Document

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: March 31, 2019

[ ] 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)

Securities registered pursuant to Section 12(b) of the Act:



Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered

Common Stock, par value $0.01 per share	CIM	New York Stock Exchange
8.00% Series A Cumulative Redeemable Preferred Stock, par value $0.01 per share	CIM PRA	New York Stock Exchange
8.00% Series B Cumulative Fixed-to-Floating Rate Redeemable Preferred Stock, par value $0.01 per share	CIM PRB	New York Stock Exchange
7.75% Series C Cumulative Fixed-to-Floating Rate Redeemable Preferred Stock, par value $0.01 per share	CIM PRC	New York Stock Exchange
8.00% Series D Cumulative Fixed-to-Floating Rate Redeemable Preferred Stock, par value $0.01 per share	CIM PRD	New York Stock Exchange

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 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, a smaller reporting company, or an emerging growth 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

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 April 30, 2019
Common Stock, $0.01 par value	187,145,152

CHIMERA INVESTMENT CORPORATION

FORM 10-Q

TABLE OF CONTENTS



Part I. FINANCIAL INFORMATION



Item 1. Consolidated Financial Statements:

Consolidated Statements of Financial Condition as of March 31, 2019 (Unaudited) and December 31, 2018 (Derived from the audited consolidated financial statements as of December 31, 2018)	2

Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2019 and 2018	3

Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended March 31, 2019 and 2018	4

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the three months ended March 31, 2019 and 2018	5

Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2019 and 2018	6

Notes to Consolidated Financial Statements (Unaudited)	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	42

Item 3. Quantitative and Qualitative Disclosures about Market Risk	60

Item 4. Controls and Procedures	65



Part II. OTHER INFORMATION



Item 1. Legal Proceedings	65

Item 1A. Risk Factors	65

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	66

Item 6. Exhibits	66

SIGNATURES	68

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)
	March 31, 2019			December 31, 2018
Cash and cash equivalents	$	122,850		$	47,486
Non-Agency RMBS, at fair value	2,538,043			2,486,130
Agency MBS, at fair value	12,238,044			12,188,950
Loans held for investment, at fair value	12,400,203			12,572,581
Receivable for investment sold	1,414,478			—
Accrued interest receivable	122,746			123,442
Other assets	500,593			252,582
Derivatives, at fair value, net	946			37,468
Total assets ⁽¹⁾	$	29,337,903		$	27,708,639
Liabilities:
Repurchase agreements ($17.2 billion and $15.8 billion pledged as collateral, respectively)	$	15,323,874		$	14,030,465
Securitized debt, collateralized by Non-Agency RMBS ($1.0 billion pledged as collateral, respectively)	153,179			159,955
Securitized debt at fair value, collateralized by loans held for investment ($11.8 billion and $12.3 billion pledged as collateral, respectively)	8,124,760			8,455,376
Payable for investments purchased	1,513,657			1,136,157
Accrued interest payable	124,759			110,402
Dividends payable	99,050			95,986
Accounts payable and other liabilities	45,447			16,469
Total liabilities ⁽¹⁾	$	25,384,726		$	24,004,810

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 shares issued and outstanding, respectively ($325,000 liquidation preference)	130			130
7.75% Series C cumulative redeemable: 10,400,000 shares issued and outstanding, respectively ($260,000 liquidation preference)	104			104
8.00% Series D cumulative redeemable: 8,000,000 and 0 shares issued and outstanding, respectively ($200,000 liquidation preference)	80			—
Common stock: par value $0.01 per share; 500,000,000 and 300,000,000 shares authorized, 187,144,009 and 187,052,398 shares issued and outstanding, respectively	1,871			1,871
Additional paid-in-capital	4,268,063			4,072,093
Accumulated other comprehensive income	672,988			626,832
Cumulative earnings	3,497,636			3,379,489
Cumulative distributions to stockholders	(4,487,753		)	(4,376,748		)
Total stockholders' equity	$	3,953,177		$	3,703,829
Total liabilities and stockholders' equity	$	29,337,903		$	27,708,639

(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 March 31, 2019 and December 31, 2018, total assets of consolidated VIEs were $13,076,640 and $13,392,951, respectively, and total liabilities of consolidated VIEs were $8,312,916 and $8,652,158, respectively. See Note 8 for further discussion.

See accompanying notes to consolidated financial statements.



CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share and per share data)
(Unaudited)
	For the Quarters Ended
	March 31, 2019			March 31, 2018
Net interest income:
Interest income ⁽¹⁾	$	350,389		$	297,132
Interest expense ⁽²⁾	202,950			149,251
Net interest income	147,439			147,881
Other-than-temporary impairments:
Total other-than-temporary impairment losses	(801		)	(294		)
Portion of loss recognized in other comprehensive income	(4,052		)	(864		)
Net other-than-temporary credit impairment losses	(4,853		)	(1,158		)
Other investment gains (losses):
Net unrealized gains (losses) on derivatives	(89,315		)	81,419
Realized gains (losses) on terminations of interest rate swaps	(108,046		)	—
Net realized gains (losses) on derivatives	(7,277		)	13,085
Net gains (losses) on derivatives	(204,638		)	94,504
Net unrealized gains (losses) on financial instruments at fair value	200,812			14,466
Net realized gains (losses) on sales of investments	8,603			—
Gains (losses) on extinguishment of debt	—			9,670
Total other gains (losses)	4,777			118,640

Other expenses:
Compensation and benefits	14,370			8,411
General and administrative expenses	5,883			5,489
Servicing fees	8,963			11,334
Deal expenses	—			1,088
Total other expenses	29,216			26,322
Income (loss) before income taxes	118,147			239,041
Income taxes	—			34
Net income (loss)	$	118,147		$	239,007

Dividends on preferred stock	17,392			9,400

Net income (loss) available to common shareholders	$	100,755		$	229,607

Net income (loss) per share available to common shareholders:
Basic	$	0.54		$	1.22
Diluted	$	0.54		$	1.22

Weighted average number of common shares outstanding:
Basic	187,112,454			187,553,281
Diluted	188,199,711			188,176,753

(1) Includes interest income of consolidated VIEs of $207,112 and $235,026 for the quarters ended March 31, 2019 and 2018, respectively. See Note 8 to consolidated financial statements for further discussion.

(2) Includes interest expense of consolidated VIEs of $91,027 and $99,614 for the quarters ended March 31, 2019 and 2018, respectively. See Note 8 to consolidated financial statements for further discussion.

See accompanying notes to consolidated financial statements.



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

	For the Quarters Ended
	March 31, 2019		March 31, 2018
Comprehensive income (loss):
Net income (loss)	$	118,147	$	239,007
Other comprehensive income:
Unrealized gains (losses) on available-for-sale securities, net	26,385		(88,816		)
Reclassification adjustment for net losses included in net income for other-than-temporary credit impairment losses	4,853		1,158
Reclassification adjustment for net realized losses (gains) included in net income	14,918		—
Other comprehensive income (loss)	46,156		(87,658		)
Comprehensive income (loss) before preferred stock dividends	$	164,303	$	151,349
Dividends on preferred stock	$	17,392	$	9,400
Comprehensive income (loss) available to common stock shareholders	$	146,911	$	141,949



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		Series C Preferred Stock Par Value		Series D 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, 2017	$	58	$	130	$	—	$	—	$	1,878		$	3,826,691		$	796,902		$	2,967,852	$	(3,958,534	)	$	3,634,977
Net income (loss)	—		—		—		—		—			—			—			239,007		—			239,007
Other comprehensive income (loss)	—		—		—		—		—			—			(87,658		)	—		—			(87,658		)
Repurchase of common stock	—		—		—		—		(8		)	(14,826		)	—			—		—			(14,834		)
Stock based compensation	—		—		—		—		—			2,526			—			—		—			2,526
Common dividends declared	—		—		—		—		—			—			—			—		(93,875		)	(93,875		)
Preferred dividends declared	—		—		—		—		—			—			—			—		(9,400		)	(9,400		)
Balance, March 31, 2018	$	58	$	130	$	—	$	—	$	1,870		$	3,814,391		$	709,244		$	3,206,859	$	(4,061,809	)	$	3,670,743

Balance, December 31, 2018	$	58	$	130	$	104	$	—	$	1,871		$	4,072,093		$	626,832		$	3,379,489	$	(4,376,748	)	$	3,703,829
Net income (loss)	—		—		—		—		—			—			—			118,147		—			118,147
Other comprehensive income (loss)	—		—		—		—		—			—			46,156			—		—			46,156
Stock based compensation	—		—		—		—		—			2,682			—			—		—			2,682
Common dividends declared	—		—		—		—		—			—			—			—		(93,613		)	(93,613		)
Preferred dividends declared	—		—		—		—		—			—			—			—		(17,392		)	(17,392		)
Issuance of preferred stock	—		—		—		80		—			193,288			—			—		—			193,368
Balance, March 31, 2019	$	58	$	130	$	104	$	80	$	1,871		$	4,268,063		$	672,988		$	3,497,636	$	(4,487,753	)	$	3,953,177

See accompanying notes to consolidated financial statements.



CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
	For the Quarters Ended
	March 31, 2019			March 31, 2018
Cash Flows From Operating Activities:
Net income	$	118,147		$	239,007
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
(Accretion) amortization of investment discounts/premiums, net	6,030			2,521
Accretion (amortization) of deferred financing costs and securitized debt discounts/premiums, net	(5,955		)	(693		)
Amortization of swaption premium	160			727
Net unrealized losses (gains) on derivatives	89,315			(81,419		)
Margin (paid) received on derivatives	(98,565		)	43,891
Net unrealized losses (gains) on financial instruments at fair value	(200,812		)	(14,466		)
Net realized losses (gains) on sales of investments	(8,603		)	—
Net other-than-temporary credit impairment losses	4,853			1,158
(Gain) loss on extinguishment of debt	—			(9,670		)
Equity-based compensation expense	2,682			2,526
Changes in operating assets:
Decrease (increase) in accrued interest receivable, net	(662		)	2,120
Decrease (increase) in other assets	1,025			12,501
Changes in operating liabilities:
Increase (decrease) in accounts payable and other liabilities	15,655			(7,766		)
Increase (decrease) in accrued interest payable, net	14,554			8,041
Net cash provided by (used in) operating activities	$	(62,176	)	$	198,478
Cash Flows From Investing Activities:
Agency MBS portfolio:
Purchases	$	(1,379,467	)	$	(217,579	)
Sales	91,731			—
Principal payments	215,403			109,645
Non-Agency RMBS portfolio:
Purchases	(112,778		)	—
Sales	4,394			—
Principal payments	78,689			96,988
Loans held for investment:
Purchases	(512,044		)	(369,583		)
Sales	358,175			—
Principal payments	375,087			443,755
Net cash provided by (used in) investing activities	$	(880,810	)	$	63,226
Cash Flows From Financing Activities:
Proceeds from repurchase agreements	$	25,994,053		$	13,951,070
Payments on repurchase agreements	(24,700,865		)	(13,997,248		)
Net proceeds from preferred stock offerings	193,368			—
Payments on repurchase of common stock	—			(14,834		)
Proceeds from securitized debt borrowings, collateralized by loans held for investment	—			509,066
Payments on securitized debt borrowings, collateralized by loans held for investment	(354,361		)	(558,917		)
Payments on securitized debt borrowings, collateralized by Non-Agency RMBS	(5,905		)	(10,353		)
Common dividends paid	(93,526		)	(93,905		)
Preferred dividends paid	(14,414		)	(9,400		)



Net cash provided by (used in) financing activities	$	1,018,350	$	(224,521	)
Net increase (decrease) in cash and cash equivalents	75,364		37,183
Cash and cash equivalents at beginning of period	47,486		63,569
Cash and cash equivalents at end of period	$	122,850	$	100,752

Supplemental disclosure of cash flow information:
Interest received	$	357,111	$	301,772
Interest paid	$	194,549	$	141,903
Non-cash investing activities:
Receivable for investments sold	$	1,414,478	$	—
Payable for investments purchased	$	1,513,657	$	766,250
Net change in unrealized gain (loss) on available-for sale securities	$	46,156	$	(87,658	)
Retained beneficial interests	$	40,825	$	—

Non-cash financing activities:
Dividends declared, not yet paid	$	99,050	$	95,335

See accompanying notes to consolidated financial statements.



CHIMERA INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Organization

Chimera Investment Corporation, or 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, or REIT, under the Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder, or the Code.

The Company conducts its operations through various subsidiaries including subsidiaries it treats as taxable REIT subsidiaries, or TRSs. 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 nine wholly owned direct subsidiaries: Chimera RMBS Whole Pool LLC, and Chimera RMBS LLC formed in June 2009; CIM Trading Company LLC, or CIM Trading, formed in July 2010; Chimera Funding TRS LLC, or 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; Chimera RR Holding LLC formed in April 2016, and Anacostia LLC, a TRS formed in June 2018.

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, or 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, or 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 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 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, or power, such as rights to direct servicer activity or the Company was determined to have power in connection with its involvement with the structure and design of the VIE.

The Company’s interest in the assets held by these securitization vehicles, which are consolidated on the Company’s Consolidated 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 Consolidated Statements of Financial Condition, are non-recourse to the Company, and can only be satisfied from each securitization vehicle’s respective asset pool.

The assets of securitization entities are comprised of residential mortgage backed securities (or 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.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that effect 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), derivative instruments (Notes 5 and 9) and compensation expense estimates (Note 12). 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, 2018, other than the significant accounting policies disclosed below.

Income Taxes

The Company does not have any material unrecognized tax positions that would affect its financial statements or require disclosure. No accruals for penalties and interest were necessary as of March 31, 2019 or December 31, 2018.

Fair Value Disclosure

The Company has elected to account for certain Non- Agency RMBS investments acquired on or after January 1, 2019 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.

The Company carries the majority of its financial instruments at fair value. The Company has elected fair value option on certain Non-Agency RMBS, Agency MBS, Loans held for investments and Securitized debt, collateralized by loans held for investment. The Company believes the fair value option election will provide its financial statements user with reduced complexity, greater consistency, understandability and comparability.

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 (Topic 815):

Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes (ASU No. 2018-16)

In October 2018, the FASB issued ASU No. 2018-16, Derivatives and Hedging - Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in this update permit the OIS rate based on SOFR as a U.S. benchmark interest rate. Including the OIS rate based on SOFR as an eligible benchmark interest rate during the early stages of the marketplace transition will facilitate the LIBOR to SOFR transition and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk management and hedge accounting purposes. The Company has adopted this guidance as of January 1, 2019. The Company does not have any derivative instruments linked to SOFR and the Company does not apply hedge accounting for GAAP reporting purposes. The adoption of this guidance did not have any impact on the Company's consolidated financial statements.

Targeted improvements to Accounting for Hedging Activities (ASU No. 2017-12)

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 amendments in this update make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The Company has adopted this guidance as of January 1, 2019. The Company does not apply hedge accounting for GAAP reporting purposes. The adoption of this guidance did not have any impact on the Company's consolidated financial statements.

Fair Value Measurement - Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820)

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. It eliminates disclosure requirements for transfers between Level 1 and Level 2 of the fair value hierarchy and policies related to valuation processes and the timing of transfers between levels of the fair value hierarchy. It adds the following disclosure requirements, but it exempts nonpublic entities from these requirements: i) The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements of instruments held at the end of the reporting period and ii) For recurring and nonrecurring Level 3 fair value measurements, the range and weighted averages used to develop significant unobservable inputs and how the weighted average was calculated, with certain exceptions. The Company has adopted this guidance as of January 1, 2019. The adoption of this guidance did not have a significant impact on the Company's consolidated financial statements.

Income Statement - Reporting Comprehensive Income - (Topic 220)

In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this Update also require certain disclosures about stranded tax effects. The Company has adopted this guidance as of January 1, 2019. The adoption of this guidance did not have a significant impact on the Company's 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 for all expected (rather than incurred) credit losses 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 did not early adopt 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 Agency residential, commercial and IO 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 March 31, 2019 and December 31, 2018.



			March 31, 2019
			(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	$	2,347,459	$	590	$	(1,076,077	)	$	1,271,972	$	1,922,984	$	651,411	$	(399	)	$	651,012
Senior, interest-only	6,227,847		289,604		—			289,604		281,757		42,464		(50,311		)	(7,847		)
Subordinated	446,450		8,729		(187,755		)	267,424		321,355		54,101		(170		)	53,931
Subordinated, interest-only	229,475		10,298		—			10,298		11,947		1,881		(232		)	1,649
Agency MBS
Residential	8,686,945		209,197		—			8,896,142		8,952,414		94,066		(37,794		)	56,272
Commercial	3,080,065		65,013		(5,185		)	3,139,893		3,138,727		25,839		(27,005		)	(1,166		)
Interest-only	2,627,192		145,343		—			145,343		146,903		4,364		(2,804		)	1,560
Total	$	23,645,433	$	728,774	$	(1,269,017	)	$	14,020,676	$	14,776,087	$	874,126	$	(118,715	)	$	755,411



			December 31, 2018
			(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	$	2,386,049	$	537	$	(1,112,368	)	$	1,274,218	$	1,943,124	$	669,356	$	(450	)	$	668,906
Senior, interest-only	5,667,198		286,942		—			286,942		254,890		31,123		(63,175		)	(32,052		)
Subordinated	394,037		8,642		(179,669		)	223,010		276,467		53,702		(245		)	53,457
Subordinated, interest-only	221,549		9,932		—			9,932		11,649		2,000		(283		)	1,717
Agency MBS