distributions to stockholders and for other general corporate expenses.
Our ability to meet our long-term (greater than one year) liquidity and capital resource requirements will be subject to obtaining additional debt financing. We may increase our capital resources by obtaining long-term credit facilities or through public or private offerings of equity or debt securities, possibly including classes of preferred stock, common stock, and senior or subordinated notes. Such financing will depend on market conditions for capital raises and our ability to invest such offering proceeds. If we are unable to renew, replace or expand our sources of financing on substantially similar terms, it may have an adverse effect on our business and results of operations.
Contractual Obligations
We have entered into an agreement with our Manager pursuant to which our Manager is entitled to receive a management fee and the reimbursement of certain expenses. The management fee is calculated and payable quarterly in arrears in an amount equal to 1.50% of our stockholders’ equity, per annum. Refer to Note 11 - "Related Party Transactions" of our condensed consolidated financial statements for a description of adjustments made to our stockholders' equity for purposes of calculating our management fee. Our Manager uses the proceeds from its management fee in part to pay compensation to its officers and personnel who, notwithstanding that certain of those individuals are also our officers, receive no cash compensation directly from us. We are required to reimburse our Manager for operating expenses related to us incurred by our Manager, including certain salary expenses and other expenses relating to legal, accounting, due diligence and other services. Our reimbursement obligation is not subject to any dollar limitation. Refer to Note 11 – "Related Party Transactions" of our condensed consolidated financial statements for details of our reimbursements to our Manager.
As of March 31,September 30, 2019, we had the following contractual obligations:
Payments Due by PeriodPayments Due by Period
$ in thousandsTotal 
Less than 1
year
 1-3 years 3-5 years 
After 5
years
Total 
Less than 1
year
 1-3 years 3-5 years 
After 5
years
Repurchase agreements16,824,387
 16,784,017
 40,370
 
 
18,072,032
 18,072,032
 
 
 
Secured loans1,650,000
 
 400,000
 
 1,250,000
1,650,000
 300,000
 100,000
 
 1,250,000
Total (1)
18,474,387
 16,784,017
 440,370
 
 1,250,000
19,722,032
 18,372,032
 100,000
 
 1,250,000
(1)Excluded from total contractual obligations are the amounts due to our Manager under the management agreement, as those obligations do not have fixed and determinable payments.
As of March 31,September 30, 2019, we have approximately $121.955.3 million and $234.8$181.7 million in contractual interest payments related to our repurchase agreements and secured loans, respectively.

The above table does not include total commitments of approximately $1.3 billion to fund the purchase of Agency CMBS TBA securities that will primarily settle during the fourth quarter of 2019 because these commitments are reported as an investment related payable in our condensed consolidated balance sheet as of September 30, 2019. These TBA purchases will be funded with a combination of shareholders' equity and debt, including paydowns of securities, proceeds from security sales and repurchase agreements.

Off-Balance Sheet Arrangements
We have committed to invest up to $122.5$125.1 million in unconsolidated ventures that are sponsored by an affiliate of our Manager. As of March 31,September 30, 2019, $114.9$118.7 million of our commitment to these unconsolidated ventures hashad been called. We are committed to fund $7.6$6.4 million in additional capital to fund future investments and cover future expenses should they occur.
As of March 31,September 30, 2019, we have an unfunded commitment on a loan participation interest of $21.2$29.9 million.


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Share-Based Compensation
We established the 2009 Equity Incentive Plan for grants of common stock and other equity based awards to our independent directors and officers and employees of our Manager and its affiliates (the "Incentive Plan"). Under the Incentive Plan, a total of 1,000,000 shares of common stock are authorized for issuance. As of March 31, 2019, 748,492 shares of common stock remain available for future issuance under the Incentive Plan. The Incentive Plan was initially scheduled to terminate on June 30, 2019 but was amended and restated as of May 3, 2019 extendingto extend the term an additional ten years.of the plan until 2029 and to reduce the number of shares of common stock available for issuance under the Incentive Plan to 200,000.
We recognized compensation expense of approximately $113,000 (March 31,(September 30, 2018: $93,000)$107,000) and approximately $338,000 (September 30, 2018: $306,000) for shares issued to our independent directors under theour Incentive Plan for the three and nine months ended March 31, 2019.September 30, 2019, respectively. During the three months ended March 31,September 30, 2019 and 2018, we issued 7,0656,765 shares and 7,1776,620 shares of common stock, respectively, to our independent directors. During the nine months ended September 30, 2019 and 2018, we issued 20,725 and 20,262 shares of common stock, respectively, to our independent directors. The fair market value of the shares granted was determined by the closing stock market price on the date of the grant. The grants vested immediately.
We recognized compensation expense of approximately $19,000 (March 31,$17,000 (September 30, 2018: $14,000)$71,000) and approximately $54,000 (September 30, 2018: $115,000) for the three and nine months ended March 31,September 30, 2019, respectively, for restricted stock units awarded to employees of our Manager and its affiliates under the Incentive Plan. Our Manager reimburses us for the cost of these restricted stock awards under the terms of our management agreement. At March 31,September 30, 2019 there was approximately $185,000$149,000 of total unrecognized compensation cost related to restricted stock unit awards that is expected to be recognized over a period of up to 4842 months, with a weighted-average remaining vesting period of 2418 months.
The following table summarizes the activity related to restricted stock units awarded to employees of our Manager and its affiliates for the three and nine months ended March 31,September 30, 2019.
Three Months Ended March 31,Three Months Ended September 30, Nine Months Ended September 30,
20192019 2019
Restricted Stock Units 
Weighted Average Grant Date Fair Value (1)
Restricted Stock Units 
Weighted Average Grant Date Fair Value (1)
 Restricted Stock Units 
Weighted Average Grant Date Fair Value (1)
Unvested at the beginning of the period11,051
 $14.55
12,520
 $15.25
 11,051
 $14.55
Shares granted during the period6,189
 15.92

 
 6,189
 15.92
Shares vested during the period(4,720) 14.48

 
 (4,720) 14.48
Unvested at the end of the period12,520
 $15.25
12,520
 $15.25
 12,520
 $15.25
(1)The grant date fair value of restricted stock awards is based on the closing market price of our common stock at the grant date.
Dividends
We intend to continue regular quarterly distributions to holders of our common stock and preferred stock. U.S. federal income tax law generally requires that a REIT distribute at least 90% of its REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our repurchase agreements and other debt payable. If our cash available for distribution is less than our taxable income, we could be required to sell assets or borrow funds to make cash distributions, or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.
Inflation
Virtually all of our assets and liabilities are sensitive to interest rates. As a result, interest rates and other factors influence our performance far more than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates.
Unrelated Business Taxable Income
We have not engaged in transactions that would result in a portion of our income being treated as unrelated business taxable income.


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Exposure to Financial Counterparties
We finance a substantial portion of our investment portfolio through repurchase agreements. Under these agreements, we pledge assets from our investment portfolio as collateral. Additionally, certain counterparties may require us to provide cash collateral in the event the market value of the assets declines to maintain a contractual repurchase agreement collateral ratio. If a counterparty were to default on its obligations, we would be exposed to potential losses to the extent the fair value of collateral pledged by us to the counterparty including any accrued interest receivable on such collateral exceeded the amount loaned to us by the counterparty plus interest due to the counterparty.
We also use bilateral interest rate swaps to manage our interest rate risk. Under these agreements, we pledge assets from our investment portfolio and cash as collateral. If a counterparty were to default on its obligations, we would be exposed to potential losses to the extent the amount of securities or cash pledged exceeded the unrealized loss for the associated derivative, including the impact of any accrued interest due to or from the counterparty. Additionally if a derivative was in an unrealized gain position, we would be exposed to potential losses to the extent that the unrealized gain for the associated derivative exceeded the amount of collateral received, including the impact of any accrued interest due to or from the counterparty.
The following table summarizes our exposure to counterparties by geographic concentration as of March 31,September 30, 2019:
$ in thousandsNumber of Counterparties Repurchase Agreement Financing Interest Rate Swaps at Fair Value ExposureNumber of Counterparties Repurchase Agreement Financing Interest Rate Swaps at Fair Value Exposure
North America17
 6,740,444
 (2,620) 776,950
18
 8,402,603
 (4,310) 867,130
Europe (excluding United Kingdom)6
 2,983,373
 
 417,647
7
 2,816,447
 
 371,590
Asia5
 3,818,497
 
 267,638
5
 2,805,779
 
 207,727
United Kingdom4
 3,282,073
 (2,520) 185,980
5
 4,047,203
 (42,071) 261,120
Total32
 16,824,387
 (5,140) 1,648,215
35
 18,072,032
 (46,381) 1,707,567


Other Matters
We believe that we satisfied each of the asset tests in Section 856(c)(4) of the Internal Revenue Code of 1986, as amended (the "Code") for the period ended March 31,September 30, 2019, and that our proposed method of operation will permit us to satisfy the asset tests, gross income tests, and distribution and stock ownership requirements for our taxable year that will end on December 31, 2019.
At all times, we intend to conduct our business so that neither we nor our Operating Partnership nor the subsidiaries of our Operating Partnership are required to register as an investment company under the 1940 Act. If we were required to register as an investment company, then our use of leverage would be substantially reduced. Because we are a holding company that conducts our business through our Operating Partnership and the Operating Partnership’s wholly-owned or majority-owned subsidiaries, the securities issued by these subsidiaries that are excepted from the definition of "investment company" under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other investment securities the Operating Partnership may own, may not have a combined value in excess of 40% of the value of the Operating Partnership’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis, which we refer to as the 40% test. This requirement limits the types of businesses in which we are permitted to engage in through our subsidiaries. In addition, we believe neither we nor the Operating Partnership are considered an investment company under Section 3(a)(1)(A) of the 1940 Act because they do not engage primarily or hold themselves out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, through the Operating Partnership’s wholly-owned or majority-owned subsidiaries, we and the Operating Partnership are primarily engaged in the non-investment company businesses of these subsidiaries. IAS Asset I LLC and certain of the Operating Partnership’s other subsidiaries that we may form in the future rely upon the exclusion from the definition of "investment company" under the 1940 Act provided by Section 3(c)(5)(C) of the 1940 Act, which is available for entities "primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate." This exclusion generally requires that at least 55% of each subsidiary’s portfolio be comprised of qualifying assets and at least 80% be comprised of qualifying assets and real estate-related assets (and no more than 20% comprised of miscellaneous assets). We calculate that as of March 31,September 30, 2019, we conducted our business so as not to be regulated as an investment company under the 1940 Act.


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ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The primary components of our market risk are related to interest rate, principal prepayment and market value. While we do not seek to avoid risk completely, we believe the risk can be quantified from historical experience and we seek to actively manage that risk, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake.
Interest Rate Risk
Interest rate risk is highly sensitive to many factors, including governmental, monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control. We are subject to interest rate risk in connection with our investments and our repurchase agreements. Our repurchase agreements are typically of limited duration and will be periodically refinanced at current market rates. We mitigate this risk through utilization of derivative contracts, primarily interest rate swap agreements, TBAs and futures contracts.
Interest Rate Effect on Net Interest Income
Our operating results depend in large part upon differences between the yields earned on our investments and our cost of borrowing and interest rate hedging activities. Most of our repurchase agreements provide financing based on a floating rate of interest calculated on a fixed spread over LIBOR. The fixed spread will vary depending on the type of underlying asset which collateralizes the financing. Accordingly, the portion of our portfolio which consists of floating interest rate assets are match-funded utilizing our expected sources of short-term financing, while our fixed interest rate assets are not match-funded. During periods of rising interest rates, the borrowing costs associated with our investments tend to increase while the income earned on our fixed interest rate investments may remain substantially unchanged. This increase in borrowing costs results in the narrowing of the net interest spread between the related assets and borrowings and may even result in losses. Further, during this portion of the interest rate and credit cycles, defaults could increase and result in credit losses to us, which could adversely affect our liquidity and operating results. Such delinquencies or defaults could also have an adverse effect on the spread between interest-earning assets and interest-bearing liabilities.
Hedging techniques are partly based on assumed levels of prepayments of our RMBS. If prepayments are slower or faster than assumed, the life of the RMBS will be longer or shorter, which would reduce the effectiveness of any hedging strategies we may use and may cause losses on such transactions. Hedging strategies involving the use of derivative securities are highly complex and may produce volatile returns.
Interest Rate Effects on Fair Value
Another component of interest rate risk is the effect that changes in interest rates will have on the market value of the assets that we acquire. We face the risk that the market value of our assets will increase or decrease at different rates than those of our liabilities, including our hedging instruments.
We primarily assess our interest rate risk by estimating the duration of our assets and the duration of our liabilities. Duration measures the market price volatility of financial instruments as interest rates change. We generally calculate duration using various financial models and empirical data. Different models and methodologies can produce different duration numbers for the same securities.
The impact of changing interest rates on fair value can change significantly when interest rates change materially. Therefore, the volatility in the fair value of our assets could increase significantly in the event interest rates change materially. In addition, other factors impact the fair value of our interest rate-sensitive investments and hedging instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, changes in actual interest rates may have a material adverse effect on us.


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Spread Risk
We employ a variety of spread risk management techniques that seek to mitigate the influences of spread changes on our book value and our liquidity to help us achieve our investment objectives. We refer to the difference between interest rates on our investments and interest rates on risk free instruments as spreads. The yield on our investments changes over time due to the level of risk free interest rates, the creditworthiness of the security, and the price of the perceived risk. The change in the market yield of our interest rate hedges also changes primarily with the level of risk free interest rates. We manage spread risk through careful asset selection, sector allocation, regulating our portfolio value-at-risk, and maintaining adequate liquidity. Changes in spreads impact our book value and our liquidity and could cause us to sell assets and to change our investment strategy in order to maintain liquidity and preserve book value.
Prepayment Risk
As we receive prepayments of principal on our investments, premiums paid on these investments are amortized against interest income. In general, an increase in prepayment rates will accelerate the amortization of purchase premiums, thereby reducing the interest income earned on the investments. Conversely, discounts on such investments are accreted into interest income. In general, an increase in prepayment rates will accelerate the accretion of purchase discounts, thereby increasing the interest income earned on the investments.
Extension Risk
We compute the projected weighted average life of our investments based upon assumptions regarding the rate at which the borrowers will prepay the underlying mortgages. In general, when a fixed-rate or hybrid adjustable-rate security is acquired with borrowings, we may, but are not required to, enter into an interest rate swap agreement or other hedging instrument that effectively fixes our borrowing costs for a period close to the anticipated average life of the fixed-rate portion of the related assets. This strategy is designed to protect us from rising interest rates, because the borrowing costs are fixed for the duration of the fixed-rate portion of the related target asset.
However, if prepayment rates decrease in a rising interest rate environment, then the life of the fixed-rate portion of the related assets could extend beyond the term of the swap agreement or other hedging instrument. This could have a negative impact on our results from operations, as borrowing costs would no longer be fixed after the end of the hedging instrument, while the income earned on the hybrid adjustable-rate assets would remain fixed. This situation may also cause the market value of our hybrid adjustable-rate assets to decline, with little or no offsetting gain from the related hedging transactions. In extreme situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur losses.
Market Risk
Market Value Risk
Our available-for-sale securities are reflected at their estimated fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income pursuant to ASC Topic 320. The estimated fair value of these securities fluctuates primarily due to changes in interest rates and other factors. Generally, in a rising interest rate environment, the estimated fair value of these securities would be expected to decrease; conversely, in a decreasing interest rate environment, the estimated fair value of these securities would be expected to increase.
The sensitivity analysis table presented below shows the estimated impact of an instantaneous parallel shift in the yield curve, up and down 50 and 100 basis points, on the market value of our interest rate-sensitive investments and net interest income, including net interest paid or received under interest rate swaps, at March 31,September 30, 2019, assuming a static portfolio. When evaluating the impact of changes in interest rates, prepayment assumptions and principal reinvestment rates are adjusted based on our Manager’s expectations. The analysis presented utilized assumptions, models and estimates of our Manager based on our Manager’s judgment and experience.
Change in Interest Rates 
Percentage Change in Projected
Net Interest Income
 
Percentage Change in Projected
Portfolio Value
 
Percentage Change in Projected
Net Interest Income
 
Percentage Change in Projected
Portfolio Value
+1.00% (9.13)% (1.08)% 1.56 % (1.90)%
+0.50% (1.90)% (0.37)% 1.79 % (0.85)%
-0.50% (0.52)% (0.16)% (4.93)% 0.45 %
-1.00% (7.07)% (0.94)% (7.92)% 0.85 %
Certain assumptions have been made in connection with the calculation of the information set forth in the foregoing interest rate sensitivity table and, as such, there can be no assurance that assumed events will occur or that other events will not


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occur that would affect the outcomes. The base interest rate scenario assumes interest rates at March 31,September 30, 2019. Furthermore, while we generally expect to retain such assets and the associated interest rate risk to maturity, future purchases and sales of assets could materially change our interest rate risk profile.
Given the low interest rates at March 31,September 30, 2019, we applied a floor of 0% for all anticipated interest rates included in our assumptions. Because of this floor, we anticipate that any hypothetical interest rate shock decrease would have a limited positive impact on our funding costs; however, because prepayment speeds are unaffected by this floor, we expect that any increase in our prepayment speeds (occurring as a result of any interest rate decrease or otherwise) could result in an acceleration of our premium amortization on securities purchased at a premium, and accretion of discount on our securities purchased at a discount. As a result, because this floor limits the positive impact of any interest rate decrease on our funding costs, hypothetical interest rate decreases could cause the fair value of our financial instruments and our net interest income to decline.
The information set forth in the interest rate sensitivity table above and all related disclosures constitutes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Actual results could differ significantly from those estimated in the foregoing interest rate sensitivity table.
Real Estate Risk
Residential and commercial property values are subject to volatility and may be adversely affected by a number of factors, including, but not limited to: national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as the supply of housing stock); changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our loans, which could also cause us to suffer losses.
Credit Risk
We believe that our investment strategy will generally keep our credit losses and financing costs low. However, we retain the risk of potential credit losses on all of our residential and commercial mortgage investments. We seek to manage this risk through our pre-acquisition due diligence process. In addition, we re-evaluate the credit risk inherent in our investments on a regular basis pursuant to fundamental considerations such as GDP, unemployment, interest rates, retail sales, store closings/openings, corporate earnings, housing inventory, affordability and regional home price trends. We also review key loan credit metrics including, but not limited to, payment status, current loan-to-value ratios, current borrower credit scores and debt yields. These characteristics assist in determining the likelihood and severity of loan loss as well as prepayment and extension expectations. We then perform structural analysis under multiple scenarios to establish likely cash flow profiles and credit enhancement levels relative to collateral performance projections. This analysis allows us to quantify our opinions of credit quality and fundamental value, which are key drivers of portfolio management decisions.
Foreign Exchange Rate Risk
We have an investment in a commercial loan denominated in foreign currency and an investment in an unconsolidated joint venture whose net assets and results of operations are exposed to foreign currency translation risk when translated in U.S. dollars upon consolidation. We seek to hedge our foreign currency exposures by purchasing currency forward contracts.
Risk Management
To the extent consistent with maintaining our REIT qualification, we seek to manage risk exposure to protect our investment portfolio against the effects of major interest rate changes. We generally seek to manage this risk by:
monitoring and adjusting, if necessary, the reset index and interest rate related to our target assets and our financings;
attempting to structure our financing agreements to have a range of different maturities, terms, amortizations and interest rate adjustment periods;
using hedging instruments, primarily interest rate swap agreements but also financial futures, options, interest rate cap agreements, floors and forward sales to adjust the interest rate sensitivity of our target assets and our borrowings; and
actively managing, on an aggregate basis, the interest rate indices, interest rate adjustment periods, and gross reset margins of our target assets and the interest rate indices and adjustment periods of our financings.


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ITEM 4.CONTROLS AND PROCEDURES.


Our management is responsible for establishing and maintaining disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act.
We have evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of March 31,September 30, 2019. Based upon our evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended March 31,September 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




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PART II – OTHER INFORMATION
 
ITEM 1.LEGAL PROCEEDINGS.
From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. As of March 31,September 30, 2019, we were not involved in any such legal proceedings.
ITEM 1A.RISK FACTORS.
There were no material changes during the period covered by this Report to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on February 20, 2019. Additional risks not presently known, or that we currently deem immaterial, also may have a material adverse effect on our business, financial condition and results of operations.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the three months ended March 31,September 30, 2019, we did not repurchase any shares of our common stock.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4.MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5.OTHER INFORMATION.
None.


ITEM 6.EXHIBITS.
A list of exhibits to this Form 10-Q is set forth on the Exhibit Index and is incorporated herein by reference.




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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 thereunto duly authorized.
 
 INVESCO MORTGAGE CAPITAL INC.
   
May 8,November 7, 2019By:/s/ John M. Anzalone
  John M. Anzalone
  Chief Executive Officer
   
May 8,November 7, 2019By:/s/ R. Lee Phegley, Jr.
  R. Lee Phegley, Jr.
  Chief Financial Officer




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EXHIBIT INDEX
Item 6.        Exhibits
 
Exhibit
No.
  Description
  
3.1

  
  
3.2

  
  
3.3

 
   
3.4

  
  
3.5

 
   
3.6

 
   
3.7

 
   
3.8

  
   
10.1

 
10.2
10.3
10.4
   
31.1

  
  
31.2

  
  
32.1

  
  
32.2

  
  

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101

  
The following series of unaudited XBRL-formatted documents are collectively included herewith as Exhibit 101. The financial information is extracted from Invesco Mortgage Capital Inc.’s unaudited condensed consolidated interim financial statements and notes that are included in this Form 10-Q Report.
101.INS XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
 
101.SCH XBRL Taxonomy Extension Schema Document
 
101.CAL XBRL Taxonomy Calculation Linkbase Document
 
101.LAB XBRL Taxonomy Label Linkbase Document
 
101.PRE XBRL Taxonomy Presentation Linkbase Document
 
101.DEF XBRL Taxonomy Definition Linkbase Document


104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)


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