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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q 
(Mark One)
ý
 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended June 30, 2017
 
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:  001-35543
logoa23.gif
 Western Asset Mortgage Capital Corporation
(Exact name of Registrant as specified in its charter) 
Delaware
 
27-0298092
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification Number)
 
Western Asset Mortgage Capital Corporation
385 East Colorado Boulevard
Pasadena, California 91101
(Address of Registrant’s principal executive offices)
 
(626) 844-9400
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ý 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 (§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 ý No o 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act (check one). 
Large accelerated filer
o
 
Accelerated filer
x
 
 
 
 
 
Non-accelerated filer
(Do not check if a smaller reporting company)
o
 
Smaller reporting company
o
 
 
 
 
 
 
 
 
Emerging growth company
x
 
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. ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 under the Securities Exchange Act of 1934).  Yes o No ý
 

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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

As of August 7, 2017, there were 41,919,801 shares, par value $0.01, of the registrant’s common stock issued and outstanding.

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TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

Part I
ITEM I. Financial Statements

Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands—except share and per share data)
(Unaudited)
 
 
June 30,
2017
 
December 31, 2016
Assets:
 

 
 

Cash and cash equivalents
$
41,159

 
$
46,172

Mortgage-backed securities and other securities, at fair value ($2,609,459 and $2,261,430 pledged as collateral, at fair value, respectively)
2,648,233

 
2,576,517

Residential Whole-Loans, at fair value ($203,540 and $192,136 pledged as collateral, at fair value, respectively)
203,540

 
192,136

Residential Bridge Loans ($64,912 and $0 pledged as collateral, respectively)
64,912

 
—

Securitized commercial loan, at fair value
24,875

 
24,225

Investment related receivable ($209,065 and $0 pledged as collateral, respectively)
211,733

 
33,600

Accrued interest receivable
11,806

 
18,812

Due from counterparties
70,901

 
243,585

Derivative assets, at fair value
8,013

 
20,571

Other assets
1,093

 
398

Total Assets (1)
$
3,286,265

 
$
3,156,016

 
 
 
 
Liabilities and Stockholders’ Equity:
 

 
 

Liabilities:
 

 
 

Borrowings under repurchase agreements, net
$
2,801,606

 
$
2,155,644

Securitized debt, at fair value
10,945

 
10,659

Accrued interest payable
5,445

 
16,041

Investment related payables
—

 
341,458

Due to counterparties
2,185

 
740

Derivative liability, at fair value
2,374

 
182,158

Accounts payable and accrued expenses
2,808

 
3,255

Payable to affiliate
1,913

 
2,584

Dividend payable
12,995

 
12,995

Total Liabilities (2)
2,840,271

 
2,725,534

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Stockholders’ Equity:
 

 
 

Common stock: $0.01 par value, 500,000,000 shares authorized, 41,919,801 shares issued and outstanding, respectively
419

 
419

Preferred stock, $0.01 par value, 100,000,000 shares authorized and no shares outstanding
—

 
—

Additional paid-in capital
765,657

 
765,042

Retained earnings (accumulated deficit)
(320,082
)
 
(334,979
)
Total Stockholders’ Equity
445,994

 
430,482

Total Liabilities and Stockholders’ Equity
$
3,286,265

 
$
3,156,016


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 See notes to unaudited consolidated financial statements.

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Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Balance Sheets (Continued)
(in thousands—except share and per share data)
(Unaudited)


 
June 30,
2017
 
December 31, 2016
(1) Assets of consolidated VIEs included in the total assets above:
 

 
 

Residential Whole-Loans, at fair value ($203,540 and $192,136 pledged as collateral, at fair value, respectively)
$
203,540

 
$
192,136

Residential Bridge Loans ($64,912 and $0 pledged as collateral, respectively)
64,912

 
—

Securitized commercial loan, at fair value
24,875

 
24,225

Investment related receivable
2,407

 
1,241

Accrued interest receivable
2,697

 
1,622

Total assets of consolidated VIEs
$
298,431

 
$
219,224

 
 
 
 
(2) Liabilities of consolidated VIEs included in the total liabilities above:
 

 
 

Securitized debt, at fair value
$
10,945

 
$
10,659

Accrued interest payable
82

 
85

Accounts payable and accrued expenses
181

 
2

Total liabilities of consolidated VIEs
$
11,208

 
$
10,746


See notes to unaudited consolidated financial statements.


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Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands—except share and per share data)
(Unaudited)
 
 
For the three months ended June 30, 2017
 
For the three months ended June 30, 2016
 
For the six months ended June 30, 2017
 
For the six months ended June 30, 2016
Net Interest Income
 

 
 

 
 
 
 
Interest income
$
30,055

 
$
29,220

 
$
58,485

 
$
58,838

Interest expense
10,407

 
7,727

 
19,144

 
15,706

Net Interest Income
19,648

 
21,493

 
39,341

 
43,132

 
 
 
 
 
 
 
 
Other Income (Loss)
 

 
 

 
 
 
 
Realized gain (loss) on sale of investments, net
(2,488
)
 
(352
)
 
18,770

 
(6,407
)
Other than temporary impairment
(6,579
)
 
(6,356
)
 
(12,676
)
 
(17,153
)
Unrealized gain (loss), net
35,017

 
21,510

 
29,877

 
32,278

Gain (loss) on derivative instruments, net
(18,555
)
 
(14,165
)
 
(23,252
)
 
(59,335
)
Other, net
222

 
234

 
625

 
(98
)
Other Income (Loss)
7,617

 
871

 
13,344

 
(50,715
)
 
 
 
 
 
 
 
 
Expenses
 

 
 

 
 
 
 
Management fee to affiliate
1,830

 
2,588

 
4,306

 
5,340

Other operating expenses
736

 
183

 
1,153

 
621

General and administrative expenses:
 

 
 

 
 
 
 

Compensation expense
664

 
649

 
1,404

 
1,386

Professional fees
832

 
1,222

 
1,720

 
3,224

Other general and administrative expenses
404

 
419

 
749

 
847

Total general and administrative expenses
1,900

 
2,290

 
3,873

 
5,457

Total Expenses
4,466

 
5,061

 
9,332

 
11,418

 
 
 
 
 
 
 
 
Income (loss) before income taxes
22,799

 
17,303

 
43,353

 
(19,001
)
Income tax provision
2,115

 
—

 
2,427

 
—

Net income (loss)
$
20,684

 
$
17,303

 
$
40,926

 
$
(19,001
)
 
 
 
 
 
 
 
 
Net income (loss) per Common Share — Basic
$
0.49

 
$
0.41

 
$
0.97

 
$
(0.46
)
Net income (loss) per Common Share — Diluted
$
0.49

 
$
0.41

 
$
0.97

 
$
(0.46
)
Dividends Declared per Share of Common Stock
$
0.31

 
$
0.31

 
$
0.62

 
$
0.76


See notes to unaudited consolidated financial statements.

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Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands—except shares and share data)
(Unaudited)
 
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings 
(Accumulated Deficit)
 
 
 
Shares
 
Par
 
 
 
Total
Balance at December 31, 2015
41,919,801

 
$
419

 
$
763,283

 
$
(252,054
)
 
$
511,648

Vesting of restricted stock
—

 
—

 
1,699

 
—

 
1,699

Net loss
—

 
—

 
—

 
(25,015
)
 
(25,015
)
Dividends declared on common stock
—

 
—

 
60

 
(57,910
)
 
(57,850
)
Balance at December 31, 2016
41,919,801

 
$
419

 
$
765,042

 
$
(334,979
)
 
$
430,482

Vesting of restricted stock
—

 
—

 
577

 
—

 
577

Net income
—

 
—

 
—

 
40,926

 
40,926

Dividends declared on common stock
—

 
—

 
38

 
(26,029
)
 
(25,991
)
Balance at June 30, 2017
41,919,801

 
$
419

 
$
765,657

 
$
(320,082
)
 
$
445,994


See notes to unaudited consolidated financial statements.


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Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows (in thousands)
(Unaudited)

 
For the six months ended June 30, 2017
 
For the six months ended June 30, 2016
Cash flows from operating activities:
 

 
 

Net income (loss)
$
40,926

 
$
(19,001
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Premium amortization and (discount accretion) on investments, net
(2,044
)
 
1,861

Interest income earned added to principal of securities
(46
)
 
(195
)
Amortization of deferred financing costs
—

 
134

Restricted stock amortization
577

 
918

Interest payments and basis recovered on MAC interest rate swaps
258

 
326

Premium on purchase of Residential Whole-Loans
(354
)
 
—

Premium on purchase of Residential Bridge Loans
(425
)
 
—

Unrealized (gain) loss, net
(29,877
)
 
(32,278
)
Unrealized (gain) loss on derivative instruments, net
(156,696
)
 
72,127

Other than temporary impairment
12,676

 
17,153

Realized (gain) loss on sale of securities, net
(18,770
)
 
6,407

(Gain) loss on derivatives, net
156,245

 
(29,652
)
Loss on foreign currency transactions, net
2

 
561

Changes in operating assets and liabilities:
 

 
 

Decrease (increase) in accrued interest receivable
7,006

 
(1,671
)
Increase in other assets
(695
)
 
(496
)
Decrease in accrued interest payable
(10,596
)
 
(3,220
)
Increase (decrease) in accounts payable and accrued expenses
(447
)
 
34

Decrease in payable to affiliate
(671
)
 
(118
)
Net cash (used in) provided by operating activities
(2,931
)
 
12,890

Cash flows from investing activities:
 

 
 

Purchase of securities
(1,656,239
)
 
(1,065,782
)
Proceeds from sale of securities
962,404

 
1,211,679

Principal repayments and basis recovered on securities
140,813

 
163,960

Purchase of Residential Whole-Loans
(35,317
)
 
—

Principal repayments on Residential Whole-Loans
24,000

 
21,964

Purchase of Residential Bridge Loans
(73,565
)
 
—

Principal repayments on Residential Bridge Loans
8,160

 
—

Payment of premium for option derivatives
(4,786
)
 
(17,951
)
Premium received from option derivatives
3,750

 
22,707

Net settlements of TBAs
2,558

 
8,591

Proceeds from (Payments on) termination of futures, net
(9,153
)
 
13,409

Proceeds from sale of interest rate swaptions
—

 
2,075

Premium for MAC interest rate swaps, net
—

 
465

Payments on termination of MAC interest rate swaps
—

 
—

Interest payments and basis recovered on MAC interest rate swaps
(258
)
 
(326
)
Due from counterparties
4,124

 
(9,719
)
Proceeds from termination of foreign currency swaps
—

 
3,942

Payments on total return swaps, net
(500
)
 
15

Premium for interest rate swaptions, net
(115
)
 
—

Net cash (used in) provided by investing activities
(634,124
)
 
355,029

 
 
 
 
Cash flows from financing activities:
 

 
 


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Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Continued) (in thousands)
(Unaudited)


 
For the six months ended June 30, 2017
 
For the six months ended June 30, 2016
Proceeds from repurchase agreement borrowings
7,464,705

 
6,992,363

Repayments of repurchase agreement borrowings
(6,818,742
)
 
(7,267,742
)
Proceeds from forward contracts
5,407

 
49,441

Repayments of forward contracts
(5,427
)
 
(49,634
)
Due from counterparties, net
10,647

 
(46,788
)
Due to counterparties, net
1,445

 
6,714

Dividends paid on common stock
(25,991
)
 
(43,177
)
Net cash provided by (used in) financing activities
632,044

 
(358,823
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(2
)
 
62

 
 
 
 
Net increase (decrease) in cash and cash equivalents
(5,013
)
 
9,158

Cash and cash equivalents beginning of period
46,172

 
24,711

Cash and cash equivalents end of period
$
41,159

 
$
33,869

 
 
 
 
Supplemental disclosure of operating cash flow information:
 

 
 

Interest paid
$
16,902

 
$
15,478

  Income taxes paid
$
2,380

 
$
—

Supplemental disclosure of non-cash financing/investing activities:
 

 
 

Principal payments of securities, not settled
$
16

 
$
—

Securities sold, not settled
$
209,310

 
$
3,652

Net unsettled TBAs
$
—

 
$
(5
)
Dividends and distributions declared, not paid
$
12,995

 
$
12,995

Principal payments of Residential Whole-Loans, not settled
$
1,598

 
$
6,370

Principal payments of Residential Bridge Loans, not settled
$
809

 
$
—

Derivative collateral offset against derivatives
$
(157,913
)
 
$
—

See notes to unaudited consolidated financial statements.



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Western Asset Mortgage Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
(in thousands- except share and per share data)
 
The following defines certain of the commonly used terms in these Notes to Consolidated Financial Statements: “Agency” or “Agencies” refer to a federally chartered corporation, such as the Federal National Mortgage Association (“Fannie Mae” or “FNMA”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac” or “FHLMC”), or an agency of the U.S. Government, such as the Government National Mortgage Association (“Ginnie Mae” or “GNMA”); references to “MBS” refer to mortgage backed securities, including residential mortgage-backed securities or “RMBS,” commercial mortgage-backed securities or “CMBS,” and “Interest-Only Strips” (as defined herein); “Agency MBS” refer to RMBS, CMBS and Interest-Only Strips issued or guaranteed by the Agencies while “Non-Agency MBS” refer to RMBS, CMBS and Interest-Only Strips that are not issued or guaranteed by the Agencies; references to “ARMs” refers to adjustable rate mortgages; references to “Interest-Only Strips” refer to interest-only (“IO”) and inverse interest-only (“IIO”) securities issued as part of or collateralized with MBS; references to “TBA” refer to To-Be-Announced Securities; and references to “Residential Whole-Loans", “Residential Bridge Loans" and “Commercial Whole-Loans" (collectively “Whole-Loans”) refer to individual mortgage loans secured by single family, multifamily and commercial properties.

Note 1 — Organization
 
Western Asset Mortgage Capital Corporation, a Delaware corporation, and its subsidiaries (the “Company”) commenced operations in May 2012. The Company invests in, finances and manages a diversified portfolio of real estate related securities, whole-loans and other financial assets.  The Company’s portfolio is comprised of Agency RMBS (including TBAs), Agency CMBS, Non-Agency RMBS, Non-Agency CMBS and Whole-Loans. In addition, and to a significantly lesser extent, the Company has invested in other securities including certain Agency obligations that are not technically MBS as well as certain Non U.S. CMBS and in asset-backed securities (“ABS”) investments secured by a portfolio of private student loans.  The Company’s investment strategy is based on Western Asset Management Company’s (the “Manager”) perspective of which mix of portfolio assets it believes provides the Company with the best risk-reward opportunities at any given time.  The Manager will vary the allocation among various asset classes subject to maintaining the Company’s qualification as a REIT and maintaining its exemption from the Investment Company Act of 1940 (the “1940 Act”).  These restrictions limit the Company’s ability to invest in non-qualifying MBS, non-real estate assets and/or assets which are not secured by real estate.  Accordingly, the Company’s portfolio will continue to be principally invested in qualifying MBS, Whole-Loans and other real estate related assets.
 
The Company is externally managed by the Manager, an investment advisor registered with the Securities and Exchange Commission (“SEC”).  The Manager is a wholly-owned subsidiary of Legg Mason, Inc.  The Company operates and has elected to be taxed as a real estate investment trust or “REIT” commencing with its taxable year ended December 31, 2012.
 
Note 2 — Summary of Significant Accounting Policies
 
Basis of Presentation and Consolidation
 
The accompanying unaudited financial statements and related notes have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial reporting in accordance with Article 10 of Regulation S-X and the instructions to Form 10-Q.  Certain prior period amounts have been reclassified to conform to the current period’s presentation. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary have been made to present fairly the Company’s financial position, results of operations and cash flows. The results of operations for the period ended June 30, 2017, are not necessarily indicative of the results to be expected for the full year or any future period. These consolidated financial statements should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission (“SEC”) on March 7, 2017.
 
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and variable interest entities (“VIEs”) in which we are considered the primary beneficiary.  Refer to Note 5 - “Variable Interest Entities” for additional information regarding the impact of consolidating these VIEs.  All intercompany amounts between the Company and its subsidiary and consolidated VIEs have been eliminated in consolidation.


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Variable Interest Entities
 
VIEs are defined as entities that by design either lack sufficient equity for the entity to finance its activities without additional subordinated financial support or are unable to direct the entity’s activities or are not exposed to the entity’s losses or entitled to its residual returns. The Company evaluates all of its interests in VIEs for consolidation. When the interests are determined to be variable interests, the Company assesses whether it is deemed the primary beneficiary. The primary beneficiary of a VIE is determined to be the party that has both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.
 
To assess whether the Company has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, it considers all facts and circumstances, including its role in establishing the VIE and its ongoing rights and responsibilities. This assessment includes first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE or have the right to unilaterally remove those decision makers is deemed to have the power to direct the activities of a VIE.
 
To assess whether the Company has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, it considers all of its economic interests. This assessment requires the Company to apply judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. Factors considered in assessing significance include: the design of the VIE, including its capitalization structure; subordination of interests; payment priority; relative share of interests held across various classes within the VIE’s capital structure; and the reasons why the interests are held by the Company.
 
In instances when a VIE is owned by both the Company and related parties, the Company considers whether there is a single party in the related party group that meets both the power and losses or benefits criteria on its own as though no related party relationship existed.  If one party within the related party group meets both these criteria, such reporting entity is the primary beneficiary of the VIE and no further analysis is needed.  If no party within the related party group on its own meets both the power and losses or benefits criteria, but the related party group does as a whole meets these two criteria, the determination of primary beneficiary within the related party group is based upon an analysis of the facts and circumstances with the objective of determining which party is most closely associated with the VIE.  Determining the primary beneficiary within the related party group requires significant judgment.
 
In instances when the Company is required to consolidate a VIE that is determined to be a qualifying collateralized financing entity, under GAAP, the Company will measure both the financial assets and financial liabilities of the VIE using the fair value of either the VIE’s financial assets or financial liabilities, whichever is more observable.
 
Ongoing assessments of whether an enterprise is the primary beneficiary of a VIE are required.
 
Use of Estimates
 
The preparation of the consolidated financial statements 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 periods.  Actual results could differ from those estimates.

Earnings (Loss) Per Share
 
GAAP requires use of the two-class method in computing earnings per share for all periods presented for each class of common stock and participating securities as if all earnings for the period had been distributed.  Under the two-class method, during periods of net income, the net income is first reduced for dividends declared on all classes of securities to arrive at undistributed earnings.  During periods of net losses, the net loss is reduced for dividends declared on participating securities only if the security has the right to participate in the earnings of the entity and an objectively determinable contractual obligation to share in net losses of the entity.  The Company’s participating securities are not allocated a share of the net loss, as the participating securities do not have a contractual obligation to share in the net losses of the Company.

The remaining earnings are allocated to common stockholders and participating securities, to the extent that each security shares in earnings, as if all of the earnings for the period had been distributed.  Each total is then divided by the applicable number

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of weighted average outstanding common shares to arrive at basic earnings per share.  For the diluted earnings, the denominator includes the weighted average outstanding common shares and all potential common shares assumed issued if they are dilutive.  The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of these potential common shares.
 
Offering Costs
 
Offering costs borne by the Company in connection with common stock offerings and private placements are reflected as a reduction of additional paid-in-capital. Offering costs borne by the Company in connection with its shelf registration will be deferred and recorded in "Other assets" until such time the Company completes a common stock offering where all or a portion will be reclassified and reflected as a reduction of additional paid-in-capital. The deferred offering costs will be expensed upon the expiration of the shelf if the Company does not complete an equity offering.

Cash and Cash Equivalents
 
The Company considers all highly-liquid short term investments with original maturities of 90 days or less when purchased to be cash equivalents.  Cash and cash equivalents are exposed to concentrations of credit risk. The Company places its cash and cash equivalents with what it believes to be high credit quality institutions. At times such investments may be in excess of the Federal Deposit Insurance Corporation insurance limit.

Valuation of Financial Instruments
 
The Company discloses the fair value of its financial instruments according to a fair value hierarchy (Levels I, II, and III, as defined below). ASC 820, "Fair Value Measurement and Disclosures" establishes a framework for measuring fair value and expands financial statement disclosure requirements for fair value measurements. ASC 820 further specifies a hierarchy of valuation techniques, which is based on whether the inputs into the valuation technique are observable or unobservable. The hierarchy is as follows:
 
Level I — Quoted prices in active markets for identical assets or liabilities.
 
Level II — Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
 
Level III — Prices are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable, for example, when there is little or no market activity for an investment at the end of the period, unobservable inputs may be used.
 
The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.  Transfers between levels are determined by the Company at the end of the reporting period. Refer to Note 3 - "Fair Value of Financial Instruments".

Mortgage-Backed Securities and Other Securities
 
The Company's mortgage-backed securities and other securities portfolio primarily consists of Agency RMBS, Non-Agency RMBS, Agency CMBS, Non-Agency CMBS, ABS and other real estate related assets, these investments are recorded in accordance with ASC 320, “Investments - Debt and Equity Securities”, ASC 325-40, “Beneficial Interests in Securitized Financial Assets” or ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality”. The Company has chosen to make a fair value election pursuant to ASC 825, “Financial Instruments” for its mortgage-backed securities and other securities portfolio. Electing the fair value option allows the Company to record changes in fair value in the Consolidated Statements of Operations as a component of “Unrealized gain (loss), net”.

If the Company purchases securities with evidence of credit deterioration, it will analyze to determine if the guidance found in ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” is applicable.

The Company evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis. The determination of whether a security is other-than-temporarily impaired involves judgments, estimates and assumptions based on

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subjective and objective factors. As a result, the timing and amount of an OTTI constitutes an accounting estimate that may change materially over time.

When the fair value of an investment security is less than its amortized cost at the balance sheet date, the security is considered impaired, and the impairment is designated as either “temporary” or “other-than-temporary.” When a security is impaired, an OTTI is considered to have occurred if (i) the Company intends to sell the security (i.e., a decision has been made as of the reporting date) or (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If the Company intends to sell the security or if it is more likely than not that the Company will be required to sell the real estate security before recovery of its amortized cost basis, the entire amount of the impairment loss, if any, is recognized in earnings as OTTI and the cost basis of the security is adjusted to its fair value. Additionally for securities accounted for under ASC 325-40 an OTTI is deemed to have occurred when there is an adverse change in the expected cash flows to be received and the fair value of the security is less than its carrying amount. In determining whether an adverse change in cash flows occurred, the present value of the remaining cash flows, as estimated at the initial transaction date (or the last date previously revised), is compared to the present value of the expected cash flows at the current reporting date. The estimated cash flows reflect those a “market participant” would use and are discounted at a rate equal to the current yield used to accrete interest income. Any resulting OTTI adjustments are reflected in the “Other than temporary impairment” in the Consolidated Statements of Operations. The Company uses its estimated prepayment speed as the primary assumption used to determine other-than temporary-impairments for Interest-Only Strips, excluding Agency and Non-Agency Interest-Only Strips accounted for as derivatives.

Increases in interest income may be recognized on a security on which the Company previously recorded an OTTI charge if the cash flow of such security subsequently improves.

In addition, unrealized losses on the Company's Agency securities, with explicit guarantee of principal and interest by the governmental sponsored entity ("GSE"), are not credit losses but rather were due to changes in interest rates and prepayment expectations. These securities would not be considered other than temporarily impaired provided we did not intend to sell the security.

Residential Whole-Loans

Investments in Residential Whole-Loans are recorded in accordance with ASC 310-20, "Nonrefundable Fees and Other Costs". The Company has chosen to make the fair value election pursuant to ASC 825 for its Residential Whole-Loan portfolio. Residential Whole-Loans are recorded at fair value in the Consolidated Balance Sheets with the periodic change in fair value being recorded in earnings in the Consolidated Statements of Operations as a component of "Unrealized gain (loss), net". All other costs incurred in connection with acquiring Residential Whole-Loans or committing to purchase these loans are charged to expense as incurred.
 
On a quarterly basis, the Company evaluates the collectability of both interest and principal of each loan, if circumstances warrant, to determine whether such loan is impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the existing contractual terms. When a loan is impaired, the Company does not record an allowance for loan loss as the Company has elected the fair value option.  However, income recognition is suspended for loans at the earlier of the date at which payments become 90-days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. A loan is written off when it is no longer realizable and/or legally discharged.

Residential Bridge Loans

Investments in Residential Bridge Loans are recorded in accordance with ASC 310-20, "Nonrefundable Fees and Other Costs". These loans are recorded at their principal amount outstanding, net of any premium or discount in the Consolidated Balance Sheets. All other costs incurred in connection with acquiring the Residential Bridge Loans or committing to purchase these loans are charged to expense as incurred.

On a quarterly basis, the Company evaluates the collectability of both interest and principal of each loan, if circumstances warrant, to determine whether such loan is impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the existing contractual terms. When a loan is impaired, the impairment is then measured based on the present value of expected future cash flows discounted at the loan’s

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effective rate or the fair value of the collateral, if the loan is collateral dependent. Upon measurement of impairment, the Company records an allowance to reduce the carrying value of the loan with a corresponding charge to net income. Significant judgments are required in determining impairment, including assumptions regarding the value of the loan, the value of the underlying collateral and other provisions such as guarantees.

Income recognition is suspended for loans at the earlier of the date at which payments become 90-days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired loan is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. A loan is written off when it is no longer realizable and/or it is legally discharged.

Interest Income Recognition
 
Agency MBS, Non-Agency MBS and other securities, excluding Interest-Only Strips, rated AA and higher at the time of purchase
 
Interest income on mortgage-backed and other securities is accrued based on the respective outstanding principal balances and corresponding contractual terms. The Company records interest income in accordance with ASC subtopic 835-30 "Imputation of Interest", using the effective interest method. As such premiums and discounts associated with Agency MBS, Non-Agency MBS and other securities, excluding Interest-Only Strips, are amortized into interest income over the estimated life of such securities. Adjustments to premium and discount amortization are made for actual prepayment activity.  The Company estimates prepayments at least quarterly for its securities and, as a result, if the projected prepayment speed increases, the Company will accelerate the rate of amortization on premiums or discounts and make a retrospective adjustment to historical amortization.  Alternatively, if projected prepayment speeds decrease, the Company will reduce the rate of amortization on the premiums or discounts and make a retrospective adjustment to historical amortization.

Non-Agency MBS and other securities that are rated below AA at the time of purchase and Interest-Only Strips that are not classified as derivatives
 
Interest income on Non-Agency MBS and other securities that are rated below AA at the time of purchase and Interest-Only Strips that are not classified as derivatives are also recognized in accordance with ASC 835, using the effective yield method.  The effective yield on these securities is based on the projected cash flows from each security, which is estimated based on the Company’s observation of the then current information and events, where applicable, and will include assumptions related to interest rates, prepayment rates and the timing and amount of credit losses.  On at least a quarterly basis, the Company reviews and, if appropriate, makes adjustments to its cash flow projections based on input and analysis received from external sources, internal models, and its judgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. Where appropriate, the Company may include in its cash flow projections the U.S. Department of Justice’s settlements with the major residential mortgage originators, regarding certain lending practices. Changes in cash flows from those originally projected, or from those estimated at the last evaluation, may result in a prospective change in the yield/interest income recognized on such securities. Actual maturities of the securities are affected by the contractual lives of the underlying collateral, periodic payments of scheduled principal, and prepayments of principal. Therefore, actual maturities of the securities will generally be shorter than stated contractual maturities.
 
Based on the projected cash flow of such securities purchased at a discount to par value, the Company may designate a portion of such purchase discount as credit protection against future credit losses and, therefore, not accrete such amount into interest income.  The amount designated as credit discount may be adjusted over time, based on the actual performance of the security, its underlying collateral, actual and projected cash flow from such collateral, economic conditions and other factors.  If the performance of a security with a credit discount is more favorable than forecasted, a portion of the amount designated as credit discount may be accreted into interest income prospectively.
 
Residential Whole-Loans and Residential Bridge Loans

Interest income on the Company's residential loan portfolio is recorded in accordance with ASC 835 using the effective interest method based on the contractual payment terms of the loan. Any premium amortization or discount accretion will be reflected as a component of "Interest income" in the Consolidated Statements of Operations.
 
Purchases and Sales of Investments


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The Company accounts for a contract for the purchase or sale of securities, or other securities that do not yet exist on a trade date basis, which it intends to take possession and thus recognizes the acquisition or disposition of the securities at the inception of the contract.
 
Sales of investments are driven by the Company’s portfolio management process. The Company seeks to mitigate risks including those associated with prepayments and will opportunistically rotate the portfolio into securities and/or other investments the Company’s Manager believes have more favorable attributes. Strategies may also be employed to manage net capital gains, which need to be distributed for tax purposes. Realized gains or losses on sales of investments, including Agency Interest-Only Strips not characterized as derivatives, are a component of "Realized gain (loss) on sale of investments, net" in the Consolidated Statements of Operations, and are recorded at the time of disposition.  Realized gains or losses on Interest-Only Strips which are characterized as derivatives are a component of "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations. 

Foreign Currency Transactions
 
The Company has and expects to continue to enter into transactions denominated in foreign currency from time to time.  At the date the transaction is recognized, the asset and/or liability will be measured and recorded using the exchange rate in effect at the date of the transaction.  At each balance sheet date, such foreign currency assets and liabilities are re-measured using the exchange rate in effect at the date of the balance sheet, resulting in unrealized foreign currency gains or losses, which are recorded in "Other, net" in the Consolidated Statements of Operations.
 
Due From Counterparties/Due To Counterparties
 
"Due from counterparties" represents cash posted by the Company with its counterparties as collateral for the Company’s interest rate and/or currency derivative financial instruments, repurchase agreements, and TBAs. "Due to counterparties" represents cash posted with the Company by its counterparties as collateral under the Company’s interest rate and/or currency derivative financial instruments, repurchase agreements, and TBAs.  Included in "Due from counterparties" and/or "Due to counterparties" are daily variation margin settlement amounts with counterparties which are based on the price movement of the Company’s futures contracts. However, commencing in 2017, daily variation margin on only the Company's centrally cleared derivatives will be treated as a settlement and classified as either "Derivative assets, at fair value" or "Derivative liability, at fair value" in the Consolidated Balance Sheets. In addition, as provided below, "Due to counterparties" may include non-cash collateral in which the Company has the obligation to return and which the Company has either sold or pledged. To the extent the Company receives collateral other than cash from its counterparties such assets are not included in the Company’s Consolidated Balance Sheets.  Notwithstanding the foregoing, if the Company either rehypothecates such assets or pledges the assets as collateral pursuant to a repurchase agreement, the cash received and the corresponding liability are reflected in the Consolidated Balance Sheets.
 
Derivatives and Hedging Activities
 
Subject to maintaining its qualification as a REIT for U.S. federal income tax purposes, the Company utilizes derivative financial instruments, including interest rate swaps, interest rate swaptions, mortgage put options, currency forwards, futures contracts, TBAs and Agency and Non-Agency Interest-Only Strips to hedge the interest rate and currency risk associated with its portfolio and related borrowings. Derivatives, subject to REIT requirements, are used for hedging purposes rather than speculation.  The Company has also entered into a total return swap, which transfers the total return of the referenced security to the Company.  The Company determines the fair value of its derivative positions and obtains quotations from third parties, including the Chicago Mercantile Exchange or CME, to facilitate the process of determining such fair values. If the Company’s hedging activities do not achieve the desired results, reported earnings may be adversely affected.
 
GAAP requires an entity to recognize all derivatives as either assets or liabilities on the balance sheet and to measure those instruments at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative. The fair value adjustment will affect either other comprehensive income in stockholders’ equity until the hedged item is recognized in earnings or net income depending on whether the derivative instrument is designated and qualifies as a for hedge for accounting purposes and if so, the nature of the hedging activity.  The Company elected not to apply hedge accounting for its derivative instruments.  Accordingly, the Company records the change in fair value of its derivative instruments, which includes net interest rate swap payments/receipts (including accrued amounts) and net currency payments/receipts (including accrued amounts) related to interest rate swaps and currency swaps, respectively, in "Gain (loss) on derivative instruments, net" in its Consolidated Statements of Operations.


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In January 2017, the CME amended its rulebooks to legally characterize variation margin payments and receipts for over-the-counter derivatives they clear as settlements of the derivatives' exposure rather than collateral against exposure. As a result of the change in legal characterization, effective January 1, 2017, variation margin is no longer classified as collateral in the Consolidated Balance Sheets in either "Due from counterparties" or "Due to counterparties", but rather a component of the respective "Derivative asset, at fair value" or "Derivative liability, at fair value" in the Consolidated Balance Sheets. The variation margin is now considered partial settlements of the derivative contract and will result in realized gains or losses which prior to January 1, 2017 were classified as unrealized gains or losses on derivatives. Prior to the CME rulebook change variation margin was included in financing activities in the Company's Consolidated Statement of Cash Flows in either "Due from counterparties, net" or "Due to counterparties, net". Commencing in January 2017, cash postings for variation margin are included in operating activities in the Consolidated Statements of Cash Flows.

In the Company’s Consolidated Statements of Cash Flows, premiums received or paid on termination of its interest rate swaps are included in cash flows from operating activities. Notwithstanding the foregoing, proceeds and payments on settlement of swaptions, mortgage put options, futures contracts and TBAs are included in cash flows from investing activities.  Proceeds and payments on settlement of forward contracts are reflected in cash flows from financing activities in the Company’s Consolidated Statements of Cash Flows.  For Agency and Non-Agency Interest-Only Strips accounted for as derivatives, the purchase, sale and recovery of basis activity is included with MBS and other securities under cash flows from investing activities in the Company’s Consolidated Statements of Cash Flows.

The Company evaluates the terms and conditions of its holdings of Agency and Non-Agency Interest-Only Strips, interest rate swaptions, currency forwards, futures contracts and TBAs to determine if these instruments have the characteristics of an investment or should be considered a derivative under GAAP. In determining the classification of its holdings of Interest-Only Strips, the Company evaluates the securities to determine if the nature of the cash flows has been altered from that of the underlying mortgage collateral. Interest-Only Strips, for which the underlying mortgage collateral has been included into a structured security that alters the cash flows from the underlying mortgage collateral, are accounted for as derivatives. The carrying value of the Agency and Non-Agency Interest-Only Strips, accounted for as derivatives, is included in "Mortgage-backed securities and other securities, at fair value" in the Consolidated Balance Sheets. The carrying value of interest rate swaptions, currency forwards, futures contracts and TBAs is included in "Derivative assets, at fair value" or "Derivative liability, at fair value" in the Consolidated Balance Sheets. Interest earned or paid along with the change in fair value of these instruments accounted for as derivatives is recorded in "Gain (loss) on derivative instruments, net" in its Consolidated Statements of Operations.

The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives.  An embedded derivative is separated from the host contact and accounted for separately when all of the guidance criteria are met.  Hybrid instruments that are remeasured at fair value through earnings, including the fair value option are not bifurcated.  Derivative instruments, including derivative instruments accounted for as liabilities, are recorded at fair value and are re-valued at each reporting date, with changes in the fair value together with interest earned or paid (including accrued amounts) reported in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.
 
Repurchase Agreements and Reverse Repurchase Agreements
 
Investments sold under repurchase agreements are treated as collateralized financing transactions, unless they meet all the criteria for sales treatment. Securities financed through a repurchase agreement remain in the Company's Consolidated Balance Sheets as assets and cash received from the lender is recorded in the Company's Consolidated Balance Sheets as a liability. Interest payable in accordance with repurchase agreements is recorded as "Accrued interest payable" in the Consolidated Balance Sheets. Interest paid (including accrued amounts) in accordance with repurchase agreements is recorded as interest expense.

The Company may borrow securities under reverse repurchase agreements to deliver a security owned and sold by the Company but pledged to a different counterparty under a separate repurchase agreement when in the Manager’s view terminating the outstanding repurchase agreement is not in the Company’s best interest.  Cash paid to the borrower is recorded in the Company’s Consolidated Balance Sheets as an asset.  Interest receivable in accordance with reverse repurchase agreements is recorded as accrued interest receivable in the Consolidated Balance Sheets. The Company reflects all proceeds on reverse repurchase agreement and repayment of reverse repurchase agreement, on a net basis in the Consolidated Statements of Cash Flows.  Upon sale of a pledged security, the Company recognizes an obligation to return the borrowed security in the Consolidated Balance Sheet in "Due to counterparties".  The Company establishes haircuts to ensure the market value of the underlying asset remains sufficient to protect the Company in the event of default by the counterparty.  Realized gains and losses associated with the sale of the security are recognized in "Realized gain (loss) on sale of investments, net" in the Consolidated Statements of Cash Flows.
 
Securitized Debt

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Securitized debt was issued at par by a consolidated securitization trust. The Company has chosen to make the fair value election pursuant to ASC 825 for the debt. The debt is recorded at fair value in the Consolidated Balance Sheets with the periodic change in fair value recorded in current period earnings in the Consolidated Statements of Operations as a component of "Unrealized gain (loss), net".
 
Share-based Compensation
 
The Company accounts for share-based compensation to its independent directors, its Manager and to employees of its Manager and its affiliates using the fair value based methodology prescribed by GAAP.  Compensation cost related to restricted common stock issued to the Company’s independent directors and any employee of the Company including any such restricted stock which is subject to a deferred compensation program, and any employee of the Company is measured at its fair value at the grant date, and amortized into expense over the service period on a straight-line basis. Compensation cost related to restricted common stock issued to the Manager and to employees of the Manager, including officers and certain directors, of the Company who are employees of the Manager and its affiliates is initially measured at fair value at the grant date, and amortized into expense over the vesting period on a straight-line basis and re-measured on subsequent dates to the extent the awards are unvested.

Warrants
 
For the Company’s warrants, the Company uses a variation of the adjusted Black-Scholes option valuation model to record the financial instruments at their relative fair values at issuance. The warrants issued with the Company’s common stock in the private placement to certain accredited institutional investors on May 15, 2012, were evaluated by the Company and were recorded at their relative fair value as a component of equity at the date of issuance.

Income Taxes
 
The Company operates and has elected to be taxed as a REIT commencing with its taxable year ended December 31, 2012. Accordingly, the Company will generally not be subject to corporate U.S. federal or state income tax to the extent that the Company makes qualifying distributions to stockholders, and provided that the Company satisfies, on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution and stock ownership tests. If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, the Company will be subject to U.S. 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 Company lost its REIT qualification. Accordingly, the failure to qualify as a REIT could have a material adverse impact in the Company’s results of operations and amounts available for distribution to stockholders.
 
The dividends paid deduction for qualifying dividends paid to stockholders is computed using the Company’s taxable income as opposed to net income reported in the Consolidated Statements of Operations. Taxable income, generally, will differ from net income reported in the Consolidated Statements of Operations because the determination of taxable income is based on tax regulations and not GAAP.
 
The Company may create and elect to treat certain subsidiaries as Taxable REIT Subsidiaries ("TRS"). In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business. A domestic TRS is subject to U.S. federal, state and local corporate income taxes, and for 2017 its value may not exceed 25% of the value of the Company; however, commencing in taxable year 2018 its value may not exceed 20% of the value of the Company. If the TRS generates net income it may declare dividends to the Company, which will be included in the Company’s taxable income and necessitate a distribution to its stockholders. Conversely, if the Company retains earnings at the TRS level, no distribution is required and it can increase book equity of the consolidated entity. As of June 30, 2017, the Company has a single wholly-owned subsidiary which it has elected to treat as a domestic TRS.

Current and deferred taxes are recorded on earnings (losses) recognized by the Company's TRS. Deferred income tax assets and liabilities are calculated based upon temporary differences between the Company's U.S. GAAP consolidated financial statements and the federal and state basis of assets and liabilities as of the Consolidated Balance Sheet date. The Company evaluates the realizability of its deferred tax assets and recognizes a valuation allowance if, based on available evidence, it is more likely than not that some or all of its deferred tax assets will not be realized. In evaluating the realizability of the deferred tax asset, the Company will consider the expected future taxable income, existing and projected book to tax differences as well as tax planning strategies. This analysis is inherently subjective, as it is based on forecasted earning and business and economic activity. Changes in estimates of deferred tax asset realizability, if any, are included in "Income tax provision" in the Consolidated Statements of Operations.

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As a REIT, if the Company fails to distribute in any calendar year (subject to specific timing rules for certain dividends paid in January) at least the sum of (i) 85% of its ordinary income for such year, (ii) 95% of its capital gain net income for such year, and (iii) any undistributed taxable income from the prior year, the Company would be subject to a non-deductible 4% excise tax on the excess of such required distribution over the sum of (i) the amounts actually distributed and (ii) the amounts of income retained and on which the Company has paid corporate income tax.
  
Accounting standards applicable to emerging growth companies
 
The JOBS Act contains provisions that relax certain requirements for “emerging growth companies”, which includes the Company. For as long as the Company is an emerging growth company, which may be up to five full fiscal years, unlike other public companies, the Company will not be required to: (i) comply with any new or revised financial accounting standards applicable to public companies until such standards are also applicable to private companies under Section 102(b)(1) of the JOBS Act; (ii) provide an auditor’s attestation report on management’s assessment of the effectiveness of the Company’s system of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act; (iii) comply with any new requirements adopted by the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer; or (iv) comply with any new audit rules adopted by the PCAOB after April 5, 2012, unless the SEC determines otherwise. The Company currently takes advantage of some of these exemptions. The Company’s qualification for remaining an emerging growth company under the five full fiscal years expires on December 31, 2017. However, the Company will no longer qualify for such exemption earlier than that date if its gross revenue for any year equals or exceeds $1.0 billion, the Company issues more than $1.0 billion in non-convertible debt during the three previous years, or if the Company is deemed to be a large accelerated filer. The Company has not elected to use the extended transition period for complying with any new or revised financial accounting standards.
 
Recent accounting pronouncements
 
Accounting Standards Adopted in 2017

In March 2016, the FASB issued ASU 2016-9, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The guidance changes the accounting for certain aspects of share-based payments to employees. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital pools. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis.  For a public company, the standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.   The Company does not have direct employees and is externally managed; therefore, the 2017 adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

Accounting Standards to be Adopted in Future Periods
 
In May 2014, the FASB issued ASU 2014-9, “Revenue from Contracts with Customers (Topic 606).” The guidance changes an entity’s recognition of revenue from contracts with customers.  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  In addition, the new guidance requires improved disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In March 2016, the FASB issued implementation guidance which clarifies principal versus agent considerations in reporting revenue gross versus net (ASU 2016-8). In April 2016, the FASB issued implementation guidance which clarifies the identification of performance obligations (ASU 2016-10). In May 2016, the FASB issued amendments that affect only the narrow aspects of Topic 606 (ASU2016-12). In applying the new guidance, an entity may use either a retrospective approach to each prior reporting period or a retrospective approach with the cumulative effect recognized at the date of initial application. For a public company, the standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is evaluating the new guidance and does not expect it to have a material impact on the Company’s consolidated financial statements. The Company has not yet determined the method by which it will adopt the standard in 2017.

In January 2016, the FASB issued ASU 2016-1, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The guidance improves certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.  The standard is effective for a public company for fiscal years beginning

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after December 15, 2017, and for interim periods within those fiscal years.   The Company is evaluating the new guidance and does not expect it to have a material impact on the Company's consolidated financial statements when adopted. It will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption.  The guidance related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist at the date of adoption.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The guidance requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected by deducting an allowance for credit losses from the amortized cost basis of the financial assets. For available-for-sale debt securities, the new guidance aligns the income statement recognition of credit losses with the reporting period in which changes occur by recording credit losses through an allowance rather than a write-down and allowing subsequent reversals in credit loss estimates to be recognized in current income. The measurement of expected credit losses will be based on historical experience, current conditions and reasonable and supportable forecasts. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. For a public company, the standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption will be permitted for fiscal years beginning after December 15, 2018. The guidance should be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. For certain assets, a prospective transition approach is required. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements when adopted.

In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments (Topic 230)." The guidance is intended to reduce diversity in practice in how certain transactions are classified on the statement of cash flows. The Company is required to adopt the new guidance in the first quarter of 2018. Early adoption is permitted, provided that all of the amendments are adopted at the same time. The Company is currently assessing the impact that this guidance and do not expect it will have a material impact on its consolidated financial statements when adopted.

 In November 2016, the FASB issued ASU 2016-18 "Statement of Cash Flows (Topic 230): Restricted Cash, a consensus of the FASB's Emerging Issues Task Force." The guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents as well as disclose information about the nature of the restrictions on its cash and cash equivalents. For public business entities, the guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The guidance should be applied using a retrospective transition method to each period presented. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements and does not believe it will have a material impact when adopted.

In January 2017, the FASB issued ASU 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of a Business." The amendments in this update provide a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this update (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. For public business entities, the guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The guidance should be applied prospectively on or after the effective date. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements however we do not believe it will have a material impact when adopted.

In May 2017, the FASB issued ASU 2017-09 "Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting." The amendments in this update provide guidance about which changes to the terms or conditions of a shared-based payment award require an entity to apply modification accounting in Topic 718. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The guidance should be applied prospectively to an award modified on or after the adoption date. The Company is currently assessing the impact that this guidance will have on its consolidated financial statements, however the guidance when adopted will not have a material impact on the financial statements.

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Note 3 — Fair Value of Financial Instruments
 
The following tables present the Company’s financial instruments carried at fair value as of June 30, 2017 and December 31, 2016, based upon the valuation hierarchy (dollars in thousands):
 
 
June 30, 2017
 
Fair Value
 
Level I
 
Level II
 
Level III
 
Total
Assets
 

 
 

 
 

 
 

Agency RMBS:
 

 
 

 
 

 
 

20-Year mortgage
$
—

 
$
166,923

 
$
—

 
$
166,923

30-Year mortgage
—

 
566,040

 
—

 
566,040

40-Year mortgage
—

 
99,075

 
—

 
99,075

Agency RMBS Interest-Only Strips
—

 
15,174

 
—

 
15,174

Agency RMBS Interest-Only Strips accounted for as derivatives, included in MBS
—

 
12,053

 
—

 
12,053

Agency CMBS
—

 
1,287,773

 
—

 
1,287,773

Agency CMBS Interest-Only Strips accounted for as derivatives, included in MBS
—

 
6,317

 
—

 
6,317

Subtotal Agency MBS
—

 
2,153,355

 
—

 
2,153,355

 
 
 
 
 
 
 
 
Non-Agency RMBS
—

 
49,333

 
14,326

 
63,659

Non-Agency CMBS
—

 
298,183

 
—

 
298,183

Subtotal Non-Agency MBS
—

 
347,516

 
14,326

 
361,842

 
 
 
 
 
 
 
 
Other securities
—

 
110,631

 
22,405

 
133,036

Total mortgage-backed securities and other securities
—

 
2,611,502

 
36,731

 
2,648,233

 
 
 
 
 
 
 
 
Residential Whole-Loans
—

 
—

 
203,540

 
203,540

Securitized commercial loan
—

 
—

 
24,875

 
24,875

Derivative assets
736

 
7,277

 
—

 
8,013

Total Assets
$
736

 
$
2,618,779

 
$
265,146

 
$
2,884,661

 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

Derivative liabilities
$
245

 
$
1,800

 
$
329

 
$
2,374

Securitized debt
—

 
—

 
10,945

 
10,945

Total Liabilities
$
245

 
$
1,800

 
$
11,274

 
$
13,319


19
Table of Contents

 
December 31, 2016
 
Fair Value
 
Level I
 
Level II
 
Level III
 
Total
Assets
 

 
 

 
 

 
 

Agency RMBS:
 

 
 

 
 

 
 

20-Year mortgage
$
—

 
$
498,470

 
$
—

 
$
498,470

30-Year mortgage
—

 
935,207

 
—

 
935,207

Agency RMBS Interest-Only Strips
—

 
19,790

 
—

 
19,790

Agency RMBS Interest-Only Strips accounted for as derivatives, included in MBS
—

 
16,503

 
—

 
16,503

Agency CMBS
—

 
290,605

 
73,059

 
363,664

Agency CMBS Interest-Only Strips
—

 
231

 
—

 
231

Agency CMBS Interest-Only Strips accounted for as derivatives, included in MBS
—

 
7,729

 
—

 
7,729

Subtotal Agency MBS
—

 
1,768,535

 
73,059

 
1,841,594

 
 
 
 
 
 
 
 
Non-Agency RMBS
—

 
240,422

 
619

 
241,041

Non-Agency RMBS Interest-Only Strips
—

 
—

 
64,116

 
64,116

Non-Agency RMBS Interest-Only Strips accounted for as derivatives, included in MBS
—

 
—

 
3,085

 
3,085

Non-Agency CMBS
—

 
351,163

 
7,756

 
358,919

Subtotal Non-Agency MBS
—

 
591,585

 
75,576

 
667,161

 
 
 
 
 
 
 
 
Other securities
—

 
36,406

 
31,356

 
67,762

Total mortgage-backed securities and other securities
—

 
2,396,526

 
179,991

 
2,576,517

 
 
 
 
 
 
 
 
Residential Whole-Loans
—

 
—

 
192,136

 
192,136

Securitized commercial loan
—

 
—

 
24,225

 
24,225

Derivative assets
71

 
20,500

 
—

 
20,571

Total Assets
$
71

 
$
2,417,026

 
$
396,352

 
$
2,813,449

 
 
 
 
 
 
 
 
Liabilities
 

 
 

 
 

 
 

Derivative liabilities
$
2,487

 
$
177,998

 
$
1,673

 
$
182,158

Securitized debt
—

 
—

 
10,659

 
10,659

Total Liabilities
$
2,487

 
$
177,998

 
$
12,332

 
$
192,817

 
When available, the Company uses quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, the Company will use independent pricing services and if the independent pricing service cannot price a particular asset or liability, the Company will obtain third party broker quotes.  The Manager’s pricing group, which functions independently from its portfolio management personnel, reviews the third party broker quotes by comparing the broker quotes for reasonableness to alternate sources when available.  If independent pricing service, or third party broker quotes are not available, the Company determines the fair value of the securities using valuation techniques that use, when possible, current market-based or independently-sourced market parameters, such as interest rates and when applicable, estimates of prepayments and credit losses.
 
Mortgage-backed securities and other securities
 
In determining the proper fair value hierarchy or level, all securities are initially classified in Level III.  The Company further determined, given the amount of available observable market data, Agency RMBS should be classified in Level II.  For Non-Agency RMBS, CMBS and other securities, to determine whether a security should be a Level II, the securities are grouped by security type and the Manager reviews the internal trade history, for the quarter, for each security type. If there is sufficient

20
Table of Contents

trade data above a predetermined threshold of a security type, the Manager determines it has sufficient observable market data and the security will be categorized as a Level II.
 
Values for the Company’s securities are based upon prices obtained from independent third party pricing services. The valuation methodology of the third party pricing services incorporates a commonly used market pricing method. Depending on the type of asset and the underlying collateral, the primary inputs to the model include yields for TBAs, Agency RMBS, the U.S. Treasury market and floating rate indices such as LIBOR, the Constant Maturity Treasury rate and the prime rate as a benchmark yield. In addition, the model may incorporate the current weighted average maturity and additional pool level information such as prepayment speeds, default frequencies and default severities, if applicable. When the third party pricing service cannot adequately price a particular security, the Company utilizes a broker’s quote which is reviewed for reasonableness by the Manager’s pricing group.

Residential Whole-Loans
 
Values for the Company’s residential whole-loans are based upon prices obtained from an independent third party pricing service that specializes in whole loans, utilizing a trade based valuation model. Their valuation methodology incorporates commonly used market pricing methods, including loan to value (“LTV”), debt to income, maturity, interest rates, collateral location, and unpaid principal balance, prepayment penalties, FICO scores, lien position and times late. Due to the inherent uncertainty of such valuation, the fair values established for residential loans held by the Company may differ from the fair values that would have been established if a readily available market existed for these loans. Accordingly, the Company’s loans are classified as Level III.
 
Securitized commercial loan and securitized debt
 
Values for the Company’s securitized commercial loan and securitized debt are based on which fair value is more observable of the fair value of the securitized commercial loan or the securitized debt.  Since there is an extremely limited market for the securitized commercial loan, the Company determined the fair value of the securitized debt was more observable.  The fair value of the securitized debt was based upon a third party broker quote, which is validated by the Manager’s pricing group. Due to the inherent uncertainty of such valuation the Company classifies its securitized commercial loan and securitized debt as Level III.
 
Derivatives
 
Values for the Company's derivatives are based upon prices from third party pricing services, whose pricing is subject to review by the Manager’s pricing committee. In valuing its over-the-counter interest rate derivatives, such as swaps and swaptions, its currency derivatives, such as swaps and forwards and credit derivatives such as total return swaps, the Company considers the creditworthiness of both the Company and its counterparties, along with collateral provisions contained in each derivative agreement, from the perspective of both the Company and its counterparties. No credit valuation adjustment was made in determining the fair value of interest rate and/or currency derivatives for the periods ended June 30, 2017 and December 31, 2016.
 
The Company performs quarterly reviews of the independent third party pricing data. These reviews may consist of a review of the daily change in the prices provided by the independent pricing vendor which exceed established tolerances or comparisons to executed transaction prices, utilizing the Manager’s pricing group.  The Manager’s pricing group, which functions independently from its portfolio management personnel, reviews the price differences or changes in price by comparing the vendor price to alternate sources including other independent pricing services or broker quotations.  If the price change or difference cannot be corroborated, the Manager’s pricing group consults with the portfolio management team for market color in reviewing such pricing data as warranted.  To the extent that the Manager has information, typically in the form of broker quotations that would indicate that a price received from the independent pricing service is outside of a tolerance range, the Manager generally challenges the independent pricing service price.


21
Table of Contents

The following tables present additional information about the Company’s financial instruments which are measured at fair value on a recurring basis for which the Company has utilized Level III inputs to determine fair value:
 
 
Three months ended June 30, 2017
$ in thousands
Mortgage-backed securities
and other securities
 
Residential 
Whole-Loans
 
Securitized 
commercial 
loan
 
Securitized debt
 
Derivative liability
Beginning balance
$
87,327

 
$
215,800

 
$
24,500

 
$
10,780

 
$
459

Transfers into Level III from Level II
—

 
—

 
—

 
—

 
—

Transfers from Level III into Level II
(50,999
)
 
—

 
—

 
—

 
—

Purchases
131

 
—

 
—

 
—

 
—

Sales and settlements
—

 
—

 
—

 
—

 
(14,711
)
Principal repayments
(1,713
)
 
(12,220
)
 
—

 
—

 
—

Total net gains / (losses) included in net income
 
 
 
 
 
 
 
 
 
Realized gains/(losses), net
—

 
—

 
—

 
—

 
14,711

Other than temporary impairment
(438
)
 
—

 
—

 
—

 
—

Unrealized gains/(losses), net on assets(1)
1,609

 
260

 
375

 
—

 
—

Unrealized (gains)/losses, net on liabilities (2)
—

 
—

 
—

 
165

 
(130
)
Premium and discount amortization, net
814

 
(300
)
 
—

 
—

 
—

Ending balance
$
36,731

 
$
203,540

 
$
24,875

 
$
10,945

 
$
329

 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2016
$ in thousands
Mortgage-backed securities
and other securities
 
Residential 
Whole-Loans
 
Securitized 
commercial 
loan
 
Securitized debt
 
Derivative liability
Beginning balance
$
233,006

 
$
201,267

 
$
23,675

 
$
10,417

 
$
866

Transfers into Level III from Level II
—

 
—

 
—

 
—

 
—

Transfers from Level III into Level II
—

 
—

 
—

 
—

 
—

Purchases
—

 
—

 
—

 
—

 
—

Sales and settlements
—

 
—

 
—

 
—

 
—

Principal repayments
(7,066
)
 
(11,114
)
 
—

 
—

 
—

Total net gains / (losses) included in net income
 

 
 

 
 

 
 

 
 

Realized gains/(losses), net
(244
)
 
—

 
—

 
—

 
—

Other than temporary impairment
(992
)
 
—

 
—

 
—

 
—

Unrealized gains/(losses), net on assets(1)
5,139

 
37

 
13

 
—

 
—

Unrealized (gains)/losses, net on liabilities (2)
—

 
—

 
—

 
6

 
1,294

Premium and discount amortization, net
(3,017
)
 
(494
)
 
—

 
—

 
—

Ending balance
$
226,826

 
$
189,696

 
$
23,688

 
$
10,423

 
$
2,160

 
(1)
For Mortgage-backed securities and other securities, Residential Whole-Loans and Securitized commercial loans classified as Level III at June 30, 2017, the Company recorded gross unrealized gains of approximately $1.0 million, $646 thousand and $375 thousand, respectively, and gross unrealized losses of approximately $0, $168 thousand and $0, respectively, for the three months ended June 30, 2017. For Mortgage-backed securities and other securities, Residential Whole-Loans and Securitized commercial loans classified as Level III at June 30, 2016, the Company recorded gross unrealized gains of approximately $7.1 million, $388 thousand and $13 thousand, respectively, and gross unrealized losses of approximately $2.0 million, $29 thousand and $0, respectively, for the three months ended June 30, 2016. These gains and losses are included in "Unrealized gain (loss), net" in the Consolidated Statements of Operations.
(2)
For securitized debt and derivative liability classified as Level III at June 30, 2017, the Company recorded gross unrealized gains of $0 and $130 thousand, respectively, and gross unrealized losses of $165 thousand and $0, respectively, for the three months ended June 30, 2017. For securitized debt and derivative liability classified as Level III at June 30, 2016, the Company recorded gross unrealized gains of approximately $0 and $0, respectively, and gross unrealized losses of $6.0 thousand and $1.3 million, respectively, for the three months ended June 30, 2016. These gains and losses are included in "Unrealized gain (loss), net" and "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations, respectively.


22
Table of Contents

 
Six months ended June 30, 2017
$ in thousands
Mortgage-backed securities
and other securities
 
Residential 
Whole-Loans
 
Securitized 
commercial 
loan
 
Securitized debt
 
Derivative liability
Beginning balance
$
179,991

 
$
192,136

 
$
24,225

 
$
10,659

 
$
1,673

Transfers into Level III from Level II
15,610

 
—

 
—

 
—

 
—

Transfers from Level III into Level II
(90,376
)
 
—

 
—

 
—

 
—

Purchases
—

 
35,671

 
—

 
—

 
—

Sales and settlements
(60,132
)
 
—

 
—

 
—

 
(14,197
)
Principal repayments
(2,247
)
 
(24,357
)
 
—

 
—

 
—

Total net gains / (losses) included in net income
 
 
 
 
 
 
 
 
 
Realized gains/(losses), net
2,623

 
—

 
—

 
—

 
14,197

Other than temporary impairment
(1,702
)
 
—

 
—

 
—

 
—

Unrealized gains/(losses), net on assets(1)
(7,915
)
 
638

 
650

 
—

 
—

Unrealized (gains)/losses, net on liabilities(2)
—

 
—

 
—

 
286

 
(1,344
)
Premium and discount amortization, net
879

 
(548
)
 
—

 
—

 
—

Ending balance
$
36,731

 
$
203,540

 
$
24,875

 
$
10,945

 
$
329

 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2016
$ in thousands
Mortgage-backed securities
and other securities
 
Residential 
Whole-Loans
 
Securitized 
commercial 
loan
 
Securitized debt
 
Derivative liability
Beginning balance
$
466,336

 
$
218,538

 
$
25,000

 
$
11,000

 
$
—

Transfers into Level III from Level II
—

 
—

 
—

 
—

 
—

Transfers from Level III into Level II
(158,566
)
 
—

 
—

 
—

 
—

Purchases
94

 
—

 
—

 
—

 
—

Sales and settlements
(68,910
)
 
—

 
—

 
—

 
—

Principal repayments
(11,087
)
 
(28,335
)
 
—

 
—

 
—

Total net gains / (losses) included in net income
 
 
 
 
 
 
 
 
 
Realized gains/(losses), net
(6,435
)
 
—

 
—

 
—

 
—

Other than temporary impairment
(5,055
)
 
—

 
—

 
—

 
—

Unrealized gains/(losses), net on assets(1)
15,858

 
584

 
(1,312
)
 
—

 
—

Unrealized (gains)/losses, net on liabilities(2)
—

 
—

 
—

 
(577
)
 
2,160

Premium and discount amortization, net
(5,409
)
 
(1,091
)
 
—

 
—

 
—

Ending balance
$
226,826

 
$
189,696

 
$
23,688

 
$
10,423

 
$
2,160

 
    

(1)
For Mortgage-backed securities and other securities, Residential Whole-Loans and Securitized commercial loans classified as Level III at June 30, 2017, the Company recorded gross unrealized gains of approximately $777 thousand, $1.2 million and $650 thousand, respectively, and gross unrealized losses of approximately $0, $397 thousand and $0, respectively, for the six months ended June 30, 2017. For Mortgage-backed securities and other securities, Residential Whole-Loans and Securitized commercial loans classified as Level III at June 30, 2016, the Company recorded gross unrealized gains of approximately $21.9 million, $1.1 million and $0, respectively, and gross unrealized losses of approximately $2.3 million, $240 thousand and $1.3 million, respectively, for the six months ended June 30, 2016. These gains and losses are included in "Unrealized gain (loss), net" in the Consolidated Statements of Operations.
(2)
For securitized debt and derivative liability classified as Level III at June 30, 2017, the Company recorded gross unrealized gains of approximately $0 and $1.3 million, respectively, and gross unrealized losses of approximately $286 thousand and $0, respectively, for the six months ended June 30, 2017. For securitized debt and derivative liability classified as Level III at June 30, 2016, the Company recorded gross unrealized gains of approximately $577 thousand and $0, respectively, and gross unrealized losses of $0 thousand and $2.2 million, respectively, for the six months ended June 30, 2016. These gains and losses are included in "Unrealized gain (loss), net" and "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.

Transfers between hierarchy levels for the six months ended June 30, 2017 and June 30, 2016 were based on the availability of sufficient observable inputs to meet Level II versus Level III criteria.  The leveling of these assets was based on information received from a third party pricing service which, along with the back-testing of historical sales transactions performed by the Manager provided the sufficient observable data for the movement from Level III to Level II. The Company did not have transfers between Level I and Level II for the six months ended June 30, 2017 and June 30, 2016.

23
Table of Contents

 
Other Fair Value Disclosures
 
"Due from counterparties" and "Due to counterparties" in the Company’s Consolidated Balance Sheets are reflected at cost which approximates fair value.
 
The fair value of the Residential Bridge Loans and repurchase agreements is based on a net present value technique. This method discounts future estimated cash flows using rates the Company determined best estimates current market interest rates that would be offered for loans with similar characteristics and credit quality. The use of different market assumptions or estimation methodologies could have a material effect on the fair value amounts. At June 30, 2017, the Company’s borrowings under repurchase agreements and its Residential Bridge Loans had a carrying value of approximately $2.8 billion and $64.9 million, respectively, which approximates their fair value. 


24
Table of Contents

Note 4 – Mortgage-Backed Securities and other securities
 
The following tables present certain information about the Company’s investment portfolio at June 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
June 30, 2017
 
 
Principal
Balance
 
Unamortized
Premium
(Discount),
net
 
Discount
Designated as
Credit Reserve
and OTTI
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value
 
Net
Weighted
Average
Coupon (1)
 
Agency RMBS:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
20-Year mortgage
$
157,450

 
$
8,932

 
$
—

 
$
166,382

 
$
1,473

 
$
(932
)
 
$
166,923

 
3.9
%
 
30-Year mortgage
526,655

 
40,287

 
—

 
566,942

 
4,444

 
(5,346
)
 
566,040

 
4.2
%
 
40-Year mortgage
96,259

 
1,147

 
—

 
97,406

 
1,669

 
—

 
99,075

 
3.5
%
 
Agency RMBS Interest-Only Strips (2)
N/A

 
N/A

 
N/A

 
14,349

 
1,077

 
(252
)
 
15,174

 
2.9
%
(2)
Agency RMBS Interest-Only Strips, accounted for as derivatives (2) (3)
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
12,053

 
3.0
%
(2)
Agency CMBS
1,285,278

 
(11,992
)
 
—

 
1,273,286

 
16,329

 
(1,842
)
 
1,287,773

 
2.9
%
 
Agency CMBS Interest-Only Strips accounted for as derivatives(2) (3)
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
6,317

 
0.6
%
(2)
Subtotal Agency MBS
2,065,642

 
38,374

 
—

 
2,118,365

 
24,992

 
(8,372
)
 
2,153,355

 
3.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Agency RMBS
82,966

 
(1,455
)
 
(21,995
)
 
59,516

 
4,143

 
—

 
63,659

 
3.0
%
 
Non-Agency CMBS
397,837

 
(65,666
)
 
(22,430
)
 
309,741

 
3,366

 
(14,924
)
 
298,183

 
4.8
%
 
Subtotal Non-Agency MBS
480,803

 
(67,121
)
 
(44,425
)
 
369,257

 
7,509

 
(14,924
)
 
361,842

 
4.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other securities (4)
102,514

 
5,529

 
(5,405
)
 
125,712

 
7,993

 
(669
)
 
133,036

 
7.0
%
 
Total
$
2,648,959

 
$
(23,218
)
 
$
(49,830
)
 
$
2,613,334

 
$
40,494

 
$
(23,965
)
 
$
2,648,233

 
3.4
%
 


25
Table of Contents

 
December 31, 2016
 
 
Principal
Balance
 
Unamortized
Premium
(Discount),
net
 
Discount 
Designated as
Credit Reserve
and OTTI
 
Amortized
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Estimated
Fair Value
 
Net
Weighted
Average
Coupon (1)
 
Agency RMBS:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
20-Year mortgage
$
470,975

 
$
25,741

 
$
—

 
$
496,716

 
$
3,689

 
$
(1,935
)
 
$
498,470

 
3.9
%
 
30-Year mortgage
878,599

 
63,608

 
—

 
942,207

 
5,209

 
(12,209
)
 
935,207

 
4.1
%
 
Agency RMBS Interest-Only Strips (2)
N/A

 
N/A

 
N/A

 
18,810

 
1,301

 
(321
)
 
19,790

 
3.0
%
(2)
Agency RMBS Interest-Only Strips, accounted for as derivatives (2) (3)
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
16,503

 
3.2
%
(2)
Agency CMBS
377,286

 
(15,383
)
 
—

 
361,903

 
2,021

 
(260
)
 
363,664

 
2.6
%
 
Agency CMBS Interest-Only Strips(2)
N/A

 
N/A

 
N/A

 
210

 
21

 
—

 
231

 
4.3
%
(2)
Agency CMBS Interest-Only Strips accounted for as derivatives (2) (3)
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
7,729

 
0.6
%
(2)
Subtotal Agency MBS
1,726,860

 
73,966

 
—

 
1,819,846

 
12,241

 
(14,725
)
 
1,841,594

 
3.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Agency RMBS
340,759

 
(294
)
 
(108,399
)
 
232,066

 
11,210

 
(2,235
)
 
241,041

 
4.5
%
 
Non-Agency RMBS Interest- Only Strips (2)
N/A

 
N/A

 
N/A

 
55,754

 
8,362

 
—

 
64,116

 
5.6
%
(2)
Non-Agency RMBS Interest-Only Strips, accounted for as derivatives (2) (3)
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
N/A

 
3,085

 
4.6
%
(2)
Non-Agency CMBS
473,024

 
(69,436
)
 
(17,787
)
 
385,801

 
3,164

 
(30,046
)
 
358,919

 
5.0
%
 
Subtotal Non-Agency MBS
813,783

 
(69,730
)
 
(126,186
)
 
673,621

 
22,736

 
(32,281
)
 
667,161

 
5.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other securities (4)
44,838

 
4,435

 
(4,298
)
 
68,085

 
1,271

 
(1,594
)
 
67,762

 
8.2
%
 
Total
$
2,585,481

 
$
8,671

 
$
(130,484
)
 
$
2,561,552

 
$
36,248

 
$
(48,600
)
 
$
2,576,517