Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED: March 31, 2020

☐ 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	CIM PRA	New York Stock Exchange
8.00% Series B Cumulative Fixed-to-Floating Rate Redeemable Preferred Stock	CIM PRB	New York Stock Exchange
7.75% Series C Cumulative Fixed-to-Floating Rate Redeemable Preferred Stock	CIM PRC	New York Stock Exchange
8.00% Series D Cumulative Fixed-to-Floating Rate Redeemable Preferred Stock	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, 2020
Common Stock, $0.01 par value	192,218,251

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, 2020 (Unaudited) and December 31, 2019 (Derived from the audited consolidated financial statements as of December 31, 2019)	2

Consolidated Statements of Operations (Unaudited) for the quarters ended March 31, 2020 and 2019	3

Consolidated Statements of Comprehensive Income (Unaudited) for the quarters ended March 31, 2020 and 2019	4

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the quarters ended March 31, 2020 and 2019	5

Consolidated Statements of Cash Flows (Unaudited) for the quarters ended March 31, 2020 and 2019	6

Notes to Consolidated Financial Statements (Unaudited)	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	43

Item 3. Quantitative and Qualitative Disclosures about Market Risk	63

Item 4. Controls and Procedures	69



Part II. OTHER INFORMATION



Item 1. Legal Proceedings	69

Item 1A. Risk Factors	69

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	74

Item 6. Exhibits	74

SIGNATURES	77

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, 2020			December 31, 2019
Cash and cash equivalents	$	261,491		$	109,878
Non-Agency RMBS, at fair value (net of allowance for credit losses of $6 million and $0 million, respectively)	2,174,400			2,614,408
Agency RMBS, at fair value	105,644			6,490,293
Agency CMBS, at fair value	2,832,716			2,850,717
Loans held for investment, at fair value	13,306,818			14,292,815
Receivable for investments sold	—			446,225
Accrued interest receivable	93,343			116,423
Other assets	467,451			194,301
Derivatives, at fair value, net	—			3,611
Total assets ⁽¹⁾	$	19,241,863		$	27,118,671
Liabilities:
Repurchase agreements ($8.8 billion and $15.4 billion pledged as collateral, respectively)	$	7,146,996		$	13,427,545
Securitized debt, collateralized by Non-Agency RMBS ($522 million and $598 million pledged as collateral, respectively)	128,683			133,557
Securitized debt at fair value, collateralized by loans held for investment ($11.9 billion and $12.1 billion pledged as collateral, respectively)	7,864,196			8,179,608
Payable for investments purchased	699,164			1,256,337
Accrued interest payable	45,709			63,600
Dividends payable	98,434			98,568
Accounts payable and other liabilities	14,827			6,163
Total liabilities ⁽¹⁾	$	15,998,009		$	23,165,378

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 shares issued and outstanding, respectively ($200,000 liquidation preference)	80			80
Common stock: par value $0.01 per share; 500,000,000 shares authorized, 185,860,307 and 187,226,081 shares issued and outstanding, respectively	1,860			1,873
Additional paid-in-capital	4,255,054			4,275,963
Accumulated other comprehensive income	502,491			708,336
Cumulative earnings	3,422,285			3,793,040
Cumulative distributions to stockholders	(4,938,208		)	(4,826,291		)
Total stockholders' equity	$	3,243,854		$	3,953,293
Total liabilities and stockholders' equity	$	19,241,863		$	27,118,671

(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, 2020, and December 31, 2019, total assets of consolidated VIEs were $12,334,195 and $12,544,744, respectively, and total liabilities of consolidated VIEs were$7,777,605 and $8,064,235, 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, 2020			March 31, 2019
Net interest income:
Interest income ⁽¹⁾	$	300,266		$	350,389
Interest expense ⁽²⁾	142,083			202,950
Net interest income	158,183			147,439

Provision for credit losses	(6,314		)	—

Net other-than-temporary credit impairment losses	—			(4,853		)

Other investment gains (losses):
Net unrealized gains (losses) on derivatives	201,000			(89,315		)
Realized gains (losses) on terminations of interest rate swaps	(463,966		)	(108,046		)
Net realized gains (losses) on derivatives	(41,086		)	(7,277		)
Net gains (losses) on derivatives	(304,052		)	(204,638		)
Net unrealized gains (losses) on financial instruments at fair value	(260,887		)	200,812
Net realized gains (losses) on sales of investments	75,854			8,603
Total other gains (losses)	(489,085		)	4,777

Other expenses:
Compensation and benefits	12,934			14,370
General and administrative expenses	5,678			5,821
Servicing fees	9,989			8,963
Transaction expenses	4,906			62
Total other expenses	33,507			29,216
Income (loss) before income taxes	(370,723		)	118,147
Income taxes	32			—
Net income (loss)	$	(370,755	)	$	118,147

Dividends on preferred stock	18,438			17,392

Net income (loss) available to common shareholders	$	(389,193	)	$	100,755

Net income (loss) per share available to common shareholders:
Basic	$	(2.08	)	$	0.54
Diluted	$	(2.08	)	$	0.54

Weighted average number of common shares outstanding:
Basic	187,018,602			187,112,454
Diluted	187,018,602			188,199,711

(1) Includes interest income of consolidated VIEs of $174,681 and $207,112 for the quarters ended March 31, 2020 and 2019, respectively. See Note 8 to consolidated financial statements for further discussion.

(2) Includes interest expense of consolidated VIEs of $64,629 and $91,027 for the quarters ended March 31, 2020 and 2019, 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, 2020			March 31, 2019
Comprehensive income (loss):
Net income (loss)	$	(370,755	)	$	118,147
Other comprehensive income:
Unrealized gains (losses) on available-for-sale securities, net⁽¹⁾	(199,204		)	26,385
Reclassification adjustment for net losses included in net income for other-than-temporary credit impairment losses	—			4,853
Reclassification adjustment for net realized losses (gains) included in net income	(6,641		)	14,918
Other comprehensive income (loss)	(205,845		)	46,156
Comprehensive income (loss) before preferred stock dividends	$	(576,600	)	$	164,303
Dividends on preferred stock	$	18,438		$	17,392
Comprehensive income (loss) available to common stock shareholders	$	(595,038	)	$	146,911

(1) March 31, 2020 amount includes $6 million of unrealized losses on AFS securities for which the Company has recognized an allowance for credit losses.



CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands, except per share data)
(Unaudited)

For the Quarter Ended March 31, 2020

	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, 2019	$	58	$	130	$	104	$	80	$	1,873		$	4,275,963		$	708,336		$	3,793,040		$	(4,826,291	)	$	3,953,293
Net income (loss)	—		—		—		—		—			—			—			(370,755		)	—			(370,755		)
Other comprehensive income (loss)	—		—		—		—		—			—			(205,845		)	—			—			(205,845		)
Repurchase of common stock	—		—		—		—		(14		)	(22,051		)	—			—			—			(22,065		)
Stock based compensation	—		—		—		—		1			1,142			—			—			—			1,143
Common dividends declared	—		—		—		—		—			—			—			—			(93,479		)	(93,479		)
Preferred dividends declared	—		—		—		—		—			—			—			—			(18,438		)	(18,438		)
Balance, March 31, 2020	$	58	$	130	$	104	$	80	$	1,860		$	4,255,054		$	502,491		$	3,422,285		$	(4,938,208	)	$	3,243,854

For the Quarter Ended March 31, 2019

	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, 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)
	For the Quarters Ended
	March 31, 2020			March 31, 2019
Cash Flows From Operating Activities:
Net income	$	(370,755	)	$	118,147
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
(Accretion) amortization of investment discounts/premiums, net	36,319			6,030
Accretion (amortization) of deferred financing costs and securitized debt discounts/premiums, net	(18,318		)	(5,955		)
Amortization of swaption premium	—			160
Net unrealized losses (gains) on derivatives	(201,000		)	89,315
Margin (paid) received on derivatives	325,594			(98,565		)
Net unrealized losses (gains) on financial instruments at fair value	260,887			(200,812		)
Net realized losses (gains) on sales of investments	(75,854		)	(8,603		)
Net provision for credit losses	6,314			—
Net other-than-temporary credit impairment losses	—			4,853
(Gain) loss on extinguishment of debt	—			—
Equity-based compensation expense	1,143			2,682
Changes in operating assets:
Decrease (increase) in accrued interest receivable, net	23,763			(662		)
Decrease (increase) in other assets	(394,817		)	1,025
Changes in operating liabilities:
Increase (decrease) in accounts payable and other liabilities	6,417			15,655
Increase (decrease) in accrued interest payable, net	(19,156		)	14,554
Net cash provided by (used in) operating activities	$	(419,463	)	$	(62,176	)
Cash Flows From Investing Activities:
Agency MBS portfolio:
Purchases	$	(160,516	)	$	(1,379,467	)
Sales	6,244,850			91,731
Principal payments	593,341			215,403
Non-Agency RMBS portfolio:
Purchases	(19,503		)	(112,778		)
Sales	33,797			4,394
Principal payments	67,518			78,689
Loans held for investment:
Purchases	(575,541		)	(512,044		)
Sales	—			358,175
Principal payments	461,594			375,087
Net cash provided by (used in) investing activities	$	6,645,540		$	(880,810	)
Cash Flows From Financing Activities:
Proceeds from repurchase agreements	$	38,210,544		$	25,994,053
Payments on repurchase agreements	(44,491,093		)	(24,700,865		)
Net proceeds from preferred stock offerings	—			193,368
Payments on repurchase of common stock	(22,066		)	—
Proceeds from securitized debt borrowings, collateralized by loans held for investment	731,013			—
Payments on securitized debt borrowings, collateralized by loans held for investment	(386,362		)	(354,361		)
Payments on securitized debt borrowings, collateralized by Non-Agency RMBS	(4,449		)	(5,905		)
Common dividends paid	(93,613		)	(93,526		)



Preferred dividends paid	(18,438		)	(14,414		)
Net cash provided by (used in) financing activities	$	(6,074,464	)	$	1,018,350
Net increase (decrease) in cash and cash equivalents	151,613			75,364
Cash and cash equivalents at beginning of period	109,878			47,486
Cash and cash equivalents at end of period	$	261,491		$	122,850

Supplemental disclosure of cash flow information:
Interest received	$	359,664		$	357,111
Interest paid	$	178,292		$	194,549
Non-cash investing activities:
Payable for investments purchased	$	699,164		$	1,513,657
Receivable for investments sold	$	—		$	1,414,478
Net change in unrealized gain (loss) on available-for sale securities	$	(205,845	)	$	46,156
Retained beneficial interests	$	—		$	40,825

Non-cash financing activities:
Dividends declared, not yet paid	$	98,434		$	99,050

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 ten 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, Anacostia LLC, a TRS formed in June 2018, and NYH Funding LLC, a TRS formed in May 2019.

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 normal and recurring adjustments considered necessary for a fair presentation of the Company's financial position, results of operations and cash flows have been included. Investment securities transactions are recorded on the trade date. 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 using proceeds 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 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 on Agency MBS, Non-Agency RMBS, IO MBS (Note 3) and residential mortgage loans (Note 4), valuation of Agency MBS and Non-Agency RMBS (Notes 3 and 5), residential mortgage loans (Note 4 and 5), securitized debt (Note 5 and 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, 2019, other than the significant accounting policies discussed below.

Interest Income Recognition and Allowance for Credit Losses

Investments in Non-agency RMBS securities

The Company considers its investments in Non-Agency RMBS as beneficial interests. Beneficial interests gives the Company the right to receive all or portions of specified cash flows received by a trust or other entity. Beneficial interests held by the Company are created in connection with securitization transactions such as those involving mortgage loan obligations. Beneficial interests are accounted for in accordance with guidance in ASC 325-40 as amended by the ASU 2016-13. Beneficial interests classified as available-for-sale (AFS) record changes in fair value in other comprehensive income (OCI). Beneficial interests for which the Company has elected the fair value option (FVO) record changes in fair value in earnings.

Interest income on the Company’s beneficial interests is recognized using the interest method based on management’s estimates of cash flows expected to be collected. The effective interest rate on these securities is based on management’s estimate for each security of the projected cash flows, which are estimated based on observation of current market information and include assumptions related to fluctuations in prepayment speeds and the timing and amount of credit losses. On a quarterly basis, the Company reviews and, if appropriate, adjusts its cash flow projections based on inputs and analyses received from external sources, internal models, and the Company’s judgments about prepayment rates, the timing and amount of credit losses, and other factors. Changes in the amount or timing of cash flows from those originally projected, or from those estimated at the last evaluation date, are considered to be either favorable changes or adverse changes.

Adverse changes in the timing or amount of cash flows on beneficial interests classified as AFS could result in the Company recording an increase in the allowance for credit losses. The allowance for credit losses are calculated using a discounted cash flow (DCF) approach and is measured as the difference between the beneficial interest’s amortized cost and the estimate of cash flows expected to be collected discounted at the effective interest rate used to accrete the beneficial interest. The allowance for credit losses is recorded as a contra-asset and a reduction in earnings. The allowance for credit losses will be limited to the amount of the unrealized losses on the beneficial interest. Any allowance for credit losses in excess of the unrealized losses on the beneficial interests are accounted for as a prospective reduction of the effective interest rate. No allowance is recorded for beneficial interests in an unrealized gain position. Favorable changes in the DCF will result in a reduction in the allowance for credit losses, if any. Any reduction in allowance for credit losses is recorded in earnings. If the allowance for credit losses has been reduced to zero, the remaining favorable changes are reflected as a prospective increase to the effective interest rate.

Beneficial interests for which other than temporary impairment (OTTI) had been recognized prior to the effective date of ASU 2016-13 shall apply the guidance in the update on a prospective basis. In addition the yield used to accrete the beneficial interest on beneficial interests with prior OTTI will remain unchanged as a result of the adoption of ASU 2016-13. Recoveries

of amounts previously written off relating to improvements in cash flows shall be recorded in income in the period received. Therefore, subsequent favorable changes in the DCF of the beneficial interests with prior OTTI will not be reflected as an adjustment to their yield used to accrete the discount. Subsequent adverse changes in the DCF will result in an increase to the allowance for credit losses, limited to the amount of the unrealized losses on the beneficial interest.

Credit losses recognized on BIs will be accreted on a monthly basis at the rate used to recognize interest income, the effective interest rate. The accretion will be recorded as a reduction to interest income in the statement of operations.

The Company presents separately all accrued interest on the statement of financial position. Interest is accrued on all BIs when due. Interest which is not received at the due date is written off when it becomes delinquent. As all interest not received when due is charged off against interest income, no allowance for accrued interest is required.

No allowances for credit losses are recognized on beneficial interests for which the Company has elected the fair value option. All favorable or adverse changes in management’s estimates of cash flows expected to be collected results in a prospective increase or decrease in the effective interest rate used to recognize interest income.

Investments in agency MBS securities

The Company invests in pass-through mortgage-backed securities guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA) and Freddie Mac (FHLMC) (collectively “Agency Securities”).

Interest income for Agency Securities for which changes in fair value are recorded in OCI, including premiums and discounts associated with the acquisition of these securities, is recognized over the life of such securities using the interest method based on the contractual cash flows of the security. In applying the interest method, the Company considers estimates of future principal prepayments in the calculation of the effective yield. Differences that arise between previously anticipated prepayments and actual prepayments received, as well as changes in future prepayment assumptions, result in a recalculation of the effective yield on the security. This recalculation of the effective yield is updated on a monthly basis. Upon a recalculation of the effective yield, the investment in the security is adjusted to the amount that would have existed had the new effective yield been retrospectively applied since acquisition with a corresponding charge or credit to interest income. This adjustment is accounted for as a change in estimate with a cumulative effect adjustment on interest income as a result in the change in the yield. Prepayments are estimated using models generally accepted in the industry.

All securities carried at fair value with changes in fair value recorded in OCI need to be evaluated for expected losses, even if the risk of loss is considered remote. However, the Company is not required to measure expected credit losses on securities in which historical credit loss information adjusted for current conditions and reasonable and supportable forecasts results in an expectation that incurring a credit loss is zero. Based on the current facts and circumstances, the Company believes it’s investments Agency Securities would qualify for zero expected credit losses. The factors considered in reaching this conclusion include the long history of zero credit losses, the explicit guarantee by the US government (although limited for FNMA and FHLMC securities) and yields that, while not risk-free, generally trade based on market views of prepayment and liquidity risk (not credit risk).

Interest income on Agency Securities for which changes in fair value are recorded in earnings is recognized using the interest method based on management’s estimates of cash flows expected to be collected. The effective interest rate on these securities is based on management’s estimate of the projected cash flows. Changes in the amount or timing of cash flows as a result in changes in expected prepayments from those originally projected, or from those estimated at the last evaluation date, are reflected prospectively as an adjustment to the effective interest rate used to recognize interest income. This recalculation of the effective interest rate is updated on a monthly basis.

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, 2020 or December 31, 2019.

Fair Value Disclosure

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

Financial Instruments - Credit Losses - (Topic 326)

On January 1, 2020 the Company adopted accounting standards update (or ASU) No. 2016-13, Measurement of Credit Losses on Financial Instruments. This update replaced the previous model for recognizing credit losses from an incurred credit loss model to a current expected credit loss (or CECL) model for financial instruments measured at amortized cost and required the Company to record an allowance for credit losses on available-for-sale (or AFS) debt securities for all expected (rather than incurred) credit losses of the asset rather than reduce the carrying amount, as the Company did under the OTTI model. This update also revised the accounting model for purchased credit-impaired debt securities. The changes in the allowance for credit losses created in accordance with this update have been recorded in earnings. Expected credit losses are limited to the amount of the unrealized loss on the debt securities impacted by the update.

The update did not have any impact on financial instruments which were carried at fair value with changes in fair value recorded in earnings. As all Loans held for investment are carried at fair value, with changes in fair value recorded in earnings, the update had no impact on the carrying value or revenue recognition of Loans held for investment.

On January 1, 2020, the effective date of the update, the Company was required to record a cumulative-effect adjustment related to financial instruments under the scope of this update to the statement of financial position. As all financial instruments impacted by the update, including all purchased credit impaired debt securities, were in an unrealized gain position as of the effective date, there was no impact on the financial statements at the transition date and no cumulative-effect adjustment was required.

In addition, the update superseded subtopic 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality. As of January 1, 2020, the Company accounted all investments previously classified as AFS and under subtopic 310-30, using the subtopic 326-30 Financial Instruments - Credit Losses; Available-for-Sale Debt Securities and subtopic 325-40, Investments -Other-Beneficial Interests in Securitized Financial Assets.

Reference Rate Reform (Topic 848)

In March 2020, the FASB issued ASU No. 2020-4, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference London Inter Bank Offering Rate (or LIBOR) or another reference rate expected to be discontinued because of reference rate reform. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. The Company has not yet adopted this guidance 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, subordinated, or Interest-only. The Company also invests in Agency MBS which it classifies as Agency RMBS to include residential and residential interest-only MBS and Agency CMBS to include commercial and commercial interest-only MBS. Senior interests in Non-Agency RMBS are generally entitled to the first principal repayments in their pro-rata ownership interests at the acquisition date. The tables below present amortized cost, allowance for credit losses, fair value and unrealized gain/losses of Company's MBS investments as of March 31, 2020 and December 31, 2019.



			March 31, 2020
			(dollars in thousands)
	Principal or Notional Value		Total Premium		Total Discount			Amortized Cost		Allowance for credit losses			Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Net Unrealized Gain/(Loss)
Non-Agency RMBS
Senior	$	1,924,284	$	1,870	$	(922,847	)	$	1,003,307	$	(5,410	)	$	1,420,224	$	424,613	$	(2,286	)	$	422,327
Subordinated	900,396		8,496		(341,888		)	567,004		(904		)	528,178		42,782		(80,704		)	(37,922		)
Interest-only	6,931,077		287,092		—			287,092		—			225,998		41,151		(102,245		)	(61,094		)
Agency RMBS
Pass-through	—		—		—			—		—			—		—		—			—
Interest-only	1,484,016		135,180		—			135,180		—			105,644		—		(29,536		)	(29,536		)
Agency CMBS
Project loans	2,506,241		49,294		(4,878		)	2,550,657		—			2,786,527		235,985		(115		)	235,870
Interest-only	1,764,487		47,163		—			47,163		—			46,189		1,614		(2,588		)	(974		)
Total	$	15,510,501	$	529,095	$	(1,269,613	)	$	4,590,403	$	(6,314	)	$	5,112,760	$	746,145	$	(217,474	)	$	528,671



			December 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	$	2,024,564	$	2,038	$	(953,916	)	$	1,072,686	$	1,700,911	$	628,518	$	(293	)	$	628,225
Subordinated	876,592		9,915		(332,913		)	553,594		624,598		76,272		(5,268		)	71,004
Interest-only	7,458,653		301,170		—			301,170		288,899		51,481		(63,752		)	(12,271		)
Agency RMBS
Pass-through	6,080,547		131,023		—			6,211,570		6,362,626		152,271		(1,215		)	151,056
Interest-only	1,539,941		139,536		—			139,536		127,667		220		(12,089		)	(11,869		)
Agency CMBS
Project loans	2,621,938		52,681		(4,961		)