10-Q 1 a50058563.htm CHIMERA INVESTMENT CORPORATION 10-Q a50058563.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 
EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED:  SEPTEMBER 30, 2011

OR
 
o
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.)

 
1211 AVENUE OF THE AMERICAS, SUITE 2902
NEW YORK, NEW YORK
(Address of principal executive offices)

10036
 (Zip Code)

(646) 454-3759
(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 o

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 o

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,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No 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 November 14, 2011
Common Stock, $.01 par value
1,027,276,394

 
 
 
 

 

CHIMERA INVESTMENT CORPORATION
FORM 10-Q
TABLE OF CONTENTS

Part I.     FINANCIAL INFORMATION
 
 
Item 1.  Consolidated Financial Statements:
 
 
1
   
2
   
3
   
4
   
6
   
31
   
50
   
55
   
   
 
   
56
   
56
   
   Item 5. Other Information 57
   
59
   
60
   
CERTIFICATIONS
 



 
i

 
 
 
CHIMERA  INVESTMENT CORPORATION
(dollars in thousands, except share and per share data)
             
             
   
September 30, 2011
(unaudited)
   
December 31, 2010
 
Assets:
           
Cash and cash equivalents
  $ 9,824     $ 7,173  
Non-Agency RMBS, at fair value
               
Senior ($146.4 million and $484.1 million resulting from consolidation of VIEs)
    321,483       987,685  
Subordinated ($1.4 billion and $1.5 billion resulting from consolidation of VIEs)
    2,074,409       2,210,858  
Senior, non-retained (held in consolidated VIEs)
    2,013,798       2,330,568  
Agency RMBS, at fair value
    4,952,721       2,133,584  
Securitized loans held for investment (held in consolidated VIEs), net of allowance for loan losses of $7.0 million and $6.6 million, respectively
    286,009       353,532  
Accrued interest receivable
    55,539       49,088  
Other assets
    422       1,212  
Total assets
  $ 9,714,205     $ 8,073,700  
                 
Liabilities:
               
Repurchase agreements, Agency RMBS  ($4.4 billion and $1.7 billion of RMBS pledged as collateral, respectively)
  $ 4,171,190     $ 1,600,078  
Repurchase agreements, non-Agency RMBS  ($0.0 and $249.4 million of RMBS pledged as collateral, respectively)
    -       208,719  
Securitized debt, loans held for investment, issued by consolidated VIEs ($286.0 million and $353.5 million of securitized loans pledged as collateral, respectively)
    230,767       289,236  
Securitized debt, non-Agency RMBS, issued by consolidated VIEs, non-retained ($3.6 billion and $4.4 billion of RMBS pledged as collateral, respectively)
    1,753,228       1,956,079  
Payable for investments purchased
    -       127,693  
Accrued interest payable
    11,538       11,641  
Dividends payable
    133,443       174,445  
Accounts payable and other liabilities
    1,583       393  
Investment management fees payable to affiliate
    13,417       12,422  
Interest rate swaps, at fair value ($50.4 million and $12.8 million of RMBS pledged as collateral, respectively)
    44,970       9,988  
Total liabilities
  $ 6,360,136     $ 4,390,694  
                 
Stockholders' Equity:
               
Common stock: par value $0.01 per share; 1,500,000,000 shares authorized,  1,027,246,793 and 1,027,034,357 shares issued and outstanding, respectively
  $ 10,264     $ 10,261  
Additional paid-in-capital
    3,603,040       3,601,890  
Accumulated other comprehensive income (loss)
    29,972       321,537  
Retained earnings (accumulated deficit)
    (289,207 )     (250,682 )
Total stockholders' equity
  $ 3,354,069     $ 3,683,006  
Total liabilities and stockholders' equity
  $ 9,714,205     $ 8,073,700  
                 
See notes to consolidated financial statements.
               
 
 
 
1

 
 
 
CHIMERA  INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(dollars in thousands, except share and per share data)
(unaudited)
 
   
For the Quarter Ended
   
For the Nine Months Ended
 
   
September 30, 2011
   
September 30, 2010
   
September 30, 2011
   
September 30, 2010
 
Net Interest Income:
                       
Interest income
  $ 177,640     $ 139,683     $ 600,576     $ 401,929  
Interest expense
    7,217       8,034       22,700       21,907  
                                 
Interest income, non-retained
    35,030       55,088       107,569       169,723  
Interest expense, non-retained
    25,575       32,237       81,462       87,488  
Net interest income (expense)
    179,878       154,500       603,983       462,257  
Other-than-temporary impairments:
                               
Total other-than-temporary impairment losses
    (249,257 )     (51,922 )     (432,973 )     (135,136 )
Non-credit portion of loss recognized in other comprehensive income (loss)
    208,081       42,112       327,469       84,032  
Net other-than-temporary credit impairment losses
    (41,176 )     (9,810 )     (105,504 )     (51,104 )
Other gains (losses):
                               
Unrealized gains (losses) on interest rate swaps
    (25,312 )     (13,583 )     (34,981 )     (24,820 )
Realized gains (losses) on interest rate swaps
    (4,500 )     (2,493 )     (11,644 )     (3,192 )
  Gains (losses) on interest rate swaps
    (29,812 )     (16,076 )     (46,625 )     (28,012 )
Net gains (losses) on interest-only RMBS
    52       -       (4,390 )     -  
Net gains (losses) on embedded derivatives in interest-only RMBS
    (28,175 )     -       (30,409 )     -  
Realized gains (losses) on sales of investments, net
    28       2,032       1,342       2,374  
Total other gains (losses)
    (57,907 )     (14,044 )     (80,082 )     (25,638 )
Net investment income (loss)
    80,795       130,646       418,397       385,515  
Other expenses:
                               
Management fee
    13,252       11,318       39,154       28,695  
Provision for loan losses
    -       482       1,442       2,112  
General and administrative expenses
    1,830       1,798       5,137       4,367  
Total other expenses
    15,082       13,598       45,733       35,174  
Income (loss) before income taxes
    65,713       117,048       372,664       350,341  
Income taxes
    (171 )     752       645       753  
Net income (loss)
  $ 65,884     $ 116,296     $ 372,019     $ 349,588  
                                 
Net income (loss) per share-basic and diluted
  $ 0.06     $ 0.13     $ 0.36     $ 0.45  
Weighted average number of shares outstanding-basic and diluted
    1,027,195,404       883,147,726       1,027,130,136       773,777,431  
Comprehensive income (loss):
                               
Net income (loss)
  $ 65,884     $ 116,296     $ 372,019     $ 349,588  
Other comprehensive income (loss):
                               
Unrealized gains (losses) on available-for-sale securities, net
    (58,429 )     24,132       (395,727 )     100,504  
Reclassification adjustment for net losses included in net income (loss) for other-than-temporary credit impairment losses
    41,176       9,810       105,504       51,104  
Reclassification adjustment for net realized losses (gains) included in net income (loss)
    (28 )     (2,032 )     (1,342 )     (2,374 )
Other comprehensive income (loss)
    (17,281 )     31,910       (291,565 )     149,234  
Comprehensive income (loss)
  $ 48,603     $ 148,206     $ 80,454     $ 498,822  
                                 
See notes to consolidated financial statements.
                               
 
 
2

 
 
CHIMERA INVESTMENT CORPORATION
 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
(dollars in thousands, except per share data)
 
(unaudited)
 
 
   
Common Stock Par Value
   
Additional Paid-in Capital
   
Accumulated Other Comprehensive Income (Loss)
   
Retained Earnings (Accumulated Deficit)
   
Total
 
Balance, December 31, 2009
  $ 6,693     $ 2,290,614     $ (99,754 )   $ (70,991 )   $ 2,126,562  
Net income (loss)
    -       -       -       349,588       349,588  
Cumulative effect of change in accounting principle
    -       -       -       (88,187 )     (88,187 )
Other comprehensive income (loss)
    -       -       149,234       -       149,234  
Proceeds from direct purchase and dividend reinvestment
    -       263       -       -       263  
Proceeds from common stock offerings
    2,128       765,425       -       -       767,553  
Restricted stock grants
    1       357       -       -       358  
Common dividends declared, $0.52 per share
    -       -       -       (403,024 )     (403,024 )
Balance, September 30, 2010
  $ 8,822     $ 3,056,659     $ 49,480     $ (212,614 )   $ 2,902,347  
                                         
Balance, December 31, 2010
  $ 10,261     $ 3,601,890     $ 321,537     $ (250,682 )   $ 3,683,006  
Net income (loss)
    -       -       -       372,019       372,019  
Other comprehensive income (loss)
    -       -       (291,565 )     -       (291,565 )
Proceeds from direct purchase and dividend reinvestment
    3       783       -       -       786  
Proceeds from common stock offerings
    -       7       -       -       7  
Restricted stock grants
    -       360       -       -       360  
Common dividends declared, $0.40 per share
    -       -       -       (410,544 )     (410,544 )
Balance, September 30, 2011
  $ 10,264     $ 3,603,040     $ 29,972     $ (289,207 )   $ 3,354,069  
                                         
See notes to consolidated financial statements.
                                 
 
 
3

 
 
CHIMERA INVESTMENT CORPORATION
 
 
(dollars in thousands)
 
(unaudited)
 
 
   
For the Nine Months Ended
 
   
September 30, 2011
   
September 30, 2010
 
Cash Flows From Operating Activities:
           
Net income (loss)
  $ 372,019     $ 349,588  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
         
(Accretion) amortization of investment discounts/premiums
    (212,788 )     (197,830 )
(Accretion) amortization of debt issue costs of securitized debt, non-retained
    6,867       8,892  
Unrealized losses (gains) on interest rate swaps
    34,981       24,820  
Net losses (gains) on interest-only RMBS
    4,390       -  
Unrealized losses (gains) on embedded derivatives in interest-only RMBS
    30,409       -  
Realized losses (gains) on sales of investments
    (1,342 )     (2,374 )
Net other-than-temporary credit impairment losses
    105,504       51,104  
Provision for loan losses
    1,442       2,112  
Restricted stock grants
    360       358  
Changes in operating assets:
               
   Decrease (increase) in accrued interest receivable
    (6,591 )     (14,639 )
   Decrease (increase) in other assets
    790       1,134  
Changes in operating liabilities:
               
   Increase (decrease) in accounts payable and other liabilities
    1,190       338  
   Increase (decrease) in investment management fees payable to affiliate
    995       2,892  
   Increase (decrease) in accrued interest payable
    (103 )     7,929  
Net cash provided by (used in) operating activities
  $ 338,123     $ 234,324  
Cash Flows From Investing Activities:
               
Mortgage-Backed Securities portfolio:
               
   Purchases
  $ (3,664,513 )   $ (2,299,939 )
   Sales
    670,863       298,284  
   Principal payments
    428,642       562,313  
Mortgage-Backed Securities portfolio, non-retained:
               
   Principal payments
    520,736       457,983  
Securitized loans:
               
   Principal payments
    65,347       78,329  
Net cash provided by (used in) investing activities
  $ (1,978,925 )   $ (903,030 )
Cash Flows From Financing Activities:
               
   Proceeds from repurchase agreements
  $ 12,863,367     $ 12,780,977  
   Payments on repurchase agreements
    (10,500,974 )     (13,188,156 )
   Net proceeds from common stock offerings
    7       767,553  
   Payments on securitized debt borrowings, loans held for investment
    (58,469 )     (70,684 )
   Proceeds from securitized debt borrowings, non-retained
    311,012       1,127,873  
   Payments on securitized debt borrowings, non-retained
    (520,730 )     (403,449 )
   Net proceeds from direct purchase and dividend reinvestment
    786       263  
   Common dividends paid
    (451,546 )     (358,001 )
Net cash provided by (used in) financing activities
  $ 1,643,453     $ 656,376  
Net increase (decrease) in cash and cash equivalents
  $ 2,651     $ (12,330 )
Cash and cash equivalents at beginning of period
    7,173       24,279  
Cash and cash equivalents at end of period
  $ 9,824     $ 11,949  
                 
See notes to consolidated financial statements.
               
 
 
4

 
 
CHIMERA INVESTMENT CORPORATION
 
CONSOLIDATED STATEMENTS OF CASH FLOW
 
(dollars in thousands)
 
(unaudited)
 
 
Supplemental disclosure of cash flow information:
           
   Interest paid
  $ 94,813     $ 104,658  
   Taxes paid
  $ -     $ 753  
                 
Non-cash investing activities:
               
   Payable for investments purchased
  $ -     $ 279,649  
   Net change in unrealized gain on available-for sale securities
  $ (291,565 )   $ 149,234  
Non-cash financing activities:
               
   Common dividends declared, not yet paid
  $ 133,443     $ 158,811  
                 
See notes to consolidated financial statements.
               
 
 
5

 


CHIMERA INVESTMENT CORPORATION
FOR THE QUARTER ENDED SEPTEMBER 30, 2011
 (unaudited) 



1.   Organization

Chimera Investment Corporation (“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 has elected to be taxed as a real estate investment trust (“REIT”), under the Internal Revenue Code of 1986, as amended.  In July 2008, the Company formed Chimera Securities Holdings, LLC, a wholly-owned subsidiary.  In June 2009, the Company formed Chimera Asset Holding LLC and Chimera Holding LLC, both wholly-owned subsidiaries.  In January 2010, the Company formed Chimera Special Holding LLC, which is a wholly-owned subsidiary of Chimera Asset Holding LLC.  In July 2010, the Company formed CIM Trading Company LLC, a wholly-owned subsidiary.  Chimera Securities Holdings, LLC, Chimera Asset Holding LLC, Chimera Holding LLC, and Chimera Special Holding LLC are qualified REIT subsidiaries.  CIM Trading Company LLC (“CIM Trading”) is a taxable REIT subsidiary (“TRS”). Annaly Capital Management, Inc. (“Annaly”) owns approximately 4.38% of the Company’s common shares.  The Company is managed by Fixed Income Discount Advisory Company (“FIDAC”), an investment advisor registered with the Securities and Exchange Commission (“SEC”).  FIDAC is a wholly-owned subsidiary of Annaly.

2.  Summary of the Significant Accounting Policies

(a) Basis of Presentation
The consolidated financial statements include the accounts of the Company and its direct and indirect wholly-owned subsidiaries.  All intercompany balances and transactions have been eliminated.

Immaterial Restatements

Beginning with the financial statements for the six month period ending June 30, 2011, the Company reclassified previously presented financial information so that amounts previously presented in the Consolidated Statement of Operations and Comprehensive Income (Loss) as interest expense on swaps are presented in Other gains (losses) as Realized gains (losses) on interest rate swaps.  Financial statements for periods prior to June 30, 2011 have been conformed to the restated presentation. 

Beginning with the financial statements for the nine month period ending September 30, 2011, the Company reclassified previously presented financial information so that amounts previously presented in the Consolidated Statement of Cash Flows as Payments on securitized debt borrowings, non-retained in the Cash Flows From Financing Activities section are presented as (Accretion) amortization of debt issue costs of securitized debt, non-retained in the Cash Flows From Operating Activities section.  Financial statements for periods prior to September 30, 2011 have been conformed to the restated presentation.

Subsequent to issuance of the Company’s 2010 consolidated financial statements, the Company determined that the application of ASC 325-40, Investments – Other, Beneficial Interests in Securitized Financial Assets, should be applied rather than ASC 320-10, Investments – Debt and Equity Securities, in evaluating non-Agency RMBS that are not of high credit quality for other-than-temporary impairment (“OTTI”) and related interest income recognition.  The Company considers a non-Agency RMBS to be not of high credit quality when it does not have an actual or implied rating of AA or higher at the time of acquisition.
 
The difference between the two methodologies lies primarily in the impact of the timing of cash flows on recognition of impairment and determination of yield.
 
 
6

 
 
Under ASC 320-10, the determination of whether OTTI has occurred is a three step process allowing management to factor in subjective market-based criteria for measurement uncertainty as the well as management’s intent to sell and ability to hold the investment pending recovery.  The Company classifies its investments as “Available for Sale” and as such, unrealized gains and losses are excluded from earnings and reported in Other Comprehensive Income (OCI) until realized.  If it is determined by management’s evaluation of both objective and subjective criteria that the decline in fair value below amortized cost is other than temporary, then an OTTI has occurred.  The amount related to decline in expected future cash flows (credit loss) is recognized in earnings and the balance of the amount is considered related to other factors and recognized in OCI.  The Company revises the yield used to accrete premium and discounts on securities monthly to update for actual prepayments and losses and estimates of future prepayment rates in accordance with ASC 310-20.

Under ASC 325-40, OTTI is taken when the fair value is less than amortized cost or “reference amount” (an unrealized loss position) and there is an adverse change in the cash flows from what was previously expected to be collected.  Determining the change in cash flows involves comparing the present value of the remaining cash flows expected to be collected at the date previously revised against the present value of the cash flows expected to be collected at the current reporting date.  The OTTI is separated into an amount representing the credit loss and the amount related to other factors (the balance of the unrealized loss).  The amount related to the credit loss is recognized in earnings and the amount related to other factors is recognized in OCI.  The previous amortized cost basis less the amount related to the credit loss that is recognized in earnings becomes the new amortized cost or reference amount.  Further under ASC 325-40, for recognition of income, whether it is a favorable or adverse change in cash flows, the accretable yield is recalculated as the excess of the present value of cash flows expected to be collected over the reference amount and applied prospectively.
 
As discussed above, as a result of this analysis, the Company is making correcting prospective restatements (hereafter referred to as “restatements”) to its historical financial statements for the quarter and nine months ended September 30, 2010 and as of December 31, 2010, and has made a similar evaluation of this issue in the comparative historical periods.  While these restatements will have an impact on the reported GAAP Net Income (Loss) for each historical period under evaluation, the Company does not believe these restatements are material to its historical consolidated financial statements for any reported periods. These restatements have no effect on the Company’s previously reported book value, its net increase (decrease) in cash and cash equivalents as presented in its historical Consolidated Statement of Cash Flows, nor its taxable income which is the basis of the Company’s dividend distributions. See Note 17 for additional detail on the effect of the restatements.
 
(b) Cash and Cash Equivalents
 
Cash and cash equivalents include cash on hand and cash deposited overnight in money market funds.

(c) Non-Agency and Agency Residential Mortgage-Backed Securities
 
The Company invests in residential mortgage-backed securities (“RMBS”) representing interests in obligations backed by pools of mortgage loans.  The Company delineates between (1) Agency RMBS, (2) non-Agency RMBS, and (3) non-Agency RMBS, non-retained as follows:  The Agency RMBS are mortgage pass-through certificates, collateralized mortgage obligations (“CMOs”), and other RMBS representing interests in or obligations backed by pools of mortgage loans issued or guaranteed as to principal and/or interest repayment by agencies of the U.S. Government or federally chartered corporations such Ginnie Mae, Freddie Mac or Fannie Mae.  The non-Agency RMBS are not issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae and is therefore subject to credit risk.  Non-Agency RMBS, non-retained are detailed in Note 8 to these consolidated financial statements.

The Company holds its RMBS as available-for-sale, records investments at estimated fair value as described in Note 5 of these consolidated financial statements, and includes unrealized gains and losses in other comprehensive income (loss) in the Consolidated Statements of Operations and Comprehensive Income (Loss).  From time to time, as part of the overall management of its portfolio, the Company may sell any of its RMBS investments and recognize a realized gain or loss as a component of earnings in the Consolidated Statements of Operations and Comprehensive Income (Loss) utilizing the specific identification method.
 
 
 
7

 

 
Interest income on RMBS is computed on the remaining principal balance of the investment security.  Premium or discount amortization/accretion on Agency RMBS is recognized over the life of the investment using the effective interest method.  Premium or discount amortization/accretion on non-Agency RMBS is recognized in accordance with ASC 325-40 for RMBS rated less than AA as well as non-rated non-Agency RMBS and other subordinate RMBS that are not of high credit quality, and in accordance with ASC 320 for RMBS that are of high credit quality.  The Company considers RMBS with an actual or implied rating of AA or higher at the time of acquisition to be of high credit quality.  For non-Agency RMBS, the Company estimates at the time of purchase expected future cash flows, prepayment speeds, credit losses, loss severity, and loss timing based on the Company’s observation of available market data, its experience, and the collective judgment of its management team to determine the effective interest rate on the RMBS.  The Company periodically reevaluates, and if necessary, makes adjustments to its analysis utilizing internal models and external market research in conjunction with management’s view on performance in the non-Agency RMBS sector.  Changes to the Company’s assumptions subsequent to the purchase date may increase or decrease the amortization/accretion of premiums or discounts which affects interest income.  Changes to assumptions that decrease expected future cash flows may result in OTTI.

The Company evaluates quarterly, or more often if market conditions warrant, each investment in its RMBS portfolio for OTTI.  The amortized cost of each investment in an unrealized loss position is compared to the present value of expected future cash flows of the position.  In estimating future cash flows, the Company evaluates the non-Agency RMBS for OTTI by considering delinquencies, credit losses, loss severities, prepayment speeds, geographic data, borrower characteristics, loan-to-value ratios, seasoning and credit support in conjunction with broader macroeconomic expectations such as home price depreciation, expectations of future delinquencies and loss severities and the ability of the borrower to refinance or modify their loans.  If the Company does not intend to sell and is not more likely than not required to sell the debt security prior to its anticipated recovery, the credit loss, if any, is recognized in earnings, while the balance of impairment related to other factors is recognized in Other Comprehensive Income (Loss).  If the Company intends to sell the debt security, or will be more likely than not required to sell the security before its anticipated recovery, the full unrealized loss is recognized in earnings.  The determination cannot be overcome by management judgment of the probability of collecting all cash flows previously projected.  If the investment is of high credit quality, and the present value of the expected future cash flows is less than its amortized cost, the Company will recognize OTTI in accordance with ASC 320.  Further, in accordance with ASC 325-40, for RMBS that are not of high credit quality, if an adverse change in cash flows expected to be collected has occurred since the initial transaction date (or the last date previously revised), the Company will recognize an OTTI.

(d) Interest-Only RMBS
 
The Company invests in interest-only Agency and non-Agency RMBS. On April 1, 2011, the Company elected the fair value option for interest-only RMBS acquired on or after such date. These interest-only RMBS represent the Company’s right to receive a specified proportion of the contractual interest flows of specific RMBS.  Interest-only strips acquired on or after April 1, 2011 are measured at fair value through earnings in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).  The interest-only strips are included in RMBS, at fair value on the accompanying consolidated statements of financial condition. 

(e) Securitized Loans Held for Investment
 
The Company’s securitized residential mortgage loans are comprised of fixed-rate and variable-rate loans.  Mortgage loans are designated as held for investment, and are carried at their principal balance outstanding, plus any premiums or discounts, less allowances for loan losses.  Interest income on loans held for investment is recognized over the life of the investment using the effective interest method.  Income recognition is suspended for loans when, in the opinion of management, a full recovery of income and principal becomes doubtful.  Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed.  The Company estimates fair value of securitized loans as described in Note 5 of these consolidated financial statements.

(f) Allowance for Loan Losses
 
The Company has established an allowance for loan losses on its securitized loans held for investment portfolio at a level that management believes is adequate based on an evaluation of known and inherent risks related to the securitized loans.  The securitized loan portfolio is comprised primarily of non-conforming, single family, owner occupied, jumbo, prime loans that are not guaranteed as to repayment of principal or interest.   The allowance for loan losses is established to provision for the credit risk associated with a borrower’s default on its loan and the potential for recovery at the liquidation of the property in an amount less than the unpaid principal balance of the loan.  The estimate is based on the aggregation of factors including current economic conditions, industry loss experience, the loan originator’s loss experience, credit quality trends, loan portfolio composition, delinquency trends, national and local economic trends, national unemployment data, changes in housing appreciation or depreciation and whether specific geographic areas where the Company has significant loan concentrations are experiencing adverse economic conditions and events such as natural disasters that may affect the local economy or property values. Upon purchase of a pool of loans, the Company obtains written representations and warranties from the sellers that the Company will be reimbursed for the value of the loan if the loan fails to meet the agreed upon origination standards.  While the Company has little history of its own to establish loan trends, delinquency trends of the originators and the current market conditions aid in determining the allowance for loan losses.  The Company has created a general provision for probable loan losses estimated as a percentage of the remaining unpaid principal balance on the loans.  Management’s estimate is based on historical experience of similarly underwritten pools in conjunction with current and expected market trends.
 
 
 
8

 

 
When the Company determines it is probable that specific contractually due amounts are uncollectible, the amount is considered impaired.  Where impairment is indicated, a valuation write-off is measured based upon the excess of the recorded investment over the net fair value of the collateral, reduced by selling costs.  Any deficiency between the carrying amount of an asset and the net sales price of repossessed collateral is charged to the allowance for loan losses.

(g) Repurchase Agreements
 
The Company may finance the acquisition of its investment securities through the use of repurchase agreements. Repurchase agreements are treated as collateralized financing transactions and are carried at their contractual amounts, including accrued interest, as specified in the respective agreements.

(h) Securitized Debt, loans held for investment and Securitized Debt, Non-Retained
 
The Company has issued securitized debt to finance its residential mortgage loan portfolio and has re-securitized RMBS to finance a portion of its RMBS portfolio.  Certain transactions involving residential mortgage loans are accounted for as financings, and are recorded as an asset called “Securitized loans held for investment” and the corresponding debt as “Securitized debt, loans held for investment” in the consolidated statements of financial condition.  These securitizations are collateralized by residential adjustable or fixed rate mortgage loans that have been placed in a trust and pay interest and principal payments to the debt holders of that securitization.  Re-securitization transactions classified as “Securitized debt, non-retained” reflect the transfer to a trust of fixed or adjustable rate RMBS which are classified as “Non-Agency RMBS Senior, non-retained (held in consolidated VIEs)” that pay interest and principal payments to the debt holders of that re-securitization.  Re-securitization transactions completed by the Company are accounted for as financings pursuant to ASC 810, Consolidation. The holders of Securitized debt and Securitized debt, non-retained have no recourse to the Company, and the Company does not receive any interest or principal paid on such debt.  The Company estimates fair value of securitized debt and securitized debt, non-retained as described in Note 5 to these consolidated financial statements.  The associated liabilities are carried at amortized cost.

(i) Fair Value Disclosure
 
A complete discussion of the methodology utilized by the Company to fair value its financial instruments is included in Note 5 to these consolidated financial statements.

(j) Derivative Financial Instruments and Hedging Activity
 
The Company’s policies permit it to enter into derivative contracts, including interest rate swaps and interest rate caps, as a means of mitigating its interest rate risk. The Company intends to use interest rate derivative instruments to mitigate interest rate risk rather than to enhance returns.  Interest rate swaps are recorded as either assets or liabilities in the consolidated statement of financial condition, and measured at fair value with realized and unrealized gains and losses recognized in earnings.  Net payments on interest rate swaps are included in the consolidated statement of cash flows as a component of net income (loss).  Unrealized gains (losses) on interest rate swaps are removed from net income (loss) as an adjustment to cash flows from operating activities. The Company estimates fair value of interest rate swaps as described in Note 5 of these consolidated financial statements.

The Company elects to net by counterparty the fair value of interest rate swap contracts.  These contracts contain legally enforceable provisions that allow for netting or setting off of all individual swap receivables and payables with each counterparty and, therefore, the fair value of those swap contracts are netted by counterparty.  The credit support annex provisions of the Company’s interest rate swap contracts allow the parties to mitigate their credit risk by requiring the party which is out of the money to post collateral. As the Company elects to net by counterparty the fair value of interest rate swap contracts, it also nets by counterparty any cash or other collateral exchanged as part of the interest rate swap contracts.
 
 
 
9

 

 
(k) Sales, Securitizations, and Re-Securitizations
 
The Company periodically enters into transactions in which it sells financial assets, such as RMBS, mortgage loans and other assets.  Gains and losses on sales of assets are computed on the specific identification method whereby the Company records a gain or loss on the difference between the carrying value of the asset and the proceeds from the sale.  In addition, the Company from time to time securitizes or re-securitizes assets and sells tranches in the newly securitized assets.  These transactions may be recorded as either a sale and the assets contributed to the securitization are removed from the consolidated statements of financial condition and a gain or loss is recognized, or as a financing whereby the assets contributed to the securitization are not derecognized but rather the liabilities issued by the securitization are recorded to reflect the term financing of the assets.  In these securitizations and re-securitizations, the Company may retain senior or subordinated interests in the securitized and/or re-securitized assets.

 (l) Income Taxes
 
The Company elected to be taxed as a REIT, and therefore it generally will not be subject to corporate, federal, or state income tax to the extent that qualifying distributions are made to stockholders and the REIT requirements, including certain asset, income, distribution and stock ownership tests are met.  If the Company failed to qualify as a REIT and did not qualify for certain statutory relief provisions, the Company would be subject to federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which the REIT qualification was lost.  The Company and CIM Trading made a joint election to treat the subsidiary as a TRS.  As such, CIM Trading is taxable as a domestic C corporation and subject to federal, state, and local income taxes based upon its taxable income.
 
 The provisions of FASB ASC 740, Income Taxes, clarify the accounting for uncertainty in income taxes recognized in financial statements and prescribe a recognition threshold and measurement attribute for tax positions taken or expected to be taken on a tax return.  FASB ASC 740 also requires that interest and penalties related to unrecognized tax benefits be recognized in financial statements.  The Company does not have any unrecognized tax benefits that would affect its financial position.  Thus, no accruals for penalties and interest were necessary as of September 30, 2011.
 
(m) Net Income per Share
 
The Company calculates basic net income per share by dividing net income for the period by the weighted-average shares of its common stock outstanding for that period.  Diluted net income per share takes into account the effect of dilutive instruments, such as stock options, but uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted average number of shares outstanding.  The Company had no potentially dilutive securities outstanding during the periods presented.

(n) Stock-Based Compensation
 
The Company accounts for stock based compensation awards granted to the employees of FIDAC and its affiliates in accordance with ASC 505-50, Equity-Based Payments to Non-Employees.  Pursuant to ASC 505-50 the Company measures the fair value of the equity instrument using the stock prices and other measurement assumptions as of the earlier of either the date at which a performance commitment by the counterparty is reached or the date at which the counterparty’s performance is complete.  Compensation expense related to the grants of stock and stock options is recognized over the vesting period of such grants based on the fair value of the stock on the vesting date.

 (o) Use of Estimates
 
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“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. The most significant estimates are related to the following: all investment securities classified as available-for-sale and interest rate swaps are reported at their estimated fair value; all investment securities are amortized/accreted based on yields that incorporate management’s assumptions as to the expected performance of the investment over time; OTTI requires the Company to estimate expected future cash flows over the expected life of an investment; and the loan loss provision reflects management estimates with regard to expected losses of the securitized loan portfolio.  Actual results could differ from those estimates.
 
 
 
10

 

 
(p) Recent Accounting Pronouncements

Presentation

Comprehensive Income (ASC 220)

In June 2011, FASB released ASU 2011-05, which attempts to improve the comparability, consistency, and transparency of financial reporting and increase the prominence of items reported in OCI.  The amendment requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of net income and comprehensive income or two separate consecutive statements.  Either presentation requires the presentation on the face of the financial statements any reclassification adjustments for items that are reclassified from OCI to net income in the statements.  There is no change in what must be reported in OCI or when an item of OCI must be reclassified to net income.  This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  This update will result in additional disclosure, but is expected to have no material effect on the Company’s consolidated financial statements.
 
Assets

Intangibles – Goodwill and Other (ASC 350)

In September 2011, FASB released ASU 2011-08, which allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.   The objective of the update is to simplify how entities test goodwill for impairment.  Under this update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.   This update if effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  The Company is not eligible to elect early adoption.  This update has no material effect on the Company’s consolidated financial statements.

Broad Transactions

Fair Value Measurements and Disclosures (ASC 820)

In May 2011, FASB release ASU 2011-04 further converging US GAAP and IFRS by providing common fair value measurement and disclosure requirements.  The amendments in this update change the wording used to describe the requirements in US GAAP for measuring fair value and for disclosing information about fair value measurements.  These include those that clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements and those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.  This guidance is effective for interim and annual reporting periods beginning after December 15, 2011.  This update may result in additional disclosure, however has no effect on the Company’s consolidated financial statements.

Transfers and Servicing (ASC 860)

In April 2011, FASB issued ASU 2011-03 regarding repurchase agreements.  In a typical repurchase agreement transaction, an entity transfers financial assets to a counterparty in exchange for cash with an agreement for the counterparty to return the same or equivalent financial assets for a fixed price in the future.  Prior to this update one of the factors in determining whether sale treatment could be used was whether the transferor maintained effective control of the transferred assets and in order to do so, the transferor must have the ability to repurchase such assets. Based on this update, FASB concluded that the assessment of effective control should focus on a transferor’s contractual rights and obligations with respect to transferred financial assets, rather than on whether the transferor has the practical ability to perform in accordance with those rights or obligations.  Therefore, this update removes the transferor’s ability criterion from consideration of effective control.  This update is effective for the first interim or annual period beginning on or after December 15, 2011.  As the Company records repurchase agreements as secured borrowings and not sales, this update will have no effect on the Company’s consolidated financial statements.
 
 
 
11

 

 
Financial Services – Investment Companies (ASC 946)
 
In October 2011, FASB issued a proposed ASU 2011-200 which would amend the criteria in ASC 946 for determining whether an entity qualifies as an investment company.  The proposed update would affect the measurement, presentation and disclosure requirements for investment companies.  This proposed update amends the investment company definition in ASC 946 and would remove the current exemption for Real Estate Investment Trusts from this topic.  If the proposed update becomes effective in its current form, it may result in material modification to the presentation of the Company’s consolidated financial statements.  The Company is currently evaluating the possible effect of the proposed update.

3.  Residential Mortgage-Backed Securities

The following tables present the principal value, unamortized premium, unamortized discount, gross unrealized gain, gross unrealized loss, and fair value of the Company’s available-for-sale RMBS portfolio as of September 30, 2011 and December 31, 2010, by asset class.  The RMBS portfolio is composed of Agency and non-Agency RMBS collateralized by residential mortgage loans.  The Agency RMBS are mortgage pass-through certificates, CMOs, and other RMBS representing interests in or obligations backed by pools of mortgage loans issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae.  The non-Agency RMBS portfolio is not issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae and is therefore subject to credit risk.  The Company classifies its non-Agency RMBS into senior, subordinated, and senior, non-retained interests.  Senior interests in non-Agency RMBS are considered to be entitled to the first principal repayments in their pro-rata ownership interests.  Securities identified as senior, non-retained represent the portion of the Company’s non-Agency RMBS included on the Company’s balance sheet that are economically owned by third parties.  The total fair value of the non-Agency RMBS that are held by the re-securitization trusts that are consolidated pursuant to ASC 810, Consolidation, was $3.6 billion and $4.4 billion at September 30, 2011 and December 31, 2010 respectively.  See Note 8 of these consolidated financial statements for further discussion on consolidation.
 
September 30, 2011
(dollars in thousands)
                                       
     
Principal Value
   
Unamortized Premium
   
Unamortized Discount
   
Gross Unrealized Gain
   
Gross Unrealized Loss
   
Fair Value
 
Non-Agency RMBS
                                     
 
Senior
  $ 1,282     $ 385,867     $ (40 )   $ 26,294     $ (91,920 )   $ 321,483  
 
Subordinated
    4,886,224       71,268       (2,427,201 )     109,914       (565,796 )     2,074,409  
 
Senior, non-retained
    1,794,023       28,927       (150,540 )     341,388       -       2,013,798  
Agency RMBS
      4,643,099       134,489       (160 )     175,458       (165 )     4,952,721  
Total
    $ 11,324,628     $ 620,551     $ (2,577,941 )   $ 653,054     $ (657,881 )   $ 9,362,411  
 
December 31, 2010
(dollars in thousands)
                                                   
     
Principal Value
   
Unamortized Premium
   
Unamortized Discount
   
Gross Unrealized Gain
   
Gross Unrealized Loss
   
Fair Value
 
Non-Agency RMBS
                                                 
 
Senior
  $ 664,251     $ 427,822     $ (9,026 )   $ 31,946     $ (127,308 )   $ 987,685  
 
Subordinated
    4,962,829       60,469       (2,793,867 )     214,613       (233,186 )     2,210,858  
 
Senior, non-retained
    2,008,167       77,264       (159,707 )     404,844       -       2,330,568  
Agency RMBS
      2,035,823       67,133       -       47,718       (17,090 )     2,133,584  
Total
    $ 9,671,070     $ 632,688     $ (2,962,600 )   $ 699,121     $ (377,584 )   $ 7,662,695  
 
Interest-only RMBS included in the table above, represent the right to receive a specified portion of the contractual interest cash flows of the underlying unamortized principal balance of specific securities.  At September 30, 2011, interest-only RMBS accounted for under the fair value option were in an unrealized loss position of $4.4 million and had an amortized cost of $30.5 million.

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, 2011 and December 31, 2010.  All securities in an unrealized loss position have been evaluated by the Company for OTTI as discussed in Note 2(c).
 
 
 
12

 
 
September 30, 2011
 
(dollars in thousands)
 
                                       
Unrealized Loss Position For:
 
     
Less than 12 Months
   
12 Months or More
   
Total
 
RMBS
   
Estimated Fair Value
   
Unrealized Losses
   
Estimated Fair Value
   
Unrealized Losses
   
Estimated Fair Value
   
Unrealized Losses
 
Non-Agency RMBS
                                   
 
Senior
  $ 94,895     $ (17,673 )   $ 68,746     $ (74,247 )   $ 163,641     $ (91,920 )
 
Subordinated
    336,333       (105,777 )     1,098,682       (460,019 )     1,435,015       (565,796 )
Agency
      1,548       (165 )     -       -       1,548       (165 )
Total
    $ 432,776     $ (123,615 )   $ 1,167,428     $ (534,266 )   $ 1,600,204     $ (657,881 )
 
December 31, 2010
 
(dollars in thousands)
 
                                       
Unrealized Loss Position For:
 
     
Less than 12 Months
   
12 Months or More
   
Total
 
RMBS
   
Estimated Fair Value
   
Unrealized Losses
   
Estimated Fair Value
   
Unrealized Losses
   
Estimated Fair Value
   
Unrealized Losses
 
Non-Agency RMBS
                                   
 
Senior
  $ 382,969     $ (4,814 )   $ 227,610     $ (122,494 )   $ 610,579     $ (127,308 )
 
Subordinated
    408,087       (13,452 )     783,232       (219,734 )     1,191,319       (233,186 )
Agency
      600,464       (17,090 )     -       -       600,464       (17,090 )
Total
    $ 1,391,520     $ (35,356 )   $ 1,010,842     $ (342,228 )   $ 2,402,362     $ (377,584 )
 
The Company recorded a $41.2 million credit loss during the quarter ended September 30, 2011 on investments where the expected future cash flows of certain non-Agency RMBS were less than their amortized cost basis or, in the case of RMBS not of high credit quality, an adverse change in cash flows expected to be collected had occurred since the initial transaction date (or the last date previously revised).  The Company believes that as of the quarter ended September 30, 2011 that all other securities with an unrealized loss reflect the general market value deterioration of the asset class that has occurred and do not require a credit related impairment as of the evaluation date.

A summary of the OTTI included in earnings for the quarter and nine months ended September 30, 2011 and 2010 is presented below.
 
   
For the Quarter Ended
 
   
September 30, 2011
   
September 30, 2010
 
    (dollars in thousands)  
Cumulative credit loss beginning balance
  $ 163,757     $ 65,805  
Additions:
               
Other-than-temporary impairments not previously recognized
    10,378       7,578  
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments
    30,798       2,232  
Cumulative credit loss ending balance
  $ 204,933     $ 75,615  
 
    For the Nine Months Ended  
   
September 30, 2011
   
September 30, 2010
 
    (dollars in thousands)  
Cumulative credit loss beginning balance
  $ 99,429     $ 24,511  
Additions:
               
Other-than-temporary impairments not previously recognized
    31,722       48,485  
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments
    73,782       2,619  
Cumulative credit loss ending balance
  $ 204,933     $ 75,615  
 
 
13

 
 
Changes in prepayment assumptions, actual cash flows, and expected future cash flows, among other items, will affect the characteristics of each asset class.   The Company’s investment guidelines place no restrictions on the credit rating of the assets the Company is able to hold in its portfolio.  The portfolio is most heavily weighted to contain RMBS with credit risk.  The Company chooses assets for the portfolio after carefully evaluating each investment’s risk profile.

 
September 30, 2011
 
December 31, 2010
 
AAA
10.06 %   14.67 %
AA
3.25 %   5.34 %
A 0.79 %   0.92 %
BBB
3.15 %   0.61 %
BB
0.00 %   0.01 %
B 0.00 %   0.00 %
Below B or not rated
82.75 %   78.45 %
Total
100.00 %   100.00 %

The table above reflects the credit rating of the Company’s consolidated non-Agency RMBS portfolio.  At September 30, 2011 approximately 13% of the AAA, AA, and A securities balance reflected in the table above include senior, non-retained, non-Agency RMBS.

The AAA rated assets in the non-Agency RMBS portfolio are predominantly senior non-retained non-Agency RMBS.  As the Company securitizes or re-securitizes assets, it expects the Below B or not rated percentages in the portfolio to increase as the Company typically retains the subordinated tranches of these types of transactions.

Actual maturities of RMBS are generally shorter than stated contractual maturities.  Actual maturities of the Company’s RMBS are affected by the contractual lives of the underlying mortgages, periodic payments of principal and prepayments of principal.  The following tables summarize the Company’s RMBS at September 30, 2011 and December 31, 2010 according to their estimated weighted-average life classifications.  The weighted-average lives of the RMBS at September 30, 2011 and December 31, 2010 in the tables below are based on consensus constant prepayment speeds.  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.
 
 
 
14

 
 
September 30, 2011
 
(dollars in thousands)
 
                         
   
Weighted Average Life
       
   
Less than one year
   
Greater than one year and less than five years
   
Greater than five years
   
Total
 
Fair value
                       
Non-Agency RMBS
                       
Senior
  $ 2,689     $ 101,014     $ 217,780     $ 321,483  
Subordinated
    9,091       252,830       1,812,488       2,074,409  
Senior, non-retained
    389,722       1,134,445       489,631       2,013,798  
Agency RMBS
    -       4,621,100       331,621       4,952,721  
Total fair value
  $ 401,502     $ 6,109,389     $ 2,851,520     $ 9,362,411  
Amortized cost
                               
Non-Agency RMBS
                               
Senior
  $ 6,045     $ 117,825     $ 263,239     $ 387,109  
Subordinated
    34,932       292,302       2,203,057       2,530,291  
Senior, non-retained
    169,674       1,033,844       468,892       1,672,410  
Agency RMBS
    -       4,450,696       326,732       4,777,428  
Total amortized cost
  $ 210,651     $ 5,894,667     $ 3,261,920     $ 9,367,238  
 
December 31, 2010
 
(dollars in thousands)
 
                         
   
Weighted Average Life
       
   
Less than one year
   
Greater than one year and less than five years
   
Greater than five years
   
Total
 
Fair Value
                       
Non-Agency RMBS
                       
Senior
  $ 26,964     $ 587,075     $ 373,646     $ 987,685  
Subordinated
    7,941       218,986       1,983,931       2,210,858  
Senior, non-retained
    200,468       1,889,732       240,368       2,330,568  
Agency RMBS
    -       1,560,859       572,725       2,133,584  
Total fair value
  $ 235,373     $ 4,256,652     $ 3,170,670     $ 7,662,695  
Amortized Cost
                               
Non-Agency RMBS
                               
Senior
  $ 27,050     $ 588,484     $ 467,513     $ 1,083,047  
Subordinated
    13,816       252,520       1,963,095       2,229,431  
Senior, non-retained
    236,792       1,463,188       225,744       1,925,724  
Agency RMBS
    -       1,513,644       589,312       2,102,956  
Total amortized cost
  $ 277,658     $ 3,817,836     $ 3,245,664     $ 7,341,158  
 
The non-Agency RMBS portfolio is subject to credit risk.  The Company seeks to mitigate credit risk through its asset selection process.  The non-Agency RMBS portfolio is primarily collateralized by what the Company classifies as Alt-A first lien mortgages.  The Company categorizes collateral as Alt-A regardless of whether the loans were originally described as “prime” if the behavior of the collateral when the Company purchased the security more typically resembles Alt-A.  The Company defines Alt-A collateral characteristics to be when the 60+ day delinquency bucket of the pool is greater than 5% and weighted average FICO scores are greater than 650 at origination.  At September 30, 2011, 98% of the non-Agency RMBS were Alt-A collateral.  At December 31, 2010, 99% of the non-Agency RMBS were Alt-A collateral.  The non-Agency securities contained in this portion of the portfolio have the following collateral characteristics at September 30, 2011 and December 31, 2010.

 
 
15

 
 
 
September 30, 2011
 
December 31, 2010
 
Number of securities in portfolio
      520         581  
Weighted average maturity (years)
      26.5         27.4  
Weighted average amortized loan to value
      72.0 %       72.5 %
Weighted average FICO
      715.8         717.3  
Weighted average loan balance (in thousands)
    $ 474.1       $ 447.6  
Weighted average percentage owner occupied
      85.2 %       83.3 %
Weighted average percentage single family residence
      64.1 %       63.1 %
Weighted average current credit enhancement
      12.1 %       16.0 %
Weighted average geographic concentration
CA
    38.4 %
CA
    57.8 %
 
FL
    8.4 %
FL
    13.3 %
 
NY
    6.3 %
NY
    7.3 %
 
NJ
    2.4 %
VA
    3.9 %
 
VA
    2.2 %
NJ
    3.3 %

 

The information presented in the table above includes senior, non-retained, non-Agency RMBS consolidated pursuant to the adoption of ASC 810 on January 1, 2010 by the Company.

The table below presents origination year for the Company’s portfolio of non-Agency RMBS at September 30, 2011 and December 31, 2010.

Origination Year
 
September 30, 2011
   
December 31, 2010
 
2003
    0.8 %     0.0 %
2004
    1.1 %     0.1 %
2005
    13.4 %     13.4 %
2006
    41.0 %     27.0 %
2007
    40.9 %     56.1 %
2008
    2.8 %     3.3 %
2009
    0.0 %     0.1 %
Total
    100.0 %     100.0 %
 
During the quarter ended September 30, 2011, the Company sold RMBS with a carrying value of $2.3 million for realized gains of $28 thousand.  During the quarter ended September 30, 2010, the Company sold RMBS with a carrying value of $206.0 million for realized gains of $2.0 million.
 
During the quarter ended September 30, 2011, the Company did not sell any bonds created in its re-securitization transactions that were executed in prior periods.  During the nine months ended September 30, 2011, the Company financed through re-securitization transactions $306.6 million of AAA-rated fixed rate bonds by selling the bonds to third party investors for net proceeds of $311.0 million.
 
During the nine months ended September 30, 2010, the Company transferred $3.5 billion in principal value of its RMBS to the CSMC 2010-1R, CSMC 2010-11R, and CSMC 2010-12R Trusts in re-securitization transactions.  These transactions were recorded as “secured borrowings” pursuant to ASC Topics 860 and 810.  During the nine months ended September 30, 2010, the Company financed through these transactions $1.1 billion of AAA-rated fixed rate bonds by selling the bonds to third party investors for net proceeds of $1.1 billion.
 
 
16

 
 
4.  Securitized Loans Held for Investment

The following table represents the Company’s securitized residential mortgage loans classified as held for investment at September 30, 2011 and December 31, 2010.  At September 30, 2011 approximately 55% of the Company’s securitized loans are adjustable rate mortgage loans and 45% are fixed rate mortgage loans.  All of the adjustable rate loans held for investment are hybrid adjustable rate mortgages (“ARMs”).  Hybrid ARMs are mortgages that have interest rates that are fixed for an initial period (typically three, five, seven or ten years) and thereafter reset at regular intervals subject to interest rate caps.  The periodic cap on all hybrid ARMs in the securitized loan portfolio range from 0.00% to 2.00% as of September 30, 2011 and 0.00% to 3.00% as of December 31, 2010.  The securitized loans held for investment are carried at their principal balance outstanding, plus premiums or discounts, less an allowance for loan losses.
 
   
September 30, 2011
   
December 31, 2010
 
     (dollars in thousands)  
             
Securitized loans, at amortized cost
  $ 293,018     $ 360,118  
Less: allowance for loan losses
    7,009       6,586  
Securitized loans held for investment
  $ 286,009     $ 353,532  
                 
 
The securitized loan portfolio is collateralized by prime, jumbo, first lien residential mortgages of which 56% were originated during 2008 and 43% were originated during 2007 and the remaining 1% of the loans were originated prior to 2007.  A summary of key characteristics of these loans follows.

 
September 30, 2011
 
December 31, 2010
 
Number of loans
      422         513  
Weighted average maturity (years)
      25.9         26.6  
Weighted average original loan to value
      74.9 %       74.5 %
Weighted average FICO
      752         755  
Weighted average loan balance (in thousands)
    $ 686.3       $ 694.3  
Weighted average percentage owner occupied
      91.2 %       90.5 %
Weighted average percentage single family residence
      58.3 %       58.2 %
Weighted average geographic concentration
CA
    35.1 %
  CA
    33.3 %
 
FL
    6.9 %
  FL
    6.7 %
 
AZ
    5.7 %
  NJ
    5.3 %
 
IL
    5.4 %
  IL
    5.3 %
 
NJ
    5.2 %
  AZ
    5.2 %
 
The following table summarizes the changes in the allowance for loan losses for the securitized mortgage loan portfolio during the quarters and nine months ended September 30, 2011 and 2010.
 
    For the Quarter Ended  
   
September 30, 2011
   
September 30, 2010
 
      (dollars in thousands)  
Balance, beginning of period
  $ 7,484     $ 5,569  
Provision for loan losses
    -       482  
Charge-offs
    (475 )     (10 )
Balance, end of period
  $ 7,009     $ 6,041  
                 
   
For the Nine Months Ended
 
   
September 30, 2011
   
September 30, 2010
 
             
Balance, beginning of period
  $ 6,586     $ 4,551  
Provision for loan losses
    1,442       2,112  
Charge-offs
    (1,019 )     (622 )
Balance, end of period
  $ 7,009     $ 6,041  
 
On a quarterly basis, the Company evaluates the adequacy of its allowance for loan losses which is calculated to reflect management’s estimate of possible losses in the securitized loan portfolio at the reporting date.  The Company’s provision for loan losses considers the quality of the collateral, performance of like collateral, and expectations of future market conditions as described more fully in Note 2(f).  The Company’s provision for loan losses is calculated on the outstanding principal balance of the portfolio, 60+ day delinquencies for like collateral and current and expected severities for similarly underwritten loans.  The Company’s allowance for loan losses at September 30, 2011 was $7.0 million, representing 242 basis points of the principal balance of the Company’s securitized mortgage loan portfolio.  The Company’s allowance for loan losses at December 31, 2010 was $6.6 million, representing 185 basis points of the principal balance of the Company’s securitized mortgage loan portfolio.  The following table summarizes the status of loans greater than 30 days delinquent.
 
   
30 Days
Delinquent
   
60 Days
Delinquent
   
90+ Days
Delinquent
   
Bankruptcy
   
Foreclosure
   
REO
   
Total
 
   
(dollars in thousands)
 
September 30, 2011
  $ 1,565     $ 0     $ 3,208     $ 417     $ 7,507     $ 4,007     $ 16,704  
December 31, 2010
  $ 1,664     $ 1,554     $ 9,649     $ 937     $ 1,295     $ 1,120     $ 16,219  
 

 
 
17

 

In addition, the following table presents the loans that were modified during the period.  Loans are modified by the servicer as a method of loss mitigation.

   
Number of Loans
Modified During
Period
   
Pre-Modification
Recorded Investment
   
Post Modification
Recorded Invesment
 
      (dollars in thousands)  
September 30, 2011
    2     $ 1,970     $ 2,162  
December 31, 2010
    14       11,385       11,975  

5.  Fair Value Measurements

GAAP defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements.  The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.  The three levels are defined as follows:
 
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets and liabilities in active markets.
 
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
 
Level 3 – inputs to the valuation methodology are unobservable and significant to fair value.
 
The following discussion describes the methodologies utilized by the Company to fair value its financial instruments by instrument class.
 
Short-term Instruments
 
The carrying value of cash and cash equivalents, accrued interest receivable, dividends payable, accounts payable, and accrued interest payable generally approximates estimated fair value due to the short term nature of these financial instruments.

Non-Agency and Agency RMBS
 
Generally, the Company determines the fair value of its investment securities utilizing a pricing model that incorporates such factors as coupon, prepayment speeds, weighted average life, collateral composition, borrower characteristics, expected interest rates, life caps, periodic caps, reset dates, collateral seasoning, expected losses, expected default severity, credit enhancement, and other pertinent factors.  Certain very liquid asset classes, such as Agency fixed-rate pass-throughs may be priced using independent sources such as quoted prices for “To-Be-Announced” securities.   Management reviews the fair values generated by the model to determine whether prices are reflective of the current market.  Management performs a validation of the fair value calculated by the pricing model by comparing its results to independent prices provided by dealers in the securities and/or third party pricing services.  The Company believes the observable inputs used in its model in conjunction with dealer and/or third party pricing services meets the criteria for classification as Level 2.

Non-Agency, Non-Retained RMBS
 
The non-Agency, non-retained securities reflected in the consolidated financial statements are securities consolidated pursuant to the Company’s adoption of ASC 810 on January 1, 2010.  These assets have been financed with third parties without recourse to the Company in the normal course of the Company’s portfolio optimization strategy.  The Company fair values these assets as described above in Non-Agency and Agency RMBS.  See Note 8 to these consolidated financial statements for a detailed discussion of these securities.

Interest Rate Swaps
 
The Company utilizes third party quotes to determine the fair values of its interest rate swaps.  The Company compares the third party quotations received to its own estimate of fair value to evaluate for reasonableness.  The dealer quotes incorporate common market pricing methods, including a spread measurement to the Treasury yield curve or interest rate swap curve as well as underlying characteristics of the particular contract. Interest rate swaps are modeled by the Company by incorporating such factors as the term to maturity, Treasury curve, LIBOR rates, and the payment rates on the fixed portion of the interest rate swaps.
 
 
 
18

 

 
Any changes to the valuation methodology are reviewed by management to ensure the changes are appropriate. As markets and products develop and the pricing for certain products becomes more transparent, the Company will continue to refine its valuation methodologies. The methodology utilized by the Company for the periods presented is materially unchanged.  The methods used to produce a fair value calculation may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.  The Company uses inputs that are current as of the measurement date, which may include periods of market dislocation, during which price transparency may be reduced.

During times of market dislocation, as has been experienced for some time and continues to exist, the observability of prices and inputs can be reduced for certain instruments.  If dealers or independent pricing services are unable to provide a price for an asset, or if the price provided by them is deemed unreliable by the Company, then the asset will be valued at its fair value as determined in good faith by the Company.  In addition, validating third party pricing for the Company’s investments may be more subjective as fewer participants may be willing to provide this service to the Company.  Illiquid investments typically experience greater price volatility as a ready market does not exist.  As fair value is not an entity-specific measure and is a market-based approach which considers the value of an asset or liability from the perspective of a market participant, observability of prices and inputs can vary significantly from period to period.  A condition such as this can cause instruments to be reclassified from Level 1 to Level 2 or Level 2 to Level 3 when the Company is unable to obtain third party pricing verification.

At September 30, 2011 and December 31, 2010, the Company classified its assets and liabilities as Level 2.  The Company’s financial assets and liabilities carried at fair value on a recurring basis are valued at September 30, 2011 and December 31, 2010 as presented below.
 
September 30, 2011
 
   
Level 1
   
Level 2
   
Level 3
 
   
(dollars in thousands)
 
Assets:
                 
Non-Agency RMBS
                 
Senior
  $ -     $ 321,483     $ -  
Subordinated
    -       2,074,409       -  
Senior, non-retained
    -       2,013,798       -  
Agency mortgage-backed securities
    -       4,952,721       -  
                         
Liabilities:
                       
Interest rate swaps
    -       44,970       -  
                         
                         
December 31, 2010
 
   
Level 1
   
Level 2
   
Level 3
 
   
(dollars in thousands)
 
Assets:
                       
Non-Agency RMBS
                       
Senior
  $ -     $ 987,685     $ -  
Subordinated
    -       2,210,858       -  
Senior, non-retained
    -       2,330,568       -  
Agency mortgage-backed securities
    -       2,133,584       -  
                         
Liabilities:
                       
Interest rate swaps
    -       9,988       -  
 
In the aggregate, the Company’s fair valuations of RMBS investments were 0.69% higher than the aggregated dealer marks for the quarter ended September 30, 2011 and 1.04% higher than the aggregated dealer marks for the quarter ended September 30, 2010.
 
 
 
19

 

Securitized Loans Held for Investment
 
The Company records securitized loans held for investment when it securitizes loans and records the transaction as a “financing.”  The Company carries securitized loans held for investment at principal value, plus premiums or discounts paid, less an allowance for loan losses.  The Company estimates the fair value of its securitized loans held for investment at the loss adjusted expected future cash flows of the collateral.  The Company models each underlying asset by considering, among other items, the nature of the underlying collateral, coupon, servicer, actual and expected defaults, actual and expected default severities, reset indices, and prepayment speeds in conjunction with market research for similar collateral performance and management’s expectations of general economic conditions in the sector and greater economy.

Repurchase Agreements
 
The Company records repurchase agreements at their contractual amounts including accrued interest payable.  Repurchase agreements are collateralized financing transactions utilized by the Company to acquire investment securities.  Due to the short term nature of these financial instruments, the Company estimated the fair value of these repurchase agreements to be the contractual obligation plus accrued interest payable at maturity.

Securitized Debt, Loans Held for Investment and Securitized Debt, Non-Retained
 
The Company records securitized debt for certificates or notes financed without recourse to the Company in securitization or re-securitization transactions treated as “financings” pursuant to ASC 860.  The Company carries securitized debt at the principal balance outstanding on non-retained notes associated with its securitized loans held for investment plus premiums or discounts recorded with the sale of the notes to third parties.  The premiums or discounts associated with the sale of the notes or certificates are amortized over the life of the instrument.  The Company estimates the fair value of securitized debt by estimating the future cash flows associated with underlying assets collateralizing the secured debt outstanding.  The Company models the fair value of each underlying asset by considering, among other items, the structure of the underlying security, coupon, servicer, actual and expected defaults, actual and expected default severities, reset indices, and prepayment speeds in conjunction with market research for similar collateral performance and management’s expectations of general economic conditions in the sector and greater economy.

The following table presents the carrying value and estimated fair value, as described above, of the Company’s financial instruments at September 30, 2011 and December 31, 2010.
 
   
September 30, 2011
   
December 31, 2010
 
   
Carrying
Amount
   
Estimated Fair
Value
   
Carrying
Amount
   
Estimated Fair
Value
 
     (dollars in thousands)  
Non-Agency RMBS
  $ 4,409,690     $ 4,409,690     $ 5,529,111     $ 5,529,111  
Agency RMBS
    4,952,721       4,952,721       2,133,584       2,133,584  
Securitized loans held for investment
    286,009       276,482       353,532       345,410  
Repurchase agreements
    (4,171,190 )     (4,176,507 )     (1,808,797 )     (1,811,575 )
Securitized debt
    (230,767 )     (242,048 )     (289,236 )     (303,102 )
Securitized debt, non-retained
    (1,753,228 )     (1,684,847 )     (1,956,079 )     (1,887,121 )
Interest rate swaps
    (44,970 )     (44,970 )     (9,988 )     (9,988 )

6.  Repurchase Agreements

The Company had outstanding $4.2 billion and $1.8 billion of repurchase agreements with weighted average borrowing rates of 0.30% and 0.45% and weighted average remaining maturities of 70 and 49 days as of September 30, 2011 and December 31, 2010, respectively.  At September 30, 2011 and December 31, 2010, RMBS pledged as collateral under these repurchase agreements had an estimated fair value of $4.4 billion and $2.0 billion, respectively.  The average daily balances of the Company’s repurchase agreements for the quarters ended September 30, 2011 and December 31, 2010 were $4.3 billion and $1.6 billion, respectively. The interest rates of these repurchase agreements are generally indexed to the one-month or the three-month LIBOR rate and re-price accordingly.

At September 30, 2011 and December 31, 2010, the repurchase agreements collateralized by RMBS had the following remaining maturities.
 
 
20

 
 
   
September 30, 2011
   
December 31, 2010
 
     (dollars in thousands)  
Overnight
  $ -     $ -  
1-29 days
    1,440,366       232,265  
30 to 59 days
    1,211,182       970,394  
60 to 89 days
    203,362       545,442  
90 to 119 days
    430,443       60,696  
Greater than or equal to 120 days
    885,837       -  
Total
  $ 4,171,190     $ 1,808,797  
 
At September 30, 2011 and December 31, 2010, the Company did not have an amount at risk greater than 10% of its equity with any counterparty.

7.  Securitized Debt

All of the Company’s securitized debt is collateralized by residential mortgage loans or RMBS.  For financial reporting purposes, the Company’s securitized debt is accounted for as a financing transaction.  Thus, the residential mortgage loans or RMBS held as collateral are recorded in the assets of the Company as securitized loans held for investment or RMBS and the securitized debt is recorded as a liability in the consolidated statements of financial condition.

At September 30, 2011 the Company’s securitized debt collateralized by residential mortgage loans had a principal balance of $242.0 million.  The debt matures between the years 2023 and 2038.  At September 30, 2011 the debt carried a weighted average cost of financing equal to 5.49%.  At December 31, 2010, the Company’s securitized debt collateralized by residential mortgage loans had a principal balance of $303.1 million.  The debt matures between the years 2023 and 2038.  At December 31, 2010, the debt carried a weighted average cost of financing equal to 5.52%.

At September 30, 2011 the Company’s securitized debt, non-retained, collateralized by RMBS had a principal balance of $1.8 billion.  The debt matures between the years 2035 and 2047.  At September 30, 2011 the debt carried a weighted average cost of financing equal to 5.10%.  At December 31, 2010, the Company’s securitized debt, non-retained, collateralized by RMBS had a principal balance of $2.0 billion.  The debt matures between the years 2035 and 2047.  At December 31, 2010, the debt carried a weighted average cost of financing equal to 5.17%.

The following table presents the estimated principal repayment schedule of the securitized debt and securitized debt, non-retained held by the Company at September 30, 2011 and December 31, 2010, based on expected cash flows of the residential mortgage loans or RMBS, as adjusted for projected losses, collateralizing the debt.  All of the securitized debt recorded in the Company’s consolidated statements of financial condition is non-recourse to the Company.
 
   
September 30, 2011
   
December 31, 2010
 
     (dollars in thousands)  
Within One Year
  $ 526,455     $ 634,988  
One to Three Years
    682,984       831,305  
Three to Five Years
    287,912       305,953  
Greater Than or Equal to Five Years
    429,544       417,977  
Total
  $ 1,926,895     $ 2,190,223  

Maturities of the Company’s securitized debt are dependent upon cash flows received from the underlying loans. The estimate of their repayment is based on scheduled principal payments on the underlying loans. This estimate will differ from actual amounts to the extent prepayments and/or loan losses are experienced.  See Note 4 for a more detailed discussion of the loans collateralizing the securitized debt.

8.  Consolidation

In June 2009, the FASB issued two new accounting standards that amended guidance applicable to the accounting for transfers of financial assets and the consolidation of Variable Interest Entities (“VIEs”) (ASC 860 and ASC 810, respectively).  The primary effect of these standards was to eliminate the concept of a QPSE when transferring assets and to remove the exemption of a QSPE when applying the consolidation standard.  The Company adopted these new accounting standards as of January 1, 2010.
 
 
 
21

 
 
The Company uses securitization trusts or variable interest entities in its securitization and re-securitization transactions.  Prior to January 1, 2010, these variable interest entities met the definition of QSPEs and, as such, were not subject to consolidation.  Effective January 1, 2010, all such variable interest entities were considered for consolidation based on the criteria in ASC 810.

Per ASC 810, an entity shall consolidate a VIE when that entity has a variable interest that provides the reporting entity with a controlling financial interest.  The assessment of the characteristics of the reporting entity’s VIE shall consider the VIEs purpose and design.  A controlling financial interest is defined as (a) the power to direct the activities of a VIE that most significantly impact the VIEs economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE and/or the right to receive benefits from the VIE that could potentially be significant to the VIE.
 
Since the Company’s inception, the Company has created VIEs for the purpose of securitizing whole mortgage loans or re-securitizing RMBS and obtaining permanent, non-recourse term financing. The Company evaluated its interest in each securitization trust VIE to determine the primary beneficiary status.  The Company determined that seven trusts, one of which had been consolidated since its inception, met the requirements of consolidation.  The Company determined that in these seven securitizations, based on holding all of the subordinate interests, it maintains the obligation to absorb losses and/or the right to receive benefits from the VIE that could be significant to the VIE.  In addition, the Company had the power to direct activities of the trust or was determined to have the ability to control the trust due to its contribution in the purpose and design of the structure.  The remaining two trusts evaluated did not meet the requirements to consolidate due to the inability to control one of the trusts and the lack of obligations to absorb losses on the other trust.

VIEs for Which the Company is the Primary Beneficiary
 
Based on the Company’s consolidation evaluation, the Company consolidated three VIEs on January 1, 2010 that were not previously consolidated and consolidated three VIEs that it created during 2010.  The Company’s retained beneficial interest is typically the subordinated tranches of these re-securitizations and in some cases the Company may hold interests in additional tranches.  The effect is the inclusion of an additional $2.0 billion of non-Agency RMBS at fair value no longer retained by the Company and the inclusion in its liabilities of $1.8 billion of non-recourse securitized debt associated with these re-securitizations.
 
The trusts are structured as pass through entities that receive principal and interest on the underlying collateral and distribute those payments to the certificate holders.  The assets and other instruments held by the securitization entities are restricted in that they can only be used to fulfill the obligations of the securitization entity.  Additionally, the obligations of the securitization entities do not have any recourse to the general credit of any other consolidated subsidiaries, nor to the Company as the primary beneficiary.  The Company’s risks associated with its involvement with these VIEs is limited to its risks and rights as a certificate holder of the bonds it has retained.  See Note 5 for a discussion of the fair value measurement of the assets and liabilities.
 
The assets of the securitization entities consolidated by the Company are similar in nature to the Company’s portfolio as a whole.  The securitization entities are all composed of RMBS of the quality and characteristics of assets reflected in the RMBS classifications found in the Company’s consolidated financial statements.  See Note 3 for a discussion of the securities characteristics of the portfolio.
 
The table below presents the assets and liabilities of consolidated entities as of January 1, 2010.  The cumulative effect adjustment reflects the reversal of realized gains of $98.1 million previously recorded on the sales of these newly consolidated trusts net of the additional accretion of discounts due to consolidating the trusts.
 
 
22

 

   
Carrying Value (1)
 
   
(dollars in thousands)
 
Assets
     
Non-Agency RMBS
     
Senior, non-retained
  $ 1,114,034  
Liabilities
       
Securitized debt, non-retained
    1,202,221  
Net assets and liabilities of newly consolidated entities
    (88,187 )
Cumulative effect adjustment to retained earnings upon adoption
  $ (88,187 )
         
(1) Carrying value represents the amount the assets would have been recorded at in the consolidated financial statements at January 1, 2010 had they been recorded in the consolidated financial statements on the date the Company first met the conditions for consolidation.
 
 
The cumulative effect of adopting ASC 810 on January 1, 2010 based on the shares outstanding on that date was to reduce the beginning book value of the Company by $0.13 per share.
 
The table below reflects the assets and liabilities recorded in the consolidated statements of financial condition related to the consolidated securitization entities as of September 30, 2011 and December 31, 2010.

   
September 30, 2011
   
December 31, 2010
 
   
(dollars in thousands)
 
Assets
           
Non-Agency RMBS
  $ 3,608,720     $ 4,357,631  
Securitized loans
    286,009       353,532  
Liabilities
               
Securitized debt, non-retained
  $ 1,753,228     $ 1,956,079  
Securitized debt, loans held for investment
    230,767       289,236  

The consolidation of these securitization entities increases both the income and expense recorded in the consolidated statements of operations for the Company as detailed in the table below.
 
   
For the Quarter Ended
 
   
September 30, 2011
   
September 30, 2010
 
   
(dollars in thousands)
 
Interest income, non-retained
  $ 35,030     $ 55,088  
Interest income, securitized loans
    4,085       6,884  
Interest expense, non-retained
    25,575       32,237  
Interest expense, securized loans
    4,068       8,333  
Net interest income
  $ 9,472     $ 21,402  
                 
   
For the Nine Months Ended
 
   
September 30, 2011
   
September 30, 2010
 
     
(dollars in thousands)
 
Interest income, non-retained
  $ 107,569     $ 169,723  
Interest income, securitized loans
    12,787       17,958  
Interest expense, non-retained
    81,462       87,488  
Interest expense, securitized loans
    13,540       17,896  
Net interest income
  $ 25,354     $ 82,297  
                 
 
A discussion of the significant accounting policies of the Company to record income and expense is included in Note 2 to these consolidated financial statements.  The effect of adopting ASC 810 based on the weighted average shares outstanding had no material effect on the net interest income of the Company for the nine months ended September 30, 2011.

The effect of the consolidation of these securitization entities on the consolidated statements of cash flows for the Company is presented in the table below for the periods presented.
 
 
 
23

 
 
   
For the Nine Months Ended
 
   
September 30, 2011
   
September 30, 2010
 
             
Proceeds from securitized debt borrowings, non-retained
  $ 311,012     $ 1,127,873  
Payments on securitized debt borrowings, non-retained
    (520,730 )     (403,449 )
Payments on securitized debt borrowings, loans held for investment
    (58,469 )     (70,684 )
(Accretion) amortization of debt issue costs of securitized debt, non-retained
    6,867       8,892  
Increase (decrease) in accrued interest receivable
    3,709       9,388  
Increase (decrease) in accrued interest payable
    (1,241 )     (9,194 )
Net cash flows, non-retained
  $ (258,852 )   $ 662,826  
 
VIEs for Which the Company is Not the Primary Beneficiary
 
The table below represents the carrying amounts and classification of assets recorded on the Company’s consolidated financial statements related to its variable interests in non-consolidated VIEs, as well as its maximum exposure to loss as a result of its involvement with these VIEs.
 
   
September 30, 2011
   
December 31, 2010
 
   
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
 
      (dollars in thousands)  
Assets
                       
Non-Agency RMBS
                       
Senior
  $ 265     $ 482     $ 400     $ 559  
Subordinated
    3,029       5,480       5,420