UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X]              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: September 30, 2017
OR
[  ]              TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _________________
COMMISSION FILE NUMBER: 1-33796
CHIMERA INVESTMENT CORPORATION
(Exact name of Registrant as specified in its Charter) 
MARYLAND
 
26-0630461
(State or other jurisdiction of incorporation or organization)
 
 (IRS Employer Identification No.)
                                                                                                                                             
520 Madison Avenue 32nd Floor
NEW YORK, NEW YORK
(Address of principal executive offices)
10022
(Zip Code)
(212) 626-2300
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
Yes þ No ☐
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No þ
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:
Class
Outstanding at October 31, 2017
Common Stock, $0.01 par value
187,781,029




CHIMERA INVESTMENT CORPORATION

FORM 10-Q
TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Financial Condition as of September 30, 2017 (Unaudited) and December 31, 2016 (Derived from the audited consolidated financial statements as of December 31, 2016)
 
 
Consolidated Statements of Operations (Unaudited) for the quarters and nine months ended September 30, 2017 and 2016
 
 
Consolidated Statements of Comprehensive Income (Unaudited) for the quarters and nine months ended September 30, 2017 and 2016
 
 
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the nine months ended September 30, 2017 and 2016
 
 
Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2017 and 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



1



Part I
Item 1. Consolidated Financial Statements
CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except share and per share data)
(Unaudited)
 
September 30, 2017
December 31, 2016
Assets:
 
 
Cash and cash equivalents
$
38,055

$
177,714

Non-Agency RMBS, at fair value
2,950,348

3,330,063

Agency MBS, at fair value
4,354,872

4,167,754

Loans held for investment, at fair value
13,538,052

8,753,653

Receivable for investment sold
11,235


Accrued interest receivable
99,421

79,697

Other assets
172,876

166,350

Derivatives, at fair value, net
22,525

9,677

Total assets (1)
$
21,187,384

$
16,684,908

Liabilities:
 

 

Repurchase agreements ($8.2 billion and $7.0 billion, pledged as collateral, respectively)
$
6,709,821

$
5,600,903

Securitized debt, collateralized by Non-Agency RMBS ($1.6 billion and $1.8 billion pledged as collateral, respectively)
233,113

334,124

Securitized debt at fair value, collateralized by loans held for investment ($13.0 billion and $8.8 billion pledged as collateral, respectively)
9,683,062

6,941,097

Payable for investments purchased
733,142

520,532

Accrued interest payable
64,280

48,670

Dividends payable
95,000

97,005

Accounts payable and other liabilities
21,331

16,694

Derivatives, at fair value
1,204

2,350

Total liabilities (1)
$
17,540,953

$
13,561,375






Commitments and Contingencies (See Note 15)









Stockholders' Equity:
 

 

Preferred Stock, par value of $0.01 per share, 100,000,000 shares authorized:




8.00% Series A cumulative redeemable: 5,800,000 shares issued and outstanding, respectively ($145,000 liquidation preference)
$
58

$
58

8.00% Series B cumulative redeemable: 13,000,000 and 0 shares issued and outstanding, respectively ($325,000 liquidation preference)
130


Common stock: par value $0.01 per share; 300,000,000 shares authorized, 187,781,000 and 187,739,634 shares issued and outstanding, respectively
1,878

1,877

Additional paid-in-capital
3,825,832

3,508,779

Accumulated other comprehensive income
813,118

718,106

Cumulative earnings
2,860,244

2,443,184

Cumulative distributions to stockholders
(3,854,829
)
(3,548,471
)
Total stockholders' equity
$
3,646,431

$
3,123,533

Total liabilities and stockholders' equity
$
21,187,384

$
16,684,908

(1) The Company's consolidated statements of financial condition include assets of consolidated variable interest entities (“VIEs”) that can only be used to settle obligations and liabilities of the VIE for which creditors do not have recourse to the primary beneficiary (Chimera Investment Corporation). As of September 30, 2017 and December 31, 2016, total assets of consolidated VIEs were $14,846,980 and $10,761,954, respectively, and total liabilities of consolidated VIEs were $9,954,437 and $7,302,905, respectively. See Note 8 for further discussion.

See accompanying notes to consolidated financial statements.

2



CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share and per share data)
(Unaudited)
 
For the Quarters Ended
 
For the Nine Months Ended

September 30, 2017
September 30, 2016
 
September 30, 2017
September 30, 2016
Net interest income:


 
 
 
Interest income (1)
$
296,813

$
250,953

 
$
836,801

$
673,246

Interest expense (2)
140,358

94,911

 
388,544

241,120

Net interest income
156,455

156,042

 
448,257

432,126

Other-than-temporary impairments:
 

 

 




Total other-than-temporary impairment losses
(784
)
(993
)
 
(4,245
)
(8,555
)
Portion of loss recognized in other comprehensive income
(10,684
)
(10,581
)
 
(39,431
)
(34,652
)
Net other-than-temporary credit impairment losses
(11,468
)
(11,574
)
 
(43,676
)
(43,207
)
Other investment gains (losses):
 

 

 




Net unrealized gains (losses) on derivatives
9,204

27,628

 
19,902

(51,382
)
Realized gains (losses) on terminations of interest rate swaps


 
(16,143
)
(60,616
)
Net realized gains (losses) on derivatives
(7,841
)
(14,268
)
 
(28,680
)
(58,934
)
Net gains (losses) on derivatives
1,363

13,360

 
(24,921
)
(170,932
)
Net unrealized gains (losses) on financial instruments at fair value
19,042

32,999

 
159,047

80,217

Net realized gains (losses) on sales of investments
1

3,079

 
9,709

7,035

Gains (losses) on extinguishment of debt
(1
)
(45
)
 
(48,016
)
(1,811
)
Total other gains (losses)
20,405

49,393

 
95,819

(85,491
)
 
 
 
 
 
 
Other income:
 

 

 




Other income


 

95,000

Total other income


 

95,000

 
 
 
 
 
 
Other expenses:
 

 

 




Compensation and benefits
7,533

6,911

 
22,759

19,087

General and administrative expenses
4,537

4,332

 
13,162

13,073

Servicing fees
10,715

9,788

 
31,193

23,139

Deal expenses
3,357


 
16,054

13,022

Total other expenses
26,142

21,031

 
83,168

68,321

Income (loss) before income taxes
139,250

172,830

 
417,232

330,107

Income taxes
18

13

 
172

65

Net income (loss)
$
139,232

$
172,817

 
$
417,060

$
330,042






 
 
 
Dividend on preferred stock
9,400


 
24,083







 
 
 
Net income (loss) available to common shareholders
$
129,832

$
172,817

 
$
392,977

$
330,042






 
 
 
Net income (loss) per share available to common shareholders:


 

 




Basic
$
0.69

$
0.92

 
$
2.09

$
1.76

Diluted
$
0.69

$
0.92

 
$
2.09

$
1.76






 




Weighted average number of common shares outstanding:
 

 

 




Basic
187,779,794

187,729,765

 
187,773,715

187,727,667

Diluted
188,192,111

187,919,792

 
188,176,757

187,917,694






 
 
 
Dividends declared per share of common stock
$
0.50

$
0.48

 
$
1.50

$
1.94






 
 
 


(1) Includes interest income of consolidated VIEs of $241,195 and $195,488 for the quarters ended September 30, 2017 and 2016, respectively and interest income of consolidated VIEs of $668,621 and $488,353 for the nine months ended September 30, 2017 and 2016 respectively. See Note 8 to consolidated financial statements for further discussion.
(2) Includes interest expense of consolidated VIEs of $101,856 and $70,715 for the quarters ended September 30, 2017 and 2016, respectively and interest expense of consolidated VIEs of $290,264 and $168,738 for the nine months ended September 30, 2017 and 2016 respectively. See Note 8 to consolidated financial statements for further discussion.

See accompanying notes to consolidated financial statements.


3




CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands, except share and per share data)
(Unaudited)






For the Quarters Ended
For the Nine Months Ended

September 30, 2017
September 30, 2016
September 30, 2017
September 30, 2016
Comprehensive income (loss):
 



Net income (loss)
$
139,232

$
172,817

$
417,060

$
330,042

Other comprehensive income:
 



Unrealized gains (losses) on available-for-sale securities, net
21,370

(18,364
)
59,114

94,059

Reclassification adjustment for net losses included in net income for other-than-temporary credit impairment losses
11,468

11,574

43,676

43,207

Reclassification adjustment for net realized losses (gains) included in net income
(1
)
(2,680
)
(7,778
)
(13,354
)
Other comprehensive income (loss)
32,837

(9,470
)
95,012

123,912

Comprehensive income (loss) before preferred stock dividends
$
172,069

$
163,347

$
512,072

$
453,954

Dividends on preferred stock
$
9,400

$

$
24,083

$

Comprehensive income (loss) available to common stock shareholders
$
162,669

$
163,347

$
487,989

$
453,954




4



CHIMERA INVESTMENT CORPORATION      
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands, except per share data)
(Unaudited)
 
Series A Preferred Stock Par Value
Series B Preferred Stock Par Value
Common
Stock Par
Value
Additional Paid-in Capital
Accumulated Other Comprehensive Income
Cumulative Earnings
Cumulative Distributions to Stockholders
Total
Balance, December 31, 2015
$

$

$
1,877

$
3,366,568

$
773,791

$
1,891,239

$
(3,087,287
)
$
2,946,188

Net income (loss)





330,042


330,042

Other comprehensive income (loss)




123,912



123,912

Stock based compensation



1,375




1,375

Common dividends declared






(364,717
)
(364,717
)
Balance, September 30, 2016
$

$

$
1,877

$
3,367,943

$
897,703

$
2,221,281

$
(3,452,004
)
$
3,036,800

 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
$
58

$

$
1,877

$
3,508,779

$
718,106

$
2,443,184

$
(3,548,471
)
$
3,123,533

Net income (loss)





417,060


417,060

Other comprehensive income (loss)




95,012



95,012

Stock based compensation


1

2,754




2,755

Common dividends declared






(282,275
)
(282,275
)
Preferred dividends declared






(24,083
)
(24,083
)
Issuance of preferred stock

130


314,299




314,429

Balance, September 30, 2017
$
58

$
130

$
1,878

$
3,825,832

$
813,118

$
2,860,244

$
(3,854,829
)
$
3,646,431



See accompanying notes to consolidated financial statements.


5



CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
 
For the Nine Months Ended
 
September 30, 2017
September 30, 2016
Cash Flows From Operating Activities:
Net income
$
417,060

$
330,042

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
(Accretion) amortization of investment discounts/premiums, net
(17,269
)
4,084

Accretion (amortization) of deferred financing costs and securitized debt discounts/premiums, net
6,649

(5,769
)
Amortization of swaption premium
5,468

5,130

Net unrealized losses (gains) on derivatives
(19,902
)
51,382

Margin (paid) received on derivatives
(3,948
)
(41,283
)
Net unrealized losses (gains) on financial instruments at fair value
(159,047
)
(80,217
)
Net realized losses (gains) on sales of investments
(9,709
)
(7,035
)
Net other-than-temporary credit impairment losses
43,676

43,207

(Gain) loss on extinguishment of debt
48,016

1,811

Equity-based compensation expense
2,755

1,375

Changes in operating assets:


 

Decrease (increase) in accrued interest receivable, net
(19,738
)
(18,081
)
Decrease (increase) in other assets
(5,076
)
(36,969
)
Changes in operating liabilities:


 

Increase (decrease) in accounts payable and other liabilities
4,635

3,905

Increase (decrease) in accrued interest payable, net
15,631

12,311

Net cash provided by (used in) operating activities
$
309,201

$
263,893

Cash Flows From Investing Activities:
Agency MBS portfolio:
 

 

Purchases
$
(1,000,336
)
$
(810,630
)
Sales
693,207

2,555,228

Principal payments
332,140

471,657

Non-Agency RMBS portfolio:
 

 

Purchases
(7,978
)
(160,805
)
Sales
5,045

95,399

Principal payments
459,854

402,971

Loans held for investment:
 

 

Purchases
(5,835,799
)
(4,745,083
)
Principal payments
1,298,855

696,281

Net cash provided by (used in) investing activities
$
(4,055,012
)
$
(1,494,982
)
Cash Flows From Financing Activities:
Proceeds from repurchase agreements
$
29,079,905

$
27,792,856

Payments on repurchase agreements
(27,970,987
)
(29,414,676
)
Net proceeds from preferred stock offerings
314,429


Proceeds from securitized debt borrowings, collateralized by loans held for investment
4,159,073

4,180,227

Payments on securitized debt borrowings, collateralized by loans held for investment
(1,564,489
)
(773,875
)
Payments on securitized debt borrowings, collateralized by Non-Agency RMBS
(103,415
)
(146,729
)
Common dividends paid
(281,832
)
(364,168
)
Preferred dividends paid
(26,532
)

Net cash provided by (used in) financing activities
$
3,606,152

$
1,273,635

Net increase (decrease) in cash and cash equivalents
(139,659
)
42,546

Cash and cash equivalents at beginning of period
177,714

114,062

Cash and cash equivalents at end of period
$
38,055

$
156,608

 
 
 
Supplemental disclosure of cash flow information:
Interest received
$
799,808

$
659,249

Interest paid
$
366,284

$
234,577

Non-cash investing activities:
 

 

Payable for investments purchased
$
733,142

$
578,499

Receivable for investments sold
$
11,235

$

Net change in unrealized gain (loss) on available-for sale securities
$
95,012

$
123,912






Non-cash financing activities:
 

 

    Common dividends declared, not yet paid
$
95,000

$
90,645

See accompanying notes to consolidated financial statements.

6



CHIMERA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Organization

Chimera Investment Corporation (the “Company”) was organized in Maryland on June 1, 2007. The Company commenced operations on November 21, 2007 when it completed its initial public offering. The Company elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder (the “Code”).

The Company conducts its operations through various subsidiaries including subsidiaries it treats as taxable REIT subsidiaries (“TRS”). In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate related business. The Company currently has eight wholly owned direct subsidiaries: Chimera RMBS Whole Pool LLC, and Chimera RMBS LLC formed in June 2009; CIM Trading Company LLC (“CIM Trading”), formed in July 2010; Chimera Funding TRS LLC (“CIM Funding TRS”), a TRS formed in October 2013, Chimera CMBS Whole Pool LLC and Chimera RMBS Securities LLC formed in March 2015; Chimera Insurance Company, LLC formed in July 2015 and Chimera RR Holdings LLC formed in April 2016.

2. Summary of the Significant Accounting Policies

(a) Basis of Presentation and Consolidation

The accompanying consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). In the opinion of management, all adjustments considered necessary for a fair presentation of the Company's financial position, results of operations and cash flows have been included. Certain prior period amounts have been reclassified to conform to the current period's presentation.

The consolidated financial statements include, the Company’s accounts, the accounts of its wholly-owned subsidiaries, and variable interest entities (“VIEs”) in which the Company is the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation.

The Company uses securitization trusts considered to be VIEs in its securitization and re-securitization transactions. VIEs are defined as entities in which equity investors (i) do not have the characteristics of a controlling financial interest, or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The entity that consolidates a VIE is known as its primary beneficiary, and is generally the entity with (i) the power to direct the activities that most significantly impact the VIEs’ economic performance, and (ii) the right to receive benefits from the VIE or the obligation to absorb losses of the VIE that could be significant to the VIE. For VIEs that do not have substantial on-going activities, the power to direct the activities that most significantly impact the VIEs’ economic performance may be determined by an entity’s involvement with the design and structure of the VIE.

The trusts are structured as pass through entities that receive principal and interest on the underlying collateral and distribute those payments to the security holders. The assets held by the securitization entities are restricted in that they can only be used to fulfill the obligations of the securitization entity. The Company’s risks associated with its involvement with these VIEs are limited to its risks and rights as a holder of the security it has retained.

Determining the primary beneficiary of a VIE requires significant judgment. The Company determined that for the securitizations it consolidates, its ownership provides the Company with the obligation to absorb losses or the right to receive benefits from the VIE that could be significant to the VIE. In addition, the Company has the power to direct the activities of the VIEs that most significantly impact the VIEs’ economic performance (“power”) such as rights to direct servicer activity or the Company was determined to have power in connection with its involvement with the purpose and design of the VIE.

The Company’s interest in the assets held by these securitization vehicles, which are consolidated on the Company’s Statements of Financial Condition, is restricted by the structural provisions of these trusts, and a recovery of the Company’s investment in the vehicles will be limited by each entity’s distribution provisions. The liabilities of the securitization vehicles, which are also consolidated on the Company’s Statements of Financial Condition, are non-recourse to the Company, and can generally only be satisfied from each securitization vehicle’s respective asset pool.


7



The assets of securitization entities are comprised of senior classes of residential mortgage backed securities (“RMBS”) or residential mortgage loans. See Notes 3, 4 and 8 for further discussion of the characteristics of the securities and loans in the Company’s portfolio.

(b) Statements of Financial Condition Presentation

The Company’s Consolidated Statements of Financial Condition include both the Company’s direct assets and liabilities and the assets and liabilities of consolidated securitization vehicles. Assets of each consolidated VIE can only be used to satisfy the obligations of that VIE, and the liabilities of consolidated VIEs are non-recourse to the Company. The Company is not obligated to provide, nor does it intend to provide, any financial support to these consolidated securitization vehicles. The notes to the consolidated financial statements describe the Company’s assets and liabilities including the assets and liabilities of consolidated securitization vehicles. See Note 8 for additional information related to the Company’s investments in consolidated securitization vehicles.

(c) Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although the Company’s estimates contemplate current conditions and how it expects them to change in the future, it is reasonably possible that actual conditions could be materially different than anticipated in those estimates, which could have a material adverse impact on the Company’s results of operations and its financial condition. Management has made significant estimates including in accounting for income recognition and OTTI on Agency and Non-Agency RMBS and IO MBS (Note 3), valuation of Agency MBS and Non-Agency RMBS (Notes 3 and 5), residential mortgage loans (Note 4), securitized debt (Note 7) and derivative instruments (Notes 5 and 9). Actual results could differ materially from those estimates.

(d) Significant Accounting Policies

There have been no significant changes to the Company's accounting policies included in Note 2 to the consolidated financial statements of the Company’s Form 10-K for the year ended December 31, 2016, other than the significant accounting policies disclosed below.

Income Taxes

The Company does not have any unrecognized tax positions that would affect its financial statements or require disclosure. No accruals for penalties and interest were necessary as of September 30, 2017 or December 31, 2016.

Fair Value Disclosure

The Company has elected to account for Agency MBS investments acquired on or after July 1, 2017 under the fair value option. Under the fair value option, these investments will be carried at fair value, with changes in fair value reported in earnings (included as part of “Net unrealized gains (losses) on financial instruments at fair value”). Consistent with all other investments for which the Company has elected the fair value option, the Company will recognize revenue on a prospective basis in accordance with guidance in ASC 325-40.

All Agency MBS investments owned prior to this date will continue to be carried at fair value with changes in fair value reported in other comprehensive income (OCI) as available-for-sale investments. All revenue recognition for these Agency MBS investments owned prior to July 1, 2017 will be in accordance with ASC 310-20.

A complete discussion of the methodology utilized by the Company to estimate the fair value of its financial instruments is included in Note 5 to these consolidated financial statements.

(e) Recent Accounting Pronouncements

Derivatives and Hedging - Targeted improvements to Accounting for Hedging Activities (Topic 815)

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging - Targeted improvements to Accounting for Hedging Activities. This update is issued with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the

8



amendments in this update make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The guidance in the ASU is effective for the Company as of January 1, 2019. Early adoption is allowed. The Company is not planning to early adopt and is currently evaluating what impact this update will have on the consolidated financial statements.

Business Combinations - (Topic 805)

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations - Clarifying the Definition of a Business. This update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business-inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. The amendments in this Update provide a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. The guidance in the ASU is effective for the Company as of January 1, 2018. Early adoption is allowed. The amendments in this update should be applied prospectively on or after the effective date. No disclosures are required at transition. The Company is not planning to early adopt and is currently evaluating what impact this update will have on the consolidated financial statements.

Statement of Cash Flows - Restricted Cash - (Topic 230)

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows - Restricted Cash. This update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update do not provide a definition of restricted cash or restricted cash equivalents. The guidance in the ASU is effective for the Company as of January 1, 2018. Early adoption is allowed. The amendments in this update should be applied using a retrospective transition method to each period presented. The Company is not planning to early adopt and is currently evaluating what impact this update will have on the consolidated financial statements.

Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments - (Topic 230)

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments. This update provides guidance on eight specific cash flow issues. The guidance is intended to reduce diversity in practice on those issues across all industries. The guidance in the ASU is effective for the Company as of January 1, 2018. Early adoption is allowed. The guidance is to be applied retrospectively, unless it is impracticable to do so for an issue, then the amendments related to that issue would be applied prospectively. The Company did not elect to early adopt the provisions of this update. The Company is currently evaluating what impact this update will have on the consolidated financial statements.

Financial Instruments - Credit Losses - (Topic 326)

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This update replaces the current model for recognizing credit losses from an incurred credit loss model to a current expected credit loss (CECL) model for instruments measured at amortized cost and requires entities to record allowances for available-for-sale (AFS) debt securities when the fair value of an AFS debt security is below the amortized cost of the asset rather than reduce the carrying amount, as the Company does under the current OTTI model. This update also simplifies the accounting model for purchased credit-impaired debt securities and loans. The changes in the allowances created in accordance with this update will be recorded in earnings. The update also expands the disclosure requirements regarding the Company's assumptions, models, and methods for estimating the expected credit losses. In addition, the Company will disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. The guidance in the ASU is effective for the Company as of January 1, 2020. Early adoption is allowed, beginning January 1, 2019. The standard requires entities to record a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is effective. The Company is currently evaluating what impact this update will have on the consolidated financial statements.

Share Based Payments - (Topic 718)


9



In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. Under this update companies will no longer record excess tax benefits and certain tax deficiencies associated with an award of equity instruments in additional paid-in capital. Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement when the awards vest or are settled, and additional paid-in capital pools will be eliminated. The updated guidance will also allow the Company to repurchase more shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The guidance is to be applied using a modified retrospective transition method with a cumulative-effect adjustment recorded in retained earnings. The Company has adopted this guidance as of January 1, 2017. The adoption of this guidance did not have a significant impact on the Company's consolidated financial statements.
 
Contingent Put and Call Options in Debt Instruments - (Topic 815)

In March 2016, the FASB issued ASU No. 2016-06, Contingent Put and Call Options in Debt Instruments Accounting.  This update clarifies that when a call or put option in a debt instrument can accelerate the repayment of principal on the debt instrument, a reporting entity does not need to assess whether the contingent event that triggers the ability to exercise the call or put option is related to interest rates or credit risk in determining whether the option should be accounted for separately as a derivative. The new guidance applies to existing debt instruments (or hybrid financial instruments that are determined to have a debt host) using a modified retrospective method as of the beginning of the period of adoption. The Company has adopted this guidance as of January 1, 2017. The adoption of this guidance did not have a significant impact on the Company’s consolidated financial statements.

Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships - (Topic 815)

In March 2016, the FASB issued ASU No. 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The amendments in this update clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The Company has adopted this guidance as of January 1, 2017. The Company currently does not apply hedge accounting for GAAP reporting purposes, therefore this guidance did not have a significant impact on the Company’s consolidated financial statements.

Financial Instruments-Overall (Subtopic 825-10)

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. This update changes how the Company will present changes in the fair value of financial liabilities measured under the fair value option that are attributable to our own credit.  Under the updated guidance, the Company will record changes in instrument-specific credit risk for financial liabilities measured under the fair value option in other comprehensive income.  The update also requires fair value measurement for equity investments that do not result in consolidation and are not accounted for under the equity method to be measured at fair value with any changes in fair value recognized in net income.  The update also eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost. In addition, the Company will have to use the exit price notion when measuring the fair value of financial instruments measured at amortized cost for disclosure purposes.  The guidance in the ASU is effective for the Company as of January 1, 2018. Early adoption for certain provisions of the update is allowed.  Any adjustment as a result of the adoption of this standard will be recorded as a cumulative-effect adjustment to beginning retained earnings as of the first period in which the guidance is adopted.  The Company did not elect to early adopt the provisions of this update and is currently evaluating what impact this update will have on the consolidated financial statements.

3. Mortgage-Backed Securities

The Company classifies its Non-Agency RMBS as senior, senior IO, subordinated, or subordinated IO. The Company also invests in residential, commercial and IO Agency MBS. Senior interests in Non-Agency RMBS are considered to be entitled to the first principal repayments in their pro-rata ownership interests at the acquisition date. The tables below present amortized cost, fair value and unrealized gain/losses of Company's MBS investments as of September 30, 2017 and December 31, 2016.

10



 
 
September 30, 2017
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
Principal or Notional Value
Total Premium
Total Discount
Amortized Cost
Fair Value
Gross Unrealized Gains
Gross Unrealized Losses
Net Unrealized Gain/(Loss)
Non-Agency RMBS
 
 
 
 
 
 
 
 
Senior
$
2,821,535

$
224

$
(1,282,801
)
$
1,538,958

$
2,304,611

$
765,653

$

$
765,653

Senior, interest-only
4,948,265

267,964


267,964

212,662

13,620

(68,922
)
(55,302
)
Subordinated
531,526

10,764

(188,169
)
354,121

421,487

67,430

(64
)
67,366

Subordinated, interest-only
256,286

12,968


12,968

11,588

860

(2,240
)
(1,380
)
Agency MBS
 

 

 

 

 

 

 



Residential
2,316,838

128,388


2,445,226

2,428,112

7,606

(24,720
)
(17,114
)
Commercial
1,774,802

44,913

(4,732
)
1,814,983

1,811,950

13,467

(16,500
)
(3,033
)
Interest-only
3,176,110

121,353


121,353

114,810

1,226

(7,769
)
(6,543
)
Total
$
15,825,362

$
586,574

$
(1,475,702
)
$
6,555,573

$
7,305,220

$
869,862

$
(120,215
)
$
749,647


 
 
December 31, 2016
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
Principal or Notional Value
Total Premium
Total Discount
Amortized Cost
Fair Value
Gross Unrealized Gains
Gross Unrealized Losses
Net Unrealized Gain/(Loss)
Non-Agency RMBS
 
 
 
 
 
 
 
 
Senior
$
3,190,947

$
231

$
(1,412,058
)
$
1,779,120

$
2,511,003

$
732,133

$
(250
)
$
731,883

Senior, interest-only
5,648,339

292,396


292,396

253,539

18,674

(57,531
)
(38,857
)
Subordinated
673,259

16,352

(212,734
)
476,877

553,498

77,857

(1,236
)
76,621

Subordinated, interest-only
266,927

13,878


13,878

12,024


(1,854
)
(1,854
)
Agency MBS
 

 

 

 

 

 

 

 

Residential
2,594,570

149,872


2,744,442

2,705,978

11,235

(49,699
)
(38,464
)
Commercial
1,331,543

37,782

(2,688
)
1,366,637

1,316,975

175

(49,837
)
(49,662
)
Interest-only
3,356,491

152,175


152,175

144,800

1,893

(9,268
)
(7,375
)
Total
$
17,062,076

$
662,686

$
(1,627,480
)
$
6,825,525

$
7,497,817

$
841,967

$
(169,675
)
$
672,292


The table below presents changes in accretable yield, or the excess of the security’s cash flows expected to be collected over the Company’s investment, solely as it pertains to the Company’s Non-Agency RMBS portfolio accounted for according to the provisions of ASC 310-30.

 
For the Quarters Ended
For the Nine Months Ended
 
September 30, 2017
September 30, 2016
September 30, 2017
September 30, 2016
 
(dollars in thousands)
(dollars in thousands)
Balance at beginning of period
$
1,383,188

$
1,714,592

$
1,550,110

$
1,742,744

Purchases
8,196

18,316

18,380

60,915

Yield income earned
(66,042
)
(69,850
)
(202,618
)
(141,256
)
Reclassification (to) from non-accretable difference
53,884

(29,490
)
15,777

(2,031
)
Sales and deconsolidation
(17,755
)
(12,907
)
(20,178
)
(39,711
)
Balance at end of period
$
1,361,471

$
1,620,661

$
1,361,471

$
1,620,661


The table below presents the outstanding principal balance and related amortized cost at September 30, 2017 and December 31, 2016 as it pertains to the Company’s Non-Agency RMBS portfolio accounted for according to the provisions of ASC 310-30.

11



 
For the Quarter Ended
For the Year Ended
 
September 30, 2017
December 31, 2016
 
(dollars in thousands)
Outstanding principal balance:
 
 
Beginning of period
$
2,910,151

$
3,550,698

End of period
$
2,772,746

$
3,138,265

Amortized cost:
 

 

Beginning of period
$
1,546,656

$
1,958,726

End of period
$
1,449,531

$
1,695,079


The following tables present the gross unrealized losses and estimated fair value of the Company’s RMBS by length of time that such securities have been in a continuous unrealized loss position at September 30, 2017 and December 31, 2016. All securities in an unrealized loss position have been evaluated by the Company for OTTI as discussed in Note 2(d) of 2016, Form 10-K.

 
 
 
September 30, 2017
 
 
 
 
 
 
 


(dollars in thousands)
 
 
 
 
 
 
 
Unrealized Loss Position for Less than 12 Months
 
Unrealized Loss Position for 12 Months or More
 
Total
 
Estimated Fair Value
Unrealized Losses
Number of Securities
 
Estimated Fair Value
Unrealized Losses
Number of Securities
 
Estimated Fair Value
Unrealized Losses
Number of Securities
Non-Agency RMBS
 
 
 
 
 
 
 
 
 
 
 
Senior
$

$


 
$

$


 
$

$


Senior, interest-only
82,130

(15,487
)
54

 
73,232

(53,435
)
93

 
155,362

(68,922
)
147

Subordinated
5,353

(64
)
7

 


1

 
5,353

(64
)
8

Subordinated, interest-only
574

(331
)
2

 
4,220

(1,909
)
2

 
4,794

(2,240
)
4

Agency MBS
 

 



 


 

 

 
 

 

 

Residential
1,932,140

(17,187
)
95

 
234,050

(7,533
)
11

 
2,166,190

(24,720
)
106

Commercial
876,181

(15,291
)
241

 
30,311

(1,209
)
1

 
906,492

(16,500
)
242

Interest-only
29,250

(1,003
)
12

 
58,031

(6,766
)
21

 
87,281

(7,769
)
33

Total
$
2,925,628

$
(49,363
)
411

 
$
399,844

$
(70,852
)
129

 
$
3,325,472

$
(120,215
)
540


 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
 
Unrealized Loss Position for Less than 12 Months
 
Unrealized Loss Position for 12 Months or More
 
Total
 
Estimated Fair Value
Unrealized Losses
Number of Securities
 
Estimated Fair Value
Unrealized Losses
Number of Securities
 
Estimated Fair Value
Unrealized Losses
Number of Securities
Non-Agency RMBS
 
 
 
 
 
 
 
 
 
 
 
Senior
$
12,384

$
(250
)
3

 
$

$


 
$
12,384

$
(250
)
3

Senior, interest-only
96,399

(13,600
)
62

 
78,516

(43,931
)
86

 
174,915

(57,531
)
148

Subordinated
56,015

(412
)
7

 
2,826

(824
)
4

 
58,841

(1,236
)
11

Subordinated, interest-only
748

(230
)
2

 
11,276

(1,624
)
3

 
12,024

(1,854
)
5

Agency MBS
 

 

 

 
 

 

 

 
 

 

 

Residential
2,338,910

(48,084
)
106

 
54,943

(1,615
)
1

 
2,393,853

(49,699
)
107

Commercial
1,247,923

(45,802
)
646

 
51,733

(4,035
)
46

 
1,299,656

(49,837
)
692

Interest-only
63,506

(2,170
)
20

 
52,963

(7,098
)
16

 
116,469

(9,268
)
36

Total
$
3,815,885

$
(110,548
)
846

 
$
252,257

$
(59,127
)
156

 
$
4,068,142

$
(169,675
)
1002


At September 30, 2017, the Company did not intend to sell any of its RMBS that were in an unrealized loss position, and it was not more likely than not that the Company would be required to sell these RMBS before recovery of their amortized cost

12



basis, which may be at their maturity. With respect to RMBS held by consolidated VIEs, the ability of any entity to cause the sale by the VIE prior to the maturity of these RMBS is either expressly prohibited, not probable, or is limited to specified events of default, none of which have occurred as of September 30, 2017.

Gross unrealized losses on the Company’s Agency residential and commercial MBS (excluding Agency MBS which are reported at fair value with changes in fair value recorded in earnings) were $37 million and $100 million as of September 30, 2017 and December 31, 2016, respectively. Given the inherent credit quality of Agency MBS, the Company does not consider any of the current impairments on its Agency MBS to be credit related. In evaluating whether it is more likely than not that it will be required to sell any impaired security before its anticipated recovery, which may be at their maturity, the Company considers the significance of each investment, the amount of impairment, the projected future performance of such impaired securities, as well as the Company’s current and anticipated leverage capacity and liquidity position. Based on these analyses, the Company determined that at September 30, 2017 and December 31, 2016, unrealized losses on its Agency MBS were temporary.

Gross unrealized losses on the Company’s Non-Agency RMBS (excluding Non-Agency MBS which are reported at fair value with changes in fair value recorded in earnings) were $45 thousand and $485 thousand at September 30, 2017 and December 31, 2016, respectively. Based upon the most recent evaluation, the Company does not consider these unrealized losses to be indicative of OTTI and does not believe that these unrealized losses are credit related, but rather are due to other factors. The Company has reviewed its Non-Agency RMBS that are in an unrealized loss position to identify those securities with losses that are other-than-temporary based on an assessment of changes in cash flows expected to be collected for such RMBS, which considers recent bond performance and expected future performance of the underlying collateral.

A summary of the OTTI included in earnings for the quarters and nine months ended September 30, 2017 and 2016 are presented below.

 
For the Quarters Ended
 
For the Nine Months Ended
 
September 30, 2017
September 30, 2016
 
September 30, 2017
September 30, 2016
 
(dollars in thousands)
Total other-than-temporary impairment losses
$
(784
)
$
(993
)
 
$
(4,245
)
$
(8,555
)
Portion of loss recognized in other comprehensive income (loss)
(10,684
)
(10,581
)
 
(39,431
)
(34,652
)
Net other-than-temporary credit impairment losses
$
(11,468
)
$
(11,574
)
 
$
(43,676
)
$
(43,207
)
 
The following table presents a roll forward of the credit loss component of OTTI on the Company’s Non-Agency RMBS for which a portion of loss was previously recognized in OCI. The table delineates between those securities that are recognizing OTTI for the first time as opposed to those that have previously recognized OTTI.


13



 
For the Quarters Ended
 
For the Nine Months Ended
 
September 30, 2017
September 30, 2016
 
September 30, 2017
September 30, 2016
 
(dollars in thousands)
Cumulative credit loss beginning balance
$
571,639

$
546,187

 
$
556,485

$
529,112

Additions:
 

 

 
 

 

Other-than-temporary impairments not previously recognized

6,184

 
12,399

17,137

Reductions for securities sold or deconsolidated during the period
(4,965
)
(2,630
)
 
(12,405
)
(6,890
)
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments
11,468

5,390

 
29,302

26,069

Reductions for increases in cash flows expected to be collected over the remaining life of the securities
(3,241
)
(1,494
)
 
(10,880
)
(11,791
)
Cumulative credit impairment loss ending balance
$
574,901

$
553,637

 
$
574,901

$
553,637


Cash flows generated to determine net other-than-temporary credit impairment losses recognized in earnings are estimated using significant unobservable inputs. The significant inputs used to measure the component of OTTI recognized in earnings for the Company’s Non-Agency RMBS for the periods reported are summarized as follows:

 
For the Nine Months Ended
 
September 30, 2017
September 30, 2016
Loss Severity
 
 
Weighted Average
67%
59%
Range
28% - 89%
25% - 85%
60+ days delinquent
 
 
Weighted Average
21%
21%
Range
11% - 27%
0% - 40%
Credit Enhancement (1)

 
Weighted Average
15%
29%
Range
0% - 50%
0% - 100%
3 Month CPR
 
 
Weighted Average
13%
5%
Range
2% - 24%
0% - 19%
12 Month CPR
 
 
Weighted Average
13%
4%
Range
4% - 19%
0% - 21%
(1) Calculated as the combined credit enhancement to the Re-REMIC and underlying from each of their respective capital structures.

The following tables present a summary of unrealized gains and losses at September 30, 2017 and December 31, 2016. IO MBS included in the tables below represent the right to receive a specified portion of the contractual interest cash flows of the underlying principal balance of specific securities. At September 30, 2017, IO MBS had a net unrealized loss of $63 million and had an amortized cost of $402 million. At December 31, 2016, IO MBS had a net unrealized loss of $48 million and had an amortized cost of $458 million. The fair value of IOs at September 30, 2017 and December 31, 2016 was $339 million and $410 million, respectively. All changes in fair value of IOs are reflected in Net Income in the Consolidated Statements of Operations.


14



 
 
September 30, 2017
 
 
 
 
 
(dollars in thousands) 
 
 
 
 
Gross Unrealized Gain Included in Accumulated Other Comprehensive Income
Gross Unrealized Gain Included in Cumulative Earnings
Total Gross Unrealized Gain
Gross Unrealized Loss Included in Accumulated Other Comprehensive Income
Gross Unrealized Loss Included in Cumulative Earnings
Total Gross Unrealized Loss
Non-Agency RMBS
 
 
 
 
 
 
Senior
$
765,653

$

$
765,653

$

$

$

Senior, interest-only

13,620

13,620


(68,922
)
(68,922
)
Subordinated
63,348

4,082

67,430

(45
)
(19
)
(64
)
Subordinated, interest-only

860

860


(2,240
)
(2,240
)
Agency MBS
 

 

 
 

 

 
Residential
7,606


7,606

(22,263
)
(2,457
)
(24,720
)
Commercial
13,339

128

13,467

(14,520
)
(1,980
)
(16,500
)
Interest-only

1,226

1,226


(7,769
)
(7,769
)
Total
$
849,946

$
19,916

$
869,862

$
(36,828
)
$
(83,387
)
$
(120,215
)
 
 
December 31, 2016
 
 
 
 
 
(dollars in thousands)  
 
 
 
 
Gross Unrealized Gain Included in Accumulated Other Comprehensive Income
Gross Unrealized Gain Included in Cumulative Earnings
Total Gross Unrealized Gain
Gross Unrealized Loss Included in Accumulated Other Comprehensive Income
Gross Unrealized Loss Included in Cumulative Earnings
Total Gross Unrealized Loss
Non-Agency RMBS
 
 
 
 
 
 
Senior
$
732,133

$

$
732,133

$
(250
)
$

$
(250
)
Senior, interest-only

18,674

18,674


(57,531
)
(57,531
)
Subordinated
74,584

3,273

77,857

(235
)
(1,001
)
(1,236
)
Subordinated, interest-only




(1,854
)
(1,854
)
Agency MBS
 

 

 

 

 

 

Residential
11,235


11,235

(49,699
)

(49,699
)
Commercial
175


175

(49,837
)

(49,837
)
Interest-only

1,893

1,893


(9,268
)
(9,268
)
Total
$
818,127

$
23,840

$
841,967

$
(100,021
)
$
(69,654
)
$
(169,675
)

Changes in prepayments, actual cash flows, and cash flows expected to be collected, among other items, are affected by the collateral characteristics of each asset class. The Company chooses assets for the portfolio after carefully evaluating each investment’s risk profile.

The following tables provide a summary of the Company’s MBS portfolio at September 30, 2017 and December 31, 2016.
 
September 30, 2017
 
Principal or Notional Value
at Period-End
(dollars in thousands)
Weighted Average Amortized
Cost Basis
Weighted Average Fair Value
Weighted Average
Coupon
Weighted Average Yield at Period-End (1)
Non-Agency RMBS
 
 
 
 
Senior
$
2,821,535

$
54.54

$
81.68

4.4
%
16.7
%
Senior, interest-only
4,948,265

5.42

4.30

1.4
%
7.8
%
Subordinated
531,526

66.62

79.30

4.1
%
9.2
%
Subordinated, interest-only
256,286

5.06

4.52

1.0
%
8.4
%
Agency MBS
 

 

 

 

 

Residential pass-through
2,316,838

105.54

104.80

3.8
%
2.9
%
Commercial pass-through
1,774,802

102.26

102.09

3.6
%
3.2
%
Interest-only
3,176,110

3.82

3.61

0.7
%
3.5
%
(1) Bond Equivalent Yield at period end.

15



 
December 31, 2016
 
Principal or Notional Value at Period-End
(dollars in thousands)
Weighted Average Amortized
Cost Basis
Weighted Average Fair Value
Weighted Average
Coupon
Weighted Average Yield at Period-End (1)
Non-Agency RMBS
 
 
 
 
Senior
$
3,190,947

$
55.76

$
78.69

4.3
%
15.5
%
Senior, interest-only
5,648,339

5.18

4.49

1.5
%
11.7
%
Subordinated
673,259

70.83

82.21

3.8
%
9.2
%
Subordinated, interest-only
266,927

5.20

4.50

1.1
%
13.5
%
Agency MBS
 

 

 

 

 

Residential pass-through
2,594,570

105.78

104.29

3.9
%
3.0
%
Commercial pass-through
1,331,543

102.64

98.91

3.6
%
2.9
%
Interest-only
3,356,491

4.53

4.31

0.8
%
3.5
%
(1) Bond Equivalent Yield at period end.

The following table presents the weighted average credit rating of the Company’s Non-Agency RMBS portfolio at September 30, 2017 and December 31, 2016.

 
September 30, 2017

December 31, 2016

AAA
0.3
%
0.3
%
AA
0.3
%
0.3
%
A
0.6
%
0.7
%
BBB
0.4
%
0.7
%
BB
2.9
%
3.0
%
B
2.1
%
3.9
%
Below B
62.4
%
67.2
%
Not Rated
31.0
%
23.9
%
Total
100.0
%
100.0
%

Actual maturities of MBS are generally shorter than the stated contractual maturities. Actual maturities of the Company’s MBS are affected by the contractual lives of the underlying mortgages, periodic payments of principal and prepayments of principal. The following tables provide a summary of the fair value and amortized cost of the Company’s MBS at September 30, 2017 and December 31, 2016 according to their estimated weighted-average life classifications. The weighted-average lives of the MBS in the tables below are based on lifetime expected prepayment rates using an industry prepayment model for the Agency MBS portfolio and the Company’s prepayment assumptions for the Non-Agency RMBS. The prepayment model considers current yield, forward yield, steepness of the interest rate curve, current mortgage rates, mortgage rates of the outstanding loan, loan age, margin, and volatility.

16



 
September 30, 2017
 
(dollars in thousands) 
 
Weighted Average Life
 
Less than one year
Greater than one year and less
than five years
Greater than five years and less
than ten years
Greater than ten years
Total
Fair value
 
 
 
 
 
Non-Agency RMBS
 
 
 
 
 
Senior
$
5,611

$
757,644

$
881,904

$
659,452

$
2,304,611

Senior interest-only
113

55,264

72,087

85,198

212,662

Subordinated

83,242

183,777

154,468

421,487

Subordinated interest-only

133

11,455


11,588

Agency MBS
 

 

 

 

 

Residential

32,666

2,395,446


2,428,112

Commercial

46,263

16,817

1,748,870

1,811,950

Interest-only

82,985

27,122

4,703

114,810

Total fair value
$
5,724

$
1,058,197

$
3,588,608

$
2,652,691

$
7,305,220

Amortized cost
 

 

 

 

 

Non-Agency RMBS
 
 

 

 

 

Senior
$
5,457

$
549,443

$
563,522

$
420,536

$
1,538,958

Senior interest-only
1,301

78,615

91,461

96,587

267,964

Subordinated

67,164

152,048

134,909

354,121

Subordinated interest-only

152

12,816


12,968

Agency MBS
 

 

 

 

 

Residential

33,035

2,412,191


2,445,226

Commercial

47,639

17,216

1,750,128

1,814,983

Interest-only

87,733

29,200

4,420

121,353

Total amortized cost
$
6,758

$
863,781

$
3,278,454

$
2,406,580

$
6,555,573

 
December 31, 2016
 
(dollars in thousands)
 
Weighted Average Life
 
Less than one year
Greater than one year and less
than five years
Greater than five years and less
than ten years
Greater than ten years
Total
Fair value
 
 
 
 
 
Non-Agency RMBS
 
 
 
 
 
Senior
$
25,612

$
508,979

$
1,267,000

$
709,412

$
2,511,003

Senior interest-only
417

37,796

115,780

99,546

253,539

Subordinated

94,793

238,630

220,075

553,498

Subordinated interest-only


12,024


12,024

Agency MBS
 

 

 

 

 

Residential

429,869

2,276,109


2,705,978

Commercial

47,354

16,833

1,252,788

1,316,975

Interest-only

75,863

63,715

5,222

144,800

Total fair value
$
26,029

$
1,194,654

$
3,990,091

$
2,287,043

$
7,497,817

Amortized cost
 

 

 

 

 

Non-Agency RMBS
 
 

 

 

 

Senior
$
21,423

$
403,250

$
868,624

$
485,823

$
1,779,120

Senior interest-only
1,992

50,252

134,642

105,510

292,396

Subordinated

76,287

195,538

205,052

476,877

Subordinated interest-only


13,878


13,878

Agency MBS
 

 

 

 

 

Residential

438,270

2,306,172


2,744,442

Commercial

49,027

17,247

1,300,363

1,366,637

Interest-only

77,598

69,333

5,244

152,175

Total amortized cost
$
23,415

$
1,094,684

$
3,605,434

$
2,101,992

$
6,825,525



17



The Non-Agency RMBS portfolio is subject to credit risk. The Non-Agency RMBS portfolio is primarily collateralized by Alt-A first lien mortgages. An Alt-A mortgage is a type of U.S. mortgage that, for various reasons, is considered riskier than A-paper, or prime, and less risky than subprime, the riskiest category. Alt-A interest rates, which are determined by credit risk, therefore tend to be between those of prime and subprime home loans. Typically, Alt-A mortgages are characterized by borrowers with less than full documentation, lower credit scores and higher loan-to-value ratios. At origination of the loan, Alt-A mortgage securities are defined as Non-Agency RMBS where (i) the underlying collateral has weighted average FICO scores between 680 and 720 or (ii) the FICO scores are greater than 720 and RMBS have 30% or less of the underlying collateral composed of full documentation loans. At September 30, 2017 and December 31, 2016, 69% and 68% of the Non-Agency RMBS collateral was classified as Alt-A, respectively. At September 30, 2017 and December 31, 2016, 11% and 14% of the Non-Agency RMBS collateral was classified as prime, respectively. The remaining Non-Agency RMBS collateral is classified as subprime.

The Non-Agency RMBS in the Portfolio have the following collateral characteristics at September 30, 2017 and December 31, 2016.
 
September 30, 2017
December 31, 2016
Weighted average maturity (years)
 
20.9

 
21.6

Weighted average amortized loan to value (1)
 
65.1
%
 
66.5
%
Weighted average FICO (2)
 
674

 
675

Weighted average loan balance (in thousands)
 
$
320

 
$
319

Weighted average percentage owner occupied
 
83.9
%
 
83.2
%
Weighted average percentage single family residence
 
65.7
%
 
65.8
%
Weighted average current credit enhancement
 
2.2
%
 
2.3
%
Weighted average geographic concentration of top four states
CA
32.0
%
CA
32.1
%
 
NY
8.4
%
FL
8.1
%
 
FL
8.2
%
NY
7.9
%
 
NJ
2.7
%
NJ
2.7
%
(1) Value represents appraised value of the collateral at the time of loan origination.
(2) FICO as determined at the time of loan origination.

The table below presents the origination year of the underlying loans related to the Company’s portfolio of Non-Agency RMBS at September 30, 2017 and December 31, 2016.

Origination Year
September 30, 2017
December 31, 2016

2003 and prior
3.6
%
3.6
%
2004
4.8
%
4.2
%
2005
19.7
%
20.2
%
2006
39.8
%
38.0
%
2007
29.6
%
31.3
%
2008
1.7
%
1.8
%
2009 and later
0.8
%
0.9
%
Total
100.0
%
100.0
%

Gross realized gains and losses are recorded in “Net realized gains (losses) on sales of investments” on the Company’s Consolidated Statements of Operations. The proceeds and gross realized gains and gross realized losses from sales of investments for the quarters and nine months ended September 30, 2017 and 2016 are as follows:


18



 
For the Quarters Ended
 
For the Nine Months Ended
 
September 30, 2017
September 30, 2016
 
September 30, 2017
September 30, 2016
 
(dollars in thousands)
Proceeds from sales
$
598,752

$
58,036

 
$
772,496

$
2,697,239

 
 
 
 
 
 
Gross realized gains
6,902

3,622

 
17,468

16,798

Gross realized losses
(6,901
)
(543
)
 
(7,759
)
(9,763
)
Net realized gain (loss)
$
1

$
3,079

 
$
9,709

$
7,035


Included in the gross realized gains for the quarter and nine months ended September 30, 2017 in the table above are exchanges of securities with a fair value of $36 million and $63 million, respectively. The Company exchanged its investment in a re-remic security for the underlying collateral supporting the group related to the exchanged asset. These exchanges were treated as non-cash sales and purchases and resulted in a realized gain of $4 million and $9 million, respectively, reflected in earnings for the quarter and nine months ended September 30, 2017. For the quarter and nine months ended September 30, 2016, the fair value of these exchanges of securities was $30 million and $47 million and resulted in a realized gain of $2 million and $1 million, respectively.

4. Loans Held for Investment

The Loans held for investment is comprised primarily of loans collateralized by seasoned subprime residential mortgages. Additionally, it includes non-conforming, single family, owner occupied, jumbo, prime residential mortgages.

At September 30, 2017, all Loans held for investment are carried at fair value. See Note 5 for a discussion on how the Company determines the fair values of the Loans held for investment. As changes in the fair value of these loans are reflected in earnings, the Company does not estimate or record a loan loss provision. The total amortized cost of our Loans held for investments was $13.1 billion and $8.6 billion as of September 30, 2017 and December 31, 2016, respectively.

The following table provides a summary of the changes in the carrying value of Loans held for investment at fair value at September 30, 2017 and December 31, 2016:

 
For the Nine Months Ended
For the Year Ended
 
September 30, 2017
December 31, 2016
 
(dollars in thousands)
Balance, beginning of period
$
8,753,653

$
4,768,416

Purchases
5,835,799

4,897,370

Principal paydowns
(1,298,856
)
(1,022,414
)
Sales and settlements
2,942

5,007

Net periodic accretion (amortization)
(27,310
)
(41,363
)
Change in fair value
271,824

146,637

Balance, end of period
$
13,538,052

$
8,753,653


The primary cause of the change in fair value is due to changes in credit risk of the portfolio.

Residential mortgage loans

The loan portfolio for all residential mortgages were originated during the following years:


19



Origination Year
September 30, 2017

December 31, 2016

2002 and prior
7.7
%
8.9
%
2003
6.9
%
5.2
%
2004
15.3
%
11.9
%
2005
20.9
%
20.5
%
2006
21.8
%
22.0
%
2007
18.8
%
20.9
%
2008
5.9
%
6.5
%
2009
0.6
%
0.6
%
2010 and later
2.1
%
3.5
%
Total
100.0
%
100.0
%

The following table presents a summary of key characteristics of the residential loan portfolio at September 30, 2017 and December 31, 2016:
 
September 30, 2017
December 31, 2016
Number of loans
 
147,340

 
95,155

Weighted average maturity (years)
 
18.8

 
19.8

Weighted average loan to value (1)
 
87.9
%
 
86.9
%
Weighted average FICO (1)
 
629

 
627