Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
FORM 10-Q
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended SeptemberJune 30, 20172023

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:  001-35543
logob35.gif
Western Asset Mortgage Capital Corporation
(Exact nameName of Registrant as specifiedSpecified in its charter)Its Charter)

Delaware27-0298092
(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).Act. 

Large accelerated fileroAccelerated fileroý
Non-accelerated filer
(Do not check if a smaller reporting company)
oSmaller reporting companyoý
Emerging growth companyxo
 
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. ýo


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.Yes ☐ No ý
 

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common Stock, $0.01 par valueWMCNew York Stock Exchange

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


As ofNovember 7, 2017, August 9, 2023 there were 41,919,8016,038,012 shares, par value $0.01, of the registrant’s common stock issued and outstanding.



TABLE OF CONTENTS
Page
PartPART I — FINANCIAL INFORMATION
2
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PartPART II — OTHER INFORMATION
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10992
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11296





Part I
ITEM I. Financial StatementsFINANCIAL STATEMENTS


Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands—except share and per share data)
(Unaudited)
 September 30,
2017		 December 31, 2016
Assets: 
  
Cash and cash equivalents$36,669
 $46,172
Mortgage-backed securities and other securities, at fair value ($3,397,699 and $2,261,430 pledged as collateral, at fair value, respectively)3,696,580
 2,576,517
Residential Whole-Loans, at fair value ($191,439 and $192,136 pledged as collateral, at fair value, respectively)191,439
 192,136
Residential Bridge Loans ($54,912 and $0 pledged as collateral, respectively)54,912
 —
Securitized commercial loan, at fair value24,952
 24,225
Investment related receivable9,551
 33,600
Accrued interest receivable13,025
 18,812
Due from counterparties88,932
 243,585
Derivative assets, at fair value5,011
 20,571
Other assets4,134
 398
Total Assets (1)
$4,125,205
 $3,156,016
    
Liabilities and Stockholders’ Equity: 
  
Liabilities: 
  
Borrowings under repurchase agreements, net$3,336,256
 $2,155,644
Securitized debt, at fair value10,979
 10,659
Accrued interest payable4,859
 16,041
Investment related payables296,317
 341,458
Due to counterparties2,320
 740
Derivative liability, at fair value986
 182,158
Accounts payable and accrued expenses2,588
 3,255
Payable to affiliate1,920
 2,584
Dividend payable12,995
 12,995
Total Liabilities (2)
3,669,220
 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, respectively419
 419
Preferred stock, $0.01 par value, 100,000,000 shares authorized and no shares outstanding—
 —
Additional paid-in capital765,898
 765,042
Retained earnings (accumulated deficit)(310,332) (334,979)
Total Stockholders’ Equity455,985
 430,482
Total Liabilities and Stockholders’ Equity$4,125,205
 $3,156,016
 June 30, 2023December 31, 2022
Assets:  
Cash and cash equivalents$17,375 $18,011 
Restricted cash— 248 
Agency mortgage-backed securities, at fair value ($278 and $249 pledged as collateral, at fair value, respectively)838 767 
Non-Agency mortgage-backed securities, at fair value ($73,572 and $100,115 pledged as collateral, at fair value, respectively)82,686 109,122 
Other securities, at fair value ($15,375 and $27,262 pledged as collateral, at fair value, respectively)16,615 27,262 
Residential Whole Loans, at fair value ($1,036,385 and $1,089,914 pledged as collateral, at fair value, respectively)1,037,381 1,091,145 
Residential Bridge Loans, at fair value2,782 2,849 
Securitized Commercial Loan, at fair value1,025,321 1,085,103 
Commercial Loans, at fair value ($66,059 and $66,864 pledged as collateral, at fair value, respectively)78,806 90,002 
Investment related receivable8,806 5,960 
Interest receivable10,895 11,330 
Due from counterparties1,302 6,574 
Derivative assets, at fair value— 1 
Other assets4,542 4,860 
Total Assets (1)
$2,287,349 $2,453,234 
Liabilities and Equity:  
Liabilities:  
Repurchase agreements, net$147,860 $193,117 
Convertible senior unsecured notes, net84,341 83,522 
Securitized debt, net ($1,629,629 and $1,719,865 at fair value and $115,793 and $128,217 held by affiliates, respectively)1,944,906 2,058,684 
Interest payable (includes $635 and $655 on securitized debt held by affiliates, respectively)10,216 12,794 
Due to counterparties— 300 
Derivative liability, at fair value68 61 
Accounts payable and accrued expenses5,246 3,201 
Payable to affiliate3,878 4,028 
Dividend payable2,113 2,415 
Other liabilities— 300 
Total Liabilities(2)
2,198,628 2,358,422 
Commitments and contingencies (Note 15)
Stockholders’ Equity:  
Common stock: $0.01 par value, 50,000,000 shares authorized, 6,038,012 and 6,038,012 outstanding, respectively60 60 
Preferred stock, $0.01 par value, 10,000,000 shares authorized and no shares outstanding— — 
Treasury stock, at cost, 57,981 and 57,981 shares held, respectively(1,665)(1,665)
Additional paid-in capital919,511 919,238 
Retained earnings (accumulated deficit)(829,193)(822,829)
Total Stockholders’ Equity88,713 94,804 
Non-controlling interest8 8 
Total Equity88,721 94,812 
Total Liabilities and Equity$2,287,349 $2,453,234 
 See notes to unaudited consolidated financial statements.

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


 September 30,
2017		 December 31, 2016
(1) Assets of consolidated VIEs included in the total assets above:
 
  
Residential Whole-Loans, at fair value ($191,439 and $192,136 pledged as collateral, at fair value, respectively)$191,439
 $192,136
Residential Bridge Loans ($54,912 and $0 pledged as collateral, respectively)54,912
 —
Securitized commercial loan, at fair value24,952
 24,225
Investment related receivable7,178
 1,241
Accrued interest receivable2,529
 1,622
Total assets of consolidated VIEs$281,010
 $219,224
    
(2) Liabilities of consolidated VIEs included in the total liabilities above:
 
  
Securitized debt, at fair value$10,979
 $10,659
Accrued interest payable82
 85
Accounts payable and accrued expenses157
 2
Total liabilities of consolidated VIEs$11,218
 $10,746

June 30, 2023December 31, 2022
(1) Assets of consolidated VIEs included in the total assets above:
  
Restricted cash$— $248 
Residential Whole Loans, at fair value ($1,036,385 and $1,089,914 pledged as collateral, at fair value, respectively)1,037,381 1,091,145 
Residential Bridge Loans, at fair value2,782 2,849 
Securitized Commercial Loan, at fair value1,025,321 1,085,103 
Commercial Loans, at fair value12,747 14,362 
Investment related receivable8,760 5,914 
Interest receivable9,798 10,182 
Other assets— 509 
Total assets of consolidated VIEs$2,096,789 $2,210,312 
(2) Liabilities of consolidated VIEs included in the total liabilities above:
  
Securitized debt, net ($1,629,629 and $1,719,865 at fair value and $115,793 and $128,217 held by affiliates, respectively)$1,944,906 $2,058,684 
Interest payable (includes $635 and $655 on securitized debt held by affiliates, respectively)7,971 8,303 
Accounts payable and accrued expenses60 43 
Other liabilities— 248 
Total liabilities of consolidated VIEs$1,952,937 $2,067,278 
See notes to unaudited consolidated financial statements.



2

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, 2023For the three months ended June 30, 2022For the six months ended June 30, 2023For the six months ended June 30, 2022
Net Interest Income  
Interest income$40,222 $39,577 $81,079 $75,219 
Interest expense (includes $3,265, $3,476, $6,583, and $6,919 on securitized debt held by affiliates, respectively)36,212 33,342 72,714 64,701 
Net Interest Income4,010 6,235 8,365 10,518 
Other Income (Loss)  
Realized loss, net(1,099)(45,661)(83,917)(33,516)
Unrealized gain (loss), net(6,854)16,185 83,462 (22,718)
Gain on derivative instruments, net1,014 4,781 64 11,717 
Other, net186 (46)243 (191)
Other Loss(6,753)(24,741)(148)(44,708)
Expenses  
Management fee to affiliate958 1,002 1,934 2,102 
Other operating expenses293 262 579 558 
Transaction costs1,989 344 2,632 2,955 
General and administrative expenses: 
Compensation expense504 130 1,015 628 
Professional fees1,550 1,552 2,965 2,808 
Other general and administrative expenses605 637 1,154 1,373 
Total general and administrative expenses2,659 2,319 5,134 4,809 
Total Expenses5,899 3,927 10,279 10,424 
Loss before income taxes(8,642)(22,433)(2,062)(44,614)
Income tax provision (benefit)(12)(46)— 10 
Net loss(8,630)(22,387)(2,062)(44,624)
Net income attributable to non-controlling interest3 — 4 3,616 
Net loss attributable to common stockholders and participating securities$(8,633)$(22,387)$(2,066)$(48,240)
Net loss per Common Share — Basic$(1.44)$(3.71)$(0.35)$(8.00)
Net loss per Common Share — Diluted$(1.44)$(3.71)$(0.35)$(8.00)
 For the three months ended September 30, 2017 For the three months ended September 30, 2016 For the nine months ended September 30, 2017 For the nine months ended September 30, 2016
Net Interest Income 
  
    
Interest income$30,928
 $29,154
 $89,413
 $87,992
Interest expense12,363
 7,685
 31,507
 23,391
Net Interest Income18,565
 21,469
 57,906
 64,601
        
Other Income (Loss) 
  
    
Realized gain (loss) on sale of investments, net1,830
 1,439
 20,600
 (4,968)
Other than temporary impairment(7,225) (4,978) (19,901) (22,131)
Unrealized gain (loss), net5,249
 15,292
 35,126
 47,571
Gain (loss) on derivative instruments, net7,217
 6,121
 (16,035) (53,214)
Other, net216
 (60) 841
 (158)
Other Income (Loss)7,287
 17,814
 20,631
 (32,900)
        
Expenses 
  
    
Management fee to affiliate1,853
 2,604
 6,159
 7,945
Other operating expenses702
 188
 1,855
 809
General and administrative expenses: 
  
    
Compensation expense660
 868
 2,064
 2,254
Professional fees781
 723
 2,501
 3,947
Other general and administrative expenses244
 379
 993
 1,226
Total general and administrative expenses1,685
 1,970
 5,558
 7,427
Total Expenses4,240
 4,762
 13,572
 16,181
        
Income before income taxes21,612
 34,521
 64,965
 15,520
Income tax provision (benefit)(1,155) 2,239
 1,272
 2,239
Net income$22,767
 $32,282
 $63,693
 $13,281
        
Net income per Common Share — Basic$0.54
 $0.77
 $1.52
 $0.31
Net income per Common Share — Diluted$0.54
 $0.77
 $1.52
 $0.31
Dividends Declared per Share of Common Stock$0.31
 $0.31
 $0.93
 $1.07


See notes to unaudited consolidated financial statements.

3

Western Asset Mortgage Capital Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands—except shares and share data)
(Unaudited)
Three Months Ended June 30, 2023
 Common Stock OutstandingAdditional 
Paid-In Capital		Retained 
Earnings 
(Accumulated Deficit)		Treasury StockTotal Stockholders' EquityNon-Controlling InterestTotal Equity
SharesPar
Balance at March 31, 20236,038,012 $60 $919,368 $(818,405)$(1,665)$99,358 $7 $99,365 
Vesting of restricted stock— — 101 — — 101 — 101 
Net income (loss)— — — (8,633)— (8,633)3 (8,630)
Dividends declared on non-controlling interest— — — — — — (2)(2)
Dividends declared on common stock— — 42 (2,155)— (2,113)— (2,113)
Balance at June 30, 20236,038,012 $60 $919,511 $(829,193)$(1,665)$88,713 $8 $88,721 

Three Months Ended June 30, 2022
Common Stock Additional Paid-In Capital 
Retained Earnings 
(Accumulated Deficit)
   Common Stock OutstandingAdditional 
Paid-In Capital		Retained 
Earnings 
(Accumulated Deficit)		Treasury StockTotal Stockholders' EquityNon-Controlling InterestTotal Equity
Shares Par TotalSharesPar
Balance at December 31, 201541,919,801
 $419
 $763,283
 $(252,054) $511,648
Balance at March 31, 2022Balance at March 31, 20226,038,012 $60 $918,874 $(752,263)$(1,665)$165,006 $144 $165,150 
Equity distributionEquity distribution— — — — — — (78)(78)
Vesting of restricted stock—
 —
 1,699
 —
 1,699
Vesting of restricted stock— — 70 — — 70 — 70 
Net loss—
 —
 —
 (25,015) (25,015)Net loss— — — (22,387)— (22,387)— (22,387)
Dividends declared on non-controlling interestDividends declared on non-controlling interest— — — — — — (2)(2)
Dividends declared on common stock—
 —
 60
 (57,910) (57,850)Dividends declared on common stock— — 30 (2,445)— (2,415)— (2,415)
Balance at December 31, 201641,919,801
 $419
 $765,042
 $(334,979) $430,482
Vesting of restricted stock—
 —
 795
 —
 795
Net income—
 —
 —
 63,693
 63,693
Dividends declared on common stock—
 —
 61
 (39,046) (38,985)
Balance at September 30, 201741,919,801
 $419
 $765,898
 $(310,332) $455,985
Balance at June 30, 2022Balance at June 30, 20226,038,012 60 918,974 (777,095)(1,665)140,274 64 140,338 



See notes to unaudited consolidated financial statements.

4


Six Months Ended June 30, 2023
 Common Stock OutstandingAdditional 
Paid-In Capital		Retained 
Earnings 
(Accumulated Deficit)		Treasury StockTotal Stockholders' EquityNon-Controlling Interest 
SharesParTotal Equity
Balance at December 31, 20226,038,012 $60 $919,238 $(822,829)$(1,665)$94,804 $8 $94,812 
Vesting of restricted stock— — 201 — — 201 — 201 
Net income (loss)— — — (2,066)— (2,066)4 (2,062)
Dividends declared on non-controlling interest— — — — — — (4)(4)
Dividends declared on common stock— — 72 (4,298)— (4,226)— (4,226)
Balance at June 30, 20236,038,012 $60 $919,511 $(829,193)$(1,665)$88,713 $8 $88,721 

Six Months Ended June 30, 2022
 Common Stock OutstandingAdditional 
Paid-In Capital		Retained 
Earnings 
(Accumulated Deficit)		Treasury StockTotal Stockholders' EquityNon-Controlling Interest 
SharesParTotal Equity
Balance at December 31, 20216,038,012 $60 $918,695 $(723,981)$(1,665)$193,109 $11,220 $204,329 
Equity distribution— — — — — — (14,768)(14,768)
Vesting of restricted stock— — 235 — — 235 — 235 
Net income (loss)— — — (48,240)— (48,240)3,616 (44,624)
Dividends declared on non-controlling interest— — — — — — (4)(4)
Dividends declared on common stock— — 44 (4,874)— (4,830)— (4,830)
Balance at June 30, 20226,038,012 $60 $918,974 $(777,095)$(1,665)$140,274 $64 $140,338 


5
Table of Contents

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

 For the six months ended June 30, 2023For the six months ended June 30, 2022
Cash flows from operating activities:  
Net loss$(2,062)$(44,624)
Adjustments to reconcile net loss to net cash provided by operating activities:  
Premium amortization and (discount accretion), net640 2,599 
Interest income earned added to principal of investments(41)(75)
Amortization of deferred financing costs1,162 1,298 
Amortization of discount on convertible senior unsecured notes343 439 
Restricted stock amortization200 235 
Premium on purchase of Residential Whole Loans— (6,619)
Unrealized (gain) loss, net(83,462)22,718 
Realized loss on extinguishment of convertible senior notes— 132 
Realized gain on sale of real estate owned ("REO")— (12,198)
Unrealized gain on derivative instruments, net(57)(157)
Realized loss on investments, net83,889 45,582 
Gain on derivatives, net— (732)
Changes in operating assets and liabilities:  
Interest receivable435 (715)
Other assets318 (853)
Interest payable(2,578)468 
Accounts payable and accrued expenses2,045 (1,255)
Payable to affiliate(150)2,053 
Other liabilities(52)179 
Net cash provided by operating activities630 8,475 
Cash flows from investing activities:  
Purchase of securities(4,714)(39,952)
Proceeds from sale of securities15,324 42,287 
Proceeds from sale of REO— 54,681 
Principal repayments and basis recovered on securities20,819 2,543 
Purchase of Residential Whole Loans— (405,298)
Principal repayments on Residential Whole Loans54,651 165,236 
Proceeds from sale of Commercial Loans8,776 — 
Principal repayments on Commercial Loans1,680 4 
Principal repayments on Residential Bridge Loans1,370 366 
Net settlements of TBAs— 732 
Due from counterparties— 150 
Net cash provided by (used in) investing activities97,906 (179,251)
Cash flows from financing activities:  
Payment of offering costs— (2)
Payments on extinguishment of convertible senior unsecured notes— (10,690)
Proceeds from repurchase agreement borrowings768,290 2,838,689 
Repayments of repurchase agreement borrowings(813,547)(2,900,802)
Proceeds from securitized debt— 397,934 
Repayments of securitized debt(54,355)(156,843)
Due from counterparties, net5,272 (1,374)
Due to counterparties, net(300)360 
Decrease in other liabilities(248)(4)
Equity distributions to non-controlling interest— (14,768)
Dividends paid on common stock(4,528)(6,038)
6
 For the nine months ended September 30, 2017 For the nine months ended September 30, 2016
Cash flows from operating activities: 
  
Net income$63,693
 $13,281
Adjustments to reconcile net income to net cash provided by (used in) operating activities: 
  
Premium amortization and (discount accretion) on investments, net(2,658) 2,355
Interest income earned added to principal of securities(46) (300)
Amortization of deferred financing costs—
 135
Restricted stock amortization795
 1,351
Interest payments and basis recovered on MAC interest rate swaps358
 491
Premium on purchase of Residential Whole-Loans(354) (573)
Premium on purchase of Residential Bridge Loans(425) —
Unrealized (gain) loss, net(35,126) (47,571)
Unrealized (gain) loss on derivative instruments, net(156,098) 46,073
Other than temporary impairment19,901
 22,131
Realized (gain) loss on sale of securities, net(20,600) 4,968
(Gain) loss on derivatives, net156,655
 (40,755)
(Gain) loss on foreign currency transactions, net1
 905
Changes in operating assets and liabilities: 
  
Decrease (increase) in accrued interest receivable5,787
 (2,664)
Increase in other assets(3,736) (374)
Decrease in accrued interest payable(11,182) (2,120)
Increase (decrease) in accounts payable and accrued expenses(667) 911
Decrease in payable to affiliate(664) (305)
Net cash provided by (used in) operating activities15,634
 (2,061)
Cash flows from investing activities: 
  
Purchase of securities(2,473,379) (1,450,137)
Proceeds from sale of securities1,189,824
 1,295,969
Principal repayments and basis recovered on securities187,157
 252,076
Purchase of Residential Whole-Loans(35,323) (28,825)
Principal repayments on Residential Whole-Loans32,287
 39,597
Principal repayments on securitized commercial loan59
 —
Purchase of Residential Bridge Loans(73,565) —
Principal repayments on Residential Bridge Loans16,251
 —
Payment of premium for option derivatives(14,995) (17,951)
Premium received from option derivatives13,721
 22,707
Net settlements of TBAs3,135
 12,166
Proceeds from (Payments on) termination of futures, net(9,230) 19,253
Proceeds from sale of interest rate swaptions—
 2,075
Premium for MAC interest rate swaps, net—
 465
Interest payments and basis recovered on MAC interest rate swaps(358) (491)
Due from counterparties8,449
 (9,719)
Proceeds from termination of foreign currency swaps—
 5,351
Payments on total return swaps, net(552) 17
Premium for interest rate swaptions, net(115) —
Net cash (used in) provided by investing activities(1,156,634) 142,553
    
Cash flows from financing activities: 
  
Table of Contents


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



 For the nine months ended September 30, 2017 For the nine months ended September 30, 2016
Proceeds from repurchase agreement borrowings13,054,995
 10,675,773
Repayments of repurchase agreement borrowings(11,874,382) (10,738,416)
Proceeds from (repayment of) cash overdraft—
 (300)
Repayments of securitized debt(26) —
Proceeds from forward contracts6,875
 82,020
Repayments of forward contracts(6,850) (82,110)
Payments made for deferred financing costs—
 (58)
Due from counterparties, net(11,709) (11,116)
Due to counterparties, net1,580
 (3,903)
Dividends paid on common stock(38,985) (56,173)
Net cash provided by (used in) financing activities1,131,498
 (134,283)
    
Effect of exchange rate changes on cash and cash equivalents(1) 45
    
Net increase (decrease) in cash and cash equivalents(9,503) 6,254
Cash and cash equivalents beginning of period46,172
 24,711
Cash and cash equivalents end of period$36,669
 $30,965
    
Supplemental disclosure of operating cash flow information: 
  
Interest paid$30,010
 $22,850
  Income taxes paid$4,966
 $1,567
Supplemental disclosure of non-cash financing/investing activities: 
  
Principal payments of securities, not settled$16
 $—
Securities sold, not settled$—
 $8,893
Securities purchased, not settled$(293,959) $—
Net unsettled TBAs$(2) $—
Dividends and distributions declared, not paid$12,995
 $12,995
Principal payments of Residential Whole-Loans, not settled$4,580
 $3,230
Principal payments of Residential Bridge Loans, not settled$2,598
 $—
Derivative collateral offset against derivatives$(157,913) $—
 For the six months ended June 30, 2023For the six months ended June 30, 2022
Dividends paid to non-controlling interest(4)(4)
Net cash (used in) provided by financing activities(99,420)146,458 
Net decrease in cash, cash equivalents and restricted cash(884)(24,318)
Cash, cash equivalents and restricted cash, beginning of period18,259 40,453 
Cash, cash equivalents and restricted cash, end of period$17,375 $16,135 
Supplemental disclosure of operating cash flow information:  
Interest paid$59,953 $50,791 
   Income taxes paid$24 $— 
Supplemental disclosure of non-cash financing/investing activities:  
Dividends and distributions declared, not paid$2,113 $2,415 
Principal payments of Residential Whole Loans, not settled$8,760 $11,906 
Principal payments of Residential Bridge Loans, not settled$— $46 
Reconciliation of cash, cash equivalents and restricted cash reported in the Consolidated Balance Sheets:
Cash and cash equivalents$17,375 $15,878 
Restricted cash— 257 
Total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows$17,375 $16,135 
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",Whole Loans,” “Residential Bridge Loans"Loans” and “Commercial Whole-Loans"Loans” (collectively “Whole-Loans”“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-loansWhole Loans and other financial assets. The Company’s current portfolio is comprised of AgencyNon-Qualified ("Non-QM") Residential Whole Loans, Non-Agency RMBS, (including TBAs), Agency CMBS, Non-Agency RMBS,Commercial Loans, 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. CMBSRMBS, GSE Risk Transfer Securities, Residential Bridge Loans, 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’sCompany, LLC’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 Company's current investment strategy will focus on residential real estate related investments, including but not limited to non-qualified mortgage loans, Non-Agency RMBS, and other related investments. The Manager will vary the allocation among variousthese asset classes subject to maintaining the Company’s qualification as a REIT and maintaining its exemption from the Investment Company Act of 1940, as amended (the “1940 Act”). These restrictions limit the Company’s ability to invest in non-qualifyingnon-qualified 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-LoansWhole 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,Franklin Resources, Inc. (“Franklin”). 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.

On June 28, 2023, the Company announced that Terra Property Trust, Inc. (“TPT”), an externally managed real estate investment trust (“REIT”) that originates, invests in, and manages loans and assets secured by commercial real estate (“CRE”), and the Company entered into a definitive merger agreement (the “TPT Merger Agreement”) under which TPT and WMC agreed to combine.

On August 8, 2023, the Company terminated the TPT Merger Agreement, and concurrently entered into an Agreement and Plan of Merger (the “MITT Merger Agreement”), dated August 8, 2023, by and among AG Mortgage Investment Trust, Inc., a Maryland corporation (“MITT”), AGMIT Merger Sub, LLC, a Delaware limited liability company (“Merger Sub”), the Company, and, solely for the purposes of Section 3.3(a), Section 3.3(i), Article V, Section 6.13, Section 7.2, Section 7.3 and Article IX therein, AG REIT Management, LLC, a Delaware limited liability company (“MITT Manager”),pursuant to which the Company will merge with and into Merger Sub, with Merger Sub surviving as a wholly owned subsidiary of MITT (the “Merger”).

Pursuant to, and subject to the terms and conditions set forth in, the MITT Merger Agreement, each outstanding share of the Company’s common stock would be converted into the right to receive (i) shares of MITT common stock pursuant to a fixed exchange ratio of 1.5 shares of MITT common stock per share (subject to adjustment for transaction expenses) and (ii) the per share portion of a cash payment from the MITT Manager equal to the lesser of $7 million or approximately 9.9% of the aggregate per share merger consideration (any difference between $7 million and the 9.9% cap would be used to benefit the
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combined company post-closing by offsetting reimbursable expenses that would otherwise be payable to the MITT Manager). Additionally, the MITT Manager, which would be the manager of the combined company, would waive $2.4 million of management fees in the first year post-closing.

The transaction has been approved by the Board of Directors of the Company and is subject to customary closing conditions. The transaction is expected to close during the fourth quarter of 2023.

Due to the termination of the TPT Merger Agreement, the Company was obligated to pay or cause to be paid to TPT a termination fee of $3 million. Concurrently with the execution of the MITT Merger Agreement, MITT paid the $3 million termination fee directly to TPT on behalf of the Company on August 8, 2023.

Note 2 — Basis of Presentation and Summary of Significant Accounting Policies
 
Basis of Presentation and Consolidation
 
The accompanying unaudited consolidated financial statements and related notes have been prepared on the accrual basis of accounting in conformityaccordance with accounting principles generally accepted accounting principles in the United States of America (“GAAP”("GAAP") for interim financial reporting in accordance with Article 10 of Regulation S-X and the instructions to Form 10-Q.  Certain prior period10-Q and Rule 10-01 of Regulation S-X. For all periods presented, all per share amounts and common shares outstanding have been reclassifiedadjusted on a retroactive basis to conform toreflect the current period’s presentation. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary have been made to state fairly the Company’s financial position, results of operations and cash flows.Company's one-for-ten reverse stock split, which was effected on July 11, 2022. The results of operations for the period ended SeptemberJune 30, 2017,2023 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 reportAnnual Report on Form 10-K for the year ended December 31, 2016,2022, filed with the Securities and Exchange Commission (“SEC”)SEC on March 7, 2017.13, 2023.

The consolidated financial statements include the accounts of the Company, its wholly-owned and majority-owned subsidiaries, and variable interest entities (“VIEs”) in which we areit is 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 subsidiarysubsidiaries and consolidated VIEs have been eliminated in consolidation.



Reverse Stock Split

Our amended and restated certificate of incorporation as of June 30, 2022, authorized the Company to issue a total of 600,000,000 shares of capital stock, consisting of 500,000,000 shares of common stock, par value $0.01 per share, and 100,000,000 shares of preferred stock, par value $0.01 per share.

Following approval by the Company’s stockholders of a reverse stock split between a range of one-for-five and one-for-ten of currently outstanding shares of the Company’s common stock, on June 30, 2022, the Company's Board of Directors selected a one-for-ten reverse stock split ratio. The one-for-ten reverse stock split was effected on July 11, 2022, which reduced the total number of authorized shares of common stock from 500,000,000 to 50,000,000 and also reduced the total number of authorized shares of preferred stock from 100,000,000 to 10,000,000. The total number of issued and outstanding shares from 60,380,105 to 6,038,012. The par value per share of our common stock remained unchanged at $0.01. All per share amounts and common shares outstanding have been adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split.

Our stockholders' equity, in the aggregate, remained unchanged. Per share net income or loss increased because there are fewer shares of common stock outstanding. The common stock held in treasury was reduced in proportion to the reverse stock split ratio. There were no other accounting consequences, including changes to the amount of stock-based compensation expense to be recognized in any period, that arose as a result of the reverse stock split. No fractional shares were issued in connection with the reverse stock split. Instead, each stockholder holding fractional shares was entitled to receive, in lieu of such fractional shares, cash in an amount determined based on the closing price of the Company's common stock the business day prior to the effective date. The reverse stock split applied to all of the Company's outstanding shares of common stock and did not affect any stockholder’s ownership percentage of shares of the Company's common stock, except for immaterial changes resulting from the payment of cash for fractional shares.
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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 includesincludes: 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 isare 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:include; the design of the VIE, including its capitalization structure;structure, subordination of interests;interests, payment priority;priority, relative share of interests held across various classes within the VIE’s capital structure;structure, and the reasons why the interests are held by the Company.

In instances when a VIE is owned by bothwhere the Company and its related parties have variable interests in a VIE, 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 requires significant judgment. The analysis is based upon an analysisqualitative as well as quantitative factors, such as the relationship of the facts and circumstancesVIE to each of the members of the related-party group, as well as the significance of the VIE's activities to those members, 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 ShareSignificant Accounting Policies

There have been no significant changes to our accounting policies included in Note 2 to the consolidated financial statements of our Annual Report on Form 10-K for the year ended December 31, 2022.
 
GAAP requires useRecently Issued Accounting Pronouncements
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Table of the two-class method in computing earnings per share for all periods presented for each classContents



DescriptionEffective DateEffect on Financial Statements
In August 2020, the FASB issued ASU 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40).” The amendments in this Update affect entities that issue convertible instruments and/or contracts in an entity’s own equity. For convertible instruments, the instruments primarily affected are those issued with beneficial conversion features or cash conversion features because the accounting models for those specific features are removed.January 1, 2024The Company evaluated the impact this standard may have on its consolidated financial statements and does not believe it will have a material impact on its financial statements and disclosures due to the limited nature of such transactions.
In March 2021, the FCA announced that the intended cessation date of the overnight 1-, 3-, 6-, and 12-month tenors of USD LIBOR would be June 30, 2023, which is beyond the current sunset date of Topic 848. Accordingly, during December 2022, the FASB issued ASU 2022-06 to defer the sunset date of ASC Topic 848, Reference Rate Reform, which provides temporary optional relief in accounting for the impact of reference rate reform from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of rate reform.December 31, 2024With additional time granted to apply the relief in Topic 848 extended through December 31, 2024, Management monitored if any legacy LIBOR reference rate contracts remained outstanding as of June 30, 2023 in the investment portfolio, as either they they terminated prior to the June 30, 2023 LIBOR cessation date, or the Company elected to use the practical expedients per Topic 848 to account for modifications to contracts prospectively within the scope of Topics 310, Receivables, and 470, Debt, as a continuation of the existing contracts. The Company adjusted the effective interest rate of all contracts, hedging relationships, and other transactions that reference LIBOR to revised reference rates and spreads as they occured. The variable-rate and floating-rate note sectors have primarily transitioned away from LIBOR as the market has already adapted to the secured overnight financing rate (SOFR), as the primary index used by issuers. As of June 30, 2023, the Company has fully transitioned away from any contracts, hedging relationships, or other transactions that reference LIBOR, which did not have a material impact on its financial statements and disclosures.

11
Table 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.Contents


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


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.

ValuationNote 3 — Fair Value of Financial Instruments
 
The Company disclosesfollowing tables present the Company’s financial instruments carried at fair value as of its financial instruments according to a fair value hierarchy (Levels I, II,June 30, 2023 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 isDecember 31, 2022, based on whether the inputs intoupon the valuation technique are observable or unobservable. The hierarchy is as follows:(dollars in thousands):
 June 30, 2023
 Fair Value
 Level ILevel IILevel IIITotal
Assets    
Agency RMBS Interest-only strips$— $— $60 $60 
Agency RMBS Interest-only strips accounted for as derivatives, included in MBS— — 778 778 
Subtotal Agency MBS— — 838 838 
Non-Agency CMBS— 59,322 — 59,322 
Non-Agency RMBS— 21,756 — 21,756 
Non-Agency RMBS Interest-only strips— — 1,608 1,608 
Subtotal Non-Agency MBS— 81,078 1,608 82,686 
Other securities— 16,615 — 16,615 
Total mortgage-backed securities and other securities— 97,693 2,446 100,139 
Residential Whole Loans— — 1,037,381 1,037,381 
Residential Bridge Loans— — 2,782 2,782 
Securitized Commercial Loans— — 1,025,321 1,025,321 
Commercial Loans— — 78,806 78,806 
Total Assets$— $97,693 $2,146,736 $2,244,429 
Liabilities    
Derivative liabilities$— $68 $— $68 
Securitized debt— 1,622,697 6,932 1,629,629 
Total Liabilities$— $1,622,765 $6,932 $1,629,697 

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 December 31, 2022
 Fair Value
 Level ILevel IILevel IIITotal
Assets    
Agency RMBS Interest-only strips$— $— $53 $53 
Agency RMBS Interest-only strips accounted for as derivatives, included in MBS— — 714 714 
Subtotal Agency MBS— — 767 767 
Non-Agency CMBS— 85,435 — 85,435 
Non-Agency RMBS— 22,483 — 22,483 
Non-Agency RMBS Interest-only strips— — 1,204 1,204 
Subtotal Non-Agency MBS— 107,918 1,204 109,122 
Other securities— 27,262 — 27,262 
Total mortgage-backed securities and other securities— 135,180 1,971 137,151 
Residential Whole Loans— — 1,091,145 1,091,145 
Residential Bridge Loans— — 2,849 2,849 
Securitized Commercial Loan— — 1,085,103 1,085,103 
Commercial Loans— — 90,002 90,002 
Derivative assets— 1 — 1 
Total Assets$— $135,181 $2,271,070 $2,406,251 
Liabilities    
Derivative liabilities$— $61 $— $61 
Securitized debt— 1,710,938 8,927 1,719,865 
Total Liabilities$— $1,710,999 $8,927 $1,719,926 
 
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 byWhen available, the Company at the end of the reporting period. Referuses quoted market prices 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

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”asset 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 thanliability. If quoted market prices are not thatavailable, the Company will be required to selluse independent pricing services and if the security before recovery of its amortized cost basis. If the Company intends to sell the securityindependent pricing service cannot price a particular asset or if it is more likely than not thatliability, the Company will be requiredobtain 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 sell the real estate security before recovery of its amortized cost basis,alternate sources when available. If independent pricing services or third-party broker quotes are not available, 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 andCompany determines 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,securities using valuation techniques that use, when possible, current market-based or independently sourced market parameters, such 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.when applicable, estimates of prepayments and credit losses.


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,In instances when the Company evaluates the collectability of both interestis required to consolidate a VIE that is determined to be a qualifying collateralized financing entity ("CFE") under GAAP, 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 suspendedoption for loans at the earliersecuritized debt, the Company will measure both the financial assets and financial liabilities of the date atVIE using the fair value of either the VIE’s financial assets or financial liabilities, whichever is more observable.

Mortgage-backed Securities and Other Securities

In determining the proper fair value hierarchy or level, the Company considers the amount of available observable market data for each security. For Agency IOs, 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
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the quarter, for each security type. If there is sufficient 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; otherwise, the
security is classified as a Level III.

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 market information and commonly used market pricing methods, which payments become 90-days past dueinclude actual trades and quoted prices for similar or when, inidentical instruments, and are designed to produce a pricing process that is responsive to market conditions. Depending on the opiniontype of management,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 and SOFR, the Constant Maturity Treasury rate, and the prime rate as a full recovery of incomebenchmark yield. In addition, the model may incorporate the current weighted average maturity and principal becomes doubtful.additional pool level information such as prepayment speeds, default frequencies and default severities, if applicable. When the ultimate collectability ofthird party pricing service cannot adequately price a particular security, the principal of an impaired loanCompany utilizes a broker’s quote which is in doubt, all payments are applied to principal underreviewed for reasonableness by 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 currentManager’s pricing group.

Residential Whole Loans 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 inValues for the Company's Residential Whole Loans and Residential Bridge Loans are recordedbased upon prices obtained from an independent third-party pricing service that specializes in accordance with ASC 310-20, "Nonrefundable Feesloan valuation, utilizing a discounted cash flow valuation model that is calibrated to recent loan trade execution. Their valuation methodology incorporates commonly used market pricing methods, which include the inputs considered most significant to the determination of fair value of the Company's Residential Whole Loans and Residential Bridge Loans. The key loan inputs include loan balance, interest rate, loan to value, delinquencies and fair value of the collateral for collateral dependent loans. The assumptions made by the independent third-party pricing service includes the market discount rate, default assumptions, and loss severity. Other Costs". These loans are recorded at their principal amount outstanding, netinputs and assumptions relevant to the pricing of any premium or discount in the Consolidated Balance Sheets. All other costs incurred in connection with acquiring theResidential Whole Loans include FICO scores and prepayment speeds.

The independent third-party pricing service used a combination of recent loan trades and recent Residential Whole Loans and Residential Bridge Loans or committingsecuritization transactions adjusted for deal cost and liquidity premium, to purchase these loans are chargedform their opinion on the appropriate discount rate.

The Company reviews the analysis provided by the pricing service, as well as the key assumptions made available to expense as incurred.

On a quarterly basis,the Company. Due to the inherent uncertainty of such valuation, the fair values established for Residential Whole Loans and Residential Bridge Loans held by the Company evaluatesmay differ from the collectability of both interestfair values that would have been established if a readily available market existed for these loans. In addition, the fair values for the Company's Non-QM Residential Whole Loans held in Arroyo Trust 2022-1 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 thenArroyo Trust 2022-2 are measured based on the present value of expected future cash flows discounted at the loan’s

effective rate orusing the fair value of the collateral, ifsecuritized debt based on the loan is collateral dependent. Upon measurement of impairment,CFE valuation methodology. See Note 5, "Residential Whole Loans and Residential Bridge Loans" to the Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for additional details. Accordingly, the Company recordsclassifies its Residential Whole Loans and Residential Bridge Loans as Level III.

Commercial Loans

Values for the Company's Commercial Loans are based upon prices obtained from an allowanceindependent third-party pricing service that specializes in loan valuation, utilizing a valuation model that is calibrated to reducerecent loan trade execution. Their valuation methodology incorporates commonly used market pricing methods, which include the carryinginputs considered most significant to the determination of fair value of the loan withCompany's Commercial Loans. The assumptions made by the independent third-party pricing vendor include 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 collateralmarket discount rate, default assumption, loss severity, cash flows 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.probability weighted loss scenarios. The Company records interest income in accordance with ASC subtopic 835-30 "Imputation of Interest", usingreviews 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 overanalysis provided by the estimated lifepricing service as well as the key assumptions. Due to the inherent uncertainty of such securities. Adjustments to premium and discount amortization are madevaluation, the fair values established 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,Commercial Loans held by the Company may include in its cash flow projectionsdiffer from the U.S. Department of Justice’s settlements withfair values that would have been established if a readily available market existed for these loans. Accordingly, 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 securitiesCompany's Commercial Loans 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.classified as Level III.
 
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 BridgeSecuritized Commercial 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


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 collateralValues 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 whichSecuritized Commercial Loans are based on the price movementcollateralized financing entity ("CFE") valuation methodology. Since there is an extremely limited market for the Securitized Commercial Loans, the Company determined the securitized debt is more actively traded and therefore was more observable. Due to the inherent uncertainty 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 whichSecuritized Commercial Loans' valuation, 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 fromclassifies 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 assetsSecuritized Commercial Loans as collateral pursuant to a repurchase agreement, the cash received and the corresponding liability are reflected in the Consolidated Balance Sheets.Level III.
14
Table of Contents
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. The Company does not necessarily seek to hedge all such risks. In addition, 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.


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 have 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


SecuritizedValues for the Company's securitized debt was issued at par by a consolidated securitization trust. Thethat the Company has chosen to makeelected the fair value election pursuant to ASC 825 for the debt.option are based upon prices obtained from independent third party pricing services. 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 basedvaluation 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 September 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 (benefit)" in the Consolidated Statements of Operations.

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.

Comprehensive Income (Loss)

The Company has none of the components of comprehensive income (loss) and therefore comprehensive income (loss) is not presented.
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.
Recently adopted accounting pronouncements

DescriptionAdoption DateEffect on Financial Statements
In March 2016, the FASB issued ASU 2016-9, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This ASU is intended to simplify several aspects of accounting for share-based payments, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows.First quarter 2017.The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.


Recently issued accounting pronouncements
DescriptionEffective DateEffect on Financial Statements
 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).First quarter 2018 and permits the use of either the full retrospective or modified retrospective method.The Company's revenue is mainly derived from interest income on our investments and to a lesser extent gains on sales of investments, which are not impacted by this standard. Therefore, the adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements.
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. First quarter 2018.The standard does not change the guidance for classifying and measuring investments in debt securities and loans as well nonrecourse liabilities of consolidated collateralized financing entities. Therefore, the adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements when adopted.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This standard significantly changes how an entity will measure credit losses for most financial assets and certain other instruments that aren't measured at fair value through the income statement. The standard will replace the current "incurred loss" approach with an "expected loss" model for instruments measured at amortized cost. For available for sale debt securities, entities will be required to record an allowance rather than reduce the carrying amount, as is currently done under the other than temporary impairment model. It also simplifies the accounting model for purchased credit impaired debt securities and loans.First quarter 2020.The Company is currently evaluating the impact the standard may 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.First quarter 2018 and requires retrospective adoption.The Company is evaluating the impact the standard may have on its Consolidated Statements of Cash Flows.
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.First quarter 2018 and requires retrospective adoption.The Company currently does not have restricted cash. Therefore, the adoption of this standard is not expected to have a material impact on its Consolidated Statements of Cash Flows.
In January 2017, the FASB issued ASU 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of a Business." This ASU provides a more robust framework to use in determining when a set of assets and activities constitutes a business.First quarter 2020. The guidance should be applied prospectively on or after the effective date.The Company does not believe the adoption of this standard will have a material impact on its consolidated financial statements.
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.First quarter 2018.The Company does not believe the adoption of this standard will have a material impact on its consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11 "Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivative and Hedges (Topic 815): Part I - Accounting for Certain Financial Instruments with Down Round Features and Part II - Replacement of the Indefinite Deferral for Mandatory Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatory Redeemable Noncontrolling Interest with a Scope Exception". Part I of this update changes the classification analysis of certain financial instruments (such as warrants and convertible instruments) with down round features. Down round features are features of certain equity-linked financial instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. Entities that present earnings per share are required to recognize the effect of the down round feature when it is triggered. The amendments in Part II of this update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect.First quarter 2019.The Company is evaluating the impact this standard may have on its consolidated financial statements.

Note 3 — Fair Value of Financial Instruments
The following tables present the Company’s financial instruments carried at fair value as of September 30, 2017 and December 31, 2016, based upon the valuation hierarchy (dollars in thousands):
 September 30, 2017
 Fair Value
 Level I Level II Level III Total
Assets 
  
  
  
Agency RMBS: 
  
  
  
20-Year mortgage$—
 $159,278
 $—
 $159,278
30-Year mortgage—
 548,196
 —
 548,196
40-Year mortgage—
 387,095
 —
 387,095
Agency RMBS Interest-Only Strips—
 14,028
 2,009
 16,037
Agency RMBS Interest-Only Strips accounted for as derivatives, included in MBS—
 11,219
 —
 11,219
Agency CMBS—
 2,103,185
 —
 2,103,185
Agency CMBS Interest-Only Strips—
 30
 —
 30
Agency CMBS Interest-Only Strips accounted for as derivatives, included in MBS—
 6,016
 —
 6,016
Subtotal Agency MBS—
 3,229,047
 2,009
 3,231,056
        
Non-Agency RMBS—
 50,100
 14,262
 64,362
Non-Agency CMBS—
 278,511
 —
 278,511
Subtotal Non-Agency MBS—
 328,611
 14,262
 342,873
        
Other securities—
 113,181
 9,470
 122,651
Total mortgage-backed securities and other securities—
 3,670,839
 25,741
 3,696,580
        
Residential Whole-Loans—
 —
 191,439
 191,439
Securitized commercial loan—
 —
 24,952
 24,952
Derivative assets375
 4,636
 —
 5,011
Total Assets$375
 $3,675,475
 $242,132
 $3,917,982
        
Liabilities 
  
  
  
Derivative liabilities$128
 $858
 $—
 $986
Securitized debt—
 —
 10,979
 10,979
Total Liabilities$128
 $858
 $10,979
 $11,965

 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 assets71
 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 independentthird-party pricing services incorporates market information and if the independentcommonly used market pricing service cannot price a particular assetmethods, which include actual trades and quoted prices for similar 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
identical instruments. In determining the proper fair value hierarchy or level, the Company considers the amount of available observable market data for each security. Agency RMBS givenSince the amount of available observable market data are classified in Level II.  For Non-Agency RMBS, CMBS and othersecuritized debt represents traded debt securities, to determine whether a security should be a Level II, the securities are grouped by security type and the ManagerManager's pricing team reviews the internal trade history, foractivity during the quarter for each security type.to determine the appropriate level within the fair value hierarchy. If there is sufficient trade

data above a predetermined volume threshold, of a security type, the Manager determines it has sufficient observable market data and the debt security will be categorized as a Level II.
Values for If there is not sufficient observable market data 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 ratedebt security will be categorized 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 derivatives and/or currency derivativesfutures contracts for the periods ended SeptemberJune 30, 20172023 and December 31, 2016.2022. See Note 8, "Derivative Instruments" to the Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.

Third Party Pricing Data Review
 
The Company performs quarterly reviews of the independent third party pricing data. These reviews may consistinclude a review of athe valuation methodology used by third party valuation specialists and 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.



The following tables present a summary of the available quantitative information about the significant unobservable inputs used in the fair value measurement of financial instruments for which the Company has utilized Level III inputs to determine fair value as of June 30, 2023 and December 31, 2022 (dollars in thousands):
 Fair Value at  Range
June 30, 2023Valuation TechniqueUnobservable InputMinimumMaximumWeighted Average
   
Residential Whole Loans$1,037,381 Discounted Cash FlowMarket Discount Rate5.5 %7.6 %6.3 %
Weighted Average Life0.710.45.4
Residential Bridge Loans$2,782 Discounted Cash FlowMarket Discount Rate12.3 %24.9 %16.8 %
Weighted Average Life1.14.93.1
Securitized Commercial Loan$1,025,321 Market Comparables, Vendor PricingWeighted Average Life2.32.32.3
Commercial Loans$78,806 Discounted Cash FlowMarket Discount Rate8.9 %11.4 %10.3 %
Weighted Average Life0.11.91.6
15
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 Fair Value at  Range
December 31, 2022Valuation TechniqueUnobservable InputMinimumMaximumWeighted Average
   
Residential Whole Loans$1,091,145 Discounted Cash FlowMarket Discount Rate6.0 %8.4 %6.8 %
Weighted Average Life1.410.45.4
Residential Bridge Loans$2,849 Discounted Cash FlowMarket Discount Rate12.9 %35.7 %(1)22.4 %
Weighted Average Life0.44.12.0
Securitized Commercial Loan$1,085,103 Market Comparables, Vendor PricingWeighted Average Life2.72.72.7
Commercial Loans$90,002 Discounted Cash FlowMarket Discount Rate8.4 %9.6 %9.2 %
Weighted Average Life0.32.41.2

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, 2023
$ in thousandsAgency MBSNon-Agency MBSResidential 
Whole Loans		Residential
Bridge Loans		Commercial LoansSecuritized 
Commercial 
Loan		Securitized debt
Beginning balance$837 $1,590 $1,074,417 $2,782 $79,182 $1,088,224 $7,972 
Transfers into Level III from Level II— — — — — — — 
Transfers from Level III into Level II— — — — — — — 
Loan modifications / capitalized interest— — 35 — — — — 
Principal repayments— — (28,278)— (750)— — 
Total net gains / losses included in net income
Unrealized gains/(losses), net on assets(1)
1 122 (8,161)— 361 (70,014)— 
Unrealized (gains)/losses, net on liabilities(2)
— — — — — — (4)
Premium and discount amortization, net— (104)(632)— 13 7,111 (1,036)
Ending balance$838 $1,608 $1,037,381 $2,782 $78,806 $1,025,321 $6,932 
Unrealized gains/(losses), net on assets held at the end of the period(1)
$1 $122 $(8,853)$— $361 $(70,014)$— 
Unrealized gains/(losses), net on liabilities held at the end of the period(2)
$— $— $— $— $— $— $4 
16
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Three months ended September 30, 2017Three months ended June 30, 2022
$ in thousands
Mortgage-backed securities
and other securities
 
Residential 
Whole-Loans
 
Securitized 
commercial 
loan
 Securitized debt Derivative liability$ in thousandsAgency MBSNon-Agency MBSResidential 
Whole Loans		Residential
Bridge Loans		Commercial LoansSecuritized 
Commercial 
Loan		Securitized debt
Beginning balance$36,731
 $203,540
 $24,875
 $10,945
 $329
Beginning balance$940 $6,659 $1,002,710 $5,350 $128,495 $1,288,943 $14,919 
Transfers into Level III from Level II9,470
 —
 —
 —
 —
Transfers into Level III from Level II— — — — — — — 
Transfers from Level III into Level II(23,852) —
 —
 —
 —
Transfers from Level III into Level II— (5,437)— — — — — 
Purchases2,009
 —
 —
 —
 —
Purchases— — 292,168 — — — — 
Sales and settlements—
 —
 —
 —
 (53)
Loan modifications / capitalized interestLoan modifications / capitalized interest— — 10 — — — — 
Principal repayments(388) (11,264) (59) (26) —
Principal repayments— — (60,548)(145)— — — 
Total net gains / losses included in net income         Total net gains / losses included in net income   
Realized (gains)/losses, net on liabilities—
 —
 —
 —
 53
Other than temporary impairment(121) —
 —
 —
 —
Unrealized gains/(losses), net on assets(1)
1,385
 (575) 136
 —
 —
Unrealized gains/(losses), net on assets(1)
(110)18 (37,165)(110)(74)(52,218)— 
Unrealized (gains)/losses, net on liabilities (2)
—
 —
 —
 60
 (329)
Unrealized (gains)/losses, net on liabilities(2)
— — — — — — 988 
Premium and discount amortization, net507
 (262) —
 —
 —
Premium and discount amortization, net(45)(59)(1,322)— — 6,646 (988)
Ending balance$25,741
 $191,439
 $24,952
 $10,979
 $—
Ending balance$785 $1,181 $1,195,853 $5,095 $128,421 $1,243,371 $14,919 
         
Three months ended September 30, 2016
$ in thousands
Mortgage-backed securities
and other securities
 
Residential 
Whole-Loans
 
Securitized 
commercial 
loan
 Securitized debt Derivative liability
Beginning balance$226,826
 $189,696
 $23,688
 $10,423
 $2,160
Transfers into Level III from Level II—
 —
 —
 —
 —
Transfers from Level III into Level II—
 —
 —
 —
 —
Purchases—
 29,404
 —
 —
 —
Sales and settlements(9,194) —
 —
 —
 —
Principal repayments(4,366) (14,493) —
 —
 —
Total net gains / losses included in net income 
  
  
  
  
Realized gains/(losses), net on assets(1,696) —
 —
 —
 —
Other than temporary impairment(251) —
 —
 —
 —
Unrealized gains/(losses), net on assets(1)
(996) 819
 450
 —
 —
Unrealized (gains)/losses, net on liabilities (2)
—
 —
 —
 198
 11
Premium and discount amortization, net(2,530) (544) —
 —
 —
Ending balance$207,793
 $204,882
 $24,138
 $10,621
 $2,171
Unrealized gains/(losses), net on assets held at the end of the period(1)
Unrealized gains/(losses), net on assets held at the end of the period(1)
$(110)$89 $(34,740)$(33)$(74)$(52,218)$— 
Unrealized gains/(losses), net on liabilities held at the end of the period(2)
Unrealized gains/(losses), net on liabilities held at the end of the period(2)
$— $— $— $— $— $— $(988)

Six months ended June 30, 2023
$ in thousandsAgency MBSNon-Agency MBSResidential 
Whole Loans		Residential
Bridge Loans		Commercial LoansSecuritized 
commercial 
loan		Securitized debt
Beginning balance$767 $1,204 $1,091,145 $2,849 $90,002 $1,085,103 $8,927 
Transfers into Level III from Level II— — — — — — — 
Transfers from Level III into Level II— — — — — — — 
Sales and settlements— — — — (8,776)— — 
Loan modifications / capitalized interest— — 41 — — — — 
Principal repayments— — (58,792)(75)(1,680)— — 
Total net gains / losses included in net income
Realized gains/(losses), net on assets— — — — (81,223)— — 
Unrealized gains/(losses), net on assets(1)
67 611 6,433 8 80,417 (74,050)— 
Unrealized (gains)/losses, net on liabilities(2)
— — — — — — (101)
Premium and discount amortization, net4 (207)(1,446)— 66 14,268 (1,894)
Ending balance$838 $1,608 $1,037,381 $2,782 $78,806 $1,025,321 $6,932 
Unrealized gains/(losses), net on assets held at the end of the period(1)
$67 $611 $4,056 $— $(806)$(74,050)$— 
Unrealized gains/(losses), net on liabilities held at the end of the period(2)
$— $— $— $— $— $— $101 
17
Table of Contents



(1)For Mortgage-backed securities and other securities, Residential Whole-Loans and Securitized commercial loans classified as Level III at September 30, 2017, the Company recorded gross unrealized gains of approximately $291 thousand, $42 thousand and $136 thousand, respectively, and gross unrealized losses of $0, $398 thousand and $0, respectively, for the three months ended September 30, 2017. For Mortgage-backed securities and other securities, Residential Whole-Loans and Securitized commercial loans classified as Level III at September 30, 2016, the Company recorded gross unrealized gains of approximately $3.0 million, $1.4 million and $450 thousand, respectively, and gross unrealized losses of approximately $4.2 million, $350 thousand and $0, respectively, for the three months ended September 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 September 30, 2017, the Company recorded gross unrealized gains of $0 and $0, respectively, and gross unrealized losses of $60 thousand and $0, respectively, for the three months ended September 30, 2017. For securitized debt and derivative liability classified as Level III at September 30, 2016, the Company recorded gross unrealized gains of $0 and $0, respectively, and gross unrealized losses of $198 thousand and $11 thousand, respectively, for the three months ended September 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.

Six months ended June 30, 2022
$ in thousandsAgency MBSNon-Agency MBSResidential 
Whole Loans		Residential
Bridge Loans		Commercial LoansSecuritized 
commercial 
loan		Securitized debt
Beginning balance$1,172 $7,845 $1,023,502 $5,428 $130,572 $1,355,808 $14,919 
Transfers into Level III from Level II— — — — — — — 
Transfers from Level III into Level II— (5,437)— — — — — 
Purchases— — 409,853 — — — — 
Loan modifications / capitalized interest— — 75 — — — — 
Principal repayments— — (154,748)(250)(4)— — 
Total net gains / losses included in net income
Unrealized gains/(losses), net on assets(1)
(266)(1,086)(79,045)(83)(2,147)(125,782)— 
Unrealized (gains)/losses, net on liabilities(2)
— — — — — — 1,799 
Premium and discount amortization, net(121)(141)(3,784)— — 13,345 (1,799)
Ending balance$785 $1,181 $1,195,853 $5,095 $128,421 $1,243,371 $14,919 
Unrealized gains/(losses), net on assets held at the end of the period(1)
$(266)$(732)$(73,658)$(8)$(2,147)$(125,782)$— 
Unrealized gains/(losses), net on liabilities held at the end of the period(2)
$— $— $— $— $— $— $(1,799)


 Nine months ended September 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 II25,080
 —
 —
 —
 —
Transfers from Level III into Level II(114,229) —
 —
 —
 —
Purchases2,009
 33,718
 —
 —
 —
Sales and settlements(60,132) —
 —
 —
 (552)
Principal repayments(2,635) (33,718) (59) (26) —
Total net gains / losses included in net income         
Realized gains/(losses), net on assets2,623
 —
 —
 —
 —
Realized (gains)/losses, net on liabilities—
 —
 —
 —
 552
Other than temporary impairment(1,823) —
 —
 —
 —
Unrealized gains/(losses), net on assets(1)
(6,529) 97
 786
 —
 —
Unrealized (gains)/losses, net on liabilities(2)
—
 —
 —
 346
 (1,673)
Premium and discount amortization, net1,386
 (794) —
 —
 —
Ending balance$25,741
 $191,439
 $24,952
 $10,979
 $—
          
 Nine months ended September 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) —
 —
 —
 —
Purchases94
 29,404
 —
 —
 —
Sales and settlements(78,104) —
 —
 —
 —
Principal repayments(15,453) (42,828) —
 —
 —
Total net gains / losses included in net income         
Realized gains/(losses), net on assets(8,131) —
 —
 —
 —
Other than temporary impairment(5,306) —
 —
 —
 —
Unrealized gains/(losses), net on assets(1)
14,862
 1,403
 (862) —
 —
Unrealized (gains)/losses, net on liabilities(2)
—
 —
 —
 (379) 2,171
Premium and discount amortization, net(7,939) (1,635) —
 —
 —
Ending balance$207,793
 $204,882
 $24,138
 $10,621
 $2,171
(1)Gains and losses are included in "Unrealized gain (loss), net" in the Consolidated Statements of Operations.
(2)Gains and losses on securitized debt are included in "Unrealized gain (loss), net" in the Consolidated Statements of Operations.

(1)For Mortgage-backed securities and other securities, Residential Whole-Loans and Securitized commercial loans classified as Level III at September 30, 2017, the Company recorded gross unrealized gains of approximately $756 thousand, $917 thousand and $786 thousand, respectively, and gross unrealized losses of approximately $0, $570 thousand and $0, respectively, for the nine months ended September 30, 2017. For Mortgage-backed securities and other securities, Residential Whole-Loans and Securitized commercial loans classified as Level III at September 30, 2016, the Company recorded gross unrealized gains of approximately $20.3 million, $2.2 million and $0, respectively, and gross unrealized losses of approximately $2.2 million, $271 thousand and $862 thousand, respectively, for the nine months ended September 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 September 30, 2017, the Company recorded gross unrealized gains of $0 and $0, respectively, and gross unrealized losses of approximately $346 thousand and $0, respectively, for the nine months ended September 30, 2017. For securitized debt and derivative liability classified as Level III at September 30, 2016, the Company recorded gross unrealized gains of approximately $379 thousand and $0, respectively, and gross unrealized losses of $0 and $2.2 million, respectively, for the nine months ended September 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 forinto the nine months ended September 30, 2017 and September 30, 2016 were based on the availability of sufficient observable inputs to meet Level II versus Level III criteria.  The levelingcategory of the fair value hierarchy occur due to the above segmented classes of investments exhibiting indications of reduced levels of market transparency, including changes in observable transactions or executable quotes involving these assets was based on information received frominvestments or similar classes of investments. Changes in these indications could impact price transparency, and thereby cause 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.change in level designations. The Company did not have transfers between either Level I and Level II or Level I and Level III for the ninethree and six months ended SeptemberJune 30, 20172023 and SeptemberJune 30, 2016.2022.
 
Other Fair Value Disclosures
 



Residential Bridge Loans andThe Company's repurchase agreement borrowings, convertible senior unsecured notes, and securitized debt from the Arroyo 2019-2 and Arroyo 2020-1 trusts are not carried at fair value in the consolidated financial statements.

Borrowings Under Repurchase Agreements

The fair values of the Company's repurchase agreements approximates the carrying value due to the floating interest rates that are based on an index plus a spread, which is typically consistent with those demanded in the market and the short-term maturities of generally one year or less. The Company's repurchase agreements are classified as Level II.

Convertible Senior Unsecured Notes

The fair values of the convertible senior unsecured notes are based on quoted market prices. Accordingly, the Company's convertible senior unsecured notes were classified as Level I.

The following table presents the carrying value and estimated fair value of the Company’s financial instrumentsconvertible senior unsecured notes and securitized debt that are not carried at fair value as of SeptemberJune 30, 2017,2023 and December 31, 2022 in the consolidated financial statements (dollars in thousands):
18
Table of Contents



 Carrying Value  Estimated Fair Value
Assets   
Residential Bridge Loans$54,912
 $56,077
Total$54,912
 $56,077
    
Liabilities   
Borrowings under repurchase agreements$3,336,256
 $3,340,801
Total$3,336,256
 $3,340,801
June 30, 2023December 31, 2022
Carrying Value Estimated Fair ValueCarrying Value Estimated Fair Value
Convertible senior unsecured notes$84,341 $75,559 $83,522 $74,712 
Securitized debt(1)
318,735 287,880 342,965 309,474 
Total$403,076 $363,439 $426,487 $384,186 


(1) Carrying value excludes $3.5 million and $4.1 million of deferred financing costs as of June 30, 2023 and December 31, 2022, respectively.
"Due from counterparties" and "Due to counterparties" in the Company’s Consolidated Balance Sheets are reflected at cost which approximates fair value.

Bridge Loans

The fair values of the Residential Bridge 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 bridge 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.

Borrowings under repurchase agreements

The fair values of the borrowings under repurchase agreements are 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.


Note 4 – Mortgage-Backed Securities and other securitiesOther Securities
 
The following tables present certain information about the Company’s investment portfolio at SeptemberJune 30, 20172023 and December 31, 20162022 (dollars in thousands):
 June 30, 2023
 Principal
Balance		Unamortized
Premium
(Discount),
net		Amortized
Cost		Unrealized
Gain		Unrealized
Loss		Estimated
Fair Value		Net
Weighted
Average
Coupon 
Agency RMBS Interest-Only Strips(1)(2)
N/AN/A$65 $— $(5)$60 — %
Agency RMBS Interest-Only Strips, accounted for as derivatives(1)(2)
N/AN/AN/AN/AN/A778 0.9 %
Total Agency MBS— — 65 — (5)838 0.8 %
Non-Agency RMBS39,528 (14,414)25,114 649 (4,007)21,756 4.2 %
Non-Agency RMBS Interest- Only Strips(1)
N/A N/A4,997 — (3,389)1,608 0.3 %
Subtotal Non-Agency RMBS39,528 (14,414)30,111 649 (7,396)23,364 1.2 %
Non-Agency CMBS88,659 (2,087)86,572 322 (27,572)59,322 7.8 %
Total Non-Agency MBS128,187 (16,501)116,683 971 (34,968)82,686 3.4 %
Other securities(3)
25,625 (7,901)18,891 389 (2,665)16,615 7.2 %
Total$153,812 $(24,402)$135,639 $1,360 $(37,638)$100,139 3.6 %


 December 31, 2022
 Principal
Balance		Unamortized
Premium
(Discount),
net		Amortized
Cost		Unrealized
Gain		Unrealized
Loss		Estimated
Fair Value
Net
Weighted
Average
Coupon(4)
Agency RMBS Interest-Only Strips(1)
N/AN/A$58 $— $(5)$53 — %
Agency RMBS Interest-Only Strips, accounted for as derivatives(1)(2)
N/AN/AN/AN/AN/A714 0.1 %
Total Agency MBS— — 58 — (5)767 0.1 %
Non-Agency RMBS39,873 (14,423)25,450 928 (3,895)22,483 4.2 %
Non-Agency RMBS Interest-Only Strips(1)
N/AN/A5,204 — (4,000)1,204 0.3 %
Subtotal Non-Agency RMBS39,873 (14,423)30,654 928 (7,895)23,687 1.1 %
Non-Agency CMBS109,266 (2,763)106,503 636 (21,704)85,435 8.1 %
Total Non-Agency MBS149,139 (17,186)137,157 1,564 (29,599)109,122 3.8 %
Other securities(3)
34,691 (8,581)31,112 543 (4,393)27,262 7.2 %
Total$183,830 $(25,767)$168,327 $2,107 $(33,997)$137,151 3.9 %

19
Table of Contents



 September 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$149,970
 $7,796
 $—
 $157,766
 $1,528
 $(16) $159,278
 3.9% 
30-Year mortgage508,739
 34,841
 —
 543,580
 4,786
 (170) 548,196
 4.2% 
40-Year mortgage374,844
 11,062
 —
 385,906
 2,003
 (814) 387,095
 3.5% 
Agency RMBS Interest-Only Strips (2)
N/A
 N/A
 N/A
 15,416
 855
 (234) 16,037
 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
 11,219
 2.9%(2)
Agency CMBS2,087,948
 2,147
 —
 2,090,095
 20,231
 (7,141) 2,103,185
 2.9% 
Agency CMBS Interest-Only Strips(2)
N/A
 N/A
 N/A
 —
 30
 —
 30
 3.2%(2)
Agency CMBS Interest-Only Strips accounted for as derivatives(2) (3)
N/A
 N/A
 N/A
 N/A
 N/A
 N/A
 6,016
 0.5%(2)
Subtotal Agency MBS3,121,501
 55,846
 —
 3,192,763
 29,433
 (8,375) 3,231,056
 3.1% 
                 
Non-Agency RMBS81,504
 (802) (22,262) 58,440
 5,922
 —
 64,362
 3.1% 
Non-Agency CMBS376,215
 (60,850) (25,342) 290,023
 2,557
 (14,069) 278,511
 4.8% 
Subtotal Non-Agency MBS457,719
 (61,652) (47,604) 348,463
 8,479
 (14,069) 342,873
 4.5% 
                 
Other securities (4)
92,302
 5,340
 (5,225) 115,845
 6,806
 —
 122,651
 7.3% 
Total$3,671,522
 $(466) $(52,829) $3,657,071
 $44,718
 $(22,444) $3,696,580
 3.3% 
(1)    IOs and IIOs have no principal balances and bear interest based on a notional balance. The notional balance is used solely to determine interest distributions on interest-only class of securities. At June 30, 2023, the notional balance for Agency RMBS IOs and IIOs, Non-Agency RMBS IOs, and IIO and Agency RMBS IOs and IIOs, accounted for as derivatives was $2.2 million, $136.5 million, and $12.3 million, respectively. At December 31, 2022, the notional balance for Agency RMBS IOs and IIOs, Non-Agency RMBS IOs and IIOs, and Agency RMBS IOs and IIOs, accounted for as derivatives was $2.4 million, $143.2 million, and $13.1 million, respectively.

(2)     Interest on these securities is reported as a component of "Gain on derivative instruments, net" in the Consolidated Statements of Operations.

(3)     Other securities include residual interests in ABS which have no principal balance and an amortized cost of approximately $1.2 million and $5.0 million, as of June 30, 2023 and December 31, 2022, respectively.
 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 mortgage878,599
 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 CMBS377,286
 (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 MBS1,726,860
 73,966
 —
 1,819,846
 12,241
 (14,725) 1,841,594
 3.3% 
                 
Non-Agency RMBS340,759
 (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 CMBS473,024
 (69,436) (17,787) 385,801
 3,164
 (30,046) 358,919
 5.0% 
Subtotal Non-Agency MBS813,783
 (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
 3.9% 
(4)     The calculation of the weighted average coupon rate includes the weighted average coupon rates of IOs and IIOs accounted for as derivatives using their notional amounts.
(1)Net weighted average coupon as of September 30, 2017 and December 31, 2016 is presented, net of servicing and other fees.
(2)IOs and IIOs have no principal balances and bear interest based on a notional balance.  The notional balance is used solely to determine interest distributions on interest-only class of securities.  At September 30, 2017, the notional balance for Agency RMBS IOs and IIOs, Agency RMBS IOs and IIOs, accounted for as derivatives, Agency CMBS IOs and IIOs, and Agency CMBS IOs and IIOs, accounted for as derivatives was $166.2 million, $131.8 million, $5.3 million and $193.8 million, respectively.  At December 31, 2016, the notional balance for Agency RMBS IOs and IIOs, Non-Agency RMBS IOs and IIOs, Agency RMBS IOs and IIOs, accounted for as derivatives, Non-Agency RMBS IOs and IIOs, accounted for as derivatives, Agency CMBS IOs and IIOs, accounted for as derivatives and Agency CMBS IOs and IIOs was $201.6 million, $278.4 million, $188.1 million, $20.7 million, $221.8 million and $32.8 million, respectively.
(3)Interest on these securities is reported as a component of "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.
(4)Other securities include residual interests in asset-backed securities which have no principal balance and an amortized cost of approximately $23.4 million and $23.1 million, as of September 30, 2017 and December 31, 2016, respectively.



As of SeptemberJune 30, 20172023 and December 31, 20162022, the weighted average expected remaining term of the MBS and other securities investment portfolio was 8.58.2 years and 7.16.7 years, respectively.

The following tables present the changes in the components of the Company’s purchase discount and amortizable premium on its Non-Agency RMBS, Non-Agency CMBS and other securities for the three and nine months ended September 30, 2017 and September 30, 2016 (dollars in thousands):
 Three months ended September 30, 2017 Three months ended September 30, 2016
 
Discount Designated as
Credit Reserve and
OTTI
 
Accretable  Discount(1)
 
Amortizable  Premium(1)
 
Discount Designated as
Credit Reserve and
OTTI
 
Accretable  Discount(1)
 
Amortizable  Premium(1)
Balance at beginning of period$(49,830) $(76,778) $15,186
 $(129,162) $(139,675) $43,402
Accretion of discount—
 2,588
 —
 —
 4,151
 —
Amortization of premium—
 —
 (87) —
 —
 (1,132)
Realized credit losses25
 —
 —
 2,623
 —
 —
Purchases—
 —
 —
 (1,216) —
 2,246
Sales187
 1,931
 (18) 1,947
 8,573
 (1,323)
Net impairment losses recognized in earnings(2,345) —
 —
 (4,526) —
 —
Transfers/release of credit reserve(2)
(866) 953
 (87) 1,679
 (254) (1,425)
Balance at end of period$(52,829) $(71,306) $14,994
 $(128,655) $(127,205) $41,768

(1)Together with coupon interest, accretable purchase discount and amortizable premium is recognized as interest income over the life of the security.
(2)Subsequent reductions of a security’s non-accretable discount results in a corresponding reduction in its amortizable premium.

 Nine months ended September 30, 2017 Nine months ended September 30, 2016
 
Discount Designated as
Credit Reserve and
OTTI
 
Accretable  Discount(1)
 
Amortizable  Premium(1)
 
Discount Designated as
Credit Reserve and
OTTI
 
Accretable  Discount(1)
 
Amortizable  Premium(1)
Balance at beginning of period$(130,484) $(109,822) $44,527
 $(152,750) $(145,532) $56,163
Accretion of discount—
 8,542
 —
 —
 13,381
 —
Amortization of premium—
 —
 (776) —
 —
 (4,242)
Realized credit losses1,854
 —
 —
 5,765
 —
 —
Purchases(1,724) (668) 1,522
 (15,482) (2,265) 4,366
Sales89,628
 32,016
 (31,060) 33,610
 22,986
 (11,752)
Net impairment losses recognized in earnings(12,696) —
 —
 (18,340) —
 —
Transfers/release of credit reserve(2)
593
 (1,374) 781
 18,542
 (15,775) (2,767)
Balance at end of period$(52,829) $(71,306) $14,994
 $(128,655) $(127,205) $41,768
(1)Together with coupon interest, accretable purchase discount and amortizable premium is recognized as interest income over the life of the security.
(2)Subsequent reductions of a security’s non-accretable discount results in a corresponding reduction in its amortizable premium.



The following tables present the fair value and contractual maturities of the Company’s investment securities at SeptemberJune 30, 20172023 and December 31, 20162022 (dollars in thousands):
 June 30, 2023
 < or equal to 10
years		> 10 years and < or
equal to 20 years		> 20 years and < or
equal to 30 years		> 30 yearsTotal
Agency RMBS Interest-Only Strips$— $60 $— $— $60 
Agency RMBS Interest-Only Strips accounted for as derivatives— 778 — — 778 
Subtotal Agency— 838 — — 838 
Non-Agency CMBS39,054 10,117 10,151 — 59,322 
Non-Agency RMBS— — 8,277 13,479 21,756 
Non-Agency RMBS Interest-Only Strips— — 192 1,416 1,608 
Subtotal Non-Agency39,054 10,117 18,620 14,895 82,686 
Other securities2,948 — 6,835 6,832 16,615 
Total$42,002 $10,955 $25,455 $21,727 $100,139 

 December 31, 2022
 < or equal to 10 
years		> 10 years and < or 
equal to 20 years		> 20 years and < or 
equal to 30 years		> 30 yearsTotal
Agency RMBS Interest-Only Strips$— $53 $— $— $53 
Agency RMBS Interest-Only Strips accounted for as derivatives— 714 — — 714 
Subtotal Agency— 767 — — 767 
Non-Agency CMBS64,484 10,469 10,482 — 85,435 
Non-Agency RMBS— — 8,667 13,816 22,483 
Non-Agency RMBS Interest-Only Strips— — 230 974 1,204 
Subtotal Non-Agency64,484 10,469 19,379 14,790 109,122 
Other securities6,735 — 13,020 7,507 27,262 
Total$71,219 $11,236 $32,399 $22,297 $137,151 
 
20
 September 30, 2017
 
< or equal to 10
years
 
> 10 years and < or
equal to 20 years
 
> 20 years and < or
equal to 30 years
 > 30 years Total
Agency RMBS: 
  
  
  
  
20-Year mortgage$—
 $159,278
 $—
 $—
 $159,278
30-Year mortgage—
 —
 548,196
 —
 548,196
40-Year mortgage—
 —
 —
 387,095
 387,095
Agency RMBS Interest-Only Strips4,203
 6,201
 5,633
 —
 16,037
Agency RMBS Interest-Only Strips, accounted for as derivatives1,798
 5,398
 4,023
 —
 11,219
Agency CMBS1,571,850
 531,335
 —
 —
 2,103,185
Agency CMBS Interest-Only Strips30
 —
 —
 —
 30
Agency CMBS Interest-Only Strips accounted for as derivatives—
 —
 —
 6,016
 6,016
Subtotal Agency1,577,881
 702,212
 557,852
 393,111
 3,231,056
          
Non-Agency RMBS13
 52,530
 4,343
 7,476
 64,362
Non-Agency CMBS8,988
 25,437
 144,292
 99,794
 278,511
Subtotal Non-Agency9,001
 77,967
 148,635
 107,270
 342,873
          
Other securities—
 93,795
 5,004
 23,852
 122,651
Total$1,586,882
 $873,974
 $711,491
 $524,233
 $3,696,580
Table of Contents

 December 31, 2016
 
< or equal to 10 
years
 
> 10 years and < or 
equal to 20 years
 
> 20 years and < or 
equal to 30 years
 > 30 years Total
Agency RMBS: 
  
  
  
  
20-Year mortgage$—
 $498,470
 $—
 $—
 $498,470
30-Year mortgage—
 —
 935,207
 —
 935,207
Agency RMBS Interest-Only Strips499
 10,434
 8,857
 —
 19,790
Agency RMBS Interest-Only Strips, accounted for as derivatives807
 9,476
 6,220
 —
 16,503
Agency CMBS282,911
 80,753
 —
 —
 363,664
Agency CMBS Interest-Only Strips231
 —
 —
 —
 231
Agency CMBS Interest-Only Strips accounted for as derivatives—
 —
 —
 7,729
 7,729
Subtotal Agency284,448
 599,133
 950,284
 7,729
 1,841,594
          
Non-Agency RMBS13
 65,780
 54,408
 120,840
 241,041
Non-Agency RMBS Interest- Only Strips—
 4,955
 10,724
 48,437
 64,116
Non-Agency RMBS Interest-Only Strips, accounted for as derivatives—
 —
 1,043
 2,042
 3,085
Non-Agency CMBS15,865
 37,998
 134,941
 170,115
 358,919
Subtotal Non-Agency15,878
 108,733
 201,116
 341,434
 667,161
          
Other securities—
 40,360
 5,346
 22,056
 67,762
Total$300,326
 $748,226
 $1,156,746
 $371,219
 $2,576,517



The following tables present the gross unrealized losses and estimated fair value of the Company’s MBS and other securities by length of time that such securities have been in a continuous unrealized loss position at SeptemberJune 30, 20172023 and December 31, 20162022 (dollars in thousands):

June 30, 2023
September 30, 2017 Less than 12 Months12 Months or MoreTotal
Less than 12 Months 12 Months or More TotalFair ValueUnrealized
Losses		Number 
of
Securities		Fair ValueUnrealized
Losses		Number 
of
Securities		Fair ValueUnrealized
Losses		Number 
of
Securities
Fair Value 
Unrealized
Losses
 
Number 
of
Securities
 Fair Value 
Unrealized
Losses
 
Number 
of
Securities
 Fair Value 
Unrealized
Losses
 
Number 
of
Securities
Agency RMBS: 
  
  
  
  
  
  
  
  
20-Year mortgage$2,729
 $(16) 4
 $—
 $—
 —
 $2,729
 $(16) 4
30-Year mortgage31,615
 (57) 3
 1,554
 (113) 4
 33,169
 (170) 7
40-Year mortgage290,834
 (814) 1
 —
 —
 —
 290,834
 (814) 1
Agency RMBS Interest-Only Strips5,213
 (189) 7
 1,312
 (45) 2
 6,525
 (234) 9
Agency RMBS Interest-Only Strips$60 $(5)1 $— $— — $60 $(5)1 
Agency CMBS927,395
 (7,141) 53
 —
 —
 —
 927,395
 (7,141) 53
Subtotal Agency1,257,786
 (8,217) 68
 2,866
 (158) 6
 1,260,652
 (8,375) 74
Subtotal Agency60 (5)1 — — — 60 (5)1 
                 
Non-Agency CMBS10,957
 (184) 4
 136,234
 (13,885) 37
 147,191
 (14,069) 41
Non-Agency CMBS— — — 50,145 (27,572)10 50,145 (27,572)10 
Non-Agency RMBSNon-Agency RMBS11,260 (752)2 8,911 (3,255)5 20,171 (4,007)7 
Non-Agency RMBS Interest-Only StripsNon-Agency RMBS Interest-Only Strips— — — 1,608 (3,389)4 1,608 (3,389)4 
Subtotal Non-Agency10,957
 (184) 4
 136,234
 (13,885) 37
 147,191
 (14,069) 41
Subtotal Non-Agency11,260 (752)2 60,664 (34,216)19 71,924 (34,968)21 
Other securitiesOther securities— — — 7,535 (2,665)2 7,535 (2,665)2 
Total$1,268,743
 $(8,401) 72
 $139,100
 $(14,043) 43
 $1,407,843
 $(22,444) 115
Total$11,320 $(757)3 $68,199 $(36,881)21 $79,519 $(37,638)24 
 December 31, 2022
 Less than 12 Months12 Months or MoreTotal
Fair ValueUnrealized
Losses		Number 
of
Securities		Fair ValueUnrealized
Losses		Number 
of
Securities		Fair ValueUnrealized
Losses		Number 
of
Securities
Agency RMBS Interest-Only Strips$52 $(5)1 $— $— — $52 $(5)1 
Subtotal Agency52 (5)1 — — — 52 (5)1 
Non-Agency CMBS— — — 76,365 (21,704)11 76,365 (21,704)11 
Non-Agency RMBS19,054 (2,794)5 1,557 (1,101)2 20,611 (3,895)7 
Non-Agency RMBS Interest-Only Strips— — — 1,203 (4,000)4 1,203 (4,000)4 
Subtotal Non-Agency19,054 (2,794)5 79,125 (26,805)17 98,179 (29,599)22 
Other securities12,483 (2,425)3 9,468 (1,968)2 21,951 (4,393)5 
Total$31,589 $(5,224)9 $88,593 $(28,773)19 $120,182 $(33,997)28 
 
 December 31, 2016
 Less than 12 Months 12 Months or More Total
 Fair Value 
Unrealized
Losses
 
Number 
of
Securities
 Fair Value 
Unrealized
Losses
 
Number 
of
Securities
 Fair Value 
Unrealized
Losses
 
Number 
of
Securities
Agency RMBS: 
  
  
  
  
  
  
  
  
20-Year mortgage$142,749
 $(1,935) 47
 $—
 $—
 —
 $142,749
 $(1,935) 47
30-Year mortgage432,949
 (11,264) 54
 22,586
 (945) 13
 455,535
 (12,209) 67
Agency RMBS Interest-Only Strips6,105
 (227) 6
 1,630
 (94) 2
 7,735
 (321) 8
Agency CMBS145,791
 (260) 7
 —
 —
 —
 145,791
 (260) 7
Subtotal Agency727,594
 (13,686) 114
 24,216
 (1,039) 15
 751,810
 (14,725) 129
                  
Non-Agency RMBS11,628
 (50) 3
 33,034
 (2,185) 6
 44,662
 (2,235) 9
Non-Agency CMBS59,529
 (4,031) 17
 208,288
 (26,015) 47
 267,817
 (30,046) 64
Subtotal Non-Agency71,157
 (4,081) 20
 241,322
 (28,200) 53
 312,479
 (32,281) 73
                  
Other securities7,966
 (415) 1
 23,390
 (1,179) 2
 31,356
 (1,594) 3
Total$806,717
 $(18,182) 135
 $288,928
 $(30,418) 70
 $1,095,645
 $(48,600) 205

The Company identified 47 securities with an unpaid principal balance of $322.2 million which it intended to sell that were in an unrealized loss position held at September 30, 2017, and as a result, the Company recognized an impairment charge of approximately $4.7 million on Agency RMBS which is included in "Other than temporary impairment" in the Company's Consolidated Statements of Operations.
Generally the Company’s records OTTI on security portfolio when the credit quality of the underlying collateral deteriorates and or the schedule payments are faster than previously projected.   The credit deterioration could be as a result of, but not limited to, increased projected realized losses, foreclosures, delinquencies and the likelihood of the borrower being able to make payments in the future.  Generally, a prepayment occurs when a loan has a higher interest rate relative to current interest rates and lenders are willing to extend credit at the lower current interest rate of the underlying collateral for the loan is sold or transferred. Refer to Note 2 "Summary of Significant Accounting Policies - Mortgage-Backed Securities and Other Securities"

The following table presents the OTTI the Company recorded on its securities portfolio (dollars in thousands):
 Three months ended September 30, 2017 Three months ended September 30, 2016 Nine months ended September 30, 2017 Nine months ended September 30, 2016
Agency RMBS$4,760
 $202
 $5,420
 $1,226
Non-Agency RMBS—
 852
 —
 8,081
Non-Agency CMBS2,344
 3,674
 12,658
 9,213
Other securities121
 250
 1,823
 3,611
Total$7,225
 $4,978
 $19,901
 $22,131

The following tables present components of interest income on the Company’s MBS and other securities (dollars in thousands) for the three and ninesix months ended SeptemberJune 30, 20172023 and SeptemberJune 30, 2016, respectively:
2022, respectively (dollars in thousands):
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Three months ended June 30, 2023Three months ended June 30, 2022
For the three months ended September 30, 2017 For the three months ended September 30, 2016Coupon
Interest		Net (Premium Amortization/Amortization Basis) Discount AccretionInterest
Income		Coupon
Interest		Net (Premium Amortization/Amortization Basis) Discount AccretionInterest
Income
Coupon
Interest
 Net (Premium Amortization/Amortization Basis) Discount Amortization 
Interest
Income
 
Coupon
Interest
 Net (Premium Amortization/Amortization Basis) Discount Amortization 
Interest
Income
Agency RMBS$8,886
 $(2,995) $5,891
 $16,525
 $(6,255) $10,270
Agency RMBS$— $3 $3 $5 $(2)$3 
Agency CMBS11,071
 110
 11,181
 677
 (505) 172
Non-Agency CMBSNon-Agency CMBS1,621 338 1,959 2,129 401 2,530 
Non-Agency RMBS571
 372
 943
 8,575
 (1,172) 7,403
Non-Agency RMBS615 (190)425 813 (152)661 
Non-Agency CMBS4,242
 2,139
 6,381
 6,021
 1,954
 7,975
Other securities2,160
 464
 2,624
 464
 732
 1,196
Other securities656 (99)557 767 272 1,039 
Total$26,930
 $90
 $27,020
 $32,262
 $(5,246) $27,016
Total$2,892 $52 $2,944 $3,714 $519 $4,233 


 Six months ended June 30, 2023Six months ended June 30, 2022
Coupon
Interest		Net (Premium Amortization/Amortization Basis) Discount AccretionInterest
Income		Coupon
Interest		Net (Premium Amortization/Amortization Basis) Discount AccretionInterest
Income
Agency RMBS$— $6 $6 $13 $(6)$7 
Non-Agency CMBS3,577 655 4,232 5,101 (1)5,100 
Non-Agency RMBS1,204 (345)859 1,358 (167)1,191 
Other securities1,496 (201)1,295 1,655 38 1,693 
Total$6,277 $115 $6,392 $8,127 $(136)$7,991 
 For the nine months ended September 30, 2017 For the nine months ended September 30, 2016
 
Coupon
Interest
 Net (Premium Amortization/Amortization Basis) Discount Amortization 
Interest
Income
 
Coupon
Interest
 Net (Premium Amortization/Amortization Basis) Discount Amortization 
Interest
Income
Agency RMBS$30,513
 $(10,662) $19,851
 $50,693
 $(22,220) $28,473
Agency CMBS24,408
 717
 25,125
 2,194
 (1,358) 836
Non-Agency RMBS4,482
 303
 4,785
 27,098
 (4,106) 22,992
Non-Agency CMBS14,675
 6,572
 21,247
 19,270
 5,513
 24,783
Other securities5,300
 2,112
 7,412
 1,656
 2,284
 3,940
Total$79,378
 $(958) $78,420
 $100,911
 $(19,887) $81,024


The following tables present the sales and realized gain (loss) of the Company’s MBS and other securities (dollars in thousands) for the three and ninesix months ended SeptemberJune 30, 20172023 and SeptemberJune 30, 2016, respectively:2022, respectively (dollars in thousands):
 Three months ended June 30, 2023Three months ended June 30, 2022
 ProceedsGross GainsGross LossesNet Gain  (Loss)ProceedsGross GainsGross LossesNet Gain (Loss)
Non-Agency CMBS$— $— $(1,237)$(1,237)$10,152 $— $(43,934)$(43,934)
Non-Agency RMBS— — (48)(48)27,729 255 (1,425)(1,170)
Other securities8,694 649 (463)186 4,406 — (478)(478)
Total$8,694 $649 $(1,748)$(1,099)$42,287 $255 $(45,837)$(45,582)

 Six months ended June 30, 2023Six months ended June 30, 2022
 ProceedsGross GainsGross LossesNet Gain  (Loss)ProceedsGross GainsGross LossesNet Gain (Loss)
Non-Agency CMBS$— $— $(1,239)$(1,239)$10,152 $— $(43,934)$(43,934)
Non-Agency RMBS— — (48)(48)27,729 255 (1,425)(1,170)
Other securities15,324 649 (2,028)(1,379)4,406 — (478)(478)
Total$15,324 $649 $(3,315)$(2,666)$42,287 $255 $(45,837)$(45,582)

Unconsolidated CMBS VIEs

The Company’s economic interests held in unconsolidated CMBS VIEs are limited in nature to those of a passive holder of CMBS issued by securitization trusts. The Company was not involved in the design or creation of the securitization trusts. The Company evaluates its CMBS holdings, for potential consolidation of the securitized trust, in which it owns the most subordinate tranche or a portion of the controlling class. As of June 30, 2023 and December 31, 2022, the Company held two and two variable interests in unconsolidated CMBS VIEs, respectively, in which it either owned the most subordinate class or a portion of the controlling class. The Company determined it was not the primary beneficiary and accordingly, the CMBS VIEs were not consolidated in the Company’s consolidated financial statements. As of June 30, 2023 and December 31, 2022, the
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Company’s maximum exposure to loss from these variable interests did not exceed the carrying value of these investments of $14.7 million and $15.5 million, respectively. These investments are classified in "Non-Agency mortgage-backed securities, at fair value" in the Company’s Consolidated Balance Sheets. Further, as of June 30, 2023 and December 31, 2022, the Company did not guarantee any obligations of unconsolidated entities or enter into any commitment or intent to provide funding to any such entities.
 
 For the three months ended September 30, 2017 For the three months ended September 30, 2016
 Proceeds Gross Gains Gross Losses Net Gain  (Loss) Proceeds Gross Gains Gross Losses Net Gain (Loss)
Agency RMBS(1)
$(2,906) $(3) $51
 $48
 $42,427
 $—
 $(138) $(138)
Agency CMBS—
 —
 —
 —
 8,216
 45
 —
 45
Non-Agency RMBS—
 —
 —
 —
 15,209
 1,306
 —
 1,306
Non-Agency CMBS10,597
 1,641
 (278) 1,363
 9,194
 —
 (1,452) (1,452)
Other securities10,419
 419
 —
 419
 14,485
 1,678
 —
 1,678
Total$18,110
 $2,057
 $(227) $1,830
 $89,531
 $3,029
 $(1,590) $1,439

(1)     Reflects a reclassification of proceeds from a sale recorded on the trade date to reflect subsequent Agency RMBS paydowns.
 For the nine months ended September 30, 2017 For the nine months ended September 30, 2016
 Proceeds Gross Gains Gross Losses Net Gain  (Loss) Proceeds Gross Gains Gross Losses Net Gain (Loss)
Agency RMBS (1)
$862,245
 $4,376
 $(7,314) $(2,938) $358,029
 $5,250
 $(5,764) $(514)
Agency CMBS—
 —
 —
 —
 18,637
 54
 (55) (1)
Non-Agency RMBS (2)
243,811
 24,389
 (2,242) 22,147
 120,649
 3,100
 (4,559) (1,459)
Non-Agency CMBS45,634
 2,377
 (1,351) 1,026
 34,188
 —
 (4,381) (4,381)
Other securities33,365
 419
 (54) 365
 764,711
 3,496
 (2,109) 1,387
Total$1,185,055
 $31,561
 $(10,961) $20,600
 $1,296,214
 $11,900
 $(16,868) $(4,968)

(1)For the nine months ended September 30, 2017 and September 30, 2016, excludes proceeds for Agency RMBS Interest-Only Strips, accounted for as derivatives, of approximately $2.6 million and $8.6 million, gross realized gains of $432 thousand and $300 thousand, and gross realized losses of $0 and $455 thousand, respectively.
(2)For the nine months ended September 30, 2017 and September 30, 2016, excludes proceeds for Non-Agency RMBS Interest-Only Strips, accounted for as derivatives, of approximately $2.2 million and $0, gross realized gains of $274 thousand and $0, and gross realized losses of $180 thousand and $0, respectively.




Note 5 — Variable Interest EntitiesResidential Whole Loans and Bridge Loans
 
Residential Whole-Loan TrustWhole Loan Trusts
 
Revolving Mortgage Investment Trust 2015-1QR2

Revolving Mortgage Investment Trust 2015-1QR2 ("RMI 2015 Trust") was formed to acquire Non-QM Residential Whole Loans. RMI 2015 Trust issued a trust certificate that is wholly-owned by the Company and represents the entire beneficial interest in pools of Non-QM Residential Whole Loans held by the trust. The consolidated financial statements also includeCompany consolidates the consolidation of a residential whole-loan trust thatsince it met the definition of a VIE related toand the acquisition of Residential Whole-Loans in which the Company has determined itself to be the primary beneficiary of such trust. The Company determined that it was the primary beneficiary of the Residential Whole-Loan trust, because it was involved in certain aspects of the design of the trust, has certain oversight rights on defaulted assets and has other significant decision making powers. In addition, the Company has the obligation to absorb losses to the extent of its ownership interest and the right to receive benefits from the trust that could potentially be significant to the trust.  The trust has issued a trust certificate to the Company, which represents the beneficial interest in pools of Residential Whole-Loans held by the trust. As of September 30, 2017, the Company financed the trust certificate with $156.8 million of repurchase borrowings, which is a liability held outside the trust.beneficiary. The Company classifies the underlying Non-QM Residential Whole-LoansWhole Loans owned by the trust in "Residential Whole-Loans,Whole Loans, at fair value" in the Consolidated Balance Sheets and has eliminated the intercompany trust certificate in consolidation.


As of June 30, 2023 and December 31, 2022, the RMI 2015 Trust owned six and six Non-QM Residential Whole Loans with a fair value of $3.4 million and $3.2 million, respectively. The loans are financed under the Company's residential whole loan facility, and the Company holds the financing liability outside the RMI 2015 Trust. See Note 7, "Financings" to the Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for additional details.

Arroyo Mortgage Trust 2019-2

In May 2019, the Company formed Arroyo Mortgage Trust 2019-2 ("Arroyo Trust 2019"), a wholly-owned subsidiary of the Company, to complete its first residential mortgage-backed securitization comprised of $945.5 million of Non-QM Residential Whole Loans. The Arroyo Trust 2019 issued $919.0 million of mortgage-backed notes and retained all the subordinate and residual debt securities ("Owner Certificates"), which includes the required 5% eligible risk retention. Refer to Note 7, "Financings" for details. The Company consolidates the trust since it met the definition of a VIE and the Company determined that it was the primary beneficiary. The Company classifies the underlying Non-QM Residential Whole Loans in "Residential Whole Loans, at fair value" in the Consolidated Balance Sheets and eliminated the intercompany Owner Certificates in consolidation.

As of June 30, 2023 and December 31, 2022, the Arroyo Trust 2019 owned 711 and 766 Non-QM Residential Whole Loans with a fair value of $223.1 million and $237.6 million, respectively.

Arroyo Mortgage Trust 2020-1

In June 2020, the Company formed Arroyo Mortgage Trust 2020-1 ("Arroyo Trust 2020"), a wholly-owned subsidiary of the Company, to complete its second residential mortgage-backed securitization comprised of $355.8 million of Non-QM Residential Whole Loans. The Arroyo Trust 2020 issued $341.7 million of mortgage-backed notes and retained all the subordinate and residual debt securities, which includes the required 5% eligible risk retention. See Note 7, "Financings" to the Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for additional details. The Company consolidates the trust since it met the definition of a VIE and the Company determined that it was the primary beneficiary. The Company classifies the underlying Non-QM Residential Whole Loans in "Residential Whole Loans, at fair value" in the Consolidated Balance Sheets and eliminated the intercompany Owner Certificates.

As of June 30, 2023 and December 31, 2022, the Arroyo Trust 2020 owned 415 and 432 Non-QM Residential Whole Loans with a fair value of $131.7 million and $135.1 million, respectively.

Arroyo Mortgage Trust 2022-1

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In February 2022, the Company formed Arroyo Mortgage Trust 2022-1 ("Arroyo Trust 2022-1"), a wholly-owned subsidiary of the Company, to complete its third residential mortgage-backed securitization comprised of $432.0 million of Non-QM Residential Whole Loans. The Arroyo Trust 2022-1 issued $398.9 million of mortgage-backed notes and retained all the subordinate and residual debt securities, which includes the required 5% eligible risk retention. See Note 7, "Financings" to the Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for additional details. The Company consolidates the trust since it met the definition of a VIE and the Company determined that it was the primary beneficiary. The Company classifies the underlying Non-QM Residential Whole Loans in "Residential Whole Loans, at fair value" in the Consolidated Balance Sheets and eliminated the intercompany Owners Certificates.

As of June 30, 2023 and December 31, 2022, the Arroyo Trust 2022-1 owned 692 and 705 Non-QM Residential Whole Loans with a fair value of $343.1 million and $350.7 million, respectively. The Company has elected the fair value option for the securitized debt. The fair values for the Company’s Non-QM loans held in the Arroyo Trust 2022-1 are measured using the fair value of the securitized debt based on the CFE valuation methodology. The Company determined that the securitized debt is more actively traded and, therefore, more observable.

Arroyo Mortgage Trust 2022-2

In July 2022, the Company formed Arroyo Mortgage Trust 2022-2 ("Arroyo Trust 2022-2"), a wholly-owned subsidiary of the Company, to complete its fourth residential mortgage-backed securitization comprised of $402.2 million of Non-QM Residential Whole Loans. The Arroyo Trust 2022-2 issued $351.9 million of mortgage-backed notes and retained all the subordinate and residual debt securities, which includes the required 5% eligible risk retention. See Note 7, "Financings" to the Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for additional details. The Company consolidates the trust since it met the definition of a VIE and the Company determined that it was the primary beneficiary. The Company classifies the underlying Non-QM Residential Whole Loans in "Residential Whole Loans, at fair value" in the Consolidated Balance Sheets and eliminated the intercompany Owners Certificates.

As of June 30, 2023 and December 31, 2022, the Arroyo Trust 2022-2 owned 997 and 1,029 Non-QM Residential Whole Loans with a fair value of $335.2 million and $363.3 million, respectively. The Company has elected the fair value option for the securitized debt. The fair values for the Company’s Non-QM loans held in the Arroyo Trust 2022-2 are measured using the fair value of the securitized debt based on the CFE valuation methodology. The Company determined that the securitized debt is more actively traded and, therefore, more observable.

Residential Bridge Loan Trust


In February 2017, the Company formed Revolving Mortgage Investment Trust 2017-BRQ1 ("RMI 2017 Trust") to acquire Residential Bridge Loans. RMI 2017 Trust issued a trust certificate tothat is wholly-owned by the Company whichand represents the entire beneficial interest in pools of Residential Bridge Loans and certain Residential Whole Loans held by the trust. Residential Bridge Loans are mortgage loans secured by non owner occupied single family or multifamily residences, typically short-term. The Company determined that RMI Trust wasconsolidates the trust since it met the definition of a VIE and itselfthe Company determined that it was the primary beneficiary because it was involved in certain aspects of the design of the trust, has certain oversight rights on defaulted assets and has other significant decision making powers. In addition, the Company has the obligation to absorb losses to the extent of its ownership interest and the right to receive benefits from the trust that could potentially be significant to the trust. As of September 30, 2017, the Company financed the trust certificate with $51.1 million of repurchase borrowings, which is a liability held outside the trust.beneficiary. The Company classifies the underlying Residential Bridge Loans owned by the trust in "Residential Bridge Loans" which are carried at amortized cost in the Consolidated Balance Sheets and has eliminated the intercompany trust certificate in consolidation.


Commercial Loan Trust
In November 2015, theThe Company acquired a $14.0 million interestis no longer allocating capital to Residential Bridge Loans. As of June 30, 2023, and December 31, 2022, there were four and five remaining Residential Bridge Loans in the trust certificate issued by CMSCRMI 2017 Trust 2015 - Longhouse MZ (“CMSC Trust”), with a fair value of $14.0$2.8 million at Septemberand $2.8 million, respectively. As of June 30, 2017, which is financed with $6.8 million of repurchase borrowings. The Company determined that CMSC Trust was a VIE2023, and itself the primary beneficiary because it was involved in certain aspects of the design ofDecember 31, 2022, the trust has certain oversight rights on defaulted assetsalso owned three and has other significant decision making powers. In addition, the Company has the obligation to absorb losses to the extent of its ownership interest and the right to receive benefits from the trust that could potentially be significant to the trust. The CMSC Trust holdsfive investor fixed rate residential mortgages with a $24.9 million mezzanine loan collateralized by interests in commercial real estate.  The mezzanine loan serves as collateral for the $24.9 million of trust certificates issued. As of September 30, 2017, the Company classified the mezzanine loan at fair value of $1.0 million and $1.2 million, respectively, which are included in "Securitized commercial loan,"Residential Whole Loans, at fair value" in the Consolidated Balance Sheets.  Sheets contained in this Quarterly Report on Form 10-Q.

Consolidated Residential Whole Loan and Residential Bridge Loan Trusts

The $24.9following table presents a summary of the assets and liabilities of the consolidated residential whole loan trusts and residential bridge loan trust included in the Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022 (dollars in thousands):
24
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 June 30, 2023December 31, 2022
Residential Whole Loans, at fair value ($1,036,385 and $1,089,914 pledged as collateral, at fair value, respectively)$1,037,381 $1,091,145 
Residential Bridge Loans, at fair value2,782 2,849 
Investment related receivable8,760 5,914 
Interest receivable4,648 4,871 
Other assets— 509 
Total assets$1,053,571 $1,105,288 
Securitized debt, net$925,596 $981,073 
Interest payable2,976 3,139 
Accounts payable and accrued expenses51 34 
Total liabilities$928,623 $984,246 

The Residential Whole Loans held by the consolidated Arroyo Trust 2019, Arroyo Trust 2020, Arroyo Trust 2022-1, and Arroyo Trust 2022-2 are held solely to satisfy the liabilities of each respective trust, and has no recourse to the general credit of the Company. The Company is not contractually required and has not provided any additional financial support to the trusts for the periods ended June 30, 2023 and December 31, 2022.

The following table presents the components of the fair value of Residential Whole Loans and Residential Bridge Loans as of June 30, 2023 and December 31, 2022 (dollars in thousands):
 Residential Whole Loans, at Fair ValueResidential Bridge Loans, at Fair Value
 June 30, 2023December 31, 2022June 30, 2023December 31, 2022
Principal balance$1,106,551 $1,165,301 $3,091 $3,166 
Unamortized premium29,415 30,961 — — 
Unamortized discount(1,449)(1,536)— — 
Amortized cost1,134,517 1,194,726 3,091 3,166 
Gross unrealized gains4,299 2,038 — — 
Gross unrealized losses(101,435)(105,619)(309)(317)
Fair value$1,037,381 $1,091,145 $2,782 $2,849 

Residential Whole Loans

The Residential Whole Loans have low LTV's and are comprised of 2,824 adjustable and fixed rate Non-QM and investor mortgages. The following tables present certain information about the Company’s residential whole loan investment portfolio at June 30, 2023 and December 31, 2022 (dollars in thousands):
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June 30, 2023
   Weighted Average
Current Coupon RateNumber of 
Loans		Principal
 Balance		Original LTV
Original 
FICO Score(1)
Expected 
Life (years)		Contractual 
Maturity 
(years)		Coupon 
Rate
2.01% – 3.00%39 $22,018 66.3 %758 8.927.82.9 %
3.01% – 4.00%366 200,548 66.9 %760 7.528.33.7 %
4.01% – 5.00%1,236 417,820 64.5 %750 5.725.74.6 %
5.01% – 6.00%875 347,001 65.5 %742 4.826.25.5 %
6.01% – 7.00%282 110,986 68.1 %742 3.627.26.4 %
7.01% - 8.00%25 8,173 68.3 %735 3.426.57.4 %
8.01% - 9.00%1 5 65.0 %693 3.823.98.5 %
Total2,824 $1,106,551 65.7 %749 5.526.54.9 %

(1)The original FICO score is not available for 219 loans with a principal balance of approximately $69.4 million at June 30, 2023. The Company has excluded these loans from the weighted average computations.
December 31, 2022
   Weighted Average
Current Coupon RateNumber of 
Loans		Principal 
Balance		Original LTV
Original 
FICO Score(1)
Expected 
Life (years)		Contractual 
Maturity 
(years)		Coupon 
Rate
2.01% – 3.00%39 $22,277 66.3 %758 8.928.32.9 %
3.01% – 4.00%402 214,402 66.3 %759 7.328.53.7 %
4.01% – 5.00%1,337 453,811 64.1 %749 5.526.04.6 %
5.01% – 6.00%901 363,197 65.6 %742 4.726.75.4 %
6.01% – 7.00%249 105,933 69.9 %742 3.628.46.4 %
7.01% - 8.00%15 5,681 75.2 %730 3.029.27.4 %
Total2,943 $1,165,301 65.6 %748 5.527.04.8 %

(1)The original FICO score is not available for 231 loans with a principal balance of trust certificates,approximately $76.6 million at December 31, 2022. The Company has excluded these loans from the weighted average computations.

The following table presents geographic concentrations by U.S. state in which the collateral securing the Company’s Residential Whole Loans are located as of which $14.0 million was eliminatedJune 30, 2023 and December 31, 2022 (dollars in consolidation andthousands):

June 30, 2023December 31, 2022
StateState ConcentrationPrincipal BalanceStateState ConcentrationPrincipal Balance
California67.4 %$745,643 California66.8 %$778,732 
New York9.1 %100,950 New York9.3 %108,108 
Texas4.8 %52,905 Texas4.8 %56,126 
Florida4.0 %44,003 Florida4.1 %47,681 
Georgia3.4 %37,771 Georgia3.5 %40,845 
Other11.3 %125,279 Other11.5 %133,809 
Total100.0 %$1,106,551 Total100.0 %$1,165,301 





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Residential Bridge Loans

The Company is no longer allocating capital to Residential Bridge Loans. The following tables present certain information about the remaining $11.0Residential Bridge Loans which are non-performing in the Company's investment portfolio at June 30, 2023 and December 31, 2022 (dollars in thousands):
June 30, 2023
  Weighted Average
Current Coupon RateNumber of LoansPrincipal
Balance		Original LTV
Contractual
Maturity
 (months)(1)
Coupon
Rate
7.01% – 9.00%2$1,822 67.5 %0.08.7 %
9.01% – 11.00%1849 90.5 %0.010.0 %
11.01% – 13.00%1420 70.0 %0.011.3 %
Total4$3,091 74.2 %0.09.4 %

December 31, 2022
   Weighted Average
Current Coupon RateNumber of LoansPrincipal
Balance		Original LTV
Contractual
Maturity
 (months)(1)
Coupon
Rate
7.01% – 9.00%2$1,822 67.5 %0.08.7 %
9.01% – 11.00%1849 90.5 %0.010.0 %
11.01% – 13.00%2495 69.7 %0.011.4 %
Total5$3,166 74.0 %0.09.5 %

(1) Non-performing loans that are past their maturity date are excluded from the calculation of the weighted average contractual maturity. The weighted average contractual maturity for these loans is zero.

The following table presents geographic concentrations by U.S. state in which the collateral securing the Company’s Residential Bridge Loans are located as of June 30, 2023 and December 31, 2022 (dollars in thousands):
June 30, 2023December 31, 2022
StateConcentrationPrincipal BalanceStateConcentrationPrincipal Balance
California56.7 %$1,754 California55.4 %$1,754 
New York43.3 %1,337 New York42.2 %1,337 
Total100.0 %$3,091 New Jersey2.4 %75 
Total100.0 %$3,166 

Loan Aging

The following table presents the aging of the Residential Whole Loans and Residential Bridge Loans as of June 30, 2023 (dollars in thousands):
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Residential Whole Loans (1)
Residential Bridge Loans (1)
No of LoansPrincipalFair ValueNo of LoansPrincipalFair Value
Current2,779 $1,082,536 $1,014,645 — $— $— 
1-30 days20 10,339 9,984 — — — 
31-60 days10 4,546 4,231 — — — 
61-90 days— — — — — — 
90+ days15 9,130 8,521 4 3,091 2,782 
Total2,824 $1,106,551 $1,037,381 4 $3,091 $2,782 

(1) As of June 30, 2023, there were no loans in forbearance.

Residential Whole Loans
As of June 30, 2023, there were 15 Residential Whole Loans carried at fair value in non-accrual status with an unpaid principal balance of approximately $9.1 million held by an affiliate is carried atand a fair value of $11.0$8.5 million. These non-performing loans represent approximately 0.8% of the total outstanding principal balance. These loans are collateral dependent with a weighted average original LTV of 70.9%.

As of December 31, 2022, there were 13 Residential Whole Loans carried at fair value in non-accrual status with an unpaid principal balance of approximately $8.7 million and classified as "Securitized debt,a fair value of approximately $8.0 million. These non-performing loans represent approximately 0.8% of the total outstanding principal balance. These loans are collateral dependent with a weighted average original LTV of 60.0%.

These loans are carried at fair value"value, and accordingly no allowance for credit losses or credit loss expense was recorded, since the adjustment for credit losses, if any, would be reflected in the fair value of these loans as a component of "Unrealized gain (loss), net" in the Consolidated Statements of Operations contained in this Quarterly Report on Form 10-Q. The Company stopped accruing interest income for these loans when they became contractually 90 days delinquent.

Residential Bridge Loans

    As of June 30, 2023, the Company had four remaining Residential Bridge Loans in the portfolio. Of these, four were in non-accrual status with an unpaid principal balance of approximately $3.1 million and a fair value of $2.8 million.

As of December 31, 2022, the Company had five remaining Residential Bridge Loans in the portfolio. Of these, five were in non-accrual status with an unpaid principal balance of approximately $3.2 million and a fair value of $2.8 million. These loans are collateral dependent.

The Residential Bridge Loans were carried at fair value. No allowance for credit losses was recorded because the valuation adjustments as of June 30, 2023 and December 31, 2022, if any, would be reflected in the fair value of these loans. The Company stopped accruing interest income for these loans when they became contractually 90 days delinquent.

Residential Real Estate Owned
As of June 30, 2023 and December 31, 2022, the Company had one residential REO property with a carrying value of $2.3 million and $2.3 million, respectively, related to a foreclosed Residential Whole Loan. The REO property held by the Company as of June 30, 2023 and December 31, 2022 was transferred to REO in December 2022. The residential REO properties are held for sale and accordingly carried at the lower of cost or fair value less cost to sell. The residential REO properties are classified in "Other assets" in the Consolidated Balance Sheets.Sheets contained in this Quarterly Report on Form 10-Q.

Note 6 — Commercial Loans

Commercial Loans

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    In January 2019, WMC CRE LLC ("CRE LLC"), a wholly-owned subsidiary of the Company was formed for the purpose of acquiring Commercial Loans. The Commercial Loans owned by CRE LLC are financed under the Commercial Whole Loan Facility. See Note 7, "Financing" to the Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.

The following table presents information about the Commercial Loans owned by CRE LLC as of June 30, 2023 (dollars in thousands):
LoanAcquisition DateLoan TypePrincipal BalanceFair ValueOriginal LTVInterest RateMaturity DateExtension OptionCollateral
CRE 4September 2019Interest-Only First Mortgage$22,204 $22,053 63%1-Month SOFR plus 3.38%
8/6/2025(1)
NoneRetail
CRE 5December 2019Interest-Only First Mortgage24,535 23,993 62%1-Month SOFR plus 4.95%
11/6/2023(2)
One - 12 month extensionHotel
CRE 6December 2019Interest-Only First Mortgage13,207 12,914 62%1-Month SOFR plus 4.95%
11/6/2023(2)
One - 12 month extensionHotel
CRE 7December 2019Interest-Only First Mortgage7,259 7,099 62%1-Month SOFR plus 4.95%
11/6/2023(2)
One - 12 month extensionHotel
$67,205 $66,059 

(1) In August 2022, CRE 4 was extended three-years through August 6, 2025, with a principal paydown of $16.2 million.
(2) In November 2022, CRE 5, 6, and 7 were each extended for one-year through November 6, 2023.

Commercial Loan Sale

On February 3, 2023, the CRE 3 loan was sold to an unaffiliated third party for its recorded fair value as of December 31, 2022 of $8.8 million. At the time of sale, the Company recognized a realized loss of $81.2 million and a related reversal of unrealized loss of the same amount.

Commercial Loan Trust

In March 2018, the Company formed the Revolving Small Balance Commercial Trust 2018-1 ("RSBC Trust") to acquire commercial real estate mortgage loans. The Company consolidates the trust because it determined that the wholly-owned RSBC Trust was a VIE and that the Company was the primary beneficiary. As of SeptemberJune 30, 2017,2023, there was one loan remaining in the aggregate fair valuetrust.

The following table presents information on the commercial real estate mortgage loan held by RSBC Trust as of June 30, 2023 (dollars in thousands):
LoanAcquisition DateLoan TypePrincipal BalanceFair ValueLTV
Interest Rate(1)
Maturity Date(1)
Extension Option
Collateral
SBC 3January 2019Interest-Only First Mortgage$12,750 $12,747 49%1-Month SOFR plus 5.50%8/4/2023One - 3 month extensionNursing Facilities
$12,750 $12,747 

(1) In January 2023, the SBC 3 loan was partially paid down by $862 thousand to bring the unpaid principal balance to $13.5 million, the maturity date was extended through May 5, 2023 for a 50 bps extension fee and the margin was increased from 4.47% to 5.00%. In May 2023, the SBC 3 loan was partially paid down by $750 thousand to bring the unpaid principal to $12.8 million, the maturity date was extended through August 4, 2023, and the margin was increased from 5.00% to 5.50%. In July 2023, the SBC 3 loan was partially paid down by $250 thousand to bring the unpaid principal balance to $12.5 million, and the maturity date was extended to October 4, 2023 for a 25 bps extension fee. The borrower under this loan may, at its option, extend the October 4, 2023 maturity date for an additional period of three months through December 31, 2023, with an additional required paydown of $250 thousand and a 25 bps extension fee.

Securitized Commercial Loans
Securitized Commercial Loans are comprised of Commercial Loans from consolidated third party sponsored CMBS VIE's. At June 30, 2023, the Company had a variable interest in one third party sponsored CMBS VIE, CSMC Trust 2014-USA, that it determined it was the primary beneficiary and was required to consolidate. The Commercial Loan that serves as collateral for the securitized debt issued by the consolidatedthis VIE was $11.0 million which is classified as Securitized debt, at fair value in the Company’s Consolidated Balance Sheets.  The cost of financingcan only be used to settle the securitized debt is approximately 8.9%.debt. See Note 7, "Financings" to

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the Consolidated Loan Trusts
Financial Statements contained in this Quarterly Report on Form 10-Q for details on the associated securitized debt. The Company assesses modifications to VIEs on an ongoing basis to determine if a significant reconsideration event has occurred that would change the Company’s initial consolidation assessment.

CSMC Trust 2014-USA

The threeCompany together with other related party entities own more than 50% of the controlling class of CSMC Trust 2014-USA ("CSMC USA"). As of June 30, 2023, the Company held an 8.8% interest in the trust certificates issued by CSMC USA (F Class) with an outstanding principal balance of $14.9 million. The Company performs ongoing reassessment of its CMBS VIE holdings for potential consolidation of the securitized trust in which it owns a portion of the controlling class. Since the ownership of the controlling financial interest is held within a related party group, the Company must determine whether it is the primary beneficiary under the related party tie-breaker rule. As a result of the Company's evaluation, it was determined that the Company is the primary beneficiary of CSMC USA, and effective on August 1, 2020, consolidated trusts hold 483 Residential Whole-Loans , 156 Residential Bridge LoansCSMC USA. The Company’s investment in the trust certificate of CSMC USA (F Class) was eliminated in the consolidation. The CSMC USA holds a commercial loan secured by a first mortgage lien on the borrowers’ fee and oneleasehold interests in a portion of a super-regional mall. The outstanding principal balance on this commercial loan is $1.4 billion as of June 30, 2023. The loan has a stated maturity date of September 11, 2025 and bears a fixed interest rate of 4.38%. The Company elected the fair value option for the commercial loan as well as the associated securitized debt.

In December 2020, the commercial loan held by CSMC USA was amended to an interest only payment through maturity. As part of Septemberthe modification, a Cash Management Forbearance Agreement was entered into by the special servicer and the borrower, which required both increased reporting requirements and monthly net cash remittance.
Consolidated Securitized Commercial Loan Trust and Commercial Loan Trust
The two commercial consolidated trusts, CSMC USA and RSBC Trust, collectively held two Commercial Loans as of June 30, 2017. 

2023. The following table presents a summary of the assets and liabilities of the twoconsolidated loan trusts included in the Consolidated Balance Sheets as of SeptemberJune 30, 20172023 and December 31, 20162022 (dollars in thousands).:


 June 30, 2023December 31, 2022
Restricted cash$— $248 
Securitized Commercial Loan, at fair value1,025,321 1,085,103 
Commercial Loans, at fair value12,747 14,362 
Interest receivable5,150 5,311 
Total assets$1,043,218 $1,105,024 
Securitized debt, at fair value$1,019,310 $1,077,611 
Interest payable4,995 5,164 
Accounts payable and accrued expenses9 9 
Other liabilities— 248 
Total liabilities$1,024,314 $1,083,032 
 September 30, 2017 December 31, 2016
Residential Whole-Loans, at fair value$191,439
 $192,136
Residential Bridge Loans54,912
 —
Securitized commercial loan, at fair value24,952
 24,225
Investment related receivable7,178
 1,241
Accrued interest receivable2,529
 1,622
Total assets$281,010
 $219,224
Securitized debt, at fair value$10,979
 $10,659
Accrued interest payable82
 85
Accounts payable and accrued expenses157
 2
Total liabilities$11,218
 $10,746

The Company’s risk with respect to its investment in eachthe securitized commercial loan trust is limited to its direct ownership in the trust. The Residential Whole-Loans, Residential Bridge Loans and securitized commercial loanCommercial Loan held by the consolidated trusts aresecuritized commercial loan trust is held solely to satisfy the liabilities of the trust, and creditors of the trust have no recourse to the general credit of the Company. The assetsSecuritized Commercial Loan of a consolidatedthe trust can only be used to satisfy the obligations of thatthe trust. The Company is not contractually required to provide, and has not provided any additional financial support to the trustssecuritized commercial loan trust for the three and ninesix months ended SeptemberJune 30, 20172023 and SeptemberJune 30, 2016.  The Company did not deconsolidate any trusts during the three and nine months ended September 30, 2017 and September 30, 2016.2022. 


The following table presents the components of the fair value of Residential Whole-Loansthe Securitized Commercial Loans and securitized commercial loanCommercial Loans as of SeptemberJune 30, 20172023 and December 31, 20162022 (dollars in thousands):

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Residential Whole-Loans Securitized Commercial Loan CSMC USA Trust Securitized Commercial Loan, at Fair ValueRSBC Trust Commercial Loans, at Fair ValueCommercial Loans, at Fair Value
September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016 June 30, 2023December 31, 2022June 30, 2023December 31, 2022June 30, 2023December 31, 2022
Principal balance$187,521
 $187,765
 $24,941
 $25,000
Principal balance$1,385,591 $1,385,591 $12,750 $14,362 $67,205 $157,205 
Unamortized premium1,255
 1,311
 —
 —
Unamortized discount(998) (539) —
 —
Unamortized discount(69,863)(84,132)(1)— — — 
Amortized costAmortized cost1,315,728 1,301,459 12,749 14,362 67,205 157,205 
Gross unrealized gains3,759
 3,643
 11
 —
Gross unrealized gains— — — — — — 
Gross unrealized losses(98) (44) —
 (775)Gross unrealized losses(290,407)(216,356)(2)— (1,146)(81,565)
Fair value$191,439
 $192,136
 $24,952
 $24,225
Fair value$1,025,321 $1,085,103 $12,747 $14,362 $66,059 $75,640 

Residential Whole-Loans

The Residential Whole-Loans are comprised of non-qualifying, mostly adjustable rate mortgages with low loan to values (or “LTV”).  The following tables present certain information about the Company’s Residential Whole-Loan investment portfolio at September 30, 2017 and December 31, 2016 (dollars in thousands):
September 30, 2017
     Weighted Average
Current Coupon RateNumber of Loans 
Principal
 Balance
 Original LTV 
Original 
FICO Score(1)
 
Expected 
Life (years)
 
Contractual 
Maturity 
(years)
 
Coupon 
Rate
3.01 – 4.00%94
 $40,696
 54.4% 750
 1.6 28.3 3.9%
4.01– 5.00%246
 92,170
 55.4% 725
 1.4 26.2 4.4%
5.01 – 6.00%138
 51,635
 57.4% 723
 1.5 26.6 5.2%
6.01 – 7.00%5
 3,020
 71.2% 738
 1.3 20.4 6.3%
Total483
 $187,521
 56.0% 731
 1.4 26.6 4.5%

(1)The original FICO score is not available for 140 loans with a principal balance of approximately $56.6 million at September 30, 2017. The Company has excluded these loans from the weighted average computations.
December 31, 2016
     Weighted Average
Current Coupon RateNumber of Loans 
Principal 
Balance
 Original LTV 
Original 
FICO Score(1)
 
Expected 
Life (years)
 
Contractual 
Maturity 
(years)
 
Coupon 
Rate
3.01 – 4.00%59
 $23,318
 54.8% 732
 1.4 26.5 4.2%
4.01– 5.00%180
 69,930
 57.1% 728
 1.5 27.3 4.6%
5.01 – 6.00%231
 91,440
 55.5% 723
 1.6 27.1 5.0%
6.01 – 7.00%5
 3,077
 71.2% 738
 1.3 21.1 6.3%
Total475
 $187,765
 56.3% 726
 1.5 27.0 4.8%
(1)The original FICO score is not available for 153 loans with a principal balance of approximately $66.7 million at December 31, 2016. The Company has excluded these loans from the weighted average computations.

The following table presents the U.S. states in which the collateral securing the Company’s Residential Whole-Loans at September 30, 2017 and December 31, 2016, based on principal balance, is located (dollars in thousands):

September 30, 2017 December 31, 2016
StateConcentration Principal Balance StateState Concentration Principal Balance
California70.0% $131,403
 California85.2% $159,955
New York19.1% 35,877
 Washington5.6% 10,591
Washington5.0% 9,290
 Massachusetts5.4% 10,161
Massachusetts4.9% 9,175
 New York2.4% 4,454
Georgia0.7% 1,266
 Georgia0.8% 1,492
Other0.3% 510
 Other0.6% 1,112
Total100.0% $187,521
 Total100.0% $187,765


Residential BridgeNon-Performing Commercial Loans

The Residential Bridge Loans are comprised of short-term non-owner occupied fixed rate loans secured by single or multi-unit residential properties, with LTVs generally not to exceed 85%. The following table presents certain information about the Company’s Residential Bridge Loan investment portfolio at September 30, 2017. (dollars in thousands):
September 30, 2017
          Weighted Average
Current Coupon Rate Number of Loans 
Principal
Balance
 Unamortized Premium Carrying Value Original LTV 
Original
FICO Score(1)
 
Contractual
Maturity
(months)
 
Coupon
Rate
8.01 – 9.00% 37 $16,164
 $78
 $16,242
 72.3% 718
 14.3 8.9%
9.01 – 10.00% 75 27,011
 110
 27,121
 73.8% 669
 7.7 9.6%
10.01 – 11.00% 34 9,193
 25
 9,218
 74.7% 648
 4.1 10.7%
17.01 – 18.00% 10 2,348
 (17) 2,331
 72.0% 630
 7.7 18.0%
Total 156 $54,716
 $196
 $54,912
 73.4% 679
 9.1 10.0%
(1)The original FICO score is not available for 20 loans with a principal balance of approximately $6.2 million at September 30, 2017. The Company has excluded these loans from the weighted average computations.

The following table presents the U.S. states in which the collateral securing the Company’s Residential Bridge Loans at September 30, 2017, based on principal balance, is located (dollars in thousands):
September 30, 2017
StateConcentration Principal Balance
California49.8% $27,311
Florida27.4% 14,988
Hawaii7.7% 4,225
Washington4.9% 2,664
Oregon4.0% 2,180
Other6.2% 3,348
Total100.0% $54,716
Non-performing Loans


As of SeptemberJune 30, 2017,2023, there was one Residential Whole-Loan over 90-days past due with a current unpaid principal balance of $825 thousand and a fair value of $803 thousand and 6 Residential Bridgeare no Commercial Loans over 90-days past due with an unpaid principal balance of approximately $1.6 million. These nonperforming Residential Whole Loans and Residential Bridge Loans represent approximately 0.4% and 2.9% of the total outstanding principal balance, respectively. No allowance and provision for credit losses was recorded for these loans as of and for the three months ended September 30, 2017 since the Company elected the fair value option for our Residential Whole-Loans and wethat are expecting full recovery of the principal and interest is expected for the non-performing Bridge Loans. The Company stopped accruing interest income for these loans when they became contractually 90 days delinquent.non-performing.


Unconsolidated VIEs

The Company’s economic interests held in unconsolidated VIEs are limited in nature to those of a passive holder of RMBS and CMBS issued by securitization trusts; the Company was not involved in the design or creation of the securitization trusts which issued its investments in MBS. As of September 30, 2017 and December 31, 2016, the Company had three investments in VIEs in which it was not the primary beneficiary, and accordingly, the VIEs were not consolidated in the Company’s consolidated financial statements. As of September 30, 2017 and December 31, 2016, the Company’s maximum exposure to loss from these investments did not exceed the sum of the $62.5 million and $60.5 million carrying value of the investments, respectively, which are classified in "Mortgage-backed securities and other securities, at fair value" in the Company’s Consolidated Balance Sheets. Further, as of September 30, 2017 and December 31, 2016, the Company had not guaranteed any obligations of unconsolidated entities or entered into any commitment or intent to provide funding to any such entities.

Note 67 — Borrowings under Financings

Repurchase Agreements


The Company mainly financeshas primarily financed its investment acquisitions with repurchase agreements. The repurchase agreements bear interest at a contractually agreed-upon rate and typically havehistorically had terms ranging from one month to three12 months.  The Company’s repurchase agreement borrowings are accounted for as secured borrowings when the Company maintains effective control of the financed assets. Under thethese repurchase agreements, the respective counterparties retain the right to determine the fair value of the underlying collateral. A reduction in the value of pledged assets normally requires the Company to post additional securities as collateral, pay down borrowings, or establish cash margin accounts with the counterparties in order to re-establish the agreed-upon collateral requirements, andwhich is referred to as a margin call. The inability of the Company to post adequate collateral for a margin call by a counterparty, in a timeframetime frame as short as the close of the same business day, could result in a condition of default under the Company’s repurchase agreements, thereby enabling the counterparty to liquidate the collateral pledged by the Company, which may have a material adverse effect on the Company’s financial position, results of operations, and cash flows. Under the terms

Residential Whole Loan Facility

The facility was extended on November 9, 2022 and matures on October 25, 2023. It bears interest at a rate of the repurchase agreements1-Month Term SOFR plus 2.25%, with a floor of 0.25%.

The Company finances its non-securitized Non-QM residential whole loans under this facility. As of June 30, 2023, the Company may rehypothecate pledged U.S. Treasury securities it receiveshad outstanding borrowings of $4.4 million under the facility. The borrowing is secured by Non-QM residential whole loans with a fair value of $3.4 million and one REO property with a carrying value of $2.3 million as of June 30, 2023.

Non-Agency CMBS and Non-Agency RMBS facility

The facility was paid off in full in May 2023 and replaced with a facility from its repurchase agreementa different counterparty which matures in May 2024. It bears a current weighted average interest rate of 1-Month Term SOFR plus 2.50%. As of June 30, 2023, the outstanding balance under this facility was $60.0 million. The borrowing is secured by investments with a fair market value of $95.0 million as incremental collateral in order to increaseof June 30, 2023.

Commercial Whole Loan Facility
The facility was extended on November 9, 2022 and matures on November 3, 2023. It bears interest at a rate of 1-Month Term SOFR plus 2.25%. As of June 30, 2023, the Company’s cash position.  At Septemberoutstanding balance under this facility was $48.0 million. The borrowing is secured by the performing commercial loans with an estimated fair market value of $66.1 million as of June 30, 2017 and December 31, 2016, the Company did not have any rehypothecated U.S. Treasury securities.2023.

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Financial Metrics
Certain of the repurchase agreementsCompany’s financing arrangements provide the counterparty with the right to terminate the agreement and accelerate amounts due under the associated agreement if the Company does not maintain certainfinancial metrics. Although specific to each financing arrangement, typical financial metrics include minimum equity, liquidity requirements, leverage ratios, and leverage metrics, the most restrictive of which include a limit on leverage based on the compositionperformance triggers. In addition, some of the Company’s portfolio.   For all the repurchasefinancing arrangements contain cross-default features, whereby default under an agreement with one lender simultaneously causes default under agreements with outstanding borrowings, theother lenders. The Company was in compliance with the terms of such financial tests as of SeptemberJune 30, 2017.
2023.
As of SeptemberJune 30, 2017, the Company had master repurchase agreements with 27 counterparties.  As of September 30, 2017,2023, the Company had borrowings under four of its master repurchase agreements with 17 counterparties.agreements. The following table summarizes certain characteristics of the Company’s repurchase agreements at SeptemberJune 30, 20172023 and December 31, 20162022 (dollars in thousands):

  September 30, 2017 December 31, 2016
Securities Pledged Repurchase Agreement Borrowings Weighted Average Interest Rate on Borrowings Outstanding at  end of period Weighted Average Remaining Maturity (days) Repurchase Agreement Borrowings Weighted Average Interest Rate on Borrowings Outstanding at end of period Weighted Average Remaining Maturity (days)
Agency RMBS $792,520
 1.39% 61 $1,427,674
 0.96% 38
Agency CMBS 2,019,010
 1.39% 32 56,365
 1.07% 46
Non-Agency RMBS 48,443
 2.85% 41 218,712
 2.53% 28
Non-Agency CMBS 192,015
 2.96% 36 255,656
 2.55% 30
Whole-Loans (1) (2)
 163,560
 3.46% 6 161,181
 2.91% 9
Residential Bridge Loans (1)
 51,074
 4.29% 59 —
 —% 0
Other securities 69,634
 3.36% 22 36,056
 2.32% 17
Borrowings under repurchase agreements $3,336,256
 1.69% 38 $2,155,644
 1.48% 34
 June 30, 2023December 31, 2022
Securities PledgedRepurchase Agreement BorrowingsWeighted Average Interest Rate on Borrowings Outstanding at end of periodWeighted Average Remaining Maturity (days)Repurchase Agreement BorrowingsWeighted Average Interest Rate on Borrowings Outstanding at end of periodWeighted Average Remaining Maturity (days)
Short-term borrowings:
Agency RMBS$274 5.84 %32$293 4.78 %32
Non-Agency RMBS(1)
35,105 8.24 %2548,237 7.50 %26
Other securities— — %01,776 7.09 %17
Total short-term borrowings35,379 8.22 %2550,306 7.47 %26
Long-term borrowings:
Non-Agency CMBS and Non-Agency RMBS Facility
Non-Agency CMBS(1)
36,720 7.61 %30755,154 6.30 %122
Non-Agency RMBS14,467 7.60 %30719,129 6.30 %122
Other securities8,861 7.94 %30716,863 6.30 %122
Subtotal60,048 7.65 %30791,146 6.30 %122
Residential Whole Loan Facility
Residential Whole Loans(2)
4,401 7.32 %1173,633 6.66 %298
Commercial Whole Loan Facility
Commercial Loans48,032 7.32 %12648,032 6.13 %307
Total long-term borrowings112,481 7.50 %222142,811 6.25 %189
Repurchase agreements borrowings$147,860 7.67 %175$193,117 6.57 %146
Less unamortized debt issuance costs— N/AN/A— N/AN/A
Repurchase agreements borrowings, net$147,860 7.67 %175$193,117 6.57 %146


(1)Repurchase agreement borrowings on loans owned are through trust certificates.  The trust certificates are eliminated upon consolidation.
(2)Whole-Loans consist of Residential Whole-Loans and a securitized commercial loan.

(1)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation.
For the nine months ended September(2)Repurchase agreement borrowings on loans owned are through trust certificates. The trust certificates are eliminated in consolidation.

At June 30, 2017 and the year ended December 31, 2016, the Company had average borrowings under its repurchase agreements of approximately $2.5 billion and $2.5 billion, respectively, and had a maximum month-end balance during the periods of approximately $3.3 billion and $3.1 billion, respectively.  The Company had accrued interest payable at September 30, 20172023 and December 31, 2016 of approximately $4.7 million and $3.2 million, respectively. 
At September 30, 2017 and December 31, 2016,2022, repurchase agreements collateralized by investments had the following remaining maturities:
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(dollars in thousands)September 30, 2017 December 31, 2016
Overnight$—
 $—
1 to 29 days1,582,898
 1,386,971
30 to 59 days710,723
 167,642
60 to 89 days1,042,635
 601,031
90 to 119 days—
 —
Greater than or equal to 120 days—
 —
Total$3,336,256
 $2,155,644
(dollars in thousands)June 30, 2023December 31, 2022
1 to 29 days$35,105 $50,013 
30 to 59 days274 293 
60 to 89 days— — 
Greater than or equal to 90 days112,481 142,811 
Total$147,860 $193,117 



At SeptemberJune 30, 2017,2023, the following table presents thereflects amounts of collateral at risk under its repurchase agreement counterparties for which the Company hasagreements greater than 10% of itsthe Company's equity at riskwith any counterparty (dollars in thousands):
 June 30, 2023
CounterpartyAmount of  Collateral at Risk, at fair valueWeighted Average Remaining Maturity (days)Percentage of  Stockholders’  Equity
Goldman Sachs Bank USA$35,288 30639.8 %
Credit Suisse AG, Cayman Islands Branch25,574 2528.8 %
Atlas Securitized Products Investments 2, L.P.18,334 12620.7 %

  September 30, 2017
Counterparty Amount of  Collateral at Risk, at fair value Weighted Average Remaining Maturity (days) Percentage of  Stockholders’  Equity
Credit Suisse Securities (USA) LLC $74,122
 18 16.3%
Citigroup Global Markets Inc. 49,929
 38 10.9%
Collateral For Borrowings Under Repurchase Agreements

Collateral for Borrowings under Repurchase Agreements


The following table summarizes the Company’s collateral positions, with respect to its borrowings under repurchase agreements at SeptemberJune 30, 20172023 and December 31, 20162022 (dollars in thousands):
 June 30, 2023December 31, 2022
 Assets PledgedAccrued Interest Assets Pledged and Accrued InterestAssets PledgedAccrued Interest Assets Pledged and Accrued Interest
Assets pledged for borrowings under repurchase agreements:   
Agency RMBS, at fair value$278 $2 $280 $249 $— $249 
Non-Agency CMBS, at fair value(1)
56,222 381 56,603 83,925 483 84,408 
Non-Agency RMBS, at fair value83,811 444 84,255 104,487 533 105,020 
Residential Whole Loans, at fair value(2)
3,377 21 3,398 3,229 3 3,232 
Commercial Loans, at fair value(2)
66,059 413 66,472 66,864 362 67,226 
REO, at carrying value2,255 — 2,255 2,255 — 2,255 
Other securities, at fair value15,375 70 15,445 27,262 78 27,340 
Cash(3)
120 — 120 3,410 — 3,410 
Total$227,497 $1,331 $228,828 $291,681 $1,459 $293,140 
 September 30, 2017 December 31, 2016
 Assets Pledged Accrued Interest  Assets Pledged and Accrued Interest 
Assets Pledged(3)
 Accrued Interest  Assets Pledged and Accrued Interest
Assets pledged for borrowings under repurchase agreements: 
  
  
      
Agency RMBS, at fair value$823,403
 $3,133
 $826,536
 $1,465,384
 $5,335
 $1,470,719
Agency CMBS, at fair value2,109,202
 5,183
 2,114,385
 61,200
 353
 61,553
Non-Agency RMBS, at fair value64,348
 162
 64,510
 308,165
 682
 308,847
Non-Agency CMBS, at fair value278,095
 1,451
 279,546
 358,919
 1,845
 360,764
Whole-Loans, at fair value (1)(2)
205,412
 1,523
 206,935
 205,702
 1,518
 207,220
Residential Bridge Loans (1)
54,912
 905
 55,817
 —
 —
 —
Other securities, at fair value122,651
 116
 122,767
 67,762
 57
 67,819
Cash (3)
24,950
 —
 24,950
 36,986
 —
 36,986
Total$3,682,973
 $12,473
 $3,695,446
 $2,504,118
 $9,790
 $2,513,908

(1)Includes securities eliminated upon VIE consolidation.
(2)Loans owned through trust certificates are pledged as collateral. The trust certificates are eliminated upon consolidation.
(1)Loans owned through trust certificates are pledged as collateral. The trust certificates are eliminated upon consolidation.
(2)Whole-Loans consist of Residential Whole-Loans and a securitized commercial loan.
(3)Cash posted as collateral is included in "Due from counterparties" in the Company’s Consolidated Balance Sheets.

(3)Cash posted as collateral is included in "Due from counterparties" in the Company’s Consolidated Balance Sheets.

A reduction in the value of pledged assets typically results in the repurchase agreement counterparties initiating a margin call. At SeptemberJune 30, 20172023 and December 31, 2016,2022, investments held by counterparties as security for repurchase agreements totaled approximately $3.7 billion$227.4 million and approximately $2.5 billion,$288.3 million, respectively. Cash collateral held by counterparties at SeptemberJune 30, 20172023 and December 31, 20162022 was approximately $25.0 million$120 thousand and approximately $37.0$3.4 million, respectively. Cash posted by repurchase agreement counterparties at Septemberboth June 30, 20172023 and December 31, 2016,2022 was approximately $2.3 millionzero and approximately $270$300 thousand, respectively.

Convertible Senior Unsecured Notes

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6.75% Convertible Senior Unsecured Notes due 2024 (the "2024 Notes")

In addition, at September 30, 2017 and December 31, 2016,2021, the Company heldissued $86.3 million aggregate principal amount of the 2024 Notes for net proceeds of $83.3 million. Interest on the 2024 Notes is paid semiannually. The 2024 Notes are convertible into, at the Company's election, cash, shares of the Company's common stock, or a combination of both, subject to the satisfaction of certain conditions and during specified periods. The conversion rate is subject to adjustment upon the occurrence of certain specified events and the holders may require the Company to repurchase all or any portion of their notes for cash equal to 100% of the principal amount of the 2024 Notes, plus accrued and unpaid interest, if the Company undergoes a fundamental change as specified in the supplemental indenture for the 2024 Notes. The post reverse stock split conversion rate is 33.7952 shares of common stock per $1,000 principal amount of notes and represented a conversion price of $29.59 per share of common stock. The 2024 Notes mature on September 15, 2024, unless earlier converted, redeemed, or repurchased by the holders pursuant to their terms, and are not redeemable by the Company except during the final three months prior to maturity.

Securitized Debt

Arroyo Trust 2019-2

In May 2019, the Company completed a residential mortgage-backed securitization comprised of $945.5 million of Non-QM Residential Whole Loans, issuing $919.0 million of mortgage-backed notes. The Company did not elect the fair value option for these notes, so they are recorded at their principal balance less unamortized deferred financing cost and classified in "Securitized debt, net" in the Consolidated Balance Sheets. The following table summarizes the issued Arroyo Trust 2019-2's residential mortgage pass-through certificates at June 30, 2023 (dollars in thousands):
ClassesPrincipal BalanceCoupon Carrying ValueContractual Maturity
Offered Notes:
Class A-1$152,658 3.3%$152,658 4/25/2049
Class A-28,187 3.5%8,187 4/25/2049
Class A-312,971 3.8%12,971 4/25/2049
Class M-125,055 4.8%25,055 4/25/2049
Subtotal$198,871 $198,871 
Less: Unamortized Deferred Financing CostsN/A2,159 
Total$198,871 $196,712 


The Company retained the non-offered securities in the securitization, which include the class B, Class A-IO-S and Class XS certificates. These non-offered securities were eliminated in consolidation. The securitized debt of $0 and $357 thousand, respectively,the Arroyo Trust 2019-2 can only be settled with the residential loans that serve as collateral from its repurchase agreement counterpartiesfor the securitized debt and is non-recourse to satisfy margin requirements.  the Company. At June 30, 2023, Residential Whole Loans, with an outstanding principal balance of approximately $221.5 million, serve as collateral for the Arroyo Trust 2019-2's securitized debt. The Company may redeem the offered notes on or after the earlier of (i) the three-year anniversary of the closing date or (ii) the date on which the aggregate collateral balance is 20% of the original principal balance. The notes are redeemable at their face value plus accrued interest.

Arroyo Trust 2020-1

In June 2020, the Company completed a residential mortgage-backed securitization comprised of $355.8 million of Non-QM Residential Whole Loans, issuing $341.7 million of mortgage-backed notes. The Company did not elect the fair value option for these notes, so they are recorded at their principal balance less unamortized deferred financing cost and classified in "Securitized debt, net" in the Consolidated Balance Sheets. The following table summarizes the issued Arroyo Trust 2020-1's residential mortgage pass-through certificates at June 30, 2023 (dollars in thousands):
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ClassesPrincipal BalanceCoupon Carrying ValueContractual Maturity
Offered Notes:
Class A-1A$68,514 1.7%$68,514 3/25/2055
Class A-1B8,130 2.1%8,130 3/25/2055
Class A-213,518 2.9%13,518 3/25/2055
Class A-317,963 3.3%17,963 3/25/2055
Class M-111,739 4.3%11,739 3/25/2055
Subtotal$119,864 $119,864 
Less: Unamortized Deferred Financing CostsN/A1,299 
Total$119,864 $118,565 


The Company retained the non-offered securities in the securitization, which include the Class B, Class A-IO-S, and Class XS certificates. These non-offered securities were eliminated in consolidation. The securitized debt of the Arroyo Trust 2020-1 can only be settled with the residential loans that serve as collateral for the securitized debt and is non-recourse to the Company. At June 30, 2023, Residential Whole Loans with an outstanding principal balance of approximately $133.5 million serve as collateral for the Arroyo Trust 2020-1's securitized debt. The Company may redeem the offered notes on or after the earlier of (i) the three-year anniversary of the closing date or (ii) the date on which the aggregate collateral balance is equal to or less than 30% of the original principal balance. The notes are redeemable at their face value plus accrued interest.

Arroyo Trust 2022-1

In February 2022, the Company completed a residential-mortgage backed securitization comprised of $432.0 million of Non-QM Residential Whole Loans, issuing $398.9 million of mortgage-backed notes. The Company has chosen to make the abilityfair value election pursuant to repledgeASC 825 for the debt and accordingly the bonds are recorded at fair value in the Consolidated Balance Sheets with the periodic changes in fair value are recorded in current period earnings in the Consolidated Statements of Operations as a component of "Unrealized gain (loss), net."

The following table summarizes the issued Arroyo Trust 2022-1's residential mortgage pass-through certificates at June 30, 2023 (dollars in thousands):

ClassesPrincipal BalanceCouponFair ValueContractual Maturity
Offered Notes:
Class A-1A$202,5562.5%$182,26212/25/2056
Class A-1B82,9423.3%73,72512/25/2056
Class A-221,1683.6%17,29212/25/2056
Class A-328,0793.7%22,18612/25/2056
Class M-117,9283.7%12,78012/25/2056
Total$352,673$308,245

The Company retained the non-offered securities in the securitization, which include the Class B, Class A-IO-S, and Class XS certificates. These non-offered securities were eliminated in consolidation. The securitized debt of the Arroyo Trust 2022-1 can only be settled with the residential loans that serve as collateral received from its repurchase counterparties.for the securitized debt and is non-recourse to the Company. At June 30, 2023, Residential Whole Loans with an outstanding principal balance of approximately$384.1 millionserve as collateral for the Arroyo Trust 2022-1's securitized debt. The Company may redeem the offered notes on or after the earlier of (i) the three-year anniversary of the closing date or (ii) the date on which the aggregate collateral balance is equal to or less than 30% of the original principal balance. The notes are redeemable at their fair value plus accrued interest.


Arroyo Trust 2022-2
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In July 2022, the Company completed a residential-mortgage backed securitization comprised of $402.2 million of Non-QM Residential Whole Loans, issuing $351.9 million of mortgage-backed notes. The Company has chosen to make the fair value election pursuant to ASC 825 for the debt and accordingly the bonds are recorded at fair value in the Consolidated Balance Sheets with the periodic changes in fair value are recorded in current period earnings in the Consolidated Statements of Operations as a component of "Unrealized gain (loss), net."

The following table summarizes the issued Arroyo Trust 2022-2's residential mortgage pass-through certificates at June 30, 2023 (dollars in thousands):

ClassesPrincipal BalanceCouponFair ValueContractual Maturity
Offered Notes:
Class A-1$250,3945.0%$242,5427/25/2057
Class A-221,3145.0%20,2397/25/2057
Class A-325,9725.0%24,6137/25/2057
Class M-117,6945.0%14,6807/25/2057
Total$315,374$302,074

The Company retained the non-offered securities in the securitization, which include the Class B-1, Class B-2, Class B-3, Class A-IO-S, and Class XS certificates. These non-offered securities were eliminated in consolidation. The securitized debt of the Arroyo Trust 2022-2 can only be settled with the residential loans that serve as collateral for the securitized debt and is non-recourse to the Company. At June 30, 2023, Residential Whole Loans with an outstanding principal balance of approximately$363.0 millionserve as collateral for the Arroyo Trust 2022-2's securitized debt. The Company may redeem the offered notes on or after the earlier of (i) the three-year anniversary of the closing date or (ii) the date on which the aggregate collateral balance is equal to or less than 30% of the original principal balance. The notes are redeemable at their fair value plus accrued interest.

Commercial Mortgage-Backed Notes

CSMC 2014 USA

The following table summarizes CSMC 2014 USA's commercial mortgage pass-through certificates at June 30, 2023 (dollars in thousands):
ClassesPrincipal BalanceCoupon Fair ValueContractual Maturity
Class A-1$120,391 3.3 %$101,120 9/11/2025
Class A-2531,700 4.0 %458,329 9/11/2025
Class B136,400 4.2 %109,843 9/11/2025
Class C94,500 4.3 %72,535 9/11/2025
Class D153,950 4.4 %111,258 9/11/2025
Class E180,150 4.4 %97,328 9/11/2025
Class F153,600 4.4 %61,965 9/11/2025
Class X-1(1)
n/a0.5 %5,717 9/11/2025
Class X-2(1)
n/a— %1,215 9/11/2025
$1,370,691 $1,019,310 

(1) Class X-1 and X-2 are interest-only classes with notional balances of $652.1 million and $733.5 million as of June 30, 2023, respectively.

At June 30, 2023, the Company owned a portion of the class F certificates with an outstanding principal balance of $14.9 million, which is eliminated in consolidation. The remaining CSMC USA debt that we elected the fair value option had a fair value of $1.0 billion at June 30, 2023, and is recorded in "Securitized debt, net" in the Consolidated Balance Sheets. Of the remaining outstanding principal balance of $1.4 billion, $180.3 million is owned by related parties and $1.2 billion is owned by
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third parties. The securitized debt of the CSMC USA can only be settled with the Commercial Loan with an outstanding principal balance of approximately $1.4 billion at June 30, 2023, that serves as collateral for the securitized debt and is non-recourse to the Company. The Company has chosen to make the fair value election pursuant to ASC 825 for the debt and accordingly the periodic changes in fair value are recorded in current period earnings in the Consolidated Statements of Operations as a component of "Unrealized gain (loss), net."

Note 78 — Derivative Instruments

The Company’s derivatives may include interest rate swaps, interest rate swaptions, options, futures contracts, currency swaps and forwards, TBAs, Agency andAgency, Non-Agency Interest-Only Strips that are classified as derivatives, credit default swaps, and total return swaps.


The following table summarizes the Company’s derivative instruments at SeptemberJune 30, 20172023 and December 31, 20162022 (dollars in thousands):
   June 30, 2023December 31, 2022
Derivative InstrumentAccounting DesignationConsolidated Balance Sheets LocationNotional AmountFair ValueNotional AmountFair Value
Interest rate swaps, assetNon-HedgeDerivative assets, at fair value$— $— $60,000 $1 
Total derivative instruments, assets   — 1 
Interest rate swaps, liabilityNon-HedgeDerivative liability, at fair value82,000 (68)98,000 (61)
Total derivative instruments, liabilities   (68)(61)
Total derivative instruments, net   $(68)$(60)

      September 30, 2017 December 31, 2016
Derivative Instrument Accounting Designation Consolidated Balance Sheets Location Notional Amount 
Fair Value (1)
 Accrued Interest  Payable  (receivable) Notional Amount 
Fair Value (1)
 Accrued Interest  Payable  (receivable)
Interest rate swaps Non-Hedge Derivative assets, at fair value $3,046,200
 $2,852
 $59
 $2,298,300
 $20,466
 $1,145
Options Non-Hedge Derivative assets, at fair value 400,000
 375
 —
 —
 —
 —
Futures contracts Non-Hedge Derivative assets, at fair value —
 —
 —
 56,900
 71
 —
Foreign currency forward contracts Non-Hedge Derivative assets, at fair value 697
 10
 —
 784
 34
 —
TBA securities Non-Hedge Derivative assets, at fair value 582,000
 1,774
 —
 —
 —
 —
Total derivative instruments, assets      
 5,011
 59
   20,571
 1,145
                 
Interest rate swaps Non-Hedge Derivative liability, at fair value 32,000
 (19) —
 5,046,300
 (177,929) 3,054
Options Non-Hedge Derivative liability, at fair value 400,000
 (128) —
 —
 —
 —
Futures contracts Non-Hedge Derivative liability, at fair value —
 —
 —
 176,300
 (2,487) —
Total return swaps Non-Hedge Derivative liability, at fair value —
 —
 —
 47,059
 (1,673) (94)
Foreign currency forward contracts Non-Hedge Derivative liability, at fair value 690
 (3) —
 1,532
 (69) —
TBA securities Non-Hedge Derivative liability, at fair value 200,000
 (836) —
 —
 —
 —
Total derivative instruments, liabilities      
 (986) —
   (182,158) 2,960
Total derivative instruments, net      
 $4,025
 $59
   $(161,587) $4,105

(1)         Fair value excludes accrued interest.

The following tables summarize the effects of the Company’s derivative positions, including Interest-Only Strips characterized as derivatives and TBAs, which are reported in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations for the three and ninesix months ended SeptemberJune 30, 20172023 and SeptemberJune 30, 20162022 (dollars in thousands):

Realized Gain (Loss), net
DescriptionOther Settlements/ ExpirationsVariation Margin SettlementReturn (Recovery) of BasisMark-to-Market
Contractual interest income (expense), net(1)
Total
Three months ended June 30, 2023
Interest rate swaps$— $184 $— $53 $766 $1,003 
Interest-Only Strips— accounted for as derivatives— — (4)1 14 11 
Total$— $184 $(4)$54 $780 $1,014 
Three months ended June 30, 2022
Interest rate swaps$— $5,781 $— $(671)$(262)$4,848 
Interest-Only Strips— accounted for as derivatives— — (43)(107)55 (95)
Credit default swaps16 — — (2,103)— (2,087)
TBAs732 — — 1,383 — 2,115 
Total$748 $5,781 $(43)$(1,498)$(207)$4,781 
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  Realized Gain (Loss), net        
Description Other Settlements / Expirations Variation Margin Settlement Mark-to-Market Return (Recovery) of Basis 
Contractual interest income  (expense), net(1)
 Total
Three months ended September 30, 2017            
Interest rate swaps $(38) $9,564
 $(2,028) $92
 $(1,764) $5,826
Interest-Only Strips— accounted for as derivatives —
 —
 351
 (1,486) 1,816
 681
Options (957) —
 477
 —
 —
 (480)
Futures contracts (77) —
 —
 —
 —
 (77)
Foreign currency forwards 45
 —
 (15) —
 —
 30
Total return swaps (52) —
 329
 —
 95
 372
TBAs 577
 —
 288
 —
 —
 865
Total $(502) $9,564
 $(598) $(1,394) $147
 $7,217
             
Three months ended September 30, 2016            
Interest rate swaps $(25,179) $—
 $35,878
 $168
 $(6,904) $3,963
Interest rate swaptions —
 —
 —
 —
 —
 —
Interest-Only Strips— accounted for as derivatives —
 —
 446
 (2,827) 3,503
 1,122
Options —
 —
 —
 —
 —
 —
Futures contracts 5,844
 —
 (8,792) —
 —
 (2,948)
Foreign currency forwards 103
 —
 (62) —
 —
 41
Foreign currency swaps 1,409
 —
 (1,852) —
 61
 (382)
Total return swaps 2
 —
 (11) —
 308
 299
TBAs 3,579
 —
 447
 —
 —
 4,026
Total $(14,242) $—
 $26,054
 $(2,659) $(3,032) $6,121
Realized Gain (Loss), net
DescriptionOther Settlements/ ExpirationsVariation Margin SettlementReturn (Recovery) of BasisMark-to-Market
Contractual interest income (expense), net(1)
Total
Six months ended June 30, 2023
Interest rate swaps$— $(2,000)$— $(8)$1,986 $(22)
Interest-Only Strips— accounted for as derivatives— — (2)65 23 86 
Total$— $(2,000)$(2)$57 $2,009 $64 
Six months ended June 30, 2022
Interest rate swaps$— $11,321 $— $(1,120)$(553)$9,648 
Interest-Only Strips— accounted for as derivatives— — (115)(216)144 (187)
Credit default swaps31 — — 110 — 141 
TBAs732 — — 1,383 — 2,115 
Total$763 $11,321 $(115)$157 $(409)$11,717 


  Realized Gain (Loss), net        
Description Other Settlements / Expirations Variation Margin Settlement Mark-to-Market Return (Recovery) of Basis 
Contractual interest income  (expense), net(1)
 Total
Nine months ended September 30, 2017            
Interest rate swaps $(150,593) $(7,966) $156,102
 $378
 $(12,662) $(14,741)
Interest rate swaptions (115) —
 —
 —
 —
 (115)
Interest-Only Strips— accounted for as derivatives 526
 —
 (783) (5,055) 6,229
 917
Options (892) —
 (134) —
 —
 (1,026)
Futures contracts (9,230) —
 2,416
 —
 —
 (6,814)
Foreign currency forwards 25
 —
 43
 —
 —
 68
Total return swaps (552) —
 1,673
 —
 469
 1,590
TBAs 3,148
 —
 938
 —
 —
 4,086
Total $(157,683) $(7,966) $160,255
 $(4,677) $(5,964) $(16,035)
             
Nine months ended September 30, 2016            
Interest rate swaps $(28,784) $—
 $(35,393) $502
 $(22,409) $(86,084)
Interest rate swaptions (1,035) —
 1,631
 —
 —
 596
Interest-Only Strips— accounted for as derivatives (155) —
 (4,480) (8,930) 11,113
 (2,452)
Options 4,756
 —
 —
 —
 —
 4,756
Futures contracts 19,253
 —
 704
 —
 —
 19,957
Foreign currency forwards (90) —
 8
 —
 —
 (82)
Foreign currency swaps 5,351
 —
 (5,883) —
 268
 (264)
Total return swaps 17
 —
 (2,171) —
 836
 (1,318)
TBAs 12,166
 —
 (489) —
 —
 11,677
Total $11,479
 $—
 $(46,073) $(8,428) $(10,192) $(53,214)
(1)Contractual interest income (expense), net on derivative instruments includes interest settlement paid or received.


At SeptemberJune 30, 20172023 and December 31, 2016,2022, the Company had cash pledged as collateral for derivatives of approximately $64.0$1.2 million and approximately $206.6$3.2 million, respectively, which is reported in "Due from counterparties" in the Consolidated Balance Sheets. Effective in January 2017, variation margin of CME cleared derivatives are treated as settlements of the derivative contract as opposed to cash collateral. The September 30, 2017 cash collateral balance of $64.0 million represents upfront cash collateral upon the Company entering into the derivative transaction and cash collateral for derivatives not cleared through the CME. As a result of the change in the CME rules, the $157.9 million of previously posted cash collateral is now recorded as a reduction in the derivative liability. The Company also held cash collateral against derivatives of $0 and $470 thousand as collateral against derivatives at September 30, 2017 and December 31, 2016, respectively, which is reported in "Due to counterparties" in the Consolidated Balance Sheets.


Interest rate swaps and interest rate swaptions
The Company enters into interest rate swaps and interest rate swaptions to mitigate its exposure to higher short-term interest rates in connection with its repurchase agreements.  Interest rate swaps generally involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the interest rate swap without exchange of the underlying notional amount.  Notwithstanding the foregoing, in order to manage its hedge position with regard to its liabilities, the Company on occasion will enter into interest rate swaps which involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the interest rate swap without

exchange of the underlying notional amount. The Company also enters into forward starting swaps and interest rate swaptions to help mitigate the effects of changes in interest rates on a portion of its borrowings under repurchase agreements. Interest rate swaptions provide the Company the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future.  On occasion the Company may enter into a MAC interest rate swap in which it may receive or make a payment at the time of entering such interest rate swap to compensate for the out of the market nature of such interest rate swap.  Similar to all other interest rate swaps, these interest rate swaps are also subject to margin requirements as previously described.
The Company has not elected to account for its interest rate swaps as “hedges” under GAAP, accordingly the change in fair value of the interest rate swaps not designated in hedging relationships are recorded together with periodic net interest settlement amounts in "Gain (loss) on derivatives instruments, net" in the Consolidated Statements of Operations.
Interest Rate Swaps
 
The following tables summarize the average fixed pay rate, average floating receive rate and average maturity for the Company’sCompany uses interest rate swaps asto mitigate its exposure to higher short-term interest rates in connection with its repurchase agreements. Interest rate swaps generally involve the receipt of September 30, 2017 and December 31, 2016 (dollarsvariable-rate amounts from a counterparty in thousands):
  September 30, 2017
Remaining Interest Rate Swap Term Notional Amount Average Fixed Pay Rate Average Floating Receive Rate Average Maturity (Years) Forward Starting
1 year or less $105,900
 0.8% 1.3% 0.1 —%
Greater than 1 year and less than 3 years 600,000
 1.6% 1.3% 2.1 —%
Greater than 3 years and less than 5 years 690,000
 2.0% 1.3% 4.6 —%
Greater than 5 years 1,682,300
 2.5% 0.1% 10.7 95.3%
Total $3,078,200
 2.2% 0.6% 7.3 52.1%
  December 31, 2016
Remaining Interest Rate Swap Term Notional Amount Average Fixed Pay Rate Average Floating Receive Rate Average Maturity (Years) Forward Starting
1 year or less $105,900
 0.8% 0.8% 0.8 —%
Greater than 1 year and less than 3 years 993,000
 1.2% 0.9% 1.4 88.1%
Greater than 3 years and less than 5 years 1,861,700
 1.9% 0.9% 3.9 36.5%
Greater than 5 years 1,701,600
 3.1% 0.9% 10.5 6.5%
Total $4,662,200
 2.1% 0.9% 5.7 35.7%
As of September 30, 2017 and December 31, 2016,exchange for the Company has enteredmaking fixed-rate payments over the life of the interest rate swap without exchange of the underlying notional amount.  Notwithstanding the foregoing, in order to manage its hedge position with regard to its liabilities, the Company on occasion will enter into fixed-pay forward starting interest rate swaps which involve the receipt of approximately $1.6 billion and $1.7 billion, respectively, which have weighted averagefixed-rate amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the interest rate swap without exchange of the underlying notional amount. The Company also enters into forward starting datesswaps to help mitigate the effects of 7.0 months and 4.5 months, respectively.


There were no variable pay ratechanges in interest rates on a portion of its borrowings under repurchase agreements. The Company generally enters into MAC (Market Agreed Coupon) interest rate swaps asin which it may receive or make a payment at the time of September 30, 2017. The following table summarizes the average variable payentering such interest rate average fixed receive rate and average maturityswap to compensate for the Company’sout of the market nature of such interest rate swap. Similar to all other interest rate swaps, as of December 31, 2016 (excludesthese interest rate swaptions) (dollars in thousands):
  December 31, 2016
Remaining Interest Rate swap Term Notional Amount Average Variable Pay Rate Average Fixed Receive Rate Average Maturity (Years) Forward Starting
Greater than 3 years and less than 5 years $1,811,400
 0.9% 1.4% 3.7 —%
Greater than 5 years 871,000
 0.9% 2.2% 12.3 —%
Total $2,682,400
 0.9% 1.7% 6.5 —%
The Company’s agreements with certain of its bilateral interest rate swap counterparties may be terminated at the option of the counterparty, and settled at fair value, if the Company does not maintain certain equity and leverage metrics.  The most restrictive of which contain provisions which become more restrictive based upon portfolio composition.  As of September 30, 2017, the Company was in compliance with the terms of such financial tests.
Options
The Company may enter into options on U.S. Treasuries. As of September 30, 2017, the Company had long position options on U.S. Treasuries with a notional amount of $400.0 million and a fair value in an asset position of $375 thousand and short position options on U.S. Treasuries with a notional amount of $400.0 million and a fair value in a liability position of $128 thousand. As of December 31, 2016, the Company had no option contracts on U.S. Treasuries.

Futures Contracts
The Company may enter into Eurodollar, Volatility Index, and U.S. Treasury futures. As of September 30, 2017, the Company had no open contracts in U.S. Treasuries futures. As of December 31, 2016, the Company had entered into contractsswaps are also subject to buy or long positions for U.S. Treasuries with a notional amount of $56.9 million, a fair value in an asset position of $71 thousand and an expiration date of March 2017. In addition, as of December 31, 2016, the Company had sale contracts or short positions for U.S. Treasuries with a notional amount of $176.3 million, a fair value in an liability position of $2.5 million and an expiration date of March 2017.
Currency Swaps and Forwardsmargin requirements.
 
The Company has invested in and, in the future, may invest in additional securities which are denominated in a currency or currencies other than U.S. dollars.  Similarly, it has and may in the future, finance such assets in a currency or currencies other than U.S. dollars.  In ordernot elected to mitigate the impact to the Company, the Company may enter into derivative financial instruments, including foreign currency swaps and foreign currency forwards, to manage fluctuations in the valuation between U.S. dollars and such foreign currencies.  Foreign currency swaps involve the payment of a foreign currency at fixedaccount for its interest rate on a fixed notional amount andswaps as “hedges” under GAAP, accordingly the receiptchange in fair value of U.S. dollars at a fixedthe interest rate on a fixed notional amount.  Foreign currency forwards provide for the payment of a fixed amount of a foreign currencyswaps not designated in exchange for a fixed amount of U.S. dollars at a date certain in the future.  The carrying value of foreign currency swaps and forwards is included in "Derivative assets, at fair value" and "Derivative liability, at fair value" in the Consolidated Balance Sheetshedging relationships are recorded together with changes in valuation includedperiodic net interest settlement amounts in "Gain (loss) on derivativederivatives instruments, net" in the Consolidated Statements of Operations.


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The following is a summarytables provide additional information on the Company's fixed-pay interest rate swaps as of the Company’s foreign currency forwards at SeptemberJune 30, 20172023 and December 31, 2016 (dollars and euros in thousands):

  September 30, 2017
Derivative Type Notional Amount 
Notional (USD Equivalent)
 Maturity Fair Value
Buy USD/Sell EUR currency forward €580
 $697
 November 2017 $10
Currency forwards, assets €580
 $697
 n/a $10
Buy EUR/Sell USD currency forward €311
 $370
 November 2017 $(1)
Buy EUR/Sell USD currency forward €269
 $320
 November 2017 $(2)
Currency forwards, liabilities €580
 $690
 n/a $(3)
Total currency forwards €1,160
 $1,387
 n/a $7
  December 31, 2016
Derivative Type Notional Amount 
Notional (USD Equivalent)
 Maturity Fair Value
Buy USD/Sell EUR currency forward €710
 $784
 January 2017 $34
Currency forwards, assets €710
 $784
 n/a $34
Buy EUR/Sell USD currency forward €673
 $735
 February 2017 $(23)
Buy EUR/Sell USD currency forward €710
 $797
 January 2017 $(46)
Currency forwards, liabilities €1,383
 $1,532
 n/a $(69)
Total currency forwards €2,093
 $2,316
 n/a $(35)
To-Be-Announced Securities
The Company purchased or sold TBAs during the nine months ended September 30, 2017 and the year ended December 31, 2016. As of December 31, 2016, the Company had no contracts to purchase (“long position”) and sell (“short position”) TBAs on a forward basis. The following is a summary of the Company's long and short TBA positions reported as of September 30, 2017, in "Derivative assets, at fair value" and "Derivative liability, at fair value" in the Consolidated Balance Sheets2022 (dollars in thousands):
June 30, 2023
Fixed Pay Interest Rate Swap Remaining TermNotional AmountAverage 
Fixed Pay Rate		Average Variable Receive RateAverage Maturity (Years)
1 year or less$60,000 1.4 %4.9 %0.8
Greater than 5 years22,000 1.2 %4.4 %8.3
Total$82,000 1.3 %4.8 %2.8

 September 30, 2017
 Notional
Amount		 Fair
Value
Sale contracts, asset$(582,000) $1,774
TBA securities, asset(582,000) 1,774
Purchase contracts, liability200,000
 (836)
TBA securities, liability200,000
 (836)
TBA securities, net$(382,000) $938
December 31, 2022
Fixed Pay Interest Rate Swap Remaining TermNotional AmountAverage 
Fixed Pay Rate		Average Variable Receive RateAverage Maturity (Years)
Greater than 1 year and less than 3 years$60,000 1.4 %2.0 %1.3
Greater than 3 years and less than 5 years70,000 1.4 %1.8 %4.1
Greater than 5 years$28,000 1.7 %3.6 %9.0
Total$158,000 1.4 %2.2 %3.9


The following table presents additional information about the Company’s contracts to purchase and sell TBAs for the nine months ended September 30, 2017 (dollars in thousands):

 Notional Amount as of Additions Settlement, Termination, Expiration or Exercise Notional Amount as of
 December 31, 2016   September 30, 2017
Purchase of TBAs$—
 $4,504,200
 $(4,304,200) $200,000
Sale of TBAs$—
 $4,886,200
 $(4,304,200) $582,000


Interest-Only Strips

 
The Company also invests in Interest-Only Strips.strips. In determining the classification of its holdings of Interest-Only Strips,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. Generally, Interest-Only Stripsstrips for which the security represents a strip off of a mortgage pass through security will be considered a hybrid instrument classified as aan MBS investment in the Consolidated Balance Sheets utilizing the fair value option. Alternatively, those Interest-Only Strips,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 at fair value with changes recognized in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations, along with any interest received. The carrying value of these Interest-Only Strips is included in "Mortgage-backed securities and other"Agency mortgage-backed securities, at fair value" in the Consolidated Balance Sheets.
 
Total Return SwapCredit Default Swaps

    
In 2016,The Company currently has no outstanding credit default swaps. Under these instruments, the Company entered intobuyer makes a total return swap and, inmonthly premium payment over the future, it may continue to enter into these types of credit derivatives. This swap transfers the total returnterm of the referenced asset, including interim cash flows and capital appreciation or depreciation fromcontract in exchange for the seller making a payment for losses of the reference securities, upon the occurrence of a specified price to the Company.  The total return swap has a referenced asset which is a security collateralized by residential loans with a notional amount of €51.0 million.  The Company receives interest from the referenced asset equal to EURIBOR plus 2.75% and is required to pay the counterparty EURIBOR plus 0.50% through June 23, 2019, with the spread decreasing to 0.25% through December 2019, with the spread further decreasing to 0% through the maturity date of the referenced asset in December 2020.  In February 2017, the Company terminated approximately half of its position, realizing a loss of $514 thousand. In August 2017, the Company terminated its remaining position, realizing a loss of $55 thousand.credit event.





Note 89 — Offsetting Assets and Liabilities
 
The following tables present information about certain assets and liabilities that are subject to master netting agreements (or similar agreements) and can potentially be offset in the Company’s Consolidated Balance Sheets at SeptemberJune 30, 20172023 and December 31, 20162022 (dollars in thousands):
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  September 30, 2017
  
Gross 
Amounts
 
Gross 
Amounts 
Offset in the Consolidated
Balance 
Sheets 
 
Net Amounts
of Assets 
presented in 
the Consolidated
Balance 
Sheets
 
Gross Amounts Not Offset in
the Consolidated Balance
Sheets
 Net Amount

Description
    
Financial 
Instruments(1)
 
Cash 
Collateral (1)
 
Derivative Assets            
Agency and Non-Agency Interest-Only Strips, accounted for as derivatives included in MBS $17,235
 $—
 $17,235
 $(12,437) $—
 $4,798
Derivative asset, at fair value(2)
 5,011
 —
 5,011
 (148) —
 4,863
Total derivative assets $22,246
 $—
 $22,246
 $(12,585) $—
 $9,661
             
Derivative Liabilities and Repurchase Agreements            
Derivative liability, at fair value(2)(3)
 $986
 $—
 $986
 $(148) $(830) $8
Repurchase Agreements(4)
 3,336,256
 —
 3,336,256
 (3,336,256) —
 —
Total derivative liability $3,337,242
 $—
 $3,337,242
 $(3,336,404) $(830) $8
June 30, 2023
 Gross 
Amounts		Gross 
Amounts 
Offset in the Consolidated
Balance 
Sheets 		Net Amounts
of Assets 
presented in 
the Consolidated
Balance 
Sheets		Gross Amounts Not Offset in
the Consolidated Balance
Sheets		Net Amount

Description
Financial 
Instruments(1)
Cash 
Collateral (1)
Derivative Assets
Agency and Non-Agency Interest-Only Strips, accounted for as derivatives included in MBS$778 $— $778 $(217)$— $561 
Total assets$778 $— $778 $(217)$— $561 
Derivative Liabilities and Repurchase Agreements
Derivative liability, at fair value(2)(3)
$68 $— $68 $— $(68)$— 
Repurchase Agreements(4)
147,860 — 147,860 (147,860)— — 
Total liability$147,928 $— $147,928 $(147,860)$(68)$— 

(1)Amounts disclosed in the Financial Instruments column of the tables above represent securities, Whole-Loans and securitized commercial loan collateral pledged and derivative assets that are available to be offset against liability balances associated with repurchase agreement and derivative liabilities. Amounts disclosed in the Cash Collateral column of the tables above represents amounts pledged or received as collateral against derivative transactions.
(2)Derivative asset, at fair value and Derivative liability, at fair value includes interest rate swaps, interest rate swaptions, mortgage put options, currency forwards, futures contracts, foreign currency swaps, total return swaps and TBAs.
(3)Cash collateral pledged against the Company’s derivative counterparties was approximately $64.0 million as of September 30, 2017.
(4)The carry value of investments pledged against the Company’s repurchase agreements was approximately $3.7 billion as of September 30, 2017.

(1)Amounts disclosed in the financial instruments column of the tables above represent securities, whole loans, securitized commercial loan collateral pledged, and derivative assets that are available to be offset against liability balances associated with repurchase agreement and derivative liabilities. Amounts disclosed in the cash collateral column of the tables above represents amounts pledged or received as collateral against derivative transactions.
  December 31, 2016
  
Gross 
Amounts
 
Gross 
Amounts 
Offset in the Consolidated
Balance 
Sheets 
 
Net Amounts
of Assets 
presented in 
the Consolidated
Balance 
Sheets
 
Gross Amounts Not Offset in
the Consolidated Balance
Sheets
 Net Amount
     
Financial 
Instruments(1)
 
Cash 
Collateral (1)
 
Derivative Assets            
Agency and Non-Agency Interest-Only Strips, accounted for as derivatives included in MBS $27,317
 $—
 $27,317
 $(23,338) $—
 $3,979
Derivative asset, at fair value(2)
 20,571
 —
 20,571
 (20,500) —
 71
Total derivative assets $47,888
 $—
 $47,888
 $(43,838) $—
 $4,050
             
Derivative Liabilities and Repurchase Agreements            
Derivative liability, at fair value(2)(3)
 $182,158
 $—
 $182,158
 $(20,500) $(161,588) $70
Repurchase Agreements(4)
 2,155,644
 —
 2,155,644
 (2,155,644) —
 —
Total derivative liability $2,337,802
 $—
 $2,337,802
 $(2,176,144) $(161,588) $70
(2)Derivative asset, at fair value, includes interest rate swaps.
(3)Cash collateral pledged against the Company’s derivative counterparties was approximately $1.2 million as of June 30, 2023.

(4)The carrying value of investments pledged against the Company’s repurchase agreements was approximately $227.4 million as of June 30, 2023.
(1)Amounts disclosed in the Financial Instruments column of the tables above represent securities, Whole-Loans and securitized commercial loan collateral pledged and derivative assets that are available to be offset against liability balances associated with repurchase agreement and derivative liabilities. Amounts disclosed in the Cash Collateral Pledged column of the tables above represents amounts pledged as collateral against derivative transactions.
(2)Derivative asset, at fair value and Derivative liability, at fair value includes interest rate swaps, interest rate swaptions, mortgage put options, currency forwards, futures contracts, foreign currency swaps and TBAs.
(3)Cash collateral pledged against the Company’s derivative counterparties was approximately $206.6 million as of December 31, 2016.
(4)The fair value of investments pledged against the Company’s repurchase agreements was approximately $2.5 billion as of December 31, 2016.

December 31, 2022
 Gross 
Amounts		Gross 
Amounts 
Offset in the Consolidated
Balance 
Sheets 		Net Amounts
of Assets 
presented in 
the Consolidated
Balance 
Sheets		Gross Amounts Not Offset in
the Consolidated Balance
Sheets		Net Amount
Description
Financial 
Instruments(1)
Cash 
Collateral (1)
Derivative Assets
Agency and Non-Agency Interest-Only Strips, accounted for as derivatives included in MBS$714 $— $714 $(196)$— $518 
Derivative asset, at fair value(2)
1 — 1 (1)— — 
Total assets$715 $— $715 $(197)$— $518 
Derivative Liabilities and Repurchase Agreements
Derivative liability, at fair value(2)(3)
$61 $— $61 $(1)$(60)$— 
Repurchase Agreements(4)
193,117 — 193,117 (193,073)(44)— 
Total liability$193,178 $— $193,178 $(193,074)$(104)$— 

(1)Amounts disclosed in the financial instruments column of the tables above represent securities, whole loans, securitized commercial loan collateral pledged, and derivative assets that are available to be offset against liability balances associated with repurchase agreement and derivative liabilities. Amounts disclosed in the cash collateral column of the tables above represents amounts pledged or received as collateral against derivative transactions.
(2)Derivative asset, at fair value and Derivative liability, at fair value includes interest rate swaps and credit default swaps.
(3)Cash collateral pledged against the Company’s derivative counterparties was approximately $3.2 million as of December 31, 2022.
(4)The carrying value of investments pledged against the Company’s repurchase agreements was approximately $288.3 million as of December 31, 2022.

Certain of the Company’s repurchase agreement and derivative transactions are governed by underlying agreements that generally provide for a right of set-off in the event of default or in the event of a bankruptcy of either party to the transaction.
 
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Note 910 — Related Party Transactions
 
Management Agreement
 
In connection with the Company’s IPOinitial public offering ("IPO") in May 2012, the Company entered into a management agreement (the “Management Agreement”) with the Manager, which describes the services to be provided by the Manager and compensation for such services. The Manager is responsible for managing the Company’s operations, including: including;(i) performing all of its day-to-day functions;functions, (ii) determining investment criteria in conjunction with the Board of Directors;Directors, (iii) sourcing, analyzing and executing investments, asset sales and financings;financings, (iv) performing asset management duties;duties, and (v) performing financial and accounting management, subject to the direction and oversight of the Company’s Board of Directors. Pursuant to the terms of the Management Agreement, the Manager is paid a management fee equal to 1.50% per annum of the Company’s stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears. For purposes of calculating the management fee, “stockholders’ equity” means the sum of the net proceeds from any issuances of the Company’s equity securities since inception (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance), plus retained earnings, calculated in accordance with GAAP, at the end of the most recently completed fiscal quarter (without taking into account any non-cash equity compensation expense incurred in current or prior periods), less any amount paid for repurchases of the Company’s shares of common stock, excluding any unrealized gains or losses on our investments and derivatives and other non-cash items (including OTTI charges prior to January 1, 2016)(excluding other than temporary impairment) that have impacted stockholder’sstockholders' equity as reported in the Company’s consolidated financial statements prepared in accordance with GAAP, regardless of whether such items are included in other comprehensive income or loss, or in net income, and excluding one-time events pursuant to changes in GAAP and certain other non-cash charges after discussions between the Manager and the Company’s independent directors and after approval by a majority of the Company’s independent directors. However, if the Company’s stockholders’ equity for any given quarter is negative based on the calculation described above, the Manager will not be entitled to receive any management fee for that quarter.

On August 3, 2016, the Company and the Manager entered into an amendment to the Management Agreement that amended the definition of "Equity" in the Management Agreement. Under the new definition, for all periods beginning on January 1, 2016, OTTI will reduce the Company's "Equity" for any completed fiscal quarter that OTTI was recognized, which in turn will reduce the Company's management fee from what would have been payable before the amendment.

In addition, the Company may be required to reimburse the Manager for certain expenses as described below, and shall reimburse the Manager for the compensation paid to the Company’s CFO, controller and their staff.controller. Expense reimbursements to the Manager are made in cash on a regular basis. The Company’s reimbursement obligation is not subject to any dollar limitation. Because the Manager’s personnel perform certain legal, accounting, due diligence tasks and other services that outside professionals or outside consultants otherwise would perform, the Manager may be paid or reimbursed for the documented cost of performing such tasks, provided that such costs and reimbursements are in amounts which are no greater than those which would be payable to outside professionals or consultants engaged to perform such services pursuant to agreements negotiated on an arm’s-length basis.
 
The Management Agreement may be amended, supplemented or modified by agreement between the Company and the Manager. The Management Agreement expires on May 16, 2018.15, 2024. It is automatically renewed for one-year terms on each May 15th unless previously terminated as described below. The Company’s independent directors review the Manager’s performance and any fees payable to the Manager annually and, the Management Agreement may be terminated annually upon the affirmative vote of at least two-thirds (2/3) of the Company’s independent directors, based upon: (i) the Manager’s unsatisfactory performance that is materially detrimental to the Company; or (ii) the Company’s determination that any fees payable to the Manager are not fair, subject to the Manager’s right to prevent such termination due to unfair fees by accepting a reduction of management fees agreed to by at least two-thirds (2/3) of the Company’s independent directors. The Company will provide the Manager 180 days prior

notice of any such termination. Unless terminated for cause, the Company will pay the Manager a termination fee equal to three times the average annual management fee earned by the Manager during the prior 24-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination.


The Company may also terminate the Management Agreement at any time, without the payment of any termination fee, with 30 days prior written notice from the Company’s Board of Directors for cause, which will be determined by at least two-thirds (2/3) of the Company’s independent directors, which is defined as: (i) the Manager’s continued material breach of any provision of the Management Agreement (including the Manager’s failure to comply with the Company’s investment guidelines); (ii) the Manager’s fraud, misappropriation of funds, or embezzlement against the Company; (iii) the Manager’s gross negligence in the performance of its duties under the Management Agreement; (iv) the occurrence of certain events with respect to the bankruptcy or insolvency of the Manager, including an order for relief in an involuntary bankruptcy case or the
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Manager authorizing or filing a voluntary bankruptcy petition; (v) the Manager is convicted (including a plea of nolo contendere) of a felony; or (vi) the dissolution of the Manager.
In December 2021, the Manager agreed to voluntarily waive 25% of its management fee solely for the duration of calendar year 2022 in order to support the earnings potential of the Company and its transition to a residential focused investment portfolio. Future waivers, if any, will be at the Manager's discretion.
For the three months ended SeptemberJune 30, 20172023 and SeptemberJune 30, 2016,2022, the Company incurred approximately $1.0 million and approximately $1.0 million in management fees, respectively. For the six months ended June 30, 2023 and June 30, 2022, the Company incurred approximately $1.9 million and approximately $2.6 million in management fee, respectively. For the nine months ended September 30, 2017 and September 30, 2016, the Company incurred approximately $6.2 million and approximately $7.9$2.1 million in management fees, respectively.
In addition to the management fee, the Company is also responsible for reimbursing the Manager for certain expenses paid by the Manager on behalf of the Company as defined in the Management Agreement. For the three months ended SeptemberJune 30, 20172023 and SeptemberJune 30, 2016,2022, the Company recorded expenses included in general and administrative expenses totaling approximately $202$59 thousand and approximately $186$296 thousand, respectively, related to reimbursable employee costs. For the ninesix months ended SeptemberJune 30, 20172023 and SeptemberJune 30, 2016,2022, the Company recorded expenses included in general and administrative expenses totaling approximately $1.1 million$150 thousand and approximately $550$447 thousand, respectively, related to reimbursable employee costs. Any such expenses incurred by the Manager and reimbursed by the Company, including the employee compensation expense, are typically included in the Company’s general and administrative expensesexpense in the Consolidated Statements of Operations, or may be reflected in the Consolidated Balance Sheets and associated Consolidated Statements of Changes in Stockholders’ Equity, based on the nature of the item.Operations. At SeptemberJune 30, 20172023 and December 31, 2016,2022, approximately $1.9$3.8 million and approximately $2.5$3.9 million, respectively, for management fees incurred but not yet paid was included in "Payable to affiliate" in the Consolidated Balance Sheets. In addition, at SeptemberJune 30, 20172023 and December 31, 2016,2022, approximately $67$103 thousand and approximately $83$86 thousand, respectively, of reimbursable costs incurred but not yet paid was included in "Payable to affiliate" in the Consolidated Balance Sheets.

Securitized Debt Held by Affiliate
At September 30, 2017 and December 31, 2016, the Company had securitized debt related to the consolidated VIEs, with a principal balance of $11.0 million and $11.0 million, respectively (and a fair value of $11.0 million and $10.7 million, respectively) which was held by an affiliate.  The securitized debt of the VIEs can only be settled with the commercial loans that serve as collateral for the securitized debt of the VIE and is non-recourse to the Company.
Note 1011 — Share-Based Payments
 
In conjunction withThe Company's ability to grant equity-based awards under the Company’s IPO and concurrent private placement,Company's previous equity incentive plans expired on May 9, 2022. At the Company’s BoardAnnual Meeting of DirectorsStockholders held on June 24, 2022, the Company's stockholders approved the Western Asset Mortgage Capital Corporation Equity2022 Omnibus Incentive Plan (the “Equity Plan”) and the Western Asset Mortgage Capital Corporation 2022 Manager EquityOmnibus Incentive Plan (the “Manager Equity Plan” and collectively(collectively, the “Equity Incentive“2022 Plans”). The Equity Incentive2022 Plans include provisionsprovide for grantsthe issuance of options (including non-statutory stock options and incentive stock options), stock appreciation rights (referred to as SARs), restricted stock, restricted stock units (referred to as RSUs), stock bonuses, other stock based awards and cash awards.

The aggregate maximum number of shares of our common stock and other equity-based awards to the Manager, its employees and employees of its affiliates and to the Company’s directors, officers and employees. The Company can issue up to 3.0% of the total number of issued and outstanding shares of its common stock (on a fully diluted basis) at the time of each award (other than any shares previously issued or subject to awards made pursuant to one of the Company’s Equity Incentive Plans) under these Equity Incentive Plans. At May 15, 2012, there were 308,335 shares of common stock initially reservedavailable for issuancefuture issuances under the Equity Incentive Plans. Upon2022 Plans is 1,000,000 shares, which was reduced to 100,000 shares following the completion of the follow on offerings,reverse stock split. The Manager and the numberofficers, employees, non-employee directors, independent contractors, and consultants of sharesthe Company or any affiliate of common stock available for issuance under the Equity IncentiveCompany, including any individuals who are employees of the Manager or one of the Manager’s affiliates, are eligible to participate in the 2022 Plans, increased to 1,237,711. Approximately 724,961 of sharesprovided that they have been issued underselected by the Equity Plans with 512,750 shares available for issuance, as of September 30, 2017.Plan Administrator.


Under the Equity Plan, the Company made the following grants during the nine months ended September 30, 2017 and the year ended December 31, 2016:

On June 1, 2017,23, 2023, the Company granted a total of 15,536 (3,884 each)31,184 restricted stock units (7,796 per each independent director), to each of restricted common stock under the Equity Plan to the Company’sCompany's four independent directors. These restricted sharesstock units will vest in full on June 1, 2018,23, 2024, the first anniversary of the grant date. Eachdate, and will be settled in shares of the Company’s common stock upon each of the independent directors has electeddirector’s separation from service with the Company.

On June 24, 2022, the Company granted 21,704 restricted stock units (5,426 per each independent director) on a post reverse stock split basis, to defer the shares granted to him under the Company’s Director Deferred Fee Plan (the “Director Deferred Fee Plan”). The Director Deferred Fee Plan permits eligible memberseach of the Company's board of directors to defer certain stock awards made under its director compensation programs. The Director Deferred Fee Plan allows directors to defer issuance of their stock awards and therefore defer payment of any tax liability until the deferral is terminated, pursuant to the election form executed each year by each eligible director.

On June 2, 2016, the Company granted a total of 17,132 (4,283 each) of restricted common stock under the Equity Plan to the Company’s four4 independent directors. These restricted sharesstock units and associated dividend equivalent units vested in full on June 2, 2017,24, 2023, the one year anniversary of the grant date, and will be settled in shares of the Company's common stock upon each of the independent director's separation from service with the Company.

On June 30, 2022, the Company granted 20,000 restricted stock units on a post reverse-stock-split basis under the Western Asset Mortgage Capital Corporation 2022 Omnibus Incentive Plan to the Company’s Chief Financial Officer. These restricted stock units and associated dividend equivalent units vest in equal installments on the first and second anniversary of the grant date. EachAs of June 30, 2022, 10,000 of the independent directors has elected to defer20,000 restricted stock units vested and will be settled with the shares granted to him under the Director Deferred Fee Plan.Company's common stock.

During the ninesix months ended SeptemberJune 30, 20172023 and SeptemberJune 30, 2016, 152,6302022, 31,704 and 200,98311,716 restricted common sharesstock units vested, respectively, including shares whose issuance has been deferred under the Director Deferred Fee Plan. The Company recognized stock-based compensation expense of approximately $218 thousand and approximately $433 thousand for the three months ended September 30, 2017 and September 30, 2016, respectively. The Company recognized stock-based compensation expense of approximately $795$100 thousand and approximately $1.4 million
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$70 thousand for the ninethree months ended SeptemberJune 30, 20172023 and SeptemberJune 30, 2016,2022, respectively. The Company recognized stock-based compensation expense of approximately $200 thousand and approximately $235 thousand for the six months ended June 30, 2023 and June 30, 2022, respectively. In addition, the Company had unamortized compensation expense of $107$378 thousand and $298 thousand for equity awards and approximately $291 thousand for liability awards and $67 thousand for equity awards and approximately $895 thousand for liability awards at SeptemberJune 30, 20172023 and December 31, 2016,2022, respectively.
 
AllHolders of restricted common shares granted, other than those whose issuance has been deferred pursuant to the Director Deferred Fee Plan, possess all incidents of ownership, including the rightstock units are entitled to receive dividends (or dividend equivalent payments) and distributions currently, andthat become payable on the right to vote.restricted stock units during the restricted period. Dividend equivalent payments otherwise allocable to restricted common shares under the Company's Deferred Compensation Planstock units are deemed to purchase additional phantom shares of the Company’sCompany's common stock that are credited to each participant’sparticipant's deferral account. The award agreements include restrictions whereby the restricted sharesstock units cannot be sold, assigned, transferred, pledged, hypothecated, or otherwise disposed of prior to the lapse of restrictions under the respective award agreement. The restrictions lapse on the unvested restricted sharesstock units awarded when vested, subject to the grantee’sgrantee's continuing to provide services to the Company as of the vesting date. Unvested restricted sharesstock units and rights to dividends thereon are forfeited upon termination of the grantee.
 
The following is a summary of restricted common stockequity awards vesting dates as of SeptemberJune 30, 20172023 and December 31, 2016, including shares whose issuance has been deferred under the Director Deferred Fee Plan:2022: 
 June 30, 2023December 31, 2022
Vesting DateShares VestingShares Vesting
June 2023— 31,704 
June 202441,184 10,000 
Total41,184 41,704 
 September 30, 2017 December 31, 2016
Vesting DateShares Vesting Shares Vesting
March 2017—
 133,334
June 2017—
 18,196
March 201866,667
 66,667
June 201816,000
 —
 82,667
 218,197



The following table presents information with respect to shares issued under the Company’s restricted stockEquity Incentive Plans for the ninesix months ended SeptemberJune 30, 2017, including2023 and June 30, 2022:
June 30, 2023June 30, 2022
 Restricted Stock Units
Weighted Average 
Grant Date Fair 
Value(1)
Restricted Stock Units
Weighted Average 
Grant Date Fair 
Value(1)
Outstanding at beginning of period81,914 $31.21 32,943 $58.85 
Granted(2)
37,625 9.10 43,577 12.74 
Cancelled/forfeited— — — — 
Outstanding at end of period119,539 24.25 76,520 32.59 
Unvested at end of period41,184 $9.74 41,704 $12.52 

(1)The grant date fair value of the awards is based on the closing market price of the Company’s common stock at the grant date.
(2)Includes 6,441 and 1,873 shares whose issuance has been deferredattributed to dividends on restricted stock under the Director Deferred Fee Plan:Plan for the six months ended June 30, 2023 and June 30, 2022, respectively.

 
Shares of 
Restricted Stock
 
Weighted Average 
Grant Date Fair 
Value (1)
Outstanding at beginning of period707,861
 $17.17
Granted (2)
17,100
 10.31
Cancelled/forfeited—
 —
Outstanding at end of period724,961
 $17.01
Unvested at end of period82,667
 $14.09

(1)The grant date fair value of restricted stock awards is based on the closing market price of the Company’s common stock at the grant date.
(2)Included 1,564 shares of restricted stock attributed to dividends on restricted stock under the Director Deferred Fee Plan.

Note 1112 — Stockholders’ Equity

WarrantsReverse Stock Split

On May 9, 2012,June 30, 2022, the Company announced that its Board of Directors approved a one-for-ten reverse stock split of the Company's outstanding shares of common stock. The one-for-ten reverse stock split was effected on July 11, 2022, which reduced the total number of authorized shares of common stock from 500,000,000 to 50,000,000 and also reduced the total number of authorized shares of preferred stock from 100,000,000 to 10,000,000. The number of common shares outstanding reducing from 60,380,105 to 6,038,012. The par value per share of our common stock remained unchanged at $0.01. All per share amounts and common shares outstanding have been adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split.

The Company's stockholders' equity, in the aggregate, remains unchanged. Per share net income or loss increased because there are fewer shares of common stock outstanding. The common stock held in treasury was reduced in proportion to
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the Reverse Stock Split Ratio. There were no other accounting consequences, including changes to the amount of stock-based compensation expense to be recognized in any period, that arose as a result of the reverse stock split. No fractional shares were issued in connection with the reverse stock split. Instead, each stockholder holding fractional shares was entitled to receive, in lieu of such fractional shares, cash in an amount determined based on the closing price of the Company's common stock the business day prior to the Effective Date. The reverse stock split applied to all of the Company's outstanding shares of common stock and did not affect any stockholder’s ownership percentage of shares of the Company's common stock, except for immaterial changes resulting from the payment of cash for fractional shares.

At-The-Market Program
    In March 2017, the Company entered into agreementsan equity distribution agreement with certain institutional investorsJMP Securities LLC, which was amended on June 5, 2020, under which the Company may offer and sell up to sell 2,231,787 warrant units. Each warrant unit consists$100 million worth of one shareshares of the Company’s common stock and a warrant to purchase 0.5 of a share ofin an At-The-Market equity offering. During the Company’s common stock, subject to adjustment. As of Septembersix months ended June 30, 2017,2023, the adjusted exercise price ofCompany did not sell any shares under the warrants was $16.70 and there were a total of 1,232,916 warrant shares purchasable. The warrants expire on May 15, 2019.amended agreement.
Stock Repurchase Program

On February 25, 2016,In December 2021, the Company extended its stock repurchase program as authorized by its Board of Directors ofDirectors. Under the extended program, the Company reauthorized itsis permitted to repurchase program of up to 2,050,000300,000 shares of its common stock, adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split, through December 31, 2017.2023. The originalprevious authorization expired on December 31, 2015. Purchases2021. Any purchases made pursuant to the program will be made in the open market, in privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rules 10b5-1 and 10b-18 of the Securities and Exchange Commission.Commission Act of 1934, as amended. The authorization does not obligate the Company to acquire any particular amount of common shares, or any shares at all, and the program may be suspended or discontinued at the Company’sCompany's discretion without prior notice. The timing, manner, price and amount of any repurchases will be determined by
During the six months ended June 30, 2023, the Company in its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors.  The Company hasdid not repurchasedrepurchase any shares of commonunder the stock pursuant to the authorization as of September 30, 2017.repurchase program.

Dividends
 
The following table presents cash dividends declared and paid by the Company on its common stock:stock, not adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split to align with 1099-DIV per share amounts as reported.
Declaration DateRecord DatePayment DateAmount per ShareTax Characterization
2023
June 21, 2023July 3, 2023July 26, 2023$0.35 Not yet determined
March 22, 2023April 3, 2023April 26, 2023$0.35 Not yet determined
2022
December 21, 2022January 3, 2023January 26, 2023$0.40 
Not yet determined(1)
September 22, 2022October 3, 2022October 26, 2022$0.40 Ordinary income
June 21, 2022July 1, 2022July 25, 2022$0.04 Ordinary income
March 23, 2022April 4, 2022April 26, 2022$0.04 Ordinary income

Declaration Date Record Date Payment Date Amount per Share Tax Characterization
2017      
  
September 21, 2017 October 2, 2017 October 26, 2017 $0.31
 Not yet determined
June 20, 2017 June 30, 2017 July 26, 2017 $0.31
 Not yet determined
March 23, 2017 April 3, 2017 April 26, 2017 $0.31
 Not yet determined
         
2016      
  
December 22, 2016 January 3, 2017 January 26, 2017 $0.31
 Ordinary income
September 22, 2016 October 4, 2016 October 25, 2016 $0.31
 Ordinary income
June 23, 2016 July 5, 2016 July 26, 2016 $0.31
 Ordinary income
March 24, 2016 April 4, 2016 April 26, 2016 $0.45
 Ordinary income
         
(1)The cash distributions made on January 26, 2023, with a record date of January 3, 2023, are treated as received by stockholders on January 26, 2023 and taxable in calendar year 2023.


Note 1213 — Net IncomeLoss per Common Share
 
The table below presents basic and diluted net incomeloss per share of common stock using the two-class method for the three and ninesix months ended SeptemberJune 30, 20172023 and SeptemberJune 30, 20162022 (dollars, other than shares and per share amounts, in thousands):, adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split.
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For the three months ended September 30, 2017 For the three months ended September 30, 2016 For the nine months ended September 30, 2017 For the nine months ended September 30, 2016 For the three months ended June 30, 2023For the three months ended June 30, 2022For the six months ended June 30, 2023For the six months ended June 30, 2022
Numerator:
 
  
    
Numerator:
  
Net income attributable to common stockholders and participating securities for basic and diluted earnings per share$22,767
 $32,282
 $63,693
 $13,281
Net loss attributable to common stockholders and participating securities for basic and diluted earnings per shareNet loss attributable to common stockholders and participating securities for basic and diluted earnings per share$(8,633)$(22,387)$(2,066)$(48,240)
Less: 
  
    Less:  
Dividends and undistributed earnings allocated to participating securities75
 193
 238
 300
Dividends and undistributed earnings allocated to participating securities32 15 62 30 
Net income allocable to common stockholders — basic and diluted$22,692
 $32,089
 $63,455
 $12,981
Net loss allocable to common stockholders — basic and dilutedNet loss allocable to common stockholders — basic and diluted$(8,665)$(22,402)$(2,128)$(48,270)
       
Denominator:
 
  
    
Denominator:
  
Weighted average common shares outstanding for basic earnings per share41,853,134
 41,719,800
 41,824,318
 41,678,592
Weighted average common shares outstanding for basic earnings per share6,038,012 6,038,012 6,038,012 6,036,300 
Weighted average common shares outstanding for diluted earnings per share41,853,134
 41,719,800
 41,824,318
 41,678,592
Weighted average common shares outstanding for diluted earnings per share6,038,012 6,038,012 6,038,012 6,036,300 
Basic earnings per common share$0.54
 $0.77
 $1.52
 $0.31
Diluted earnings per common share$0.54
 $0.77
 $1.52
 $0.31
Basic loss per common shareBasic loss per common share$(1.44)$(3.71)$(0.35)$(8.00)
Diluted loss per common shareDiluted loss per common share$(1.44)$(3.71)$(0.35)$(8.00)

 
For the three and ninesix months ended SeptemberJune 30, 20172023 and SeptemberJune 30, 2016,2022, the Company excluded the effects of the warrantsconvertible senior unsecured notes from the computation of diluted earnings per share since the average market value per share of the Company’s common stock was below the exercise price of the warrants.convertible senior unsecured notes.
 
Note 1314 — Income Taxes
 
As a REIT, the Company is not subject to federal income tax to the extent that it makes qualifying distributions to its stockholders and satisfies on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income and stock ownership tests.
 
Based on the Company’s analysis of any potential uncertain income tax positions, the Company concluded that it does not have any uncertain tax positions that meet the recognition or measurement criteria as of SeptemberJune 30, 2017.2023. The Company files U.S. federal and state income tax returns.  As of SeptemberJune 30, 2017,2023, U.S. federal tax returnsreturns filed by the Company for 2015, 20142021, 2020, and 20132019 and state tax returns filed for 2015, 2014, 20132021, 2020, 2019, 2018 and 20122017 are open for examination pursuant to relevantrelevant statutes of limitation. In the event that the Company incurs income tax related interest and penalties, the Company’s policy is to classify them as a component of its provision for income taxes.
 
Income Tax Provision

Subject to the limitation under the REIT asset test rules, the Company is permitted to own up to 100% of the stock of one or more taxable REIT subsidiaries ("TRS"). Currently, the Company owns one TRS that is taxable as a corporation and is subject to federal, state and local income tax on its net income at the applicable corporate rates. The TRS, which was formed in Delaware on July 28, 2014, is a limited liability company and a wholly-owned subsidiary of the Company. During the three months ended June 30, 2023 and June 30, 2022, the Company recorded a federal and state tax benefit of $12 thousand and tax benefit of $46 thousand, respectively, which is recorded in "Income tax provision" in the Consolidated Statements of Operations. During the six months ended June 30, 2023 and June 30, 2022, the Company recorded a federal and state tax provision of zero and a tax provision of $10 thousand respectively.

Deferred Tax Asset


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As of SeptemberJune 30, 2017,2023 and December 31, 2022, the Company recorded a deferred tax asset of approximately $8.5$14.3 million and $13.5 million, respectively, relating to capital loss carryforward and temporary differences as a result of the timing of income recognition of certain investments held in the TRS. The capital loss carryforwards and temporary differences may only be recognized to the extent of capital gains. There is uncertainty as to the TRS ability to recognize capital gains in the future, however, the Company can utilize a carryback to 2015.future. As a result, the Company has concluded it is more likely than not the deferred tax asset will not be realized and has recorded a full valuation allowance of $8.5 million.allowance.


In addition, the REIT generated net operating losses ("NOL's"NOLs") during the year ended December 31, 2021 related to ordinary losses on its MBS portfolio and it generated NOLs for the years ended December 31, 2020 and December 31, 2017, related to its interest rate swap terminations, and for its California return a portion of the NOL'sNOLs is apportioned to the TRS. The Company recordingrecorded a deferred state tax asset relating to the NOLs of $10.4$14.5 million and $14.5 million in the REIT and $899 thousand$1.6 million and $1.6 million in the TRS.TRS as of June 30, 2023 and December 31, 2022, respectively. The TRS can carryback the NOL'sNOLs generated during the years ended December 31, 2020 and December 31, 2017 to each of the two preceding years and receiveto request a refund for taxes paid. As a result,of June 30, 2023 and December 31, 2022, the Company has concluded it is more likely than not the deferred tax asset relating to the NOLs will not be realized with the exception of the TRS carryback to 2015 and it has recorded a combined valuation allowance of $10.9 million.


Income Tax Provision

Subject to the limitation under the REIT asset test rules, the Company is permitted to own up to 100% of the stock of one or more TRS. Currently, the Company owns one TRS that is taxable as a corporation and is subject to federal, state and local income tax on its net income at the applicable corporate rates. The TRS, which was formed in Delaware on July 28, 2014, is a limited liability company and a wholly-owned subsidiary of the Company. During the three and nine months ended September 30, 2017, the Company recorded a federal and state tax benefit of approximately $1.2$16.2 million and a federal and state tax provision of approximately $1.3$16.1 million,, respectively, which is recorded in "Income tax provision (benefit)" in the Consolidated Statements of Operations. respectively.


Effective Tax Rate


The Company's effective tax rate differs from its combined federal and state income tax rate primarily due to its valuation allowance and the deduction of dividends distributions to be paid under Code Section 857(a).


Note 1415 — Commitments and Contingencies
 
From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of business. Management is not aware of any material commitments nor contingencies at SeptemberJune 30, 2017.2023.
 
Note 1516 — Subsequent Events


In October 2017,Financing Facility

Subsequent to quarter end, the Company issued $115replaced an existing short-term repurchase financing facility facing Credit Suisse AG (UBS) with a new two-year term, $65 million aggregate principal amount of 6.75% convertible senior unsecured notes, including the underwriter’s overallotment option to purchase an additional $15 million aggregate principal of the notes. The notes pay interest semiannually in arrears. The Company received proceeds of $111.6 million from the offerings, net of underwriting discounts and commissions, which will be amortized through interest expense over the life of the notes. The notes mature on October 1, 2022, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable byfixed rate, non-mark-to-market, securitized funding vehicle. As a result, the Company except during the final three months prior to maturity.no longer has any financing arrangements with Credit Suisse AG (UBS) as a counterparty.

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The notes are convertible into, at the Company's election, cash, shares
Table of the Company's common stock or a combination of both, subject to the satisfaction of certain conditions and during specified periods. The conversion rate is subject to adjustment upon the occurrence of certain specified events and the holders may require the Company to repurchase all or any portion of their notes for cash equal to 100% of the principal amount of the notes, plus accrued and unpaid interest, if the Company undergoes a fundamental change as specified in the agreement. The initial conversion rate was 83.1947 shares of common stock per $1,000 principal amount of notes and represented a conversion price of $12.02 per share of common stock.Contents


ASC 470-20 "Debt/Debt with Conversion and Other Options" requires that convertible debt instruments with cash settlement features, including partial cash settlement, account for the liability component and equity component (conversion feature) of the instrument separately. The initial value of the liability component will reflect the present value of the discounted cash flows using the nonconvertible debt borrowing rate at the time of issuance. The debt discount represents the difference between the proceeds received from the issuance and the initial carrying value of the liability component, which is accreted back to the notes principal amount through interest expense over the life of the notes.





ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
FORWARD-LOOKING INFORMATION
 
The Company makes forward-looking statements herein and will make forward-looking statements in future filings with the Securities and Exchange Commission (the “SEC”), press releases or other written or oral communications within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For these statements, the Company claims the protections of the safe harbor for forward-looking statements contained in such sections. Forward-looking statements are subject to substantial risks and uncertainties,uncertainties, many of which are difficult to predict and are generally beyond the Company’s control.

These forward-looking statements include information about possible or assumed future results of the Company’s business, financial condition, liquidity, results of operations, plans and objectives. When the Company uses the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions, the Company intends to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking: market trends in the Company’s industry, interest rates, real estate values, the debt securities markets, the U.S. housing and the U.S. and foreign commercial real estate markets or the general economy or the market for residential and/or commercial mortgage loans; the Company’s business and investment strategy; the Company’s projected operating results; actionschanges in interest rates and initiativesthe market value of the U.S. GovernmentCompany’s target assets; credit risks; servicing-related risks, including those associated with foreclosure and changes to U.S. Government policies and the execution and impact of these actions, initiatives and policies;liquidation; the state of the U.S. and to a lesser extent, international economy generally or in specific geographic regions; economic trends and economic recoveries; the Company’s ability to obtain and maintain financing arrangements, including under the Company'sCompany’s repurchase agreements, a form of secured financing, and securitizations; the current potential return dynamics available in residential mortgage-backed securities (“RMBS”), and commercial mortgage-backed securities (“CMBS” and collectively with RMBS, “MBS”); the level of government involvement in the U.S. mortgage market; the anticipated default rates on Non-Agency MBS (as defined herein), ResidentialCMBS and Commercial Whole-Loans and Residential Bridge Loans; the loss severity on Non-Agency MBS; the return of the Non-Agency RMBS, Non-Agency CMBS and asset-backed securities (“ABS”) securitization markets; the general volatility of the securities markets in which the Company participates; changes in the value of the Company’s assets; the Company’s expected portfolio of assets; the Company’s expected investment and underwriting process; interest rate mismatches between the Company’s target assets and any borrowings used to fund such assets; changes in interest rates and the market value of the Company’s target assets; changes in prepayment rates on the Company’s target assets; effects of hedging instruments on the Company’s target assets; rates of default or decreased recovery rates on the Company’s target assets; the degree to which the Company’s hedging strategies may or may not protect the Company from interest rate volatility; the impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters; the Company’s ability to maintain the Company’s qualification as a real estate investment trust for U.S. federal income tax purposes; the Company’s ability to maintain its exemption from registration under the Investment Company Act of 1940, as amended (the “1940 Act”); the availability of opportunities to acquire Agency RMBS, Non-Agency RMBS, CMBS, Residential and Commercial Whole-Loans, Residential and Commercial BridgeWhole Loans, and other mortgage assets; the availability of qualified personnel; estimates relating to the Company’s ability to make distributions to its stockholders in the future; and the Company’s understanding of its competition.competition; the result of Company's recently announced definitive merger agreement where MITT and the Company have agreed to combine and form a REIT; and the uncertainty and economic impact of pandemics, epidemics, or other public health emergencies, such as the lingering effects of the COVID-19 pandemic.

The forward-looking statements are based on the Company’s beliefs, assumptions and expectations of its future performance, taking into account all information currently available to it. Forward-looking statements are not predictions of future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to the Company. Some of these factors, are described in Item 1A - “Risk Factors” and Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in the Company’s annual reportAnnual Report on Form 10-K for the year ended December 31, 2016,2022, filed with the SEC on March 7, 2017.13, 2023. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that the Company files with the SEC, could cause its actual results to differ materially from those included in any forward-looking statements the Company makes. All forward-looking statements speak only as of the date they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect the Company. Except as required by law, the Company is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.




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Overview
 
Western Asset Mortgage Capital Corporation, a Delaware corporation, and Subsidiariesits subsidiaries (the “Company” unless otherwise indicated or except where the context otherwise requires “we”,“we,” “us” or “our”) commenced operations in May 2012, focused on investing in, financing and managing a diversified portfolio of real estate related securities, whole-loansWhole Loans and other financial assets, which we collectively refer to as our target assets. We are externally managed by Western Asset Management Company, LLC (our “Manager”) pursuant to the terms of a management agreement. We conduct our operations to qualify and be taxed as a real estate investment trust, or REIT, for U.S. federal income tax purposes. Accordingly, we generally will not be subject to U.S. federal income taxes on our taxable income that we distribute currently to our stockholders as long as we maintain our intended qualification as a REIT. However, certain activities that we may perform may cause us to earn income which will not be qualifying income for REIT purposes. We have designated a subsidiary as a taxable REIT subsidiary, or TRS, to engage in such activities. We also intend to operate our business in a manner that permits us to maintain our exemption from registration under the 1940 Act. Our common stock is traded on the New York Stock Exchange, or the NYSE, under the symbol "WMC."

Our objective is to provide attractive risk adjusted returns to our stockholders primarily through an attractive dividend, which we intend to support with sustainable distributable earnings (which we previously referred to as core earnings), as well as the potential for higher returns through capital appreciation. Our investment strategy is based on Western Asset Management Company’s (our “Manager”)our Manager's perspective of which mix of portfolioour target assets it believes provides us with the best risk-reward opportunities at any given time. Our Manager will vary the allocation among various asset classes subject to maintaining our qualification as a real estate investment trust ("REIT") under the federal tax law and maintaining our exemption from the 1940 Act.  These restrictions limit our ability to invest in non-real estate assets and/or assets which are not secured by real estate.
At September 30, 2017, our investment portfolio was comprised of approximately $1.1 billion of Agency RMBS (including approximately $27.3 million of Agency RMBS Interest-Only Strips), approximately $2.1 billion of Agency CMBS (including approximately $6.0 million of Agency CMBS Interest-Only Strips), approximately $64.4 million of Non-Agency RMBS, approximately $278.5 million of Non-Agency CMBS, approximately $122.7 million of other securities, approximately $191.4 million of Residential Whole-Loans and approximately $54.9 million of Residential Bridge Loans.  In addition, we hold a controlling financial interest in a CMBS trust with a principal balance of approximately $14.0 million, which resulted in the consolidation of the assets and liabilities of the trust.  As a result of the consolidation of the CMBS trust, our holdings included a $25.0 million securitized commercial loan.
We generate income from the difference between the yields earned on our investments and our cost of borrowing including any hedging activity. We usealso deploy leverage as part of our businessinvestment strategy in order to increase potential returns to our stockholders. We primarily finance our investments through short-term borrowings structured as repurchase agreements. We may also change our financing strategy and leverage without the consent of our stockholders.returns.

As of September 30, 2017, we had entered into master repurchase agreements or MRAs with 27 counterparties. As of September 30, 2017, we had approximately $3.3 billion of borrowings outstanding under our repurchase agreements collateralized by approximately $3.7 billion of our investments.  We have approximately $1.5 billion of interest rate swaps to effectively fix the interest rate of our borrowings under our repurchase agreements; excluding the net forward starting interest rate swap of $1.6 billion. As of September 30, 2017, our aggregate debt-to-equity ratio was approximately 7.3 to 1. The debt-to-equity ratio is not a comprehensive statement of overall investment portfolio leverage which is affected by any leverage embedded in TBAs and derivative instruments.
We operate and have elected to be taxed as a REIT, commencing with our taxable year ended December 31, 2012. To comply with the REIT requirements, some of our investments were held in a taxable REIT subsidiary, or “TRS”.  Acquiring non-qualifying investments through the TRS enables us to avoid jeopardizing our REIT status. These investments or activities are not held or conducted at the REIT level and as a result would not impact our ability to maintain our qualification as a REIT.  We generally will not be subject to U.S. federal income taxes on our taxable income to the extent that we annually distribute, in accordance with the REIT requirements, all of our net taxable income to stockholders and otherwise maintain our intended qualification as a REIT.
We also intend to operate our business in a manner that will permit us to maintain our exemption from registration under the 1940 Act.

Factors Impacting Our Operating Results
Our results of operations are affected by a number of factors and primarily depend on, among other things, the size of our investment portfolio, our net interest income, changes in the market value of our investments, derivative instruments and to a lesser extent realized gains and losses on the sale of our investments and termination of our derivative instruments. Our overall performance is also impacted by the supply and demand for our target assets in the market, the terms and availability of financing for such assets, general economic conditions, the impact of U.S Government actions that affect the real estate and mortgage sectors, and the unanticipated credit events experienced by borrowers whose loans are included in our MBS, as well as our Residential and Commercial Whole-Loan and Residential Bridge Loan borrowers.

Our net interest income varies primarily as a result of changes in market interest rates and constant prepayment rates, or (“CPR”) on our Agency RMBS. The CPR measures the amount of unscheduled principal prepayments on RMBS as a percentage of the principal balance. Interest income on our credit sensitive investments can also be impacted by unanticipated prepayments, defaults, liquidations or delinquencies experienced by the underlying borrowers. These factors can vary according to type of investment and conditions in the financial markets none of which can be predicted with any certainty.

See the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2016, which is available on the SEC's website at www.sec.gov for additional factors that may impact our operating results.
Recent Market Conditions

Our business is affected by general U.S. residential real estate fundamentals, domestic and foreign commercial real estate fundamentals and the overall U.S. and international economic environment. In particular, our strategy is influenced by the specific characteristics of these markets, including but not limited to prepayment rates and interest rate levels. We expect the results of our operations to be affected by various factors, many of which are beyond our control. Our results of operations will primarily depend on, among other things, the level of our net interest income, the market value of our investment portfolio and the supply of and demand for mortgage-related assets. Our net interest income, which includes the amortization of purchase premiums and accretion of discounts, will vary primarily as a result of changes in interest rates, defaults and loss severity rates, borrowing costs, and prepayment speeds on our MBS and other Target Assets (as defined herein) investments.  Similarly, the overall value of our investment portfolio will be impacted by these factors as well as changes in the value of residential and commercial real estate and continuing regulatory changes.
    Our Manager's global outlook for 2017, which late last year was in line with market expectations for both robust growth and improving inflation has proven more optimistic than fundamentals could support. The consensus transitioned from expectations for secular stagnation before the US election to global reflation afterward, to a more moderate tone today focusing on central bank monetary policy normalization. We are still hopeful that the extraordinarily accommodative stance from central banks will continue to moderate, but believe it will be a particularly slow process and even slower than we expected earlier this year.

Global debt burdens are still higher than they were before the financial crisis and continue to serve as an impediment to greater growth. While the US growth and economic outlook remains positive, we are more cautious than we were at the start of the year based on weaker-than-expected manufacturing and housing data, and stubbornly low inflation. We do not expect a dramatic or sustained rise in interest rates over the near term.

Our current expectations are for ongoing slow but steady economic growth and moderate inflation, both in the U.S. and abroad. During the quarter, the Federal Reserve kept the federal funds rate unchanged and maintained a slow and steady path of monitory policy normalization. Presidents Trump's nomination of Jerome Powell as the next Federal Reserve chair is predicted to bring little change to the central bank's incremental rate increases and monetary policy normalization. As a result of less policy uncertainty, as it relates to the Federal Reserve’s balance sheet reduction plan, the performance of Agency RMBS was strong during the quarter with spreads tightening. However, we still believe the Agency RMBS sector is at risk for spread widening longer term. Against this backdrop, the fundamentals in the U.S. housing market remain strong and spreads for most mortgages remained supported during the quarter despite three significant hurricanes We believe that a balanced portfolio consisting of Agency CMBS, Agency RMBS, Whole-Loans, Bridge Loans and other credit-sensitive investments continues to be appropriate. We continue to be constructive on the commercial real estate sector with a focus on single asset/single borrower transactions. Our Manager will continue to actively manage the portfolio and reallocate capital as it believes appropriate.

Our Investment Strategy
 
Our Manager’s investment philosophy, which developed from a singular focus in fixed-income asset management over a variety of credit cycles and conditions, is to provide clients with diversified, tightly controlled,a long-term value-oriented portfolios. Through rigorousportfolio. We benefit from the breadth and depth of our Manager’s overall investment philosophy, which focuses on a macroeconomic analysis as well as an in-depth analysis of all sectors of the fixed-income market, our Manager seeks to identifyindividual assets with the greatest risk-adjusted total value potential.and their relative value. In making investment decisions on our behalf, our Manager seeks to identify assets across the broad mortgage universe with attractive risk adjusted returns, which incorporates its viewsview on the economic environment and the outlook for the mortgage markets, including relative valuation, supply and demand trends, the level of interest rates, the shape of the yield curve, prepayment rates, financing and liquidity, commercial and residential real estate prices, delinquencies, default rates, recovery of various segments of the economy and vintage of collateral, subject to maintaining our REIT qualification and our exemption from registration under the 1940 Act.

In December 2021, we announced that our investment strategy will focus on residential real estate-related investments, including but not limited to non-qualified mortgage loans, Non-Agency RMBS, and other related investments. We benefitbelieve this focus allows us to address attractive market opportunities while maintaining alignment with our Manager’s core competencies. We are continuing to transition out of the commercial investments in our portfolio, though we may from the breadth and depth of our Manager’s

overall investment philosophy, which focusestime to time make commercial investments on a macroeconomic analysis as well as an in-depth analysis of individual assets and their relative value.opportunistic basis.
 
Our target assetsTarget Assets
Residential Whole Loans — Residential Whole Loans are Agency CMBS, Agency RMBS (including TBAs), Non-Agency CMBS, Non-Agency RMBS,mortgages secured by single family residences held directly by us or through consolidated trusts with us holding the beneficial interest in the trusts. Our Residential and Commercial Whole-Loans, Residential and Commercial BridgeWhole Loans Risk Sharing Securities, Non U.S. CMBS and ABS.  We do not have specific investment guidelines providing for precise minimum or maximum allocations to any sector other than those necessary for maintaining our qualification as a REIT and our exemption from the 1940 Act.  These regulatory limits restrict our ability to shift away from investmentsare mainly adjustable rate mortgages that do not qualify as real estate assets. Accordingly, subjectfor the Consumer Finance Protection Bureau’s (or CFPB) safe harbor provision for “qualified mortgages” ("Non-QM mortgages"). Our Manager’s review, relating to these limits, allocationsNon-QM mortgages, includes an analysis of the loan originator’s procedures and documentation for compliance with Ability to various sectorsRepay requirements. As discussed in Note 7 - "Financing" to the financial statements contained in this Quarterly Report on Form 10-Q, we have and may continue to securitize Whole Loan interests, selling more senior interests in the pool of loans and retaining residual portions. The characteristics of our Residential Whole Loans may vary significantly with market constraints and our Manager’s investment views.  Our Manager has not and does not expect to purchase securities on our behalf with a view to selling them shortly after purchase.  However, in order to maximize returns and manage portfolio risk while remaining opportunistic, we may dispose of securities earlier than anticipated or hold securities longer than anticipated depending upon prevailing market conditions, credit performance, availability of leverage or other factors regarding a particular asset and/or our capital position.going forward.

As of September 30, 2017, our investment portfolio, excluding the securitized commercial loan from a consolidated VIE, was comprised of 53.5% of Agency CMBS, 28.4% of Agency RMBS, 7.1% of Non-Agency CMBS, 4.9% of Residential Whole-Loans, 3.1% of other securities, 1.6% of Non-Agency RMBS and 1.4% of Residential Bridge Loans.

Our Target Assets

Agency CMBS. — Fixed and floating rate CMBS, for which the principal and interest paymentsNon-RMBS that are not guaranteed by a U.S. Government agency or U.S. Government-sponsored entity. The mortgage loan collateral for Non-Agency RMBS consists of residential mortgage loans that do not generally conform to underwriting guidelines issued by a U.S. Government agency or U.S. Government-sponsored entity but for whichdue to certain factors, including mortgage balances in excess of Agency underwriting guidelines, borrower characteristics, loan characteristics and/or level of documentation, and therefore are not issued or guaranteed by a U.S. Government agency or U.S. Government-sponsored entity. The mortgage loan collateral may be classified as subprime, Alternative-A or prime depending on the borrower’s credit rating and the underlying level of documentation. Non-Agency RMBS collateral may also include re-
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performing loans, which are conventional mortgage loans arethat were current at the time of the securitization, but had been delinquent in the past. Non-Agency RMBS may be secured by real property other than single family residences. These may include, but are not limited to Fannie Mae DUS (Delegated Underwriting and Servicing) MBS, Freddie Mac Multifamily Mortgage Participation Certificates, Ginnie Mae project loan pools, and/fixed-rate mortgages, adjustable-rate mortgages or CMOs structured from such collateral.hybrid adjustable-rate mortgages.

Agency RMBS.RMBS — Agency RMBS, which are RMBS for which the principal and interest payments are guaranteed by a U.S. Government agency, such as the Government National Mortgage Association (“GNMA” or “Ginnie Mae”), or a U.S. Government-sponsored entity ("GSE"), such as the Federal National Mortgage Association (“FNMA” or “Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”).  The Agency RMBS we acquire can be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages. Fixed-rate mortgages have interest rates that are fixed for the term of the loan and do not adjust. The interest rates on adjustable-rate mortgages generally adjust annually (although some may adjust more frequently) to an increment over a specified interest rate index. Hybrid adjustable-rate mortgages have interest rates that are fixed for a specified period of time (typically three, five, seven or ten years) and, thereafter, adjust to an increment over a specified interest rate index. Adjustable-rate mortgages and hybrid adjustable-rate mortgages generally have periodic and lifetime constraints on the amount by which the loan interest rate can change on any predetermined interest rate reset date.

Non-Agency RMBS. — RMBS that are not guaranteed by a U.S. Government agency or U.S. Government-sponsored entity, with an emphasis on securities that when originally issued were rated These investments can be in the highest rating category by oneform of pools, TBA and CMO (including interest only, principal only or more of the nationally recognized statistical rating organizations. The mortgage loan collateral for Non-Agency RMBS consists of residential mortgage loans that do not generally conform to underwriting guidelines issued by a U.S. Government agency or U.S. Government-sponsored entity due to certain factors, including mortgage balances in excess of Agency underwriting guidelines, borrower characteristics, loan characteristics and/or level of documentation, and therefore are not issued or guaranteed by a U.S. Government agency or U.S. Government-sponsored entity. The mortgage loan collateral may be classified as subprime, Alternative-A or prime depending on the borrower’s credit rating and the underlying level of documentation. Non-Agency RMBS may be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages.other structures).


Non-Agency CMBS. — Fixed and floating rate CMBS for which the principal and interest payments are not guaranteed by a U.S. Government agency or U.S. Government-sponsored entity.  We do not have an established minimum current rating requirement for such investments.

Non U.S. CMBS. —CMBS which is not guaranteed by a U.S. Government agency or U.S. Government-sponsored entity and which is secured by commercial real estate located outside of the U.S.  Although our Manager believes that these investments can provide attractive risk-reward opportunities and offer additional asset diversification, investing in international real estate has

a number of additional risks, including but not limited to currency risk, political risk and the legal risk of investing in jurisdiction(s) with varying laws and regulations and potential tax implications.  See Item 3: Quantitative and Qualitative Disclosures about Market Risk — Foreign Investment Risk and Currency Risk, herein.
GSE Risk Sharing Securities Issued by Fannie Mae and Freddie Mac. Mac — From time to time we have invested and may in the future continue to invest in risk sharing securities issued by Fannie Mae and Freddie Mac. Principal and interest payments on these securities are based on the performance of a specified pool of Agency residential mortgages. The payments due on these securities, however, are not secured by the referenced mortgages, butmortgages. The payments due are full faith and credit obligations of Fannie Mae or Freddie Mac respectively.respectively, but neither agency guarantees full payment of the underlying mortgages.  Investments in these securities generally are not qualifying assets for purposes of the 75% real estate asset test applicable to REITs and generally do not generate qualifying income for purposes of the 75% real estate income test applicable to REITs. As a result, we may be limited in our ability to invest in such assets.

TBAs. — We may utilize TBAs, in order to invest in Agency RMBS. Pursuant to these TBAs, we agree to purchase (or deliver), for future settlement, Agency RMBS with certain principal and interest terms and certain underlying collateral, but the particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date. Our ability to invest in Agency RMBS through TBAs may be limited by the 75% real estate income and asset tests applicable to REITs.
Mortgage pass-through certificates. — Mortgage pass-through certificates are securities representing interests in “pools” of mortgage loans secured by residential real property where payments of both interest and scheduled principal, plus pre-paid principal, on the underlying loan pools are made monthly to holders of the securities, in effect “passing through” monthly payments made by the individual borrowers on the mortgage loans that underlie the securities, net of fees paid to the issuer/guarantor of the securities and servicers of the underlying mortgages.

Interest-Only Strips or IOs. — This type of security entitles the holder only to payments of interest based on a notional principal balance. The yield to maturity of Interest-Only Strips is extremely sensitive to the rate of principal payments (particularly prepayments) on the underlying pool of mortgages. We invest in these types of securities primarily to take advantage of particularly attractive prepayment-related or structural opportunities in the MBS markets, as well as to help manage the duration of our overall portfolio.
Inverse Interest-Only Strips or IIOs. — This type of security has a coupon with an inverse relationship to its index and is subject to caps and floors. Inverse Interest-Only MBS entitles the holder to interest only payments based on a notional principal balance, which is typically equal to a fixed rate of interest on the notional principal balance less a floating rate of interest on the notional principal balance that adjusts according to an index subject to set minimum and maximum rates. The current yield of Inverse Interest-Only MBS will generally decrease when its related index rate increases and increase when its related index rate decreases.
Agency and Non-Agency CMBS IO and IIO Securities. — Interest-Only and Inverse Interest-Only securities for which the underlying collateral is commercial mortgages the principal and interest on which may or may not be guaranteed by a U.S Government agency or U.S. Government-sponsored entity.  Unlike single family residential mortgages in which the borrower, generally, can prepay at any time, commercial mortgages frequently limit the ability of the borrower to prepay, thereby providing a certain level of prepayment protection.  Common restrictions include yield maintenance and prepayment penalties, the proceeds of which are generally at least partially allocable to these securities, as well as, defeasance.

Principal-Only Strips or POs. — This type of security generally only entitles the holder to receive cash flows that are derived from principal repayments of an underlying loan pool, but in the case of Non-Agency Principal-Only Strips will also include cash flows from default recoveries and excess interest.  The yield to maturity of Principal-Only Strips is extremely sensitive to the rate of principal payments (particularly prepayments) on the underlying pool of mortgages. We invest in these types of securities primarily to take advantage of structural opportunities in the MBS markets.
Residential Whole-Loans. — Residential Whole-Loans are mortgages secured by single family residences held directly by us or through structured Non-Agency RMBS programs crafted specifically for us and other clients of our Manager.  To date our Residential Whole-Loans have been mostly adjustable rate loans that do not qualify for the Consumer Finance Protection Bureau’s (or CFPB) safe harbor provision for “qualifying mortgages”. However, our Manager’s review, relating to possible purchases of loans, includes an analysis of the loan originator’s procedures and documentation for compliance with Ability to Repay requirements.  These loans are held in consolidated trusts with us holding the beneficial interest in the trusts.  We may in

the future securitize the whole-loan interests, selling more senior interests in the pool of loans and retaining residual portions.   The characteristics of our Residential Whole-Loans may vary going forward.

Residential Bridge Loans. —Residential Bridge Loans are mortgages secured by non owner occupied single family and multi-family residences, typically short-term, held directly by us or through structured Non-Agency RMBS programs crafted specifically for us and other clients of our Manager.  These loans are held in a consolidated trust with us holding the beneficial interest in the trust.  We may in the future securitize these loan interests, selling more senior interests in the pool of loans and retaining residual portions. 
Commercial Whole-Loans. - Our Manager is also actively exploring opportunities to invest in small balance, $2.5 million to $25.0 million, Commercial Whole-Loans, including commercial mortgages and Small Business Administration or SBA loans secured primarily by real estate.  While our Manager has experience in CMBS and we currently invest in Agency and Non-Agency CMBS, as well as, Non U.S. CMBS, investing in Whole-Loans backed or secured by commercial real estate assets involves complex investment, structural, regulatory and accounting issues.  Some of these issues are unique to Commercial Whole-Loans as opposed to residential mortgages.  Accordingly, there is no assurance of the prevalence suchOther investments will have in our overall portfolio in the future.

Commercial Mezzanine Loans. —Commercialmezzanine loans are generally structured to represent a senior position in the borrower’s equity in, and subordinate to a first mortgage loan, on a property. These loans are generally secured by pledges of ownership interests, in whole or in part, in entities that directly or indirectly own the real property. At times, mezzanine loans may be secured by additional collateral, including letters of credit, personal guarantees, or collateral unrelated to the property. Mezzanine loans may be structured to carry either fixed or floating interest rates as well as carry a right to participate in a percentage of gross revenues and a percentage of the increase in the fair market value of the property securing the loan. Mezzanine loans may also contain prepayment lockouts, penalties, minimum profit hurdles and other mechanisms to protect and enhance returns to the lender. Mezzanine loans usually have maturities that match the maturity of the related mortgage loan but may have shorter or longer terms.

Collateralized Mortgage Obligations or CMOs. — These are securities that are structured from residential and/or commercial pass-through certificates, which receive monthly payments of principal and interest. CMOs divide the cash flows which come from the underlying mortgage pass-through certificates into different classes of securities that may have different maturities and different weighted average lives than the underlying pass-through certificates.
ABS. — Debt and/or equity tranches of securitizations backed by various asset classes including, but not limited to, aircrafts, automobiles, credit cards, equipment, franchises, recreational vehicles and student loans. Investments in ABS generally are not qualifying assets for purposes of the 75% real estate asset test applicable to REITs and generally do not generate qualifying income for purposes of the 75% real estate income test applicable to REITs. As a result, we may be limited in our ability to invest in such assets.
Other investments. — In addition to MBS,Residential Whole Loans and Non-Agency RMBS, our principal investment, and ABS from time to time,current target investments, we may also make other investments in Commercial Loans and Non-Agency CMBS and other securities on an opportunistic basis, which our Manager believes will assist us in meeting our investment objective and are consistent with our overall investment policies.  These investments will normally be limited by the REIT requirements that 75% our assets be real estate assets and that 75% of our income be generated from real estate, thereby limiting our ability to invest in such assets.


Our Investment Portfolio

Our investment strategy will focus on residential real estate related investments, including but not limited to non-qualified mortgage loans, Non-Agency RMBS, and other related investments. We are continuing to transition out of our commercial loan investments.

Our investment portfolio composition at June 30, 2023 is as follows:



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Our Financing Strategy
 
The Company has worked to diversify our financing sources to provide an alternative to short-term repurchase agreements. We expect to continue to seek financing arrangements with longer terms and less onerous margin requirements, including but not limited to longer-term repurchase agreements, term financing, securitizations, and convertible senior unsecured notes, as the market permits. We believe the amount of leverage that we employuse is specific to each asset classconsistent with our intention of keeping total borrowings within a prudent range, as determined by our Manager, taking into account a variety of factors such as general economic, political and is determined based on several factors, including potential assetfinancial market conditions, the anticipated liquidity and price volatility margin requirements,of our assets, the current cycle for interest rates,availability and cost of financing the shapeassets, the creditworthiness of financing counterparties, and the health of the yield curve, the outlook for interest ratesU.S. residential and our ability to use and the effectiveness of interest rate hedges. We analyze both historical volatility and market-driven implied volatility for each asset class in order to determine potential asset price volatility. Our leverage targets attempt to risk-adjust asset classes based on each asset class’s potential price volatility. The goal of our leverage strategy is to ensure that, at all times, our investment portfolio’s overall leverage ratio is appropriate for the level of risk inherent in the investment portfolio.

We primarily finance our investments through repurchase agreements for which we pledge our assets. Our repurchase agreements have maturities generally ranging from one to three months, but in some cases longer. The amount borrowed under our repurchase agreements is a specified percentage of the asset’s fair value, which is dependent on the collateral type.  The portion of the pledged collateral held by the counterparty in excess of the amount borrowed under the repurchase agreement is the margin

requirement for that borrowing.  Repurchase agreements involve the transfer of the pledged collateral to a counterparty at an agreed upon price in exchange for such counterparty’s simultaneous agreement to return the same security back to the borrower at a future date (i.e., the maturity of the borrowing). Under our repurchase agreements, we retain beneficial ownership of the pledged collateral, while the counterparty maintains custody of such collateral.  At the maturity of a repurchase financing, unless the repurchase financing is renewed with the same counterparty, we are required to repay the loan, including any accrued interest, and concurrently reacquire custody of the pledged collateral or, with the consent of the counterparty, we may renew the repurchase financing at the then prevailing market interest rate and terms
Volatility in thecommercial mortgage markets may create additional stress on the overall liquidity of the Company due to the long-term nature of its assets and the short-term nature of its liabilities.  In an instance of severe volatility, or where the additional stress on liquidity resulting from volatility is sustained over an extended period of time, the Company could be required to sell assets, possibly even at a loss, to generate sufficient liquidity to satisfy collateral and margin requirements which could have a material adverse effect on the Company’s financial position, results of operations and cash flows. Margin calls from counterparties are routinely experienced by us when the fair value of our existing pledged collateral declines as a result of principal amortization and prepayments or due to changes in market interest rates, spreads or other market conditions.  As a result, the counterparty will require that we pledge additional securities and/or cash as collateral to secure our borrowings under repurchase financing.  In certain circumstances, we also may make margin calls on our counterparties when collateral values increase.  As of September 30, 2017, we had $25.0 million of cash collateral held by our repurchase agreement counterparties and we have satisfied all of our margin calls.

The costs associated with our borrowings are generally based on prevailing market interest rates. During a period of rising interest rates, our borrowing costs generally will increase while the yields earned on our existing portfolio of leveraged fixed-rate MBS and other fixed rate securities will remain static. This could result in a decline in our net interest spread and net interest margin. The severity of any such decline would depend on our asset/liability composition at the time, as well as the magnitude and duration of the interest rate increase. We entered into interest rate swaps to mitigate the effects of increases in interest rates under a portion of our repurchase agreements. Refer to "Hedging Strategy" for details. Further, an increase in short-term interest rates could also have a negative impact on the market value of our assets. If either of these events happens, we could experience a decrease in net income or incur a net loss during these periods, which could adversely affect our liquidity and results of operations.
markets. We expect to maintain a debt to equitydebt-to-equity ratio of threetwo to tenfour and a half times the amount of our stockholders’stockholders' equity, although there is no stated minimum or maximum leverage independing on our investment policies. To the extent the Agency MBS percentage ofcomposition. We seek to enhance equity returns by effectively utilizing leverage and seeking to limit our portfolio decreases, our overall leverage is likelyexposure to decrease.  Depending on the different cost of borrowing funds at different maturities, we will vary the maturities of our borrowed funds to attempt to produce lower borrowing costs and reduce interest rate risk. Generally, we enter into collateralized borrowings only with institutions that are rated investment grade by at least one nationally-recognized statistical rating organization.  We relyvolatility and daily margin calls. The following table presents our debt-to-equity ratio on financingJune 30, 2023 and December 31, 2022:

(dollars in thousands)June 30, 2023December 31, 2022
Total debt(1)
$232,201$276,639
Total equity$88,713$94,804
Debt-to-equity ratio2.62.9

(1) Total debt excludes the securitized debt which is non-recourse to acquire, on a leveraged basis, assets in which we invest. If market conditions deteriorate, our counterparties may exit the repurchase market, and tighten lending standards, or increase the amount of equity capital required to obtain financing thereby making it more difficult and costly for us to obtain financing. In the future, we may be limited or restricted in the amount of leverage we may employ by the terms and provisions of any financing or other agreements. We may also change our financing strategy and leverage without the consent of our stockholders.Company.


Our Hedging and Risk Management Strategy
 
SubjectOur overall portfolio strategy is designed to maintaininggenerate attractive returns to our qualification as a REIT for U.S. federal income tax purposes,investors through various economic cycles. In connection with our risk management activities, we may pursue various economic hedging strategies in an effortenter into a variety of derivative and non-derivative instruments. When purchased, our primary objective for acquiring these derivatives and non-derivative instruments is to reducemitigate our exposure to adverse changes in interest rates and, to a more limited extent, foreign currency. There is no guaranteefuture events that we will engage in any level of hedging activity or that the intended hedges will effectively reduceare outside our interest rate exposure. The U.S. federal income tax rules applicable to REITs may require us to implement certain of these techniques through a domestic TRS that is subject to federal, state and local corporate income taxation.

control. Our hedging activity varies in scope based on the level and volatility of interest rates, the type of assets held, including currency denomination and other changing market conditions.  The majority of swaps we entered intoderivative instruments are designed to mitigate the effects of increases inmarket risk and cash flow volatility associated with interest rates under a portionrate risk, including prepayment risk. As part of our repurchase agreements.  These swaps generally provide for fixed interest rates indexed off of the London interbank offered rate, or LIBOR, and effectively fix the floating interest rates.  Notwithstanding the foregoing, in order to manage our hedge position with regard to our liabilities,hedging strategy, we may enter into interest rate swaps, which involve the receipt of fixed-rate amounts from counterparty in exchange for us making variable-rate payments over the life of the interest rate swap without exchange of the underlying notional amount.  We also enter into compression trades that enable us to

terminate substantial amounts of swap contracts before they expire by their terms, when there has been substantial two-way (pay and receive) swap activity.  These “compression trades” reduce the number of interest rate swaps outstanding.  In addition to simplifying, our balance sheet, by reducing the number of interest rate swaps outstanding, we are frequently able to reduce the amount of margin required to carry such positions.

We utilizeincluding forward starting swaps, and swaptions for several reasons including replacing expiring swaps, in anticipation of increasing our overall financing and reducing our exposure to future interest rate increases.  Interest rate swaptions, provide us the option to enter into an interest rate swap agreement for a predetermined notional amount, stated termU.S. Treasury
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options, future contracts, TBAs, credit default swaps, forwards and set pay and receive interest rates in the future.
We utilize foreign currency swaps, agreeing to pay a fixed amount of non U.S. currency such as the euro in exchange for a fixed amount of U.S. dollars as well as currency forwards.  We entered into the currency swaps and forwards in order to hedge our exposure to foreign currency with respect to Non U.S. CMBS investments and the corresponding repurchase financings utilized to make such investments.
In order to enable us to maintain compliance with the REIT requirements, we have generally elected to treat the aforementioned derivative instruments as hedges for U.S. federal tax purposes.  To date, however, we have not elected to apply hedge accounting for financial statement reporting purposes for our derivativeother similar instruments. As a result, we record the change in fair value of our derivatives and the associated interest and currency exchange in "Gain (loss) on derivatives, net" in the Statement of Operations. Additionally, we may enter intoThere can be no assurance that appropriate hedging transactions in the form of puts and calls or other financial instruments that we deem appropriate.
Our interest rate hedging techniques are partly based on assumed levels of prepayments of our target assets. If prepayments are slower or faster than assumed, the life of the investmentstrategies will be longeravailable or shorter, which would reduce the effectiveness of any of the interest rate hedging strategies we may use and may cause losses on such transactions. Hedging strategies, both interest rate and foreign currency, involve the use of derivative securities which are highly complex and may produce volatile returns.that if implemented they will be successful.

We may invest in equity index derivatives such as futures, options on futures and options on indices.  These instruments are used normally to hedge interest rate movements as well as credit risks and other risks associated with our portfolio which may be impacted by volatility in the equity markets. Tax and other regulatory rules may limit our overall ability to use these instruments even through a TRS. Investing in these instruments introduces equity market risks into the management of the portfolio although as noted above our Manager uses them for the purpose of hedging our overall interest rate risk. These hedging strategies involving equity index products may not be successful, and may expose us to additional losses, if expected correlations between such risks and the equity markets do not occur.
Critical Accounting Policies
 
The consolidated financial statements include our accounts, those of our consolidated subsidiary, our wholly-owned TRSsubsidiaries and certain variable interest entities (“VIEs”)VIEs in which we are the primary beneficiary. All intercompany amounts have been eliminated in consolidation. In accordance with GAAP, our consolidated financial statements require the use of estimates and assumptions that involve the exercise of judgment and use of assumptions as to future uncertainties.  In accordance with SEC guidance, the following discussion addresses the accounting policies that we currently apply. Our most critical accounting policies will involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our consolidated financial statements have been based were reasonable at the time made and based upon information available to us at that time. For a review of recentThere have been no significant changes to our critical accounting pronouncements that may impact our results of operations, see Note 2 of our “Notes to Consolidated Financial Statements (Unaudited)”.
Valuation of Financial Instruments
We disclose the fair value of our financial instruments according to a fair value hierarchy (Levels I, II, and III, as defined below). ASC 820 "Fair Value Measurements 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 marketspolicies 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 us at the end of the reporting period.

Mortgage-Backed Securities and Other Securities

Our 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”. We have chosen to make a fair value election pursuant to ASC 825, “Financial Instruments” for our mortgage-backed securities and other securities portfolio. Electing the fair value option allows us to record changes in fair value in the Consolidated Statements of Operations as a component of “Unrealized gain (loss), net”.

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

We evaluate 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 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) if we intend 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 we will be required to sell the security before recovery of its amortized cost basis. If we intend to sell the security or if it is more likely than not that we will be required to sell the 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”disclosed in our Consolidated Statements of Operations.

Increases in interest income may be recognizedmost recent Annual Report on a security on which we have previously recorded an OTTI charge if the cash flow of such security subsequently improves.

In addition, unrealized losses on our 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". We have chosen to make the fair value election pursuant to ASC 825 for our Residential Whole-Loan portfolio. Residential Whole-Loans are recorded at fair value in the Consolidated Balance Sheets with the periodic change in fair market value being recorded in earnings in our 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, we evaluate 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 we will be unable to collect all amounts due according to the existing contractual terms. When a loan is impaired, we do not record an allowance for loan loss as we have 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 our 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, we evaluate 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 we 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 effective rate or the fair value of the collateral, if the loan is collateral dependent. Upon measurement of impairment, we record 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. We record 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, rated AA and higher at the time of purchase, are amortized into interest income over the estimated life of such securities. Adjustments to premium and discount amortization are made for actual prepayment activity.  We estimate prepayments at least quarterly for our securities and, as a result, if the projected prepayment speed increases, we will accelerate the rate of amortization on premiums or discounts and make a retrospective adjustment to historical amortization. Alternatively, if projected prepayment speeds decrease, we 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 our 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, we review and, if appropriate, make adjustments to our cash flow projections based on input and analysis received from external sources, internal models, and our judgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. Where appropriate, we may include in our 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, we 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 our 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 our Consolidated Statements of Operations.
Variable Interest Entities (“VIEs”)
VIEs are defined as entities that by design either lack sufficient equityForm 10-K 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. We evaluate all of our interests in VIEs for consolidation. When the interests are determined to be variable interests, we assess whether we are 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 we have the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, we consider all facts and circumstances, including our role in establishing the VIE and our 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 we have 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, we consider all of our economic interests. This assessment requires that we 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 us.
In instances when a VIE is owned by both us and related parties, we consider 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 judgement.
In instances when we are required to consolidate a VIE that is determined to be a qualifying collateralized financing entity, under GAAP, we 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 is required.
Derivatives and Hedging Activities
Subject to maintaining our qualification as a REIT for U.S. federal income tax purposes, we utilize 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 our portfolio and related borrowings. Derivatives, subject to REIT requirements, are used for hedging purposes rather than speculation. We have also entered into a total return swap, which transfers the total return of the referenced security to the Company. We determine the fair value of our derivative positions and obtain quotations from third parties, including the Chicago Mercantile Exchange or CME, to facilitate the process of determining such fair values. If our 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. We have elected not to apply hedge accounting for our derivative instruments.  Accordingly, we record the change in fair value of our 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 our Consolidated Statements of Operations. 

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 our 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.

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 our 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 our Consolidated Statements of Cash Flows.

We evaluate the terms and conditions of our 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 our holdings of Interest-Only Strips, we evaluate 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 our Agency and Non-Agency Interest-Only Strips, accounted for as derivatives, is included in "Mortgage-backed securities and other securities, at fair value" in our 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 our 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 our Consolidated Statements of Operations".
We evaluate all of our 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 our Consolidated Statements of Operations.
Accounting Standards Applicable to Emerging Growth Companies
The JOBS Act contains provisions that relax certain requirements for “emerging growth companies” for which we qualify. For as long as we are an emerging growth company, which may be up to five full fiscal years, unlike other public companies, we 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 our 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.  We currently take advantage of some of these exemptions.  Our qualification for remaining an emerging growth company under the five full fiscal years expires onyear ended December 31, 2017.  However, we will no longer qualify for such exemption earlier than that date if our gross revenue for any year equals or exceeds $1.0 billion or more, we issue more than $1.0 billion in non-convertible debt during the three previous years, or if we are deemed to be a large accelerated filer. We have not elected to use the extended transition period for complying with any new or revised financial accounting standards.2022.

As noted above, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards apply to private companies.  Since we are not required to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies, our financial statements may not be comparable to the consolidated financial statements of companies that comply with public company effective dates. If we were to elect to comply with these public company effective dates, such election would be irrevocable pursuant to Section 107 of the JOBS Act.

2023 Activity



















Recent Accounting Pronouncements
DescriptionEffective DateEffect on Financial Statements
 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).First quarter 2018 and permits the use of either the full retrospective or modified retrospective method.Our revenue is mainly derived from interest income on our investments and to a lesser extent gains on sales of investments, which are not impacted by this standard. Therefore, the adoption of this standard is not expected to have a material impact on our consolidated financial statements.
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. 
First quarter 2018.The standard does not change the guidance for classifying and measuring investments in debt securities and loans. Therefore, the adoption of this standard is not expected to have a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This standard significantly changes how an entity will measure credit losses for most financial assets and certain other instruments that aren't measured at fair value through the income statement. The standard will replace the current "incurred loss" approach with an "expected loss" model for instruments measured at amortized cost. For available for sale debt securities, entities will be required to record an allowance rather than reduce the carrying amount, as is currently done under the other than temporary impairment model. It also simplifies the accounting model for purchased credit impaired debt securities and loans.First quarter 2020.We are evaluating the impact the standard may have on our 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 flowsFirst quarter 2018 and requires retrospective adoption.We are evaluating the impact the standard may have on our Consolidated Statements of Cash Flows 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.First quarter 2018 and requires retrospective adoption.We currently do not have restricted cash. Therefore, the adoption of this standard is not expected to have a material impact on our Consolidated Statements of Cash Flows.
In January 2017, the FASB issued ASU 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of a Business." This ASU provides a more robust framework to use in determining when a set of assets and activities constitutes a business.First quarter 2020. The guidance should be applied prospectively on or after the effective date.We do not believe the adoption of this standard will have a material impact on our consolidated financial statements.
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.First quarter 2018.We do not believe the adoption of this standard will have a material impact on our consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11 "Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivative and Hedges (Topic 815): Part I - Accounting for Certain Financial Instruments with Down Round Features and Part II - Replacement of the Indefinite Deferral for Mandatory Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatory Redeemable Noncontrolling Interest with a Scope Exception". Part I of this update changes the classification analysis of certain financial instruments (such as warrants and convertible instruments) with down round features. Down round features are features of certain equity-linked financial instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. Entities that present earnings per share are required to recognize the effect of the down round feature when it is triggered. The amendments in Part II of this update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect.First quarter 2019.We are evaluating the impact the standard will have on our consolidated financial statements.

Investments
Our Current Investment Portfolio
The following table presents certain information about our investment portfolio at September 30, 2017 (dollars in thousands):
 Principal
Balance		 Unamortized
Premium
(Discount)		 Discount
Designated as
Credit Reserve
and OTTI		 Amortized Cost Unrealized
Gain (Loss)		 
Carrying Value(4)
 Net
Weighted
Average
Coupon
Agency RMBS 
  
  
  
  
  
  
20-Year mortgage 
  
  
  
  
  
  
Coupon Rate: 
  
  
  
  
  
  
3.50%$31,291
 $1,481
 $—
 $32,772
 $10
 $32,782
 3.5%
4.00%118,679
 6,315
 —
 124,994
 1,502
 126,496
 4.0%
 149,970
 7,796
 —
 157,766
 1,512
 159,278
 3.9%
30-Year mortgage 
  
  
  
  
  
  
Coupon Rate: 
  
  
  
  
  
  
3.00%23,788
 111
 —
 23,899
 —
 23,899
 3.0%
4.00%245,220
 14,990
 —
 260,210
 448
 260,658
 4.0%
4.50%192,641
 14,128
 —
 206,769
 4,213
 210,982
 4.5%
5.00%43,066
 5,038
 —
 48,104
 —
 48,104
 5.0%
5.50%1,872
 326
 —
 2,198
 (125) 2,073
 5.5%
6.00%2,152
 248
 —
 2,400
 80
 2,480
 6.0%
 508,739
 34,841
 —
 543,580
 4,616
 548,196
 4.2%
              
40-Year mortgage374,844
 11,062
 —
 385,906
 1,189
 387,095
 3.5%
              
Agency RMBS IOs and IIOs(1)
N/A
 N/A
 N/A
 15,416
 621
 16,037
 3.0%
Agency RMBS IOs and IIOs accounted for as derivatives (1)(2)
N/A
 N/A
 N/A
 N/A
 N/A
 11,219
 2.9%
 N/A
 N/A
 N/A
 15,416
 621
 27,256
 3.0%
              
Agency CMBS2,087,948
 2,147
 —
 2,090,095
 13,090
 2,103,185
 2.9%
Agency CMBS Interest-Only Strips(1)
N/A
 N/A
 N/A
 —
 30
 30
 3.2%
Agency CMBS IOs and IIOs accounted for as derivatives (1)(2)
N/A
 N/A
 N/A
 N/A
 N/A
 6,016
 0.5%
 2,087,948
 2,147
 —
 2,090,095
 13,120
 2,109,231
 2.7%
Subtotal Agency3,121,501
 55,846
 —
 3,192,763
 21,058
 3,231,056
 3.1%
              
Non-Agency RMBS81,504
 (802) (22,262) 58,440
 5,922
 64,362
 3.1%
 

 

 

 

 

    
Non-Agency CMBS376,215
 (60,850) (25,342) 290,023
 (11,512) 278,511
 4.8%
Subtotal Non-Agency457,719
 (61,652) (47,604) 348,463
 (5,590) 342,873
 4.5%
              

Other securities(3)
92,302
 5,340
 (5,225) 115,845
 6,806
 122,651
 7.3%
Subtotal MBS and Other securities3,671,522
 (466) (52,829) 3,657,071
 22,274
 3,696,580
 3.3%
              
Whole-Loans             
Residential Whole-Loans187,521
 257
 —
 187,778
 3,661
 191,439
 4.5%
Residential Bridge Loans54,716
 196
 —
 54,912
 N/A
 54,912
 10.0%
Securitized commercial loan24,941
 —
 —
 24,941
 11
 24,952
 9.0%
Subtotal Whole-Loans267,178
 453
 —
 267,631
 3,672
 271,303
 6.1%
Total Portfolio$3,938,700
 $(13) $(52,829) $3,924,702
 $25,946
 $3,967,883
 3.5%
(1) IOs and IIOs have no principal balances and bear interest based on a notional balance.  The notional balance is used solely to determine interest distributions on interest-only class of securities.  At September 30, 2017, the notional balance for Agency RMBS IOs and IIOs, Agency RMBS IOs and IIOs accounted for as derivatives, Agency CMBS IOs and IIOs and Agency CMBS IOs and IIOs accounted for as derivatives was $166.2 million, $131.8 million, $5.3 million and $193.8 million, respectively.
(2) Interest on these securities is reported as a component of "Gain (loss) on derivative instruments, net" in our Consolidated Statements of Operations.
(3) Other securities include residual interests in asset-backed securities which have no principal balance and an amortized cost of approximately $23.4 million.
(4) All investments are carried at their fair value with the exception of the residential bridge loans, which are carried at their amortized cost.


The following table summarizes our investment portfolio according to their estimated weighted average life as of September 30, 2017 (dollars in thousands):
Weighted Average Life
Carrying Value(1)
 
Net Weighted
Average
Coupon
Less than or equal to three years$373,484
 5.8%
Greater than three years and less than or equal to five years138,062
 2.3%
Greater than five years and less than or equal to 10 years2,854,797
 3.3%
Greater than 10 years601,540
 3.8%
Total$3,967,883
 3.5%
(1)All investments are carried at their fair value with the exception of the residential bridge loans, which are carried at their amortized cost.


Our Agency Portfolio
The following table summarizes certain characteristics of our Agency portfolio by issuer and investment category as of September 30, 2017 (dollars in thousands): 
 Principal Balance Amortized Cost Fair Value 
Net Weighted
Average Coupon
(1)
Agency RMBS 20-Year, 30-Year and 40-Year 
  
  
  
Fannie Mae$824,774
 $867,416
 $873,021
 3.9%
Freddie Mac208,779
 219,836
 221,548
 3.9%
Total Agency RMBS 20-Year, 30-Year and 40-Year1,033,553
 1,087,252
 1,094,569
 3.9%
Agency RMBS IOs and IIOs (2)
 
  
  
  
Fannie MaeN/A
 6,605
 7,095
 3.5%
Freddie MacN/A
 5,013
 5,024
 2.5%
Ginnie MaeN/A
 3,798
 3,918
 3.1%
Total Agency RMBS IOs and IIOs (2)
N/A
 15,416
 16,037
 3.0%
Agency RMBS IOs and IIOs accounted for as derivatives(2)
 
  
  
  
Fannie MaeN/A
 N/A
 8,488
 2.6%
Freddie MacN/A
 N/A
 1,453
 3.3%
Ginnie MaeN/A
 N/A
 1,278
 4.6%
Total Agency RMBS IOs and IIOs accounted for as derivatives (2)
N/A
 N/A
 11,219
 2.9%
Total: Agency RMBS1,033,553
 1,102,668
 1,121,825
 3.7%
        
Agency CMBS 
  
  
  
Fannie Mae2,087,948
 2,090,095
 2,103,185
 2.9%
Agency CMBS IOs and IIOs (2)
 
  
  
  
Fannie MaeN/A
 —
 30
 3.2%
Agency CMBS IOs and IIOs accounted for as derivatives (2)
 
  
  
  
Ginnie MaeN/A
 N/A
 6,016
 0.5%
Total: Agency CMBS2,087,948
 2,090,095
 2,109,231
 2.7%
Total$3,121,501
 $3,192,763
 $3,231,056
 3.1%
(1)Net weighted average coupon as of September 30, 2017 is presented net of servicing and other fees.
(2)IOs and IIOs have no principal balances and bear interest based on a notional balance.  The notional balance is used solely to determine interest distributions on the interest-only class of securities.

The following table details the constant prepayment rates for our Agency portfolio as of September 30, 2017, based on our Manager’s estimates which are based on third party models, as adjusted by our Manager, and are updated quarterly on a prospective basis:
Constant Prepayment Rates Low High
Agency RMBS  
  
20-Year mortgage 8.54% 14.02%
30-Year mortgage 7.35% 16.96%
40-Year mortgage 8.52% 9.33%
Agency RMBS IOs and IIOs 6.97% 21.38%
Agency RMBS IOs and IIOs accounted for as derivatives 6.69% 22.80%
Agency CMBS and Agency CMBS IOs and IIOs(1)
 N/A
 N/A
Agency CMBS IOs accounted for as derivatives(1)
 N/A
 N/A
(1)CMBS generally include prepayment restrictions; therefore, there are no Constant Prepayment Rates available.

Our Non-Agency Portfolio
The following table presents the fair value and weighted average purchase price for each of our Non-agency RMBS categories, including IOs accounted for as derivatives, together with certain of their respective underlying loan collateral attributes and current performance metrics as of September 30, 2017 (fair value dollars in thousands):
    Weighted Average
Category Fair Value  
Purchase
Price
 Life (Years) Original LTV 
Original
FICO
 
60+ Day
Delinquent
 
6-Month
CPR
Alt-A $56,044
 $77.86
 6.6
 74.8% 708
 19.1% 13.4%
Subprime 8,318
 58.57
 8.2
 77.4% 598
 19.0% 6.3%
Total $64,362
 $75.37
 6.8
 75.2% 694
 19.1% 12.4%
The following table presents certain characteristics of our Non-Agency CMBS portfolio as of September 30, 2017 (dollars in thousands): 
    Principal   Weighted Average
Type Vintage Balance Fair Value  Life (Years) Original LTV
Conduit:    
  
  
  
  2006-2009 $164,097
 $137,477
 2.8
 71.8%
  2010-2016 177,245
 111,283
 8.3
 64.0%
    341,342
 248,760
 5.3
 68.3%
Single Asset:    
  
  
  
  2010-2016 34,873
 29,751
 6.0
 60.4%
Total   $376,215
 $278,511
 5.3
 67.5%

The following table summarizes the credit ratings of our Non-agency RMBS, Non-agency CMBS and other securities, based on fair value, as of September 30, 2017: 
  Percentage
Credit Rating (1) 
Non-Agency CMBS

 
Non-Agency RMBS

 
Other Securities

B 5.4% —% —%
B- 3.5% —% —%
Below B 35.2% 77.9% —%
Not Rated 55.9% 22.1% 100.0%
Total 100.0% 100.0% 100.0%
(1)For securities for which one or two ratings are obtained, the lower rating is used. For securities for which three ratings are obtained, the middle rating is used. Ratings are obtained either from S&P or other rating agencies, stated in terms of the S&P equivalent.

The following table details information for our Non-Agency and other securities portfolio as of September 30, 2017, based on our Manager’s estimates which are based on third party models, as adjusted by our Manager, and are updated quarterly on a prospective basis:
 Cumulative Default Cumulative Severity 
Cumulative 5-Year
CRR (1)
 Low High Low High Low High
Non-Agency RMBS0.31% 9.49% 26.24% 100.00% 3.23% 13.91%
Other securities0.66% 1.92% —% 100.00% 8.42% 10.93%
(1)Conditional Repayment Rate
The mortgages underlying our Non-Agency RMBS and Non-Agency CMBS are located in various states across the United States and other countries. The following table presents the five largest concentrations by location for the mortgages collateralizing our Non-Agency RMBS and Non-Agency CMBS as of September 30, 2017, based on fair value (dollars in thousands):
 Non-Agency RMBS  Non-Agency CMBS
 Concentration Fair Value  Concentration Fair Value
California35.3% $22,750
 New York12.6% $35,178
Florida10.6% 6,822
 California8.0% 22,415
New York9.3% 5,993
 Florida7.5% 21,024
Virginia9.2% 5,898
 Illinois7.2% 20,036
Maryland4.4% 2,863
 Texas5.5% 15,245
Our Whole-Loan Portfolio

Residential Whole-Loans
Our Residential Whole-Loans are comprised of non-qualifying, mostly adjustable rate mortgages with low LTVs generally up to 80%.  The following table presents certain information about our Residential Whole-Loans investment portfolio at September 30, 2017 (dollars in thousands): 

      Weighted Average
Current Coupon Rate Number of Loans 
Principal
Balance
 Original LTV 
Original
FICO Score(1)
 
Expected
Life (years)
 
Contractual
Maturity
(years)
 
Coupon
Rate
3.01 – 4.00% 94 $40,696
 54.4% 750
 1.6 28.3 3.9%
4.01 – 5.00% 246 92,170
 55.4% 725
 1.4 26.2 4.4%
5.01 – 6.00% 138 51,635
 57.4% 723
 1.5 26.6 5.2%
6.01 – 7.00% 5 3,020
 71.2% 738
 1.3 20.4 6.3%
Total 483 $187,521
 56.0% 731
 1.4 26.6 4.5%
(1)The original FICO score is not available for 140 loans with a principal balance of approximately $56.6 million at September 30, 2017. We have excluded those loans from the weighted average computation.

The following table presents the U.S. states in which the collateral securing our Residential Whole-Loans at September 30, 2017, based on principal balance, is located (dollars in thousands): 
 State Concentration Principal Balance
California70.0% $131,403
New York19.1% 35,877
Washington5.0% 9,290
Massachusetts4.9% 9,175
Georgia0.7% 1,266
Other0.3% 510
Total100.0% $187,521

Residential Bridge Loans

Our Residential Bridge Loans are comprised of short-term fixed rate mortgages with low LTVs generally up to 80%. The following table presents certain information about our Residential Bridge Loans investment portfolio at September 30, 2017 (dollars in thousands): 
          Weighted Average
Current Coupon Rate Number of Loans 
Principal
Balance
 Unamortized Premium Carrying Value Original LTV 
Original
FICO Score(1)
 
Contractual
Maturity
(months)
 
Coupon
Rate
8.01 – 9.00% 37 $16,164
 $78
 $16,242
 72.3% 718
 14.3 8.9%
9.01 – 10.00% 75 27,011
 110
 27,121
 73.8% 669
 7.7 9.6%
10.01 – 11.00% 34 9,193
 25
 9,218
 74.7% 648
 4.1 10.7%
17.01 – 18.00% 10 2,348
 (17) 2,331
 72.0% 630
 7.7 18.0%
Total 156 $54,716
 $196
 $54,912
 73.4% 679
 9.1 10.0%
(1)The original FICO score is not available for 20 loans with a principal balance of approximately $6.2 million at September 30, 2017. We have excluded these loans from the weighted average computations.

The following table presents the U.S. states in which the collateral securing our Residential Bridge Loans at September 30, 2017, based on principal balance, is located (dollars in thousands): 

 State Concentration Principal Balance
California49.8% $27,311
Florida27.4% 14,988
Hawaii7.7% 4,225
Washington4.9% 2,664
Oregon4.0% 2,180
Other6.2% 3,348
Total100.0% $54,716
Non-performing Loans

As of September 30, 2017, there was one Residential Whole-Loan over 90-days past due with a current unpaid principal balance of $825 thousand and a fair value of $803 thousand and 6 Residential Bridge Loans over 90-days past due with an unpaid principal balance of approximately $1.6 million. These nonperforming Residential Whole Loans and Residential Bridge Loans represent approximately 0.4% and 2.9% of the total outstanding principal balance, respectively. No allowance and provision for credit losses was recorded for these bridge loans as of and for the three months ended September 30, 2017 since since we have elected the fair value option for our Residential Whole-Loans and we are expecting full recovery of the principal and interest is expected for the non-performing Bridge Loans. We stopped accruing interest income for these loans when they became contractually 90 days delinquent.
Investment ActivityInterest Rate Swaps
The Company uses interest rate swaps to mitigate its exposure to higher short-term interest rates in connection with its repurchase agreements. Interest rate swaps generally involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the interest rate swap without exchange of the underlying notional amount.  Notwithstanding the foregoing, in order to manage its hedge position with regard to its liabilities, the Company on occasion will enter into interest rate swaps which involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the interest rate swap without exchange of the underlying notional amount. The Company also enters into forward starting swaps to help mitigate the effects of changes in interest rates on a portion of its borrowings under repurchase agreements. The Company generally enters into MAC (Market Agreed Coupon) interest rate swaps in which it may receive or make a payment at the time of entering such interest rate swap to compensate for the out of the market nature of such interest rate swap. Similar to all other interest rate swaps, these interest rate swaps are also subject to margin requirements.
The Company has not elected to account for its interest rate swaps as “hedges” under GAAP, accordingly the change in fair value of the interest rate swaps not designated in hedging relationships are recorded together with periodic net interest settlement amounts in "Gain on derivatives instruments, net" in the Consolidated Statements of Operations.

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The following tables provide additional information on the Company's fixed-pay interest rate swaps as of June 30, 2023 and December 31, 2022 (dollars in thousands):
June 30, 2023
Fixed Pay Interest Rate Swap Remaining TermNotional AmountAverage 
Fixed Pay Rate		Average Variable Receive RateAverage Maturity (Years)
1 year or less$60,000 1.4 %4.9 %0.8
Greater than 5 years22,000 1.2 %4.4 %8.3
Total$82,000 1.3 %4.8 %2.8

December 31, 2022
Fixed Pay Interest Rate Swap Remaining TermNotional AmountAverage 
Fixed Pay Rate		Average Variable Receive RateAverage Maturity (Years)
Greater than 1 year and less than 3 years$60,000 1.4 %2.0 %1.3
Greater than 3 years and less than 5 years70,000 1.4 %1.8 %4.1
Greater than 5 years$28,000 1.7 %3.6 %9.0
Total$158,000 1.4 %2.2 %3.9




Interest-Only Strips
The Company also invests in Interest-Only strips. 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. Generally, Interest-Only strips for which the security represents a strip off of a mortgage pass through security will be considered a hybrid instrument classified as an MBS investment in the Consolidated Balance Sheets utilizing the fair value option. Alternatively, those 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 at fair value with changes recognized in "Gain on derivative instruments, net" in the Consolidated Statements of Operations, along with any interest received. The carrying value of these Interest-Only Strips is included in "Agency mortgage-backed securities, at fair value" in the Consolidated Balance Sheets.
Credit Default Swaps

    The Company currently has no outstanding credit default swaps. Under these instruments, the buyer makes a monthly premium payment over the term of the contract in exchange for the seller making a payment for losses of the reference securities, upon the occurrence of a specified credit event.

Note 9 — Offsetting Assets and Liabilities
 
The following tables present our investment portfolio activity forinformation about certain assets and liabilities that are subject to master netting agreements (or similar agreements) and can potentially be offset in the threeCompany’s Consolidated Balance Sheets at June 30, 2023 and nine months ended September 30, 2017 and September 30, 2016December 31, 2022 (dollars in thousands):
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 Three Months Ended September 30, 2017 Three Months Ended September 30, 2016
 Purchases 
Principal  Payments
and Basis  Recovery
 
Proceeds from
Sales
 Purchases 
Principal  Payments
and Basis  Recovery
 
Proceeds from
Sales
Agency RMBS and Agency RMBS IOs and IIOs$293,656
 $32,911
 $(2,906) $355,762
 $65,698
 $42,427
Non-Agency RMBS—
 1,447
 —
 1,247
 12,602
 15,209
Agency CMBS and Agency CMBS IOs and IIOs817,443
 1,496
 —
 —
 1,590
 8,216
Non-Agency CMBS—
 10,279
 10,597
 —
 8,067
 9,194
Other securities—
 211
 10,419
 27,346
 159
 14,485
Total MBS and other securities1,111,099
 46,344
 18,110
 384,355
 88,116
 89,531
Residential Whole-Loans 
—
 11,269
 —
 29,398
 14,493
 —
Residential Bridge Loans—
 9,880
 —
 —
 —
 —
Securitized Commercial Loan—
 59
 —
 —
 —
 —
Total Investments$1,111,099
 $67,552
 $18,110
 $413,753
 $102,609
 $89,531
June 30, 2023
 Gross 
Amounts		Gross 
Amounts 
Offset in the Consolidated
Balance 
Sheets 		Net Amounts
of Assets 
presented in 
the Consolidated
Balance 
Sheets		Gross Amounts Not Offset in
the Consolidated Balance
Sheets		Net Amount

Description
Financial 
Instruments(1)
Cash 
Collateral (1)
Derivative Assets
Agency and Non-Agency Interest-Only Strips, accounted for as derivatives included in MBS$778 $— $778 $(217)$— $561 
Total assets$778 $— $778 $(217)$— $561 
Derivative Liabilities and Repurchase Agreements
Derivative liability, at fair value(2)(3)
$68 $— $68 $— $(68)$— 
Repurchase Agreements(4)
147,860 — 147,860 (147,860)— — 
Total liability$147,928 $— $147,928 $(147,860)$(68)$— 



(1)Amounts disclosed in the financial instruments column of the tables above represent securities, whole loans, securitized commercial loan collateral pledged, and derivative assets that are available to be offset against liability balances associated with repurchase agreement and derivative liabilities. Amounts disclosed in the cash collateral column of the tables above represents amounts pledged or received as collateral against derivative transactions.
(2)Derivative asset, at fair value, includes interest rate swaps.
 Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016
 Purchases 
Principal  Payments
and Basis  Recovery
 
Proceeds from
Sales
 Purchases 
Principal  Payments
and Basis  Recovery
 
Proceeds from
Sales
Agency RMBS and Agency RMBS IOs and IIOs$631,928
 $111,441
 $864,819
 $643,766
 $167,443
 $366,677
Non-Agency RMBS—
 9,514
 246,006
 12,043
 46,816
 120,649
Agency CMBS and Agency CMBS IOs and IIOs1,728,833
 4,113
 —
 —
 4,105
 18,637
Non-Agency CMBS16,490
 61,575
 45,634
 —
 31,216
 34,188
Other securities81,001
 530
 33,365
 728,182
 1,924
 764,711
Total MBS and other securities2,458,252
 187,173
 1,189,824
 1,383,991
 251,504
 1,304,862
Residential Whole-Loans 
35,671
 35,626
 —
 29,398
 42,827
 —
Residential Bridge Loans73,990
 18,849
 —
 —
 —
 —
Securitized Commercial Loan—
 59
 —
 —
 —
 —
Total Investments$2,567,913
 $241,707
 $1,189,824
 $1,413,389
 $294,331
 $1,304,862
(3)Cash collateral pledged against the Company’s derivative counterparties was approximately $1.2 million as of June 30, 2023.

(4)The carrying value of investments pledged against the Company’s repurchase agreements was approximately $227.4 million as of June 30, 2023.

December 31, 2022
 Gross 
Amounts		Gross 
Amounts 
Offset in the Consolidated
Balance 
Sheets 		Net Amounts
of Assets 
presented in 
the Consolidated
Balance 
Sheets		Gross Amounts Not Offset in
the Consolidated Balance
Sheets		Net Amount
Description
Financial 
Instruments(1)
Cash 
Collateral (1)
Derivative Assets
Agency and Non-Agency Interest-Only Strips, accounted for as derivatives included in MBS$714 $— $714 $(196)$— $518 
Derivative asset, at fair value(2)
1 — 1 (1)— — 
Total assets$715 $— $715 $(197)$— $518 
Derivative Liabilities and Repurchase Agreements
Derivative liability, at fair value(2)(3)
$61 $— $61 $(1)$(60)$— 
Repurchase Agreements(4)
193,117 — 193,117 (193,073)(44)— 
Total liability$193,178 $— $193,178 $(193,074)$(104)$— 


(1)Amounts disclosed in the financial instruments column of the tables above represent securities, whole loans, securitized commercial loan collateral pledged, and derivative assets that are available to be offset against liability balances associated with repurchase agreement and derivative liabilities. Amounts disclosed in the cash collateral column of the tables above represents amounts pledged or received as collateral against derivative transactions.
(2)Derivative asset, at fair value and Derivative liability, at fair value includes interest rate swaps and credit default swaps.
(3)Cash collateral pledged against the Company’s derivative counterparties was approximately $3.2 million as of December 31, 2022.
(4)The carrying value of investments pledged against the Company’s repurchase agreements was approximately $288.3 million as of December 31, 2022.

Certain of the Company’s repurchase agreement and derivative transactions are governed by underlying agreements that generally provide for a right of set-off in the event of default or in the event of a bankruptcy of either party to the transaction.
 
The following table presents the vintage(1) of our investment portfolio at September 30, 2017:
40
 2001 2005 2006 2007 2011 2012 2013 2014 2015 2016 2017 Total
Agency RMBS 
  
  
  
  
  
  
  
  
  
  
  
20-Year Mortgage—% —% —% —% —% 0.6% 1.3% 2.0% 0.1% —% —% 4.0%
30-Year Mortgage—% —% —% —% —% 2.4% 3.1% 4.0% —% 1.0% 3.3% 13.8%
40-Year Mortgage—% —% —% —% —% —% —% —% —% 2.4% 7.4% 9.8%
Agency RMBS IOs and IIOs—% —% —% —% —% 0.1% —% 0.1% —% —% 0.2% 0.4%
Agency RMBS IOs and IIOs, accounted for as derivatives—% —% 0.1% —% —% 0.2% —% —% —% —% —% 0.3%
Agency CMBS—% —% —% —% —% —% 0.4% —% —% 13.3% 39.3% 53.0%
Agency CMBS IOs and IIOs, accounted for as derivatives—% —% —% —% —% —% 0.2% —% —% —% —% 0.2%
Non-Agency RMBS—% 0.7% 0.6% 0.3% —% —% —% —% —% —% —% 1.6%
Non-Agency CMBS—% —% 1.5% 1.9% 0.9% 0.2% 0.1% 0.3% 1.9% 0.2% —% 7.0%
Other securities0.2% —% —% —% —% —% —% 0.4% 0.4% 0.9% 1.2% 3.1%
Residential Whole-Loans—% —% —% —% 0.1% 0.2% 2.1% 1.0% 0.1% 1.3% —% 4.8%
Residential Bridge Loans—% —% —% —% —% —% —% —% 0.1% 0.7% 0.6% 1.4%
Securitized commercial loan—% —% —% —% —% —% —% —% —% 0.6% —% 0.6%
Total0.2% 0.7% 2.2% 2.2% 1.0% 3.7% 7.2% 7.8% 2.6% 20.4% 52.0% 100%
Table of Contents
 (1) Based on carrying amount


Note 10 — Related Party Transactions
Management Agreement
In connection with the Company’s initial public offering ("IPO") in May 2012, the Company entered into a management agreement (the “Management Agreement”) with the Manager, which describes the services to be provided by the Manager and compensation for such services. The Manager is responsible for managing the Company’s operations, including;(i) performing all of its day-to-day functions, (ii) determining investment criteria in conjunction with the Board of Directors, (iii) sourcing, analyzing and executing investments, asset sales and financings, (iv) performing asset management duties, and (v) performing financial and accounting management, subject to the direction and oversight of the investments.


Financing Activity
We have enteredCompany’s Board of Directors. Pursuant to the terms of the Management Agreement, the Manager is paid a management fee equal to 1.50% per annum of the Company’s stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears. For purposes of calculating the management fee, “stockholders’ equity” means the sum of the net proceeds from any issuances of the Company’s equity securities since inception (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance), plus retained earnings, calculated in accordance with GAAP, at the end of the most recently completed fiscal quarter (without taking into repurchase agreements to financeaccount any non-cash equity compensation expense incurred in current or prior periods), less any amount paid for repurchases of the vast majorityCompany’s shares of our investments.  These agreements are secured bycommon stock, excluding any unrealized gains or losses on our investments and bear interest at ratesderivatives and other non-cash items (excluding other than temporary impairment) that have historically movedimpacted stockholders' equity as reported in close relationshipthe Company’s consolidated financial statements prepared in accordance with GAAP, regardless of whether such items are included in other comprehensive income or loss, or in net income, and excluding one-time events pursuant to LIBOR.  The following table summarizes our repurchase agreementschanges in GAAP and certain other non-cash charges after discussions between the Manager and the valueCompany’s independent directors and after approval by a majority of the collateral pledgedCompany’s independent directors. However, if the Company’s stockholders’ equity for any given quarter is negative based on the calculation described above, the Manager will not be entitled to receive any management fee for that quarter.

In addition, the Company may be required to reimburse the Manager for certain expenses as described below, and shall reimburse the Manager for the compensation paid to the Company’s controller. Expense reimbursements to the Manager are made in cash on a regular basis. The Company’s reimbursement obligation is not subject to any dollar limitation. Because the Manager’s personnel perform certain legal, accounting, due diligence tasks and other services that outside professionals or outside consultants otherwise would perform, the Manager may be paid or reimbursed for the documented cost of performing such tasks, provided that such costs and reimbursements are in amounts which are no greater than those which would be payable to outside professionals or consultants engaged to perform such services pursuant to agreements negotiated on an arm’s-length basis.
The Management Agreement may be amended, supplemented or modified by agreement between the Company and the Manager. The Management Agreement expires on May 15, 2024. It is automatically renewed for one-year terms on each May 15th unless previously terminated as described below. The Company’s independent directors review the Manager’s performance and any fees payable to the Manager annually and, the Management Agreement may be terminated annually upon the affirmative vote of at least two-thirds (2/3) of the Company’s independent directors, based upon: (i) the Manager’s unsatisfactory performance that is materially detrimental to the Company; or (ii) the Company’s determination that any fees payable to the Manager are not fair, subject to the Manager’s right to prevent such termination due to unfair fees by accepting a reduction of management fees agreed to by at least two-thirds (2/3) of the Company’s independent directors. The Company will provide the Manager 180 days prior notice of any such termination. Unless terminated for cause, the Company will pay the Manager a termination fee equal to three times the average annual management fee earned by the Manager during the prior 24-month period immediately preceding the date of termination, calculated as of Septemberthe end of the most recently completed fiscal quarter prior to the date of termination.

The Company may also terminate the Management Agreement at any time, without the payment of any termination fee, with 30 2017days prior written notice from the Company’s Board of Directors for cause, which will be determined by at least two-thirds (2/3) of the Company’s independent directors, which is defined as: (i) the Manager’s continued material breach of any provision of the Management Agreement (including the Manager’s failure to comply with the Company’s investment guidelines); (ii) the Manager’s fraud, misappropriation of funds, or embezzlement against the Company; (iii) the Manager’s gross negligence in the performance of its duties under the Management Agreement; (iv) the occurrence of certain events with respect to the bankruptcy or insolvency of the Manager, including an order for relief in an involuntary bankruptcy case or the
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Manager authorizing or filing a voluntary bankruptcy petition; (v) the Manager is convicted (including a plea of nolo contendere) of a felony; or (vi) the dissolution of the Manager.
In December 2021, the Manager agreed to voluntarily waive 25% of its management fee solely for the duration of calendar year 2022 in order to support the earnings potential of the Company and its transition to a residential focused investment portfolio. Future waivers, if any, will be at the Manager's discretion.
     For the three months ended June 30, 2023 and June 30, 2022, the Company incurred approximately $1.0 million and approximately $1.0 million in management fees, respectively. For the six months ended June 30, 2023 and June 30, 2022, the Company incurred approximately $1.9 million and approximately $2.1 million in management fees, respectively.
In addition to the management fee, the Company is also responsible for reimbursing the Manager for certain expenses paid by the Manager on behalf of the Company as defined in the Management Agreement. For the three months ended June 30, 2023 and June 30, 2022, the Company recorded expenses included in general and administrative expenses totaling approximately $59 thousand and approximately $296 thousand, respectively, related to reimbursable employee costs. For the six months ended June 30, 2023 and June 30, 2022, the Company recorded expenses included in general and administrative expenses totaling approximately $150 thousand and approximately $447 thousand, respectively, related to reimbursable employee costs. Any such expenses incurred by the Manager and reimbursed by the Company, including the employee compensation expense, are typically included in the Company’s general and administrative expense in the Consolidated Statements of Operations. At June 30, 2023 and December 31, 2016 (dollars2022, approximately $3.8 million and approximately $3.9 million, respectively, for management fees incurred but not yet paid was included in thousands):"Payable to affiliate" in the Consolidated Balance Sheets. In addition, at June 30, 2023 and December 31, 2022, approximately $103 thousand and approximately $86 thousand, respectively, of reimbursable costs incurred but not yet paid was included in "Payable to affiliate" in the Consolidated Balance Sheets. 

Note 11 — Share-Based Payments
 
  September 30, 2017 December 31, 2016
Collateral 
Repurchase
Agreement
Borrowings
Outstanding
 
 Value of
Collateral
Pledged
 
Repurchase
Agreement
Borrowings
Outstanding
 
Value of
Collateral
Pledged
Agency RMBS, at fair value $792,520
 $823,403
 $1,427,674
 $1,465,384
Agency CMBS, at fair value 2,019,010
 2,109,202
 56,365
 61,200
Non-Agency RMBS, at fair value 48,443
 64,348
 218,712
 308,165
Non-Agency CMBS, at fair value 192,015
 278,095
 255,656
 358,919
Whole-Loans, at fair value (1)(2)
 163,560
 205,412
 161,181
 205,702
Residential Bridge Loans 51,074
 54,912
 —
 —
Other securities, at fair value 69,634
 122,651
 36,056
 67,762
Borrowings under repurchase agreements $3,336,256
 $3,658,023
 $2,155,644
 $2,467,132
The Company's ability to grant equity-based awards under the Company's previous equity incentive plans expired on May 9, 2022. At the Annual Meeting of Stockholders held on June 24, 2022, the Company's stockholders approved the Western Asset Mortgage Capital Corporation 2022 Omnibus Incentive Plan and the Western Asset Mortgage Capital Corporation 2022 Manager Omnibus Incentive Plan (collectively, the “2022 Plans”). The 2022 Plans provide for the issuance of options (including non-statutory stock options and incentive stock options), stock appreciation rights (referred to as SARs), restricted stock, restricted stock units (referred to as RSUs), stock bonuses, other stock based awards and cash awards.

The aggregate maximum number of shares of our common stock available for future issuances under the 2022 Plans is 1,000,000 shares, which was reduced to 100,000 shares following the completion of the reverse stock split. The Manager and the officers, employees, non-employee directors, independent contractors, and consultants of the Company or any affiliate of the Company, including any individuals who are employees of the Manager or one of the Manager’s affiliates, are eligible to participate in the 2022 Plans, provided that they have been selected by the Plan Administrator.

On June 23, 2023, the Company granted a total of 31,184 restricted stock units (7,796 per each independent director), to each of the Company's four independent directors. These restricted stock units will vest in full on June 23, 2024, the first anniversary of the grant date, and will be settled in shares of the Company’s common stock upon each of the independent director’s separation from service with the Company.

On June 24, 2022, the Company granted 21,704 restricted stock units (5,426 per each independent director) on a post reverse stock split basis, to each of the Company's 4 independent directors. These restricted stock units and associated dividend equivalent units vested in full on June 24, 2023, the one year anniversary of the grant date, and will be settled in shares of the Company's common stock upon each of the independent director's separation from service with the Company.

On June 30, 2022, the Company granted 20,000 restricted stock units on a post reverse-stock-split basis under the Western Asset Mortgage Capital Corporation 2022 Omnibus Incentive Plan to the Company’s Chief Financial Officer. These restricted stock units and associated dividend equivalent units vest in equal installments on the first and second anniversary of the grant date. As of June 30, 2022, 10,000 of the 20,000 restricted stock units vested and will be settled with the Company's common stock.

During the six months ended June 30, 2023 and June 30, 2022, 31,704 and 11,716 restricted stock units vested, respectively. The Company recognized stock-based compensation expense of approximately $100 thousand and approximately
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(1) Whole-Loans consist$70 thousand for the three months ended June 30, 2023 and June 30, 2022, respectively. The Company recognized stock-based compensation expense of Residential Whole-Loansapproximately $200 thousand and a securitized commercial loan.approximately $235 thousand for the six months ended June 30, 2023 and June 30, 2022, respectively. In addition, the Company had unamortized compensation expense of $378 thousand and $298 thousand for equity awards at June 30, 2023 and December 31, 2022, respectively.
(2) Repurchase borrowings
Holders of restricted stock units are entitled to receive dividends (or dividend equivalent payments) and collateraldistributions that become payable on the restricted stock units during the restricted period. Dividend equivalent payments allocable to restricted stock units are deemed to purchase additional phantom shares of the Company's common stock that are credited to each participant's deferral account. The award agreements include restrictions whereby the restricted stock units cannot be sold, assigned, transferred, pledged, attributedhypothecated, or otherwise disposed of prior to loans owned through trust certificates.the lapse of restrictions under the respective award agreement. The trust certificatesrestrictions lapse on the unvested restricted stock units awarded when vested, subject to the grantee's continuing to provide services to the Company as of the vesting date. Unvested restricted stock units and rights to dividends thereon are eliminatedforfeited upon consolidation.termination of the grantee.    

The following tables present our repurchase agreement borrowing activity, by typeis a summary of collateral pledged, for the threerestricted equity awards vesting dates as of June 30, 2023 and nine months ended September 30, 2017 and September 30, 2016 (dollars in thousands):
  Three Months Ended September 30, 2017 Three Months Ended September 30, 2016
Collateral Proceeds Repayments Proceeds Repayments
Agency RMBS $1,459,970
 $1,697,890
 $2,119,828
 $1,882,784
Agency CMBS 3,101,186
 2,308,184
 45,213
 54,746
Non-Agency RMBS 48,443
 48,908
 513,797
 523,329
Non-Agency CMBS 287,827
 311,653
 412,562
 431,121
Whole-Loans(1)
 496,528
 505,330
 494,263
 482,095
Residential Bridge Loans 51,074
 54,621
 —
 —
Other securities 145,262
 129,054
 97,747
 96,599
Total $5,590,290
 $5,055,640
 $3,683,410
 $3,470,674

(1)Whole-Loans consist of Residential Whole-Loans and a securitized commercial loan.

  Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016
Collateral Proceeds Repayments Proceeds Repayments
Agency RMBS $4,014,637
 $4,649,790
 $6,031,664
 $5,848,926
Agency CMBS 5,642,114
 3,679,469
 154,568
 176,542
Non-Agency RMBS 254,375
 424,644
 1,330,783
 1,440,901
Non-Agency CMBS 991,042
 1,054,683
 1,192,568
 1,260,073
Whole-Loans(1)
 1,577,897
 1,575,518
 1,587,853
 1,594,845
Residential Bridge Loans 164,887
 113,813
 —
 —
Other securities 410,043
 376,465
 378,337
 417,129
Total $13,054,995
 $11,874,382
 $10,675,773
 $10,738,416

(1)Whole-Loans consist of Residential Whole-Loans and a securitized commercial loan.

At September 30, 2017, we had outstanding repurchase agreement borrowings with the following counterparties totaling approximately $3.3 billion:

(dollars in thousands)
Repurchase Agreement Counterparties
 Amount Outstanding Percent of Total Amount Outstanding Company Investments Held as Collateral 
Counterparty Rating(1)
Citigroup Global Markets Inc. $942,748
 28.2% $982,927
 A+
Jefferies & Company, Inc. 489,434
 14.6% 511,641
 BBB-
RBC Capital Markets LLC 409,755
 12.3% 429,862
 AA-
TD Securities (USA) LLC 303,870
 9.1% 318,128
 AA-
Mizuho Securities USA Inc. 233,318
 7.0% 243,720
 A
Credit Suisse AG, Cayman Islands Branch 161,698
 4.8% 200,428
 A
Merrill Lynch Pierce Fenner & Smith Inc. 129,053
 3.9% 133,128
 A+
KGS-Alpha Capital Markets, L.P. 119,489
 3.6% 125,189
 Unrated
The Bank of Nova Scotia 117,041
 3.5% 117,944
 A+
RBC (Barbados) Trading Bank Corporation 115,458
 3.5% 154,068
  P-1
Credit Suisse Securities (USA) LLC 82,416
 2.5% 156,214
 A
Nomura Securities International, Inc. 68,874
 2.1% 73,618
 
Unrated(2)
Deutsche Bank AG 50,515
 1.5% 68,769
 A-
BNP Paribas Securities Corporation 43,366
 1.3% 45,343
 A
Goldman Sachs Bank USA 25,842
 0.8% 35,020
 A+
Morgan Stanley & Co. LLC 24,675
 0.7% 37,390
 A+
Royal Bank of Canada 18,704
 0.6% 24,634
 AA-
Total $3,336,256
 100.0% $3,658,023
  

(1)The counterparty ratings presented above are the long-term issuer credit ratings as rated at September 30, 2017 by S&P, except for RBC (Barbados) Trading Bank Corporation which is the short-term issuer credit rating by Moody’s at September 30, 2017.
(2) Nomura Holdings, Inc., the parent company of Nomura Securities International, Inc., is rated A- by S&P at September 30, 2017.


At December 31, 2016, we had outstanding repurchase agreement borrowings with the following counterparties totaling approximately $2.2 billion:2022: 
(dollars in thousands)
Repurchase Agreement Counterparties
 Amount Outstanding Percent of Total Amount Outstanding Fair Value of Company Investments Held as Collateral 
Counterparty Rating(1)
Merrill Lynch Pierce Fenner & Smith Inc. $507,779
 23.5% $509,760
  A+
RBC (Barbados) Trading Bank Corporation 174,937
 8.0% 228,433
  P-1
RBC Capital Markets LLC 161,986
 7.5% 170,365
  AA-
Credit Suisse AG, Cayman Islands Branch 154,391
 7.2% 192,136
  A
The Bank of Nova Scotia 148,531
 6.9% 152,640
  A+
Barclays Capital Inc. 145,416
 6.7% 161,824
  A-
TD Securities (USA) LLC 124,745
 5.8% 130,847
  AA-
BNP Paribas Securities Corporation 120,346
 5.6% 126,815
  A
Credit Suisse Securities (USA) LLC 92,547
 4.3% 165,858
  A
The Bank of New York Mellon 76,986
 3.6% 79,704
  A
Deutsche Bank AG 75,462
 3.5% 94,054
  BBB+
Deutsche Bank Securities LLC 74,729
 3.5% 73,817
  BBB+
KGS-Alpha Capital Markets, L.P. 74,384
 3.5% 78,657
 Unrated
Goldman Sachs Bank USA 70,085
 3.3% 100,587
  A+
Morgan Stanley & Co. LLC 56,410
 2.6% 86,777
  A+
Mizuho Securities USA Inc. 45,570
 2.1% 50,114
  A
Nomura Securities International, Inc. 35,746
 1.7% 43,243
 
Unrated(2)
All other counterparties (3)
 15,594
 0.7% 21,501
  
Total $2,155,644
 100.0% $2,467,132
  
 June 30, 2023December 31, 2022
Vesting DateShares VestingShares Vesting
June 2023— 31,704 
June 202441,184 10,000 
Total41,184 41,704 
(1)The counterparty ratings presented above are the long-term issuer credit ratings as rated at December 31, 2016 by S&P, except for RBC (Barbados) Trading Bank Corporation, which is the short-term issuer credit rating by Moody’s at December 31, 2016.
(2)Nomura Holdings, Inc., the parent company of Nomura Securities International, Inc., is rated A- by S&P at December 31, 2016.
(3)Represents amount outstanding with three counterparties, which each holds collateral valued less than 5% of our stockholders’ equity as security for our obligations under the applicable repurchase agreements as of December 31, 2016.

We record the liability for MBS and other securities purchased, for which settlement has not taken place as an investment related payable.  As of September 30, 2017, we had investment related payables of $296.3 million.


The following table presents information with respect to shares issued under the Company’s Equity Incentive Plans for the six months ended June 30, 2023 and June 30, 2022:
June 30, 2023June 30, 2022
 Restricted Stock Units
Weighted Average 
Grant Date Fair 
Value(1)
Restricted Stock Units
Weighted Average 
Grant Date Fair 
Value(1)
Outstanding at beginning of period81,914 $31.21 32,943 $58.85 
Granted(2)
37,625 9.10 43,577 12.74 
Cancelled/forfeited— — — — 
Outstanding at end of period119,539 24.25 76,520 32.59 
Unvested at end of period41,184 $9.74 41,704 $12.52 

(1)The grant date fair value of the awards is based on the closing market price of the Company’s common stock at the grant date.
(2)Includes 6,441 and 1,873 shares attributed to dividends on restricted stock under the Director Deferred Fee Plan for the six months ended June 30, 2023 and June 30, 2022, respectively.


Note 12 — Stockholders’ Equity

Reverse Stock Split

On June 30, 2022, the Company announced that its Board of Directors approved a one-for-ten reverse stock split of the Company's outstanding shares of common stock. The one-for-ten reverse stock split was effected on July 11, 2022, which reduced the total number of authorized shares of common stock from 500,000,000 to 50,000,000 and also reduced the total number of authorized shares of preferred stock from 100,000,000 to 10,000,000. The number of common shares outstanding reducing from 60,380,105 to 6,038,012. The par value per share of our common stock remained unchanged at $0.01. All per share amounts and common shares outstanding have been adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split.

The Company's stockholders' equity, in the aggregate, remains unchanged. Per share net income or loss increased because there are fewer shares of common stock outstanding. The common stock held in treasury was reduced in proportion to
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the Reverse Stock Split Ratio. There were no other accounting consequences, including changes to the amount of stock-based compensation expense to be recognized in any period, that arose as a result of the reverse stock split. No fractional shares were issued in connection with the reverse stock split. Instead, each stockholder holding fractional shares was entitled to receive, in lieu of such fractional shares, cash in an amount determined based on the closing price of the Company's common stock the business day prior to the Effective Date. The reverse stock split applied to all of the Company's outstanding shares of common stock and did not affect any stockholder’s ownership percentage of shares of the Company's common stock, except for immaterial changes resulting from the payment of cash for fractional shares.

At-The-Market Program
    In March 2017, the Company entered into an equity distribution agreement with JMP Securities LLC, which was amended on June 5, 2020, under which the Company may offer and sell up to $100 million worth of shares of common stock in an At-The-Market equity offering. During the six months ended June 30, 2023, the Company did not sell any shares under the amended agreement.
Stock Repurchase Program

In December 2021, the Company extended its stock repurchase agreement borrowingsprogram as authorized by typeits Board of collateral pledgedDirectors. Under the extended program, the Company is permitted to repurchase up to 300,000 shares of its common stock, adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split, through December 31, 2023. The previous authorization expired December 31, 2021. Any purchases made pursuant to the program will be made in the open market, in privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rules 10b5-1 and 10b-18 of the Securities and Exchange Commission Act of 1934, as amended. The authorization does not obligate the Company to acquire any particular amount of September 30, 2017 and September 30, 2016,common shares, or any shares at all, and the respective Cost of Funds on a GAAP and Non-GAAP basis forprogram may be suspended or discontinued at the periods thenCompany's discretion without prior notice.
During the six months ended (dollars in thousands):June 30, 2023, the Company did not repurchase any shares under the stock repurchase program.

Dividends
 
Collateral Balance at September 30, 2017 Weighted Average Cost of Funds for the three months ended September 30, 2017 Weighted Average Cost
of Funds for the nine months ended September 30, 2017		 Balance at September 30, 2016 Weighted Average Cost
of Funds for the three months ended September 30, 2016		 Weighted Average Cost
of Funds for the nine months ended September 30, 2016
Agency RMBS $792,520
 1.34% 1.15% $1,784,448
 0.76% 0.75%
Agency CMBS 2,019,010
 1.37% 1.23% 10,725
 1.71% 1.82%
Non-Agency RMBS 48,443
 2.84% 2.69% 270,060
 2.26% 2.18%
Non-Agency CMBS 192,015
 2.97% 2.80% 256,544
 2.30% 2.17%
Whole-Loans (1)
 163,560
 3.50% 3.35% 173,901
 2.47% 2.52%
Residential Bridge Loans 51,074
 4.29% 4.40% —
 —% —%
Other securities 69,634
 3.47% 3.36% 27,858
 2.67% 2.63%
GAAP - Effective Cost of Funds

 $3,336,256
 1.72% 1.62% $2,523,536
 1.26% 1.27%
Interest rate swaps

 N/A
 0.24% 0.64% N/A
 1.14% 1.22%
Non-GAAP - Effective Cost of Funds(2)

 $3,336,256
 2.00% 2.30% $2,523,536
 2.43% 2.53%
(1)Whole-Loans consist of Residential Whole-Loans and a securitized commercial loan.
(2)The Non-GAAP effective cost of funds for the three and nine months ended September 30, 2017 and September 30, 2016, is calculated on an annualized basis and include interest expense for the periods and net periodic interest payments on interest rate swaps, net of premium amortization on MAC swaps, of approximately $1.7 million, $12.3 million, $6.7 million and $21.9 million, respectively. While swaps are not accounted for using hedge accounting, such instruments are viewed by us as an economic hedge against increases in interest rates on our liabilities and are classified as hedges for U.S. federal income tax purposes in satisfying the REIT requirements.  See “Non-GAAP Financial Measures.”




The following table presents our average repurchase agreement borrowings, excluding unamortized debt issuance costs,cash dividends declared and paid by typethe Company on its common stock, not adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split to align with 1099-DIV per share amounts as reported.
Declaration DateRecord DatePayment DateAmount per ShareTax Characterization
2023
June 21, 2023July 3, 2023July 26, 2023$0.35 Not yet determined
March 22, 2023April 3, 2023April 26, 2023$0.35 Not yet determined
2022
December 21, 2022January 3, 2023January 26, 2023$0.40 
Not yet determined(1)
September 22, 2022October 3, 2022October 26, 2022$0.40 Ordinary income
June 21, 2022July 1, 2022July 25, 2022$0.04 Ordinary income
March 23, 2022April 4, 2022April 26, 2022$0.04 Ordinary income

(1)The cash distributions made on January 26, 2023, with a record date of collateral pledgedJanuary 3, 2023, are treated as received by stockholders on January 26, 2023 and taxable in calendar year 2023.

Note 13 — Net Loss per Common Share
The table below presents basic and diluted net loss per share of common stock using the two-class method for the three and ninesix months ended SeptemberJune 30, 20172023 and SeptemberJune 30, 20162022 (dollars, other than shares and per share amounts, in thousands):, adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split.
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Collateral Three Months Ended September 30, 2017 Three Months Ended September 30, 2016 Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016
Agency RMBS $836,749
 $1,602,770
 $934,923
 $1,558,747
Agency CMBS 1,429,116
 14,895
 1,049,598
 21,453
Non-Agency RMBS 48,681
 275,900
 71,994
 302,219
Non-Agency CMBS 196,467
 270,633
 223,040
 291,178
Whole-Loans(1)
 166,061
 165,326
 174,829
 169,370
Residential Bridge Loans 53,310
 —
 37,952
 —
Other securities 55,689
 25,171
 51,908
 35,354
Total $2,786,073
 $2,354,695
 $2,544,244
 $2,378,321
Maximum borrowings during the period(2)
 $3,336,256
 $2,523,536
 $3,336,256
 $2,523,536
 For the three months ended June 30, 2023For the three months ended June 30, 2022For the six months ended June 30, 2023For the six months ended June 30, 2022
Numerator:
  
Net loss attributable to common stockholders and participating securities for basic and diluted earnings per share$(8,633)$(22,387)$(2,066)$(48,240)
Less:  
Dividends and undistributed earnings allocated to participating securities32 15 62 30 
Net loss allocable to common stockholders — basic and diluted$(8,665)$(22,402)$(2,128)$(48,270)
Denominator:
  
Weighted average common shares outstanding for basic earnings per share6,038,012 6,038,012 6,038,012 6,036,300 
Weighted average common shares outstanding for diluted earnings per share6,038,012 6,038,012 6,038,012 6,036,300 
Basic loss per common share$(1.44)$(3.71)$(0.35)$(8.00)
Diluted loss per common share$(1.44)$(3.71)$(0.35)$(8.00)

For the three and six months ended June 30, 2023 and June 30, 2022, the Company excluded the effects of the convertible senior unsecured notes from the computation of diluted earnings per share since the average market value per share of the Company’s common stock was below the exercise price of the convertible senior unsecured notes.
Note 14 — Income Taxes
As a REIT, the Company is not subject to federal income tax to the extent that it makes qualifying distributions to its stockholders and satisfies on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income and stock ownership tests.
Based on the Company’s analysis of any potential uncertain income tax positions, the Company concluded that it does not have any uncertain tax positions that meet the recognition or measurement criteria as of June 30, 2023. The Company files U.S. federal and state income tax returns.  As of June 30, 2023, U.S. federal tax returns filed by the Company for 2021, 2020, and 2019 and state tax returns filed for 2021, 2020, 2019, 2018 and 2017 are open for examination pursuant to relevant statutes of limitation. In the event that the Company incurs income tax related interest and penalties, the Company’s policy is to classify them as a component of its provision for income taxes.
Income Tax Provision

Subject to the limitation under the REIT asset test rules, the Company is permitted to own up to 100% of the stock of one or more taxable REIT subsidiaries ("TRS"). Currently, the Company owns one TRS that is taxable as a corporation and is subject to federal, state and local income tax on its net income at the applicable corporate rates. The TRS, which was formed in Delaware on July 28, 2014, is a limited liability company and a wholly-owned subsidiary of the Company. During the three months ended June 30, 2023 and June 30, 2022, the Company recorded a federal and state tax benefit of $12 thousand and tax benefit of $46 thousand, respectively, which is recorded in "Income tax provision" in the Consolidated Statements of Operations. During the six months ended June 30, 2023 and June 30, 2022, the Company recorded a federal and state tax provision of zero and a tax provision of $10 thousand respectively.

Deferred Tax Asset

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(1)Whole-Loans consist of Residential Whole-Loans and a securitized commercial loan.
(2)Amount represents the maximum borrowings at month-end during each of the respective periods. 

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As of June 30, 2023 and December 31, 2022, the Company recorded a deferred tax asset of approximately $14.3 million and $13.5 million, respectively, relating to capital loss carryforward and temporary differences as a result of the timing of income recognition of certain investments held in the TRS. The capital loss carryforwards may only be recognized to the extent of capital gains. There is uncertainty as to the TRS ability to recognize capital gains in the future. As a result, the Company has concluded it is more likely than not the deferred tax asset will not be realized and has recorded a full valuation allowance.

In addition, the REIT generated net operating losses ("NOLs") during the year ended December 31, 2021 related to ordinary losses on its MBS portfolio and it generated NOLs for the years ended December 31, 2020 and December 31, 2017, related to its interest rate swap terminations, and for its California return a portion of the NOLs is apportioned to the TRS. The Company recorded a deferred tax asset relating to the NOLs of $14.5 million and $14.5 million in the REIT and $1.6 million and $1.6 million in the TRS as of June 30, 2023 and December 31, 2022, respectively. The TRS can carryback the NOLs generated during the years ended December 31, 2020 and December 31, 2017 to each of the two preceding years to request a refund for taxes paid. As of June 30, 2023 and December 31, 2022, the Company has concluded it is more likely than not the deferred tax asset relating to the NOLs will not be realized and it has recorded a combined valuation allowance of $16.2 million and $16.1 million, respectively.

Effective Tax Rate

The Company's effective tax rate differs from its combined federal and state income tax rate primarily due to its valuation allowance and the deduction of dividends distributions to be paid under Code Section 857(a).

Note 15 — Commitments and Contingencies
From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of business. Management is not aware of any material commitments nor contingencies at June 30, 2023.
Note 16 — Subsequent Events

Financing Facility

Subsequent to quarter end, the Company replaced an existing short-term repurchase financing facility facing Credit Suisse AG (UBS) with a new two-year term, $65 million fixed rate, non-mark-to-market, securitized funding vehicle. As a result, the Company no longer has any financing arrangements with Credit Suisse AG (UBS) as a counterparty.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
The Company makes forward-looking statements herein and will make forward-looking statements in future filings with the Securities and Exchange Commission (the “SEC”), press releases or other written or oral communications within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For these statements, the Company claims the protections of the safe harbor for forward-looking statements contained in such sections. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond the Company’s control.

These forward-looking statements include information about possible or assumed future results of the Company’s business, financial condition, liquidity, results of operations, plans and objectives. When the Company uses the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions, the Company intends to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking: market trends in the Company’s industry, interest rates, real estate values, the debt securities markets, the U.S. housing and the U.S. and foreign commercial real estate markets or the general economy or the market for residential and/or commercial mortgage loans; the Company’s business and investment strategy; the Company’s projected operating results; changes in interest rates and the market value of the Company’s target assets; credit risks; servicing-related risks, including those associated with foreclosure and liquidation; the state of the U.S. and to a lesser extent, international economy generally or in specific geographic regions; economic trends and economic recoveries; the Company’s ability to obtain and maintain financing arrangements, including under the Company’s repurchase agreements, a form of secured financing, and securitizations; the current potential return dynamics available in residential mortgage-backed securities (“RMBS”), and commercial mortgage-backed securities (“CMBS” and collectively with RMBS, “MBS”); the level of government involvement in the U.S. mortgage market; the anticipated default rates on CMBS and Commercial Loans; the loss severity on Non-Agency MBS; the general volatility of the securities markets in which the Company participates; changes in the value of the Company’s assets; the Company’s expected portfolio of assets; the Company’s expected investment and underwriting process; interest rate mismatches between the Company’s target assets and any borrowings used to fund such assets; changes in prepayment rates on the Company’s target assets; effects of hedging instruments on the Company’s target assets; rates of default or decreased recovery rates on the Company’s target assets; the degree to which the Company’s hedging strategies may or may not protect the Company from interest rate volatility; the impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters; the Company’s ability to maintain the Company’s qualification as a real estate investment trust for U.S. federal income tax purposes; the Company’s ability to maintain its exemption from registration under the Investment Company Act of 1940, as amended (the “1940 Act”); the availability of opportunities to acquire Agency RMBS, Non-Agency RMBS, CMBS, Residential and Commercial Whole Loans, and other mortgage assets; the availability of qualified personnel; estimates relating to the Company’s ability to make distributions to its stockholders in the future; the Company’s understanding of its competition; the result of Company's recently announced definitive merger agreement where MITT and the Company have agreed to combine and form a REIT; and the uncertainty and economic impact of pandemics, epidemics, or other public health emergencies, such as the lingering effects of the COVID-19 pandemic.

The forward-looking statements are based on the Company’s beliefs, assumptions and expectations of its future performance, taking into account all information currently available to it. Forward-looking statements are not predictions of future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to the Company. Some of these factors, are described in Item 1A - “Risk Factors” and Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 13, 2023. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that the Company files with the SEC, could cause its actual results to differ materially from those included in any forward-looking statements the Company makes. All forward-looking statements speak only as of the date they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect the Company. Except as required by law, the Company is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.


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Overview
Western Asset Mortgage Capital Corporation, a Delaware corporation, and its subsidiaries (the “Company” unless otherwise indicated or except where the context otherwise requires “we,” “us” or “our”) commenced operations in May 2012, focused on investing in, financing and managing a portfolio of real estate related securities, Whole Loans and other financial assets, which we collectively refer to as our target assets. We are externally managed by Western Asset Management Company, LLC (our “Manager”) pursuant to the terms of a management agreement. We conduct our operations to qualify and be taxed as a real estate investment trust, or REIT, for U.S. federal income tax purposes. Accordingly, we generally will not be subject to U.S. federal income taxes on our taxable income that we distribute currently to our stockholders as long as we maintain our intended qualification as a REIT. However, certain activities that we may perform may cause us to earn income which will not be qualifying income for REIT purposes. We have designated a subsidiary as a taxable REIT subsidiary, or TRS, to engage in such activities. We also intend to operate our business in a manner that permits us to maintain our exemption from registration under the 1940 Act. Our common stock is traded on the New York Stock Exchange, or the NYSE, under the symbol "WMC."

Our objective is to provide attractive risk adjusted returns to our stockholders primarily through an attractive dividend, which we intend to support with sustainable distributable earnings (which we previously referred to as core earnings), as well as the potential for higher returns through capital appreciation. Our investment strategy is based on our Manager's perspective of which mix of our target assets it believes provides us with the best risk-reward opportunities at any given time. We also deploy leverage as part of our investment strategy to increase potential returns.

Our Investment Strategy
Our Manager’s investment philosophy, which developed from a singular focus in fixed-income asset management over a variety of credit cycles and conditions, is to provide clients with a long-term value-oriented portfolio. We benefit from the breadth and depth of our Manager’s overall investment philosophy, which focuses on a macroeconomic analysis as well as an in-depth analysis of individual assets and their relative value. In making investment decisions on our behalf, our Manager seeks to identify assets across the broad mortgage universe with attractive risk adjusted returns, which incorporates its view on the outlook for the mortgage markets, including relative valuation, supply and demand trends, the level of interest rates, the shape of the yield curve, prepayment rates, financing and liquidity, residential real estate prices, delinquencies, default rates, recovery of various segments of the economy and vintage of collateral, subject to maintaining our REIT qualification and our exemption from registration under the 1940 Act.

In December 2021, we announced that our investment strategy will focus on residential real estate-related investments, including but not limited to non-qualified mortgage loans, Non-Agency RMBS, and other related investments. We believe this focus allows us to address attractive market opportunities while maintaining alignment with our Manager’s core competencies. We are continuing to transition out of the commercial investments in our portfolio, though we may from time to time make commercial investments on an opportunistic basis.
Our Target Assets
Residential Whole Loans — Residential Whole Loans are mortgages secured by single family residences held directly by us or through consolidated trusts with us holding the beneficial interest in the trusts. Our Residential Whole Loans are mainly adjustable rate mortgages that do not qualify for the Consumer Finance Protection Bureau’s (or CFPB) safe harbor provision for “qualified mortgages” ("Non-QM mortgages"). Our Manager’s review, relating to Non-QM mortgages, includes an analysis of the loan originator’s procedures and documentation for compliance with Ability to Repay requirements. As discussed in Note 7 - "Financing" to the financial statements contained in this Quarterly Report on Form 10-Q, we have and may continue to securitize Whole Loan interests, selling more senior interests in the pool of loans and retaining residual portions. The characteristics of our Residential Whole Loans may vary going forward.

Non-Agency RMBS — Non-RMBS that are not guaranteed by a U.S. Government agency or U.S. Government-sponsored entity. The mortgage loan collateral for Non-Agency RMBS consists of residential mortgage loans that do not generally conform to underwriting guidelines issued by a U.S. Government agency or U.S. Government-sponsored entity due to certain factors, including mortgage balances in excess of Agency underwriting guidelines, borrower characteristics, loan characteristics and/or level of documentation, and therefore are not issued or guaranteed by a U.S. Government agency or U.S. Government-sponsored entity. The mortgage loan collateral may be classified as subprime, Alternative-A or prime depending on the borrower’s credit rating and the underlying level of documentation. Non-Agency RMBS collateral may also include re-
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performing loans, which are conventional mortgage loans that were current at the time of the securitization, but had been delinquent in the past. Non-Agency RMBS may be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages.

Agency RMBS — Agency RMBS, which are RMBS for which the principal and interest payments are guaranteed by a U.S. Government agency, such as the Government National Mortgage Association (“GNMA” or “Ginnie Mae”), or a U.S. Government-sponsored entity ("GSE"), such as the Federal National Mortgage Association (“FNMA” or “Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”).  The Agency RMBS we acquire can be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages. Fixed-rate mortgages have interest rates that are fixed for the term of the loan and do not adjust. The interest rates on adjustable-rate mortgages generally adjust annually (although some may adjust more frequently) to an increment over a specified interest rate index. Hybrid adjustable-rate mortgages have interest rates that are fixed for a specified period of time (typically three, five, seven or ten years) and, thereafter, adjust to an increment over a specified interest rate index. Adjustable-rate mortgages and hybrid adjustable-rate mortgages generally have periodic and lifetime constraints on the amount by which the loan interest rate can change on any predetermined interest rate reset date. These investments can be in the form of pools, TBA and CMO (including interest only, principal only or other structures).

GSE Risk Sharing Securities Issued by Fannie Mae and Freddie Mac — From time to time we have and may in the future continue to invest in risk sharing securities issued by Fannie Mae and Freddie Mac. Principal and interest payments on these securities are based on the performance of a specified pool of Agency residential mortgages. The payments due on these securities, however, are not secured by the referenced mortgages. The payments due are full faith and credit obligations of Fannie Mae or Freddie Mac respectively, but neither agency guarantees full payment of the underlying mortgages.  Investments in these securities generally are not qualifying assets for purposes of the 75% real estate asset test applicable to REITs and generally do not generate qualifying income for purposes of the 75% real estate income test applicable to REITs. As a result, we may be limited in our ability to invest in such assets.

Other investments — In addition to Residential Whole Loans and Non-Agency RMBS, our current target investments, we may also make investments in Commercial Loans and Non-Agency CMBS and other securities on an opportunistic basis, which our Manager believes will assist us in meeting our investment objective and are consistent with our overall investment policies.  These investments will normally be limited by the REIT requirements that 75% our assets be real estate assets and that 75% of our income be generated from real estate, thereby limiting our ability to invest in such assets.

Our Investment Portfolio

Our investment strategy will focus on residential real estate related investments, including but not limited to non-qualified mortgage loans, Non-Agency RMBS, and other related investments. We are continuing to transition out of our commercial loan investments.

Our investment portfolio composition at June 30, 2023 is as follows:



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8856



Our Financing Strategy
The Company has worked to diversify our financing sources to provide an alternative to short-term repurchase agreements. We expect to continue to seek financing arrangements with longer terms and less onerous margin requirements, including but not limited to longer-term repurchase agreements, term financing, securitizations, and convertible senior unsecured notes, as the market permits. We believe the amount of leverage we use is consistent with our intention of keeping total borrowings within a prudent range, as determined by our Manager, taking into account a variety of factors such as general economic, political and financial market conditions, the anticipated liquidity and price volatility of our assets, the availability and cost of financing the assets, the creditworthiness of financing counterparties, and the health of the U.S. residential and commercial mortgage markets. We expect to maintain a debt-to-equity ratio of two to four and a half times the amount of our stockholders' equity, depending on our investment composition. We seek to enhance equity returns by effectively utilizing leverage and seeking to limit our exposure to interest rate volatility and daily margin calls. The following table presents our debt-to-equity ratio on June 30, 2023 and December 31, 2022:

(dollars in thousands)June 30, 2023December 31, 2022
Total debt(1)
$232,201$276,639
Total equity$88,713$94,804
Debt-to-equity ratio2.62.9

(1) Total debt excludes the securitized debt which is non-recourse to the Company.

Our Hedging Activityand Risk Management Strategy

ToOur overall portfolio strategy is designed to generate attractive returns to our investors through various economic cycles. In connection with our risk management activities, we may enter into a variety of derivative and non-derivative instruments. When purchased, our primary objective for acquiring these derivatives and non-derivative instruments is to mitigate our exposure to future events that are outside our control. Our derivative instruments are designed to mitigate the effects of increases in short-termmarket risk and cash flow volatility associated with interest rates in connection withrate risk, including prepayment risk. As part of our repurchase agreements,hedging strategy, we may enter into interest rate swaps.  The interest rate swaps, generally provide for fixed interest rates that are indexed off of LIBOR and are viewed by us to effectively fix the floating interest rates, on our repurchase agreements.  In managing our interest rate swap position in conjunction with our hedging strategy and potential tax implications, we may enter into variable-rate payment swaps which effectively act as an offset to fixed-rate payment swaps,including forward starting swaps, and interest rate swaptions.swaptions, U.S. Treasury
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options, future contracts, TBAs, credit default swaps, forwards and other similar instruments. There can be no assurance that appropriate hedging strategies will be available or that if implemented they will be successful.

Critical Accounting Policies
The consolidated financial statements include our accounts, those of our wholly-owned subsidiaries and certain VIEs in which we are the primary beneficiary. All intercompany amounts have been eliminated in consolidation. In accordance with GAAP, our consolidated financial statements require the use of estimates and assumptions that involve the exercise of judgment and use of assumptions as to future uncertainties. Our most critical accounting policies will involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We also enter into compression tradesbelieve that enableall of the decisions and assessments upon which our consolidated financial statements have been based were reasonable at the time made and based upon information available to us at that time. There have been no significant changes to terminate substantial amounts of swap contracts before they expire by their terms, when there has been substantial two-way (pay and receive) swap activity. Forour critical accounting policies that are disclosed in our most recent Annual Report on Form 10-K for the nine monthsyear ended September 30, 2017, we entered into compression trades to terminate approximately $3.3 billion of fixed pay rate interest rate swaps and approximately $2.0 billion of variable pay rate interest rate swaps realizing a net loss on termination of approximately $155.8 million. These "compression trades" reduce the number of interest rate swaps outstanding.December 31, 2022.


As of September 30, 2017, we had approximately $1.5 billion of fixed pay rate interest rate swaps, excluding $1.6 billion of forward starting fixed pay interest rate swap (forward starting date of 7.0 months).

2023 Activity

Interest Rate Swaps
 
The Company uses interest rate swaps to mitigate its exposure to higher short-term interest rates in connection with its repurchase agreements. Interest rate swaps generally involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the interest rate swap without exchange of the underlying notional amount.  Notwithstanding the foregoing, in order to manage its hedge position with regard to its liabilities, the Company on occasion will enter into interest rate swaps which involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the interest rate swap without exchange of the underlying notional amount. The Company also enters into forward starting swaps to help mitigate the effects of changes in interest rates on a portion of its borrowings under repurchase agreements. The Company generally enters into MAC (Market Agreed Coupon) interest rate swaps in which it may receive or make a payment at the time of entering such interest rate swap to compensate for the out of the market nature of such interest rate swap. Similar to all other interest rate swaps, these interest rate swaps are also subject to margin requirements.
The Company has not elected to account for its interest rate swaps as “hedges” under GAAP, accordingly the change in fair value of the interest rate swaps not designated in hedging relationships are recorded together with periodic net interest settlement amounts in "Gain on derivatives instruments, net" in the Consolidated Statements of Operations.

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The following table presentstables provide additional information about our fixed pay rateon the Company's fixed-pay interest rate swaps as of SeptemberJune 30, 20172023 and December 31, 20162022 (dollars in thousands):
June 30, 2023
Fixed Pay Interest Rate Swap Remaining TermNotional AmountAverage 
Fixed Pay Rate		Average Variable Receive RateAverage Maturity (Years)
1 year or less$60,000 1.4 %4.9 %0.8
Greater than 5 years22,000 1.2 %4.4 %8.3
Total$82,000 1.3 %4.8 %2.8


December 31, 2022
Fixed Pay Interest Rate Swap Remaining TermNotional AmountAverage 
Fixed Pay Rate		Average Variable Receive RateAverage Maturity (Years)
Greater than 1 year and less than 3 years$60,000 1.4 %2.0 %1.3
Greater than 3 years and less than 5 years70,000 1.4 %1.8 %4.1
Greater than 5 years$28,000 1.7 %3.6 %9.0
Total$158,000 1.4 %2.2 %3.9




Interest-Only Strips
The Company also invests in Interest-Only strips. 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. Generally, Interest-Only strips for which the security represents a strip off of a mortgage pass through security will be considered a hybrid instrument classified as an MBS investment in the Consolidated Balance Sheets utilizing the fair value option. Alternatively, those 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 at fair value with changes recognized in "Gain on derivative instruments, net" in the Consolidated Statements of Operations, along with any interest received. The carrying value of these Interest-Only Strips is included in "Agency mortgage-backed securities, at fair value" in the Consolidated Balance Sheets.
Credit Default Swaps

    The Company currently has no outstanding credit default swaps. Under these instruments, the buyer makes a monthly premium payment over the term of the contract in exchange for the seller making a payment for losses of the reference securities, upon the occurrence of a specified credit event.

Note 9 — Offsetting Assets and Liabilities
The following tables present information about certain assets and liabilities that are subject to master netting agreements (or similar agreements) and can potentially be offset in the Company’s Consolidated Balance Sheets at June 30, 2023 and December 31, 2022 (dollars in thousands):
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  September 30, 2017 December 31, 2016
Remaining Interest Rate Swap Term Notional  Amount 
Average  Fixed Pay
Rate
 Average Floating Receive Rate 
Average
Maturity
(Years)
 
Forward
Starting(1)
 Notional  Amount 
Average  Fixed Pay
Rate
 Average Floating Receive Rate 
Average
Maturity
(Years)
 
Forward
Starting(1)
1 year or less $105,900
 0.8% 1.3% 0.1 —% $105,900
 0.8% 0.8% 0.8 —%
Greater than 1 year and less than 3 years 600,000
 1.6% 1.3% 2.1 —% 993,000
 1.2% 0.9% 1.4 88.1%
Greater than 3 years and less than 5 years 690,000
 2.0% 1.3% 4.6 —% 1,861,700
 1.9% 0.9% 3.9 36.5%
Greater than 5 years 1,682,300
 2.5% 0.1% 10.7 95.3% 1,701,600
 3.1% 0.9% 10.5 6.5%
Total $3,078,200
 2.2% 0.6% 7.3 52.1% $4,662,200
 2.1% 0.9% 5.7 35.7%
June 30, 2023
 Gross 
Amounts		Gross 
Amounts 
Offset in the Consolidated
Balance 
Sheets 		Net Amounts
of Assets 
presented in 
the Consolidated
Balance 
Sheets		Gross Amounts Not Offset in
the Consolidated Balance
Sheets		Net Amount

Description
Financial 
Instruments(1)
Cash 
Collateral (1)
Derivative Assets
Agency and Non-Agency Interest-Only Strips, accounted for as derivatives included in MBS$778 $— $778 $(217)$— $561 
Total assets$778 $— $778 $(217)$— $561 
Derivative Liabilities and Repurchase Agreements
Derivative liability, at fair value(2)(3)
$68 $— $68 $— $(68)$— 
Repurchase Agreements(4)
147,860 — 147,860 (147,860)— — 
Total liability$147,928 $— $147,928 $(147,860)$(68)$— 


(1) RepresentsAmounts disclosed in the percentagefinancial instruments column of notionalthe tables above represent securities, whole loans, securitized commercial loan collateral pledged, and derivative assets that is forward starting.are available to be offset against liability balances associated with repurchase agreement and derivative liabilities. Amounts disclosed in the cash collateral column of the tables above represents amounts pledged or received as collateral against derivative transactions.

(2)Derivative asset, at fair value, includes interest rate swaps.
There were no variable pay rate(3)Cash collateral pledged against the Company’s derivative counterparties was approximately $1.2 million as of June 30, 2023.
(4)The carrying value of investments pledged against the Company’s repurchase agreements was approximately $227.4 million as of June 30, 2023.
December 31, 2022
 Gross 
Amounts		Gross 
Amounts 
Offset in the Consolidated
Balance 
Sheets 		Net Amounts
of Assets 
presented in 
the Consolidated
Balance 
Sheets		Gross Amounts Not Offset in
the Consolidated Balance
Sheets		Net Amount
Description
Financial 
Instruments(1)
Cash 
Collateral (1)
Derivative Assets
Agency and Non-Agency Interest-Only Strips, accounted for as derivatives included in MBS$714 $— $714 $(196)$— $518 
Derivative asset, at fair value(2)
1 — 1 (1)— — 
Total assets$715 $— $715 $(197)$— $518 
Derivative Liabilities and Repurchase Agreements
Derivative liability, at fair value(2)(3)
$61 $— $61 $(1)$(60)$— 
Repurchase Agreements(4)
193,117 — 193,117 (193,073)(44)— 
Total liability$193,178 $— $193,178 $(193,074)$(104)$— 

(1)Amounts disclosed in the financial instruments column of the tables above represent securities, whole loans, securitized commercial loan collateral pledged, and derivative assets that are available to be offset against liability balances associated with repurchase agreement and derivative liabilities. Amounts disclosed in the cash collateral column of the tables above represents amounts pledged or received as collateral against derivative transactions.
(2)Derivative asset, at fair value and Derivative liability, at fair value includes interest rate swaps as of September 30, 2017. The following table presents information about our variable pay rate interest rate swapsand credit default swaps.
(3)Cash collateral pledged against the Company’s derivative counterparties was approximately $3.2 million as of December 31, 2016 (dollars2022.
(4)The carrying value of investments pledged against the Company’s repurchase agreements was approximately $288.3 million as of December 31, 2022.

Certain of the Company’s repurchase agreement and derivative transactions are governed by underlying agreements that generally provide for a right of set-off in thousands):the event of default or in the event of a bankruptcy of either party to the transaction.
 
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  December 31, 2016
Remaining Interest Rate swap Term Notional  Amount 
Average Variable Pay
Rate
 Average Fixed Receive Rate 
Average
Maturity
(Years)
 
Forward
Starting (1)
Greater than 3 years and less than 5 years $1,811,400
 0.9% 1.4% 3.7 —%
Greater than 5 years 871,000
 0.9% 2.2% 12.3 —%
Total $2,682,400
 0.9% 1.7% 6.5 —%
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(1) Represents

Note 10 — Related Party Transactions
Management Agreement
In connection with the percentageCompany’s initial public offering ("IPO") in May 2012, the Company entered into a management agreement (the “Management Agreement”) with the Manager, which describes the services to be provided by the Manager and compensation for such services. The Manager is responsible for managing the Company’s operations, including;(i) performing all of notionalits day-to-day functions, (ii) determining investment criteria in conjunction with the Board of Directors, (iii) sourcing, analyzing and executing investments, asset sales and financings, (iv) performing asset management duties, and (v) performing financial and accounting management, subject to the direction and oversight of the Company’s Board of Directors. Pursuant to the terms of the Management Agreement, the Manager is paid a management fee equal to 1.50% per annum of the Company’s stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears. For purposes of calculating the management fee, “stockholders’ equity” means the sum of the net proceeds from any issuances of the Company’s equity securities since inception (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance), plus retained earnings, calculated in accordance with GAAP, at the end of the most recently completed fiscal quarter (without taking into account any non-cash equity compensation expense incurred in current or prior periods), less any amount paid for repurchases of the Company’s shares of common stock, excluding any unrealized gains or losses on our investments and derivatives and other non-cash items (excluding other than temporary impairment) that have impacted stockholders' equity as reported in the Company’s consolidated financial statements prepared in accordance with GAAP, regardless of whether such items are included in other comprehensive income or loss, or in net income, and excluding one-time events pursuant to changes in GAAP and certain other non-cash charges after discussions between the Manager and the Company’s independent directors and after approval by a majority of the Company’s independent directors. However, if the Company’s stockholders’ equity for any given quarter is negative based on the calculation described above, the Manager will not be entitled to receive any management fee for that quarter.

In addition, the Company may be required to reimburse the Manager for certain expenses as described below, and shall reimburse the Manager for the compensation paid to the Company’s controller. Expense reimbursements to the Manager are made in cash on a regular basis. The Company’s reimbursement obligation is not subject to any dollar limitation. Because the Manager’s personnel perform certain legal, accounting, due diligence tasks and other services that outside professionals or outside consultants otherwise would perform, the Manager may be paid or reimbursed for the documented cost of performing such tasks, provided that such costs and reimbursements are in amounts which are no greater than those which would be payable to outside professionals or consultants engaged to perform such services pursuant to agreements negotiated on an arm’s-length basis.
The Management Agreement may be amended, supplemented or modified by agreement between the Company and the Manager. The Management Agreement expires on May 15, 2024. It is automatically renewed for one-year terms on each May 15th unless previously terminated as described below. The Company’s independent directors review the Manager’s performance and any fees payable to the Manager annually and, the Management Agreement may be terminated annually upon the affirmative vote of at least two-thirds (2/3) of the Company’s independent directors, based upon: (i) the Manager’s unsatisfactory performance that is forward starting.materially detrimental to the Company; or (ii) the Company’s determination that any fees payable to the Manager are not fair, subject to the Manager’s right to prevent such termination due to unfair fees by accepting a reduction of management fees agreed to by at least two-thirds (2/3) of the Company’s independent directors. The Company will provide the Manager 180 days prior notice of any such termination. Unless terminated for cause, the Company will pay the Manager a termination fee equal to three times the average annual management fee earned by the Manager during the prior 24-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination.

The Company may also terminate the Management Agreement at any time, without the payment of any termination fee, with 30 days prior written notice from the Company’s Board of Directors for cause, which will be determined by at least two-thirds (2/3) of the Company’s independent directors, which is defined as: (i) the Manager’s continued material breach of any provision of the Management Agreement (including the Manager’s failure to comply with the Company’s investment guidelines); (ii) the Manager’s fraud, misappropriation of funds, or embezzlement against the Company; (iii) the Manager’s gross negligence in the performance of its duties under the Management Agreement; (iv) the occurrence of certain events with respect to the bankruptcy or insolvency of the Manager, including an order for relief in an involuntary bankruptcy case or the
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Manager authorizing or filing a voluntary bankruptcy petition; (v) the Manager is convicted (including a plea of nolo contendere) of a felony; or (vi) the dissolution of the Manager.
In December 2021, the Manager agreed to voluntarily waive 25% of its management fee solely for the duration of calendar year 2022 in order to support the earnings potential of the Company and its transition to a residential focused investment portfolio. Future waivers, if any, will be at the Manager's discretion.
     For the three months ended June 30, 2023 and June 30, 2022, the Company incurred approximately $1.0 million and approximately $1.0 million in management fees, respectively. For the six months ended June 30, 2023 and June 30, 2022, the Company incurred approximately $1.9 million and approximately $2.1 million in management fees, respectively.
In addition to the management fee, the Company is also responsible for reimbursing the Manager for certain expenses paid by the Manager on behalf of the Company as defined in the Management Agreement. For the three months ended June 30, 2023 and June 30, 2022, the Company recorded expenses included in general and administrative expenses totaling approximately $59 thousand and approximately $296 thousand, respectively, related to reimbursable employee costs. For the six months ended June 30, 2023 and June 30, 2022, the Company recorded expenses included in general and administrative expenses totaling approximately $150 thousand and approximately $447 thousand, respectively, related to reimbursable employee costs. Any such expenses incurred by the Manager and reimbursed by the Company, including the employee compensation expense, are typically included in the Company’s general and administrative expense in the Consolidated Statements of Operations. At June 30, 2023 and December 31, 2022, approximately $3.8 million and approximately $3.9 million, respectively, for management fees incurred but not yet paid was included in "Payable to affiliate" in the Consolidated Balance Sheets. In addition, at June 30, 2023 and December 31, 2022, approximately $103 thousand and approximately $86 thousand, respectively, of reimbursable costs incurred but not yet paid was included in "Payable to affiliate" in the Consolidated Balance Sheets. 

Note 11 — Share-Based Payments
 
To-Be-Announced SecuritiesThe Company's ability to grant equity-based awards under the Company's previous equity incentive plans expired on May 9, 2022. At the Annual Meeting of Stockholders held on June 24, 2022, the Company's stockholders approved the Western Asset Mortgage Capital Corporation 2022 Omnibus Incentive Plan and the Western Asset Mortgage Capital Corporation 2022 Manager Omnibus Incentive Plan (collectively, the “2022 Plans”). The 2022 Plans provide for the issuance of options (including non-statutory stock options and incentive stock options), stock appreciation rights (referred to as SARs), restricted stock, restricted stock units (referred to as RSUs), stock bonuses, other stock based awards and cash awards.


We purchasedThe aggregate maximum number of shares of our common stock available for future issuances under the 2022 Plans is 1,000,000 shares, which was reduced to 100,000 shares following the completion of the reverse stock split. The Manager and sold TBAsthe officers, employees, non-employee directors, independent contractors, and consultants of the Company or any affiliate of the Company, including any individuals who are employees of the Manager or one of the Manager’s affiliates, are eligible to participate in the 2022 Plans, provided that they have been selected by the Plan Administrator.

On June 23, 2023, the Company granted a total of 31,184 restricted stock units (7,796 per each independent director), to each of the Company's four independent directors. These restricted stock units will vest in full on June 23, 2024, the first anniversary of the grant date, and will be settled in shares of the Company’s common stock upon each of the independent director’s separation from service with the Company.

On June 24, 2022, the Company granted 21,704 restricted stock units (5,426 per each independent director) on a post reverse stock split basis, to each of the Company's 4 independent directors. These restricted stock units and associated dividend equivalent units vested in full on June 24, 2023, the one year anniversary of the grant date, and will be settled in shares of the Company's common stock upon each of the independent director's separation from service with the Company.

On June 30, 2022, the Company granted 20,000 restricted stock units on a post reverse-stock-split basis under the Western Asset Mortgage Capital Corporation 2022 Omnibus Incentive Plan to the Company’s Chief Financial Officer. These restricted stock units and associated dividend equivalent units vest in equal installments on the first and second anniversary of the grant date. As of June 30, 2022, 10,000 of the 20,000 restricted stock units vested and will be settled with the Company's common stock.

During the six months ended June 30, 2023 and June 30, 2022, 31,704 and 11,716 restricted stock units vested, respectively. The Company recognized stock-based compensation expense of approximately $100 thousand and approximately
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$70 thousand for the three months ended June 30, 2023 and June 30, 2022, respectively. The Company recognized stock-based compensation expense of approximately $200 thousand and approximately $235 thousand for the six months ended June 30, 2023 and June 30, 2022, respectively. In addition, the Company had unamortized compensation expense of $378 thousand and $298 thousand for equity awards at June 30, 2023 and December 31, 2022, respectively.
Holders of restricted stock units are entitled to receive dividends (or dividend equivalent payments) and distributions that become payable on the restricted stock units during the nine months ended September 30, 2017 and the year ended December 31, 2016. As of December 31, 2016, we had no contractsrestricted period. Dividend equivalent payments allocable to restricted stock units are deemed to purchase ("long position")additional phantom shares of the Company's common stock that are credited to each participant's deferral account. The award agreements include restrictions whereby the restricted stock units cannot be sold, assigned, transferred, pledged, hypothecated, or sell ("short position") TBAsotherwise disposed of prior to the lapse of restrictions under the respective award agreement. The restrictions lapse on a forward basis. the unvested restricted stock units awarded when vested, subject to the grantee's continuing to provide services to the Company as of the vesting date. Unvested restricted stock units and rights to dividends thereon are forfeited upon termination of the grantee.    
The following is a summary of our long and short TBA positions reportedrestricted equity awards vesting dates as of SeptemberJune 30, 2023 and December 31, 2022: 
 June 30, 2023December 31, 2022
Vesting DateShares VestingShares Vesting
June 2023— 31,704 
June 202441,184 10,000 
Total41,184 41,704 

The following table presents information with respect to shares issued under the Company’s Equity Incentive Plans for the six months ended June 30, 2023 and June 30, 2022:
June 30, 2023June 30, 2022
 Restricted Stock Units
Weighted Average 
Grant Date Fair 
Value(1)
Restricted Stock Units
Weighted Average 
Grant Date Fair 
Value(1)
Outstanding at beginning of period81,914 $31.21 32,943 $58.85 
Granted(2)
37,625 9.10 43,577 12.74 
Cancelled/forfeited— — — — 
Outstanding at end of period119,539 24.25 76,520 32.59 
Unvested at end of period41,184 $9.74 41,704 $12.52 

(1)The grant date fair value of the awards is based on the closing market price of the Company’s common stock at the grant date.
(2)Includes 6,441 and 1,873 shares attributed to dividends on restricted stock under the Director Deferred Fee Plan for the six months ended June 30, 2023 and June 30, 2022, respectively.


Note 12 — Stockholders’ Equity

Reverse Stock Split

On June 30, 2022, the Company announced that its Board of Directors approved a one-for-ten reverse stock split of the Company's outstanding shares of common stock. The one-for-ten reverse stock split was effected on July 11, 2022, which reduced the total number of authorized shares of common stock from 500,000,000 to 50,000,000 and also reduced the total number of authorized shares of preferred stock from 100,000,000 to 10,000,000. The number of common shares outstanding reducing from 60,380,105 to 6,038,012. The par value per share of our common stock remained unchanged at $0.01. All per share amounts and common shares outstanding have been adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split.

The Company's stockholders' equity, in the aggregate, remains unchanged. Per share net income or loss increased because there are fewer shares of common stock outstanding. The common stock held in treasury was reduced in proportion to
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the Reverse Stock Split Ratio. There were no other accounting consequences, including changes to the amount of stock-based compensation expense to be recognized in any period, that arose as a result of the reverse stock split. No fractional shares were issued in connection with the reverse stock split. Instead, each stockholder holding fractional shares was entitled to receive, in lieu of such fractional shares, cash in an amount determined based on the closing price of the Company's common stock the business day prior to the Effective Date. The reverse stock split applied to all of the Company's outstanding shares of common stock and did not affect any stockholder’s ownership percentage of shares of the Company's common stock, except for immaterial changes resulting from the payment of cash for fractional shares.

At-The-Market Program
    In March 2017, the Company entered into an equity distribution agreement with JMP Securities LLC, which was amended on June 5, 2020, under which the Company may offer and sell up to $100 million worth of shares of common stock in "Derivativean At-The-Market equity offering. During the six months ended June 30, 2023, the Company did not sell any shares under the amended agreement.
Stock Repurchase Program

In December 2021, the Company extended its stock repurchase program as authorized by its Board of Directors. Under the extended program, the Company is permitted to repurchase up to 300,000 shares of its common stock, adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split, through December 31, 2023. The previous authorization expired December 31, 2021. Any purchases made pursuant to the program will be made in the open market, in privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rules 10b5-1 and 10b-18 of the Securities and Exchange Commission Act of 1934, as amended. The authorization does not obligate the Company to acquire any particular amount of common shares, or any shares at all, and the program may be suspended or discontinued at the Company's discretion without prior notice.
During the six months ended June 30, 2023, the Company did not repurchase any shares under the stock repurchase program.

Dividends
The following table presents cash dividends declared and paid by the Company on its common stock, not adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split to align with 1099-DIV per share amounts as reported.
Declaration DateRecord DatePayment DateAmount per ShareTax Characterization
2023
June 21, 2023July 3, 2023July 26, 2023$0.35 Not yet determined
March 22, 2023April 3, 2023April 26, 2023$0.35 Not yet determined
2022
December 21, 2022January 3, 2023January 26, 2023$0.40 
Not yet determined(1)
September 22, 2022October 3, 2022October 26, 2022$0.40 Ordinary income
June 21, 2022July 1, 2022July 25, 2022$0.04 Ordinary income
March 23, 2022April 4, 2022April 26, 2022$0.04 Ordinary income

(1)The cash distributions made on January 26, 2023, with a record date of January 3, 2023, are treated as received by stockholders on January 26, 2023 and taxable in calendar year 2023.

Note 13 — Net Loss per Common Share
The table below presents basic and diluted net loss per share of common stock using the two-class method for the three and six months ended June 30, 2023 and June 30, 2022 (dollars, other than shares and per share amounts, in thousands), adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split.
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 For the three months ended June 30, 2023For the three months ended June 30, 2022For the six months ended June 30, 2023For the six months ended June 30, 2022
Numerator:
  
Net loss attributable to common stockholders and participating securities for basic and diluted earnings per share$(8,633)$(22,387)$(2,066)$(48,240)
Less:  
Dividends and undistributed earnings allocated to participating securities32 15 62 30 
Net loss allocable to common stockholders — basic and diluted$(8,665)$(22,402)$(2,128)$(48,270)
Denominator:
  
Weighted average common shares outstanding for basic earnings per share6,038,012 6,038,012 6,038,012 6,036,300 
Weighted average common shares outstanding for diluted earnings per share6,038,012 6,038,012 6,038,012 6,036,300 
Basic loss per common share$(1.44)$(3.71)$(0.35)$(8.00)
Diluted loss per common share$(1.44)$(3.71)$(0.35)$(8.00)

For the three and six months ended June 30, 2023 and June 30, 2022, the Company excluded the effects of the convertible senior unsecured notes from the computation of diluted earnings per share since the average market value per share of the Company’s common stock was below the exercise price of the convertible senior unsecured notes.
Note 14 — Income Taxes
As a REIT, the Company is not subject to federal income tax to the extent that it makes qualifying distributions to its stockholders and satisfies on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income and stock ownership tests.
Based on the Company’s analysis of any potential uncertain income tax positions, the Company concluded that it does not have any uncertain tax positions that meet the recognition or measurement criteria as of June 30, 2023. The Company files U.S. federal and state income tax returns.  As of June 30, 2023, U.S. federal tax returns filed by the Company for 2021, 2020, and 2019 and state tax returns filed for 2021, 2020, 2019, 2018 and 2017 are open for examination pursuant to relevant statutes of limitation. In the event that the Company incurs income tax related interest and penalties, the Company’s policy is to classify them as a component of its provision for income taxes.
Income Tax Provision

Subject to the limitation under the REIT asset test rules, the Company is permitted to own up to 100% of the stock of one or more taxable REIT subsidiaries ("TRS"). Currently, the Company owns one TRS that is taxable as a corporation and is subject to federal, state and local income tax on its net income at the applicable corporate rates. The TRS, which was formed in Delaware on July 28, 2014, is a limited liability company and a wholly-owned subsidiary of the Company. During the three months ended June 30, 2023 and June 30, 2022, the Company recorded a federal and state tax benefit of $12 thousand and tax benefit of $46 thousand, respectively, which is recorded in "Income tax provision" in the Consolidated Statements of Operations. During the six months ended June 30, 2023 and June 30, 2022, the Company recorded a federal and state tax provision of zero and a tax provision of $10 thousand respectively.

Deferred Tax Asset

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As of June 30, 2023 and December 31, 2022, the Company recorded a deferred tax asset of approximately $14.3 million and $13.5 million, respectively, relating to capital loss carryforward and temporary differences as a result of the timing of income recognition of certain investments held in the TRS. The capital loss carryforwards may only be recognized to the extent of capital gains. There is uncertainty as to the TRS ability to recognize capital gains in the future. As a result, the Company has concluded it is more likely than not the deferred tax asset will not be realized and has recorded a full valuation allowance.

In addition, the REIT generated net operating losses ("NOLs") during the year ended December 31, 2021 related to ordinary losses on its MBS portfolio and it generated NOLs for the years ended December 31, 2020 and December 31, 2017, related to its interest rate swap terminations, and for its California return a portion of the NOLs is apportioned to the TRS. The Company recorded a deferred tax asset relating to the NOLs of $14.5 million and $14.5 million in the REIT and $1.6 million and $1.6 million in the TRS as of June 30, 2023 and December 31, 2022, respectively. The TRS can carryback the NOLs generated during the years ended December 31, 2020 and December 31, 2017 to each of the two preceding years to request a refund for taxes paid. As of June 30, 2023 and December 31, 2022, the Company has concluded it is more likely than not the deferred tax asset relating to the NOLs will not be realized and it has recorded a combined valuation allowance of $16.2 million and $16.1 million, respectively.

Effective Tax Rate

The Company's effective tax rate differs from its combined federal and state income tax rate primarily due to its valuation allowance and the deduction of dividends distributions to be paid under Code Section 857(a).

Note 15 — Commitments and Contingencies
From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of business. Management is not aware of any material commitments nor contingencies at June 30, 2023.
Note 16 — Subsequent Events

Financing Facility

Subsequent to quarter end, the Company replaced an existing short-term repurchase financing facility facing Credit Suisse AG (UBS) with a new two-year term, $65 million fixed rate, non-mark-to-market, securitized funding vehicle. As a result, the Company no longer has any financing arrangements with Credit Suisse AG (UBS) as a counterparty.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
The Company makes forward-looking statements herein and will make forward-looking statements in future filings with the Securities and Exchange Commission (the “SEC”), press releases or other written or oral communications within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For these statements, the Company claims the protections of the safe harbor for forward-looking statements contained in such sections. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond the Company’s control.

These forward-looking statements include information about possible or assumed future results of the Company’s business, financial condition, liquidity, results of operations, plans and objectives. When the Company uses the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions, the Company intends to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking: market trends in the Company’s industry, interest rates, real estate values, the debt securities markets, the U.S. housing and the U.S. and foreign commercial real estate markets or the general economy or the market for residential and/or commercial mortgage loans; the Company’s business and investment strategy; the Company’s projected operating results; changes in interest rates and the market value of the Company’s target assets; credit risks; servicing-related risks, including those associated with foreclosure and liquidation; the state of the U.S. and to a lesser extent, international economy generally or in specific geographic regions; economic trends and economic recoveries; the Company’s ability to obtain and maintain financing arrangements, including under the Company’s repurchase agreements, a form of secured financing, and securitizations; the current potential return dynamics available in residential mortgage-backed securities (“RMBS”), and commercial mortgage-backed securities (“CMBS” and collectively with RMBS, “MBS”); the level of government involvement in the U.S. mortgage market; the anticipated default rates on CMBS and Commercial Loans; the loss severity on Non-Agency MBS; the general volatility of the securities markets in which the Company participates; changes in the value of the Company’s assets; the Company’s expected portfolio of assets; the Company’s expected investment and underwriting process; interest rate mismatches between the Company’s target assets and any borrowings used to fund such assets; changes in prepayment rates on the Company’s target assets; effects of hedging instruments on the Company’s target assets; rates of default or decreased recovery rates on the Company’s target assets; the degree to which the Company’s hedging strategies may or may not protect the Company from interest rate volatility; the impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters; the Company’s ability to maintain the Company’s qualification as a real estate investment trust for U.S. federal income tax purposes; the Company’s ability to maintain its exemption from registration under the Investment Company Act of 1940, as amended (the “1940 Act”); the availability of opportunities to acquire Agency RMBS, Non-Agency RMBS, CMBS, Residential and Commercial Whole Loans, and other mortgage assets; the availability of qualified personnel; estimates relating to the Company’s ability to make distributions to its stockholders in the future; the Company’s understanding of its competition; the result of Company's recently announced definitive merger agreement where MITT and the Company have agreed to combine and form a REIT; and the uncertainty and economic impact of pandemics, epidemics, or other public health emergencies, such as the lingering effects of the COVID-19 pandemic.

The forward-looking statements are based on the Company’s beliefs, assumptions and expectations of its future performance, taking into account all information currently available to it. Forward-looking statements are not predictions of future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to the Company. Some of these factors, are described in Item 1A - “Risk Factors” and Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 13, 2023. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that the Company files with the SEC, could cause its actual results to differ materially from those included in any forward-looking statements the Company makes. All forward-looking statements speak only as of the date they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect the Company. Except as required by law, the Company is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.


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Overview
Western Asset Mortgage Capital Corporation, a Delaware corporation, and its subsidiaries (the “Company” unless otherwise indicated or except where the context otherwise requires “we,” “us” or “our”) commenced operations in May 2012, focused on investing in, financing and managing a portfolio of real estate related securities, Whole Loans and other financial assets, which we collectively refer to as our target assets. We are externally managed by Western Asset Management Company, LLC (our “Manager”) pursuant to the terms of a management agreement. We conduct our operations to qualify and be taxed as a real estate investment trust, or REIT, for U.S. federal income tax purposes. Accordingly, we generally will not be subject to U.S. federal income taxes on our taxable income that we distribute currently to our stockholders as long as we maintain our intended qualification as a REIT. However, certain activities that we may perform may cause us to earn income which will not be qualifying income for REIT purposes. We have designated a subsidiary as a taxable REIT subsidiary, or TRS, to engage in such activities. We also intend to operate our business in a manner that permits us to maintain our exemption from registration under the 1940 Act. Our common stock is traded on the New York Stock Exchange, or the NYSE, under the symbol "WMC."

Our objective is to provide attractive risk adjusted returns to our stockholders primarily through an attractive dividend, which we intend to support with sustainable distributable earnings (which we previously referred to as core earnings), as well as the potential for higher returns through capital appreciation. Our investment strategy is based on our Manager's perspective of which mix of our target assets it believes provides us with the best risk-reward opportunities at any given time. We also deploy leverage as part of our investment strategy to increase potential returns.

Our Investment Strategy
Our Manager’s investment philosophy, which developed from a singular focus in fixed-income asset management over a variety of credit cycles and conditions, is to provide clients with a long-term value-oriented portfolio. We benefit from the breadth and depth of our Manager’s overall investment philosophy, which focuses on a macroeconomic analysis as well as an in-depth analysis of individual assets and their relative value. In making investment decisions on our behalf, our Manager seeks to identify assets across the broad mortgage universe with attractive risk adjusted returns, which incorporates its view on the outlook for the mortgage markets, including relative valuation, supply and demand trends, the level of interest rates, the shape of the yield curve, prepayment rates, financing and liquidity, residential real estate prices, delinquencies, default rates, recovery of various segments of the economy and vintage of collateral, subject to maintaining our REIT qualification and our exemption from registration under the 1940 Act.

In December 2021, we announced that our investment strategy will focus on residential real estate-related investments, including but not limited to non-qualified mortgage loans, Non-Agency RMBS, and other related investments. We believe this focus allows us to address attractive market opportunities while maintaining alignment with our Manager’s core competencies. We are continuing to transition out of the commercial investments in our portfolio, though we may from time to time make commercial investments on an opportunistic basis.
Our Target Assets
Residential Whole Loans — Residential Whole Loans are mortgages secured by single family residences held directly by us or through consolidated trusts with us holding the beneficial interest in the trusts. Our Residential Whole Loans are mainly adjustable rate mortgages that do not qualify for the Consumer Finance Protection Bureau’s (or CFPB) safe harbor provision for “qualified mortgages” ("Non-QM mortgages"). Our Manager’s review, relating to Non-QM mortgages, includes an analysis of the loan originator’s procedures and documentation for compliance with Ability to Repay requirements. As discussed in Note 7 - "Financing" to the financial statements contained in this Quarterly Report on Form 10-Q, we have and may continue to securitize Whole Loan interests, selling more senior interests in the pool of loans and retaining residual portions. The characteristics of our Residential Whole Loans may vary going forward.

Non-Agency RMBS — Non-RMBS that are not guaranteed by a U.S. Government agency or U.S. Government-sponsored entity. The mortgage loan collateral for Non-Agency RMBS consists of residential mortgage loans that do not generally conform to underwriting guidelines issued by a U.S. Government agency or U.S. Government-sponsored entity due to certain factors, including mortgage balances in excess of Agency underwriting guidelines, borrower characteristics, loan characteristics and/or level of documentation, and therefore are not issued or guaranteed by a U.S. Government agency or U.S. Government-sponsored entity. The mortgage loan collateral may be classified as subprime, Alternative-A or prime depending on the borrower’s credit rating and the underlying level of documentation. Non-Agency RMBS collateral may also include re-
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performing loans, which are conventional mortgage loans that were current at the time of the securitization, but had been delinquent in the past. Non-Agency RMBS may be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages.

Agency RMBS — Agency RMBS, which are RMBS for which the principal and interest payments are guaranteed by a U.S. Government agency, such as the Government National Mortgage Association (“GNMA” or “Ginnie Mae”), or a U.S. Government-sponsored entity ("GSE"), such as the Federal National Mortgage Association (“FNMA” or “Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”).  The Agency RMBS we acquire can be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages. Fixed-rate mortgages have interest rates that are fixed for the term of the loan and do not adjust. The interest rates on adjustable-rate mortgages generally adjust annually (although some may adjust more frequently) to an increment over a specified interest rate index. Hybrid adjustable-rate mortgages have interest rates that are fixed for a specified period of time (typically three, five, seven or ten years) and, thereafter, adjust to an increment over a specified interest rate index. Adjustable-rate mortgages and hybrid adjustable-rate mortgages generally have periodic and lifetime constraints on the amount by which the loan interest rate can change on any predetermined interest rate reset date. These investments can be in the form of pools, TBA and CMO (including interest only, principal only or other structures).

GSE Risk Sharing Securities Issued by Fannie Mae and Freddie Mac — From time to time we have and may in the future continue to invest in risk sharing securities issued by Fannie Mae and Freddie Mac. Principal and interest payments on these securities are based on the performance of a specified pool of Agency residential mortgages. The payments due on these securities, however, are not secured by the referenced mortgages. The payments due are full faith and credit obligations of Fannie Mae or Freddie Mac respectively, but neither agency guarantees full payment of the underlying mortgages.  Investments in these securities generally are not qualifying assets for purposes of the 75% real estate asset test applicable to REITs and generally do not generate qualifying income for purposes of the 75% real estate income test applicable to REITs. As a result, we may be limited in our ability to invest in such assets.

Other investments — In addition to Residential Whole Loans and Non-Agency RMBS, our current target investments, we may also make investments in Commercial Loans and Non-Agency CMBS and other securities on an opportunistic basis, which our Manager believes will assist us in meeting our investment objective and are consistent with our overall investment policies.  These investments will normally be limited by the REIT requirements that 75% our assets be real estate assets and that 75% of our income be generated from real estate, thereby limiting our ability to invest in such assets.

Our Investment Portfolio

Our investment strategy will focus on residential real estate related investments, including but not limited to non-qualified mortgage loans, Non-Agency RMBS, and other related investments. We are continuing to transition out of our commercial loan investments.

Our investment portfolio composition at June 30, 2023 is as follows:



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8856



Our Financing Strategy
The Company has worked to diversify our financing sources to provide an alternative to short-term repurchase agreements. We expect to continue to seek financing arrangements with longer terms and less onerous margin requirements, including but not limited to longer-term repurchase agreements, term financing, securitizations, and convertible senior unsecured notes, as the market permits. We believe the amount of leverage we use is consistent with our intention of keeping total borrowings within a prudent range, as determined by our Manager, taking into account a variety of factors such as general economic, political and financial market conditions, the anticipated liquidity and price volatility of our assets, the availability and cost of financing the assets, the creditworthiness of financing counterparties, and the health of the U.S. residential and commercial mortgage markets. We expect to maintain a debt-to-equity ratio of two to four and a half times the amount of our stockholders' equity, depending on our investment composition. We seek to enhance equity returns by effectively utilizing leverage and seeking to limit our exposure to interest rate volatility and daily margin calls. The following table presents our debt-to-equity ratio on June 30, 2023 and December 31, 2022:

(dollars in thousands)June 30, 2023December 31, 2022
Total debt(1)
$232,201$276,639
Total equity$88,713$94,804
Debt-to-equity ratio2.62.9

(1) Total debt excludes the securitized debt which is non-recourse to the Company.

Our Hedging and Risk Management Strategy
Our overall portfolio strategy is designed to generate attractive returns to our investors through various economic cycles. In connection with our risk management activities, we may enter into a variety of derivative and non-derivative instruments. When purchased, our primary objective for acquiring these derivatives and non-derivative instruments is to mitigate our exposure to future events that are outside our control. Our derivative instruments are designed to mitigate the effects of market risk and cash flow volatility associated with interest rate risk, including prepayment risk. As part of our hedging strategy, we may enter into interest rate swaps, including forward starting swaps, interest rate swaptions, U.S. Treasury
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options, future contracts, TBAs, credit default swaps, forwards and other similar instruments. There can be no assurance that appropriate hedging strategies will be available or that if implemented they will be successful.

Critical Accounting Policies
The consolidated financial statements include our accounts, those of our wholly-owned subsidiaries and certain VIEs in which we are the primary beneficiary. All intercompany amounts have been eliminated in consolidation. In accordance with GAAP, our consolidated financial statements require the use of estimates and assumptions that involve the exercise of judgment and use of assumptions as to future uncertainties. Our most critical accounting policies will involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our consolidated financial statements have been based were reasonable at the time made and based upon information available to us at that time. There have been no significant changes to our critical accounting policies that are disclosed in our most recent Annual Report on Form 10-K for the year ended December 31, 2022.

2023 Activity

Investment Activity

We continually evaluate potential investments and our investment selection is based on supply and demand of our target assets, costs of financing, and the expected future interest rate volatility costs of hedging. During the six months ended June 30, 2023, the Company sold the CRE 3 loan to an unaffiliated third party for its recorded fair value as of December 31, 2022 of $8.8 million.

The following table presents our investing activity for the six months ended June 30, 2023 (dollars in thousands):
Balance atLoan Modification/Capitalized InterestPrincipal  Payments and Basis RecoveryProceeds  from
Sales		Transfers to REORealized Gain/(Loss)Unrealized Gain/(Loss)Premium and discount amortization, netBalance at
Investment TypeDecember 31, 2022PurchasesJune 30, 2023
Agency RMBS and Agency RMBS IOs$767 $— N/A$4 $— N/A$— $67 $— $838 
Non-Agency RMBS23,687 — N/A(264)— N/A(48)128 (139)23,364 
Non-Agency CMBS85,435 — N/A(20,559)— N/A(1,239)(4,970)655 59,322 
Other securities(1)
27,262 4,714 N/A— (15,324)N/A(1,379)1,543 (201)16,615 
Total MBS and other securities137,151 4,714 N/A(20,819)(15,324)N/A(2,666)(3,232)315 100,139 
Residential Whole Loans1,091,145 — 41 (58,792)— — — 6,444 (1,457)1,037,381 
Residential Bridge Loans2,849 — — (75)— — — 8 — 2,782 
Commercial Loans90,002 — — (1,680)(8,776)— (81,223)80,417 66 78,806 
Securitized Commercial Loans1,085,103 — — — — — — (74,050)14,268 1,025,321 
REO2,255 — N/A— 28 — (28)— N/A2,255 
Total Investments$2,408,505 $4,714 $41 $(81,366)$(24,072)$— $(83,917)$9,587 $13,192 $2,246,684 

(1) Other securities include $15.4 million of GSE CRTs and $1.2 million of ABS at June 30, 2023.

Portfolio Characteristics

Residential Whole Loans
The Residential Whole Loans have low LTV's and are comprised of 2,824 adjustable and fixed-rate Non-QM and investor mortgages. The following table presents certain information about our Residential Whole Loans investment portfolio at June 30, 2023 (dollars in thousands): 
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   Weighted Average
Current Coupon RateNumber of LoansPrincipal
Balance		Original LTV
Original
FICO Score(1)
Expected
Life (years)		Contractual
Maturity
(years)		Coupon
Rate
2.01% – 3.00%39$22,018 66.3 %758 8.927.82.9 %
3.01% – 4.00%366200,548 66.9 %760 7.528.33.7 %
4.01% – 5.00%1,236417,820 64.5 %750 5.725.74.6 %
5.01% – 6.00%875347,001 65.5 %742 4.826.25.5 %
6.01% – 7.00%282110,986 68.1 %742 3.627.26.4 %
7.01% - 8.00%258,173 68.3 %735 3.426.57.4 %
8.01% - 9.00%15 65.0 %693 3.823.98.5 %
Total2,824$1,106,551 65.7 %749 5.526.54.9 %

(1)The original FICO score is not available for 219 loans with a principal balance of approximately $69.4 million at June 30, 2023. We have excluded these loans from the weighted average computations.

Residential Bridge Loans

    We are no longer allocating capital to Residential Bridge Loans. The following table presents certain information about the remaining four Residential Bridge Loans left in the portfolio at June 30, 2023 (dollars in thousands):

   Weighted Average
Current Coupon RateNumber of LoansPrincipal
Balance		Original LTV
Contractual
Maturity
(months)(1)
Coupon
Rate
7.01% – 9.00%2$1,822 67.5 %0.08.7 %
9.01% – 11.00%1849 90.5 %0.010.0 %
11.01% – 13.00%1420 70.0 %0.011.3 %
Total4$3,091 74.2 %0.09.4 %

(1) Non-performing loans that are past their maturity date are excluded from the calculation of the weighted average contractual maturity. The weighted average contractual maturity for these loans is zero.

Non-Performing Residential Loans

The following table presents the aging of the Residential Whole Loans and Bridge Loans as of June 30, 2023 (dollars in thousands):
Residential Whole LoansBridge Loans
No of LoansPrincipalFair ValueNo of LoansPrincipalFair Value
Current2,779 $1,082,536 $1,014,645 — $— $— 
1-30 days20 10,339 9,984 — — — 
31-60 days10 4,546 4,231 — — — 
61-90 days— — — — — — 
90+ days15 9,130 8,521 4 3,091 2,782 
Total2,824 $1,106,551 $1,037,381 4 $3,091 $2,782 

Residential Whole Loans in Non-Accrual Status

As of June 30, 2023, there were fifteen Non-QM loans carried at fair value"value in non-accrual status with an unpaid principal balance of approximately $9.1 million and "Derivative liability,a fair value of $8.5 million. These non-performing loans represent approximately 0.8% of the total outstanding principal balance. No allowance or provision for credit losses was recorded as of
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and for the three and six months ended June 30, 2023, since the valuation adjustment, if any, would be reflected in the fair value of these loans. We stopped accruing interest income for these loans when they became contractually 90 days delinquent.     

    As of June 30, 2023, there were four Residential Bridge Loans carried at fair value"value in non-accrual status with an unpaid principal balance of approximately $3.1 million and a fair value of $2.8 million. No allowance and provision for credit losses was recorded for loans carried at fair value as of and for the three and six months ended June 30, 2023, since valuation adjustments, if any, would be reflected in the fair value of these loans. We stopped accruing interest income for these loans when they became contractually 90 days delinquent.

    As of June 30, 2023, the Company had one real estate owned ("REO") property with an aggregate carrying value of $2.3 million related to a foreclosed Residential Whole Loan. The REO properties are held for sale and accordingly carried at the lower of cost or fair value less cost to sell. The REO properties are classified in "Other assets" in the Consolidated Balance Sheets.

Non-Agency RMBS
The following table presents the fair value and weighted average purchase price for each of our Non-Agency RMBS categories, including IOs accounted for as derivatives, together with certain of their respective underlying loan collateral attributes and current performance metrics as of June 30, 2023 (fair value dollars in thousands):
  Weighted Average
CategoryFair Value Purchase
Price		Life (Years)Original LTVOriginal
FICO		60+ Day
Delinquent		CPR
Prime$11,770 $81.81 11.6 67.6 %747 1.0 %16.8 %
Alt-A11,594 48.30 18.5 81.3 %661 17.5 %6.0 %
Total$23,364 $65.18 15.0 74.4 %704 9.2 %11.4 %

Agency RMBS Portfolio
The following table summarizes our Agency portfolio by investment category as of June 30, 2023 (dollars in thousands):
 Principal BalanceAmortized CostFair ValueNet Weighted
Average Coupon
Agency RMBS IOs and IIOs(1)
N/A$65 $60 — %
Agency RMBS IOs and IIOs accounted for as derivatives(1)
N/AN/A778 0.9 %
Total$— $65 $838 0.8 %

(1)IOs and IIOs have no principal balances and bear interest based on a notional balance. The notional balance is used solely to determine interest distributions on the interest-only class of securities.

Non-Agency CMBS

The following table presents certain characteristics of our Non-Agency CMBS portfolio as of June 30, 2023 (dollars in thousands):
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  Principal Weighted Average
TypeVintageBalanceFair Value Life (Years)Original LTV
Conduit:     
 2006-2009$68 $66 0.6 88.7 %
 2010-202014,982 10,085 5.6 62.6 %
  15,050 10,151 5.5 62.8 %
Single Asset:     
 2010-202073,609 49,171 1.6 66.1 %
Total $88,659 $59,322 2.3 65.5 %

Commercial Real Estate Investments

We are continuing to transition out of our commercial loan investments. The following table presents our commercial loan investments as of June 30, 2023 (dollars in thousands):

LoanLoan TypePrincipal BalanceFair ValueOriginal LTVInterest RateMaturity DateExtension OptionCollateralGeographic Location
CRE 4Interest-Only First Mortgage22,204 22,053 63%1-Month SOFR plus 3.38%
8/6/2025(1)
NoneRetailCT
CRE 5Interest-Only First Mortgage24,535 23,993 62%1-Month SOFR plus 4.95%
11/6/2023(2)
One - 12 month extensionHotelNY
CRE 6Interest-Only First Mortgage13,207 12,914 62%1-Month SOFR plus 4.95%
11/6/2023(2)
One - 12 month extensionHotelCA
CRE 7Interest-Only First Mortgage7,259 7,099 62%1-Month SOFR plus 4.95%
11/6/2023(2)
One - 12 month extensionHotelIL, FL
SBC 3(3)
Interest-Only First Mortgage12,750 12,747 49%1-Month SOFR plus 5.50%8/4/2023One - 3 month extensionNursing FacilitiesCT
$79,955 $78,806 

(1) In August 2022, the CRE 4 loan was extended by three years through August 6, 2025, with a principal pay down of $16.2 million.
(2) In November 2022, the CRE 5, 6, and 7 loans were each extended for one year through November 6, 2023.
(3) In January 2023, the SBC 3 loan was partially paid down by $862 thousand to bring the unpaid principal balance to $13.5 million, the maturity date was extended through May 5, 2023 for a 50-bps extension fee and the margin was increased from 4.47% to 5.00%. In May 2023, the SBC 3 loan was partially paid down by $750 thousand to bring the unpaid principal to $12.8 million, the maturity date was extended through August 4, 2023, and the margin was increased from 5.00% to 5.50%. In July 2023, the SBC 3 loan was partially paid down by $250 thousand to bring the unpaid principal balance to $12.5 million, and the maturity date was extended through October 4, 2023 for a 25 bps extension fee. The borrower under the loan may, at its option, extend the October 4, 2023 maturity date for an additional period of three months through December 31, 2023, with an additional required paydown of $250 thousand and a 25-bps extension fee.

Non-Performing Commercial Loans

As of June 30, 2023, there are no Commercial Loans that are non-performing.

Geographic Concentration

The mortgages underlying our Non-Agency RMBS and Non-Agency CMBS are located in various states across the United States and other countries. The following table presents the five largest concentrations by location for the mortgages collateralizing our Non-Agency RMBS and Non-Agency CMBS as of June 30, 2023, based on fair value (dollars in thousands):
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 Non-Agency RMBS Non-Agency CMBS
 ConcentrationFair Value ConcentrationFair Value
California28.3 %$6,623 California52.9 %$31,396 
Florida11.7 %2,742 Bahamas22.2 %13,175 
New York6.9 %1,603 Texas5.2 %3,067 
New Jersey4.1 %956 Pennsylvania2.8 %1,636 
Georgia3.7 %861 New York2.7 %1,603 
The following table presents the various states across the United States in which the collateral securing our Residential Whole Loans and Residential Bridge Loans at June 30, 2023, based on principal balance, is located (dollars in thousands): 

 Residential Whole Loans Residential Bridge Loans
 State
Concentration		Principal
Balance		State
Concentration		Principal
Balance
California67.4 %$745,643 California56.7 %$1,754 
New York9.1 %100,950 New York43.3 %1,337 
Texas4.8 %52,905 Total100.0 %3,091 
Florida4.0 %44,003 
Georgia3.4 %37,771 
Other11.3 %125,279 
Total100.0 %$1,106,551 

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Financing Activity

     The Company will continue to look to expand and diversify our financing sources, especially those sources that provide an alternative to short-term repurchase agreements with less onerous margin requirements.

Repurchase Agreements

Our repurchase agreements bear interest at a contractually agreed-upon rate and have terms ranging from one month to 12 months. Our counterparties generally require collateral in excess of the loan amount, or haircuts. As of June 30, 2023, the contractual haircuts required under repurchase agreements on our investments were as follows:

MinimumMaximum
Short-Term Borrowings
Agency RMBS IOs25%25%
Non-Agency RMBS44%69%
Long-Term Borrowings
Non-Agency CMBS and Non-Agency RMBS Facility
Non-Agency RMBS25%50%
Non-Agency CMBS30%60%
Other Securities35%48%
Residential Whole Loan Facility
Residential Whole Loans(1)
43%43%
Commercial Whole Loan Facility
Commercial Loans(2)
22%32%

(1) The haircut is based on 10% of the outstanding principal amount of the Residential Whole Loans.
(2) Each Commercial Loan is financed separately under this facility and the haircuts are dependent on the type of collateral.

Residential Whole Loan Facility

The facility was extended on November 9, 2022 and matures on October 25, 2023. It bears interest at a rate of SOFR plus 2.25%, with a SOFR floor of 0.25%.

We finance our Non-QM residential whole loans under this facility. As of June 30, 2023, we had outstanding borrowings of $4.4 million. The borrowing is secured by Non-QM residential whole loans with a fair value of $3.4 million and one REO property with a carrying value of $2.3 million as of June 30, 2023.

Non-Agency CMBS and Non-Agency RMBS facility

The facility was paid off in full in May 2023 and replaced with a facility from a different counterparty which matures in May 2024. It bears a current weighted average interest rate of 1-Month Term SOFR plus 2.50%. As of June 30, 2023, the outstanding balance under this facility was $60.0 million. The borrowing is secured by investments with an estimated fair market value of $95.0 million as of June 30, 2023.

Commercial Whole Loan Facility
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The facility was extended on November 9, 2022 and matures on November 3, 2023. It bears interest at a rate of SOFR plus 2.25%. As of June 30, 2023, the outstanding balance under this facility was $48.0 million. The borrowing is secured by performing commercial loans, with an estimated fair market value of $66.1 million as of June 30, 2023.

Repurchase Agreements
At June 30, 2023, we had outstanding borrowings under four of our repurchase agreements. The following table summarizes certain characteristics of our repurchase agreements at June 30, 2023 (dollars in thousands):

Securities PledgedRepurchase Agreement BorrowingsWeighted Average Interest Rate on Borrowings Outstanding at end of periodWeighted Average Remaining Maturity (days)
Short-Term Borrowings:
Agency RMBS$274 5.84 %32
Non-Agency RMBS(1)
35,105 8.24 %25
Total short term borrowings35,379 8.22 %25
Long Term Borrowings:
Non-Agency CMBS and Non-Agency RMBS Facility
Non-Agency CMBS (1)
36,720 7.61 %307
Non-Agency RMBS14,467 7.60 %307
Other Securities8,861 7.94 %307
Subtotal60,048 7.65 %307
Residential Whole Loan Facility
Residential Whole Loans (2)
4,401 7.32 %117
Commercial Whole Loan Facility
Commercial Loans48,032 7.32 %126
Total long term borrowings112,481 7.50 %222
Repurchase agreements borrowings$147,860 7.67 %175
Less unamortized debt issuance costs— N/AN/A
Repurchase agreement borrowings, net$147,860 7.67 %175

(1)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation.
(2)Repurchase agreement borrowings on loans owned are through trust certificates. The trust certificates are eliminated in consolidation.

At June 30, 2023, we had outstanding repurchase agreement borrowings with the following counterparties:

(dollars in thousands)
Repurchase Agreement Counterparties		Amount OutstandingPercent of Total Amount OutstandingCompany Investments Held as Collateral
Counterparty Rating(1)
Goldman Sachs Bank USA$60,322 40.8 %$95,236 A+
Atlas Securitized Products Investments 2, L.P.48,032 32.5 %66,059 
Unrated (3)
Credit Suisse AG, Cayman Islands Branch (2)
35,105 23.7 %60,449 A
Atlas Securitized Products, L.P.4,401 3.0 %5,633 
Unrated (3)
Total$147,860 100.0 %$227,377  

(1)The counterparty ratings presented above are the long-term issuer credit ratings as rated at June 30, 2023 by S&P.
(2)Includes master repurchase agreements in which the buyer includes Alpine Securitization LTD., a Credit Suisse sponsored asset-backed commercial paper conduit.
(3)    Affiliates of Apollo purchased a significant portion of the Securitized Products Group from Credit Suisse. A majority of the assets and professionals associated with the transaction are now part of or managed by ATLAS SP Partners, a new standalone credit firm focused on asset-backed financing and capital markets solutions. The firm needs more time operating to achieve a credit rating and, therefore, is currently unrated.
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The following table presents our average repurchase agreement borrowings, excluding unamortized debt issuance costs, by type of collateral pledged for the three and six months ended June 30, 2023 (dollars in thousands):

CollateralThree Months Ended June 30, 2023Six Months Ended June 30, 2023
Agency RMBS$277 $282 
Non-Agency RMBS(1)
52,607 63,733 
Non-Agency CMBS(1)
38,862 44,833 
Residential Whole Loans4,517 4,656 
Commercial Loans32,725 42,730 
Other securities11,434 14,875 
Total$140,422 $171,109 
Maximum borrowings during the period(2)
$170,666 $190,356 
(1)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation.
(2)Amount represents the maximum borrowings at month-end during each of the respective periods.

Repurchase Agreements Financial Metrics

Certain of our financing agreements provide the counterparty with the right to terminate the agreement and accelerate amounts due under the associated agreement if we do not maintain certain financial metrics. Although specific to each financing arrangement, typical financial metrics include minimum equity and liquidity requirements, leverage ratios, and performance triggers. In addition, some of the financing arrangements contain cross-default features, whereby default under an agreement with one lender simultaneously causes default under agreements with other lenders with borrowings outstanding as of June 30, 2023. We were in compliance with the terms of such financial tests as of June 30, 2023.

Securitized Debt

Residential Mortgage-Backed Notes

Arroyo Trust 2019-2

The following table summarizes the consolidated Arroyo Trust 2019's issued mortgage-backed notes at June 30, 2023 which is classified in "Securitized debt, net" in the Consolidated Balance Sheets (dollars in thousands):
ClassesPrincipal BalanceCouponCarrying ValueContractual Maturity
Issued Mortgage-Backed Notes
Class A-1$152,658 3.3%$152,658 4/25/2049
Class A-28,187 3.5%8,187 4/25/2049
Class A-312,971 3.8%12,971 4/25/2049
Class M-125,055 4.8%25,055 4/25/2049
Subtotal$198,871 $198,871 
Less: Unamortized deferred financing costsN/A2,159 
Total$198,871 $196,712 

 September 30, 2017
 Notional
Amount		 Fair
Value
Sale contracts, asset$(582,000) $1,774
TBA securities, asset(582,000) 1,774
Purchase contracts, liability200,000
 (836)
TBA securities, liability200,000
 (836)
TBA securities, net$(382,000) $938
Arroyo Trust 2020-1


The following table presents additional information about our contracts to purchase and sell TBAs forsummarizes the nine months ended Septemberconsolidated Arroyo Trust 2020's issued mortgage-backed notes at June 30, 20172023 which is classified in "Securitized debt, net" in the Consolidated Balance Sheets (dollars in thousands):
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 Notional 
Amount
 
Settlement, 
Termination, Expiration
or Exercise
Notional 
Amount
 December 31, 2016 Additions  September 30, 2017
Purchase of TBAs$—

$4,504,200

$(4,304,200)
$200,000
Sale of TBAs$—

$4,886,200

$(4,304,200)
$582,000
ClassesPrincipal BalanceCouponCarrying ValueContractual Maturity
Issued Mortgage-Backed Notes
Class A-1A$68,514 1.7%$68,514 3/25/2055
Class A-1B8,130 2.1%8,130 3/25/2055
Class A-213,518 2.9%13,518 3/25/2055
Class A-317,963 3.3%17,963 3/25/2055
Class M-111,739 4.3%11,739 3/25/2055
Subtotal$119,864 $119,864 
Less: Unamortized deferred financing costsN/A1,299 
Total$119,864 $118,565 

OptionsArroyo Trust 2022-1

The Company may enter into Optionsfollowing table summarizes the consolidated Arroyo Trust 2022-1's issued mortgage-backed notes at June 30, 2023 which is classified as "Securitized debt, net" on U.S. Treasuries. the Consolidated Balance Sheets (dollars in thousands):

ClassesPrincipal BalanceCouponFair ValueContractual Maturity
Issued Mortgage-Backed Notes
Class A-1A$202,556 2.5%$182,262 12/25/2056
Class A-1B82,942 3.3%73,725 12/25/2056
Class A-221,168 3.6%17,292 12/25/2056
Class A-328,079 3.7%22,186 12/25/2056
Class M-117,928 3.7%12,780 12/25/2056
Total$352,673 $308,245 

Arroyo Trust 2022-2

The following table summarizes the consolidated Arroyo Trust 2022-2's issued mortgage-backed notes at June 30, 2023 which is classified as "Securitized debt, net" on the Consolidated Balance Sheets (dollars in thousands):

ClassesPrincipal BalanceCouponFair ValueContractual Maturity
Issued Mortgage-Backed Notes
Class A-1$250,394 5.0%$242,542 7/25/2057
Class A-221,314 5.0%20,239 7/25/2057
Class A-325,972 5.0%24,613 7/25/2057
Class M-117,694 5.0%14,680 7/25/2057
Total$315,374 $302,074 

Commercial Mortgage-Backed Notes

We hold a controlling financial variable interest in CSMC USA and are required to consolidate the CMBS VIE. Refer to Note 7, "Financings" for details. The following table summarizes the consolidated CSMC USA's commercial mortgage pass-through certificates at June 30, 2023 which is classified in "Securitized debt, net" in the Consolidated Balance Sheets (dollars in thousands):
60
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ClassesPrincipal BalanceCoupon Fair ValueContractual Maturity
Class A-1$120,391 3.3 %$101,120 9/11/2025
Class A-2531,700 4.0 %458,329 9/11/2025
Class B136,400 4.2 %109,843 9/11/2025
Class C94,500 4.3 %72,535 9/11/2025
Class D153,950 4.4 %111,258 9/11/2025
Class E180,150 4.4 %97,328 9/11/2025
Class F153,600 4.4 %61,965 9/11/2025
Class X-1(1)
n/a0.5 %5,717 9/11/2025
Class X-2(1)
n/a— %1,215 9/11/2025
$1,370,691 $1,019,310 

(1) Class X-1 and X-2 are interest-only classes with notional balances of $652.1 million and $733.5 million as of June 30, 2023, respectively.

The above table does not reflect the portion of the class F bond held by us because the bond is eliminated in consolidation. Our ownership interest in the F bond represents a controlling financial interest, which resulted in consolidation of the trust. The bond had a fair market value of $6.0 million at June 30, 2023, and our exposure to loss is limited to our ownership interest in this bond.

Convertible Senior Unsecured Notes

2024 Notes

As of June 30, 2023, we had $86.3 million aggregate principal amount of the 2024 Notes outstanding. The 2024 notes mature on September 15, 2024, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by us except during the final three months prior to maturity.

Recourse and Non-Recourse Financing

We utilize both recourse and non-recourse debt to finance our portfolio. Our recourse debt included our short and long-term repurchase agreement financings and our convertible senior unsecured notes. At June 30, 2017, the Company had2023, our total non-recourse financing is comprised of $925.6 million of securitized debt issued in connection with our four Residential Whole Loan securitizations and $1.0 billion of securitized debt from owning a total long position options on U.S. Treasury NoteNon-Agency CMBS bond with a notional value of $400.0 million and a fair value of $6.0 million that was deemed to be a controlling financial variable interest in an asset positionCSMC USA which required us to consolidate the CMBS VIE.

(dollars in thousands)June 30, 2023December 31, 2022
Recourse and non-recourse financing$2,177,107 $2,335,323 
Non-recourse financing
Arroyo 2019-2196,712 213,885 
Arroyo 2020-1118,565 124,934 
Arroyo 2022-1308,245 318,219 
Arroyo 2022-2302,074 324,035 
CMSC USA1,019,310 1,077,611 
Total recourse financing$232,201 $276,639 
Stockholders' equity$88,713 $94,804 
Recourse leverage2.6x2.9x

61
Table of $375 thousand and a total short position options on U.S. Treasury Note with a notional value of $400.0 million and a fair value in a liability position of $128 thousand. As of December 31, 2016, the Company had no open options.Contents


Futures Contracts


We may enter into Eurodollar, Volatility Index, and U.S. Treasury futures. As of December 31, 2016, we had contracts to buy or long positions for U.S. Treasuries with a notional amount of $56.9 million, a fair value in an asset position of $71 thousand and an expiration date of March 2017. In addition, as of December 31, 2016, the Company had sale contracts or short positions for U.S. Treasuries with a notional amount of $176.3 million, a fair value in a liability position of $2.5 million and an expiration date of March 2017. 

Currency Swaps and ForwardsHedging Activity

We have invested in and, in the future, may invest in additional assets which are denominated in a currency or currencies other than U.S. dollars.  Similarly, we have and may in the future, finance such assets in a currency or currencies other than U.S. dollars.  In order to mitigate the impact to us, we may enter into derivative financial instruments, including foreign currency swaps and foreign currency forwards, to manage fluctuations in the valuation between U.S. dollars and such foreign currencies.  Foreign currency swaps involve the payment of a foreign currency at fixed interest rate on a fixed notional amount and the receipt of U.S. dollars at a fixed interest rate on a fixed notional amount.  Foreign currency forwards provide for the payment of a fixed amount of a foreign currency in exchange for a fixed amount of U.S. dollars at a date certain in the future.  The following is a summary of our foreign currency forwards at Septembertables summarize the hedging activity during the six months ended June 30, 2017 and December 31, 20162023 (dollars and euros in thousands):
Notional Amount atSettlements, Terminations or ExpirationsNotional Amount at
Derivative InstrumentDecember 31, 2022AcquisitionsJune 30, 2023
Fixed pay interest rate swaps$158,000 $— $(76,000)$82,000 
Total derivative instruments$158,000 $— $(76,000)$82,000 
Fair Value atAcquisitionsSettlements, Terminations or ExpirationsRealized Gains / LossesMark-to-marketFair Value at
Derivative InstrumentDecember 31, 2022June 30, 2023
Fixed pay interest rate swaps$(60)$— $2,000 $(2,000)$(8)$(68)
Total derivative instruments$(60)$— $2,000 $(2,000)$(8)$(68)

Dividends

During the six months ended June 30, 2023, we declared dividends totaling $0.70 per share generating a dividend yield of approximately 15.8% based on the stock closing price of $8.87 on June 30, 2023.
Book Value

The following chart reflects our book value per common share basic and diluted over five consecutive quarters:
128
    We continue to implement measures to improve our balance sheet by increasing liquidity, reducing leverage, and seeking alternative financing arrangements to preserve long-term shareholder value. The decrease in book value from $16.46 as of March 31, 2023, to $14.69 as of June 30, 2023, was primarily driven by the decreased value of our securitized commercial loan portfolio of $62.9 million, offset by the increased value of our residential whole loans of $37.0 million.


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 September 30, 2017  December 31, 2016
Derivative Type
Notional Amount
 
Notional
 (USD )
 Maturity Fair 
Value		 Derivative Type
Notional Amount
 
Notional
 (USD)
 Maturity Fair 
Value
Buy USD/Sell EUR currency forward€580
 $697
 November 2017 $10
 Buy USD/Sell EUR currency forward€710
 $784
 January 2017 $34
Currency forwards, assets€580
 $697
 n/a $10
 Currency forwards, assets€710
 $784
 n/a $34
Buy EUR/Sell USD currency forward€311
 $370
 November 2017 $(1) Buy EUR/Sell USD currency forward€673
 $735
 February 2017 $(23)
Buy EUR/Sell USD currency forward€269
 $320
 November 2017 $(2) Buy EUR/Sell USD currency forward€710
 $797
 January 2017 $(46)
Currency forwards, liabilities€580
 $690
 n/a $(3) Currency forwards, liabilities€1,383
 $1,532
 n/a $(69)
Total currency forwards€1,160
 $1,387
 n/a $7
 Total currency forwards€2,093
 $2,316
 n/a $(35)


Pending Merger Agreement

On August 8, 2023, we entered into a merger agreement with AG Mortgage Investment Trust, Inc., a Maryland corporation (“MITT”) for the acquisition of the Company by MITT. The Company's Board of Directors determined that the transaction offered by MITT pursuant to which each outstanding share of the Company’s common stock would be converted into the right to receive (i) shares of MITT common stock pursuant to a fixed exchange ratio of 1.5 shares of MITT common stock per share (subject to adjustment for transaction expenses) and (ii) the per share portion of a cash payment from MITT’s external manager equal to the lesser of $7 million or approximately 9.9% of the aggregate per share merger consideration (any difference between $7 million and the 9.9% cap would be used to benefit the combined company post-closing by offsetting reimbursable expenses that would otherwise be payable to MITT’s external manager) was superior to the previous transaction agreement (the “TPT Merger Agreement”) with Terra Property Trust, Inc. (“TPT”). The proposed transaction with MITT is pending and subject to various conditions and we will provide updates as appropriate.

Results of Operations


Comparison of the three months ended SeptemberJune 30, 20172023 to the three months ended SeptemberJune 30, 20162022.


General

During the second quarter of 2023, we continued to take actions to strengthen our balance sheet.
Our operating results mainly depend upon the difference between the yield on our investments, the cost of our borrowing, including our hedging activities, and the composition and changes in market prices of our portfolio. For
During the three months ended SeptemberJune 30, 2017,2023, we generatedreceived approximately $1.1 million from the repayment or paydown of Commercial Whole Loans, Non-Agency CMBS, and Other Securities, and $28.4 million from the sale or repayment of Residential Whole Loans, and Non-Agency RMBS. We also received proceeds of $8.7 million on the sale of Other Securities. Due to the spread widening during the quarter, we experienced a decline in the fair value of our residential whole loan and mortgage backed securities investments. Overall, our net income of $22.8loss was $8.6 million, or $0.54 per basic and diluted weighted common share, compared to net income of $32.3 million, or $0.77$1.44 per basic and diluted weighted common share, for the three months ended SeptemberJune 30, 2016. The decrease in2023.

In contrast, for the three months ended June 30, 2022, we had a net incomeloss of $22.4 million, or $3.71 per basic and diluted weighted common share, which was primarily attributable to lower net interest income generated from lower yielding investments, an increasea decline in fair value in our average costresidential whole loan investments.

63
Table of funds in 2017, lower security prices resulting in a decrease in our unrealized gains and an increase in OTTI offset by lower operating and general administrative expenses. The key components of these changes are discussed in greater detail below.Contents




Net Interest Income

The following table setstables set forth certain information regarding our net interest income on our investment incomeportfolio for the three months ended SeptemberJune 30, 20172023 and SeptemberJune 30, 20162022 (dollars in thousands):
Three Months Ended June 30, 2023Average Amortized
Cost of Assets		Total Interest IncomeYield on Average Assets
Investments
Agency RMBS$62 $3 19.41 %
Non-Agency CMBS86,391 1,959 9.10 %
Non-Agency RMBS30,354 425 5.62 %
Residential Whole Loans1,152,246 12,995 4.52 %
Residential Bridge Loans3,091 — — %
Commercial Loans80,357 1,832 9.14 %
Securitized Commercial Loan1,308,695 22,451 6.88 %
Other securities21,894 557 10.20 %
Total investments$2,683,090 $40,222 6.01 %
Average Carrying ValueTotal Interest Expense
Average Cost of Funds(1)
Borrowings   
Repurchase agreements$140,422 $2,923 8.35 %
Convertible senior unsecured notes, net84,204 1,865 8.88 %
Securitized debt2,278,207 31,424 5.53 %
Total borrowings$2,502,833 $36,212 5.80 %
Net interest income and net interest margin(2)
$4,010 0.60 %
Three Months Ended June 30, 2022Average Amortized
Cost of Assets		Total Interest IncomeYield on Average Assets
Investments
Agency RMBS$55 $3 21.88 %
Non-Agency CMBS151,288 2,530 6.71 %
Non-Agency RMBS54,816 661 4.84 %
Residential Whole Loans1,199,076 12,082 4.04 %
Residential Bridge Loans5,682 16 1.13 %
Commercial Loans192,154 1,260 2.63 %
Securitized Commercial Loan1,281,594 21,986 6.88 %
Other securities45,467 1,039 9.17 %
Total investments$2,930,132 $39,577 5.42 %
Average Carrying ValueTotal Interest Expense
Average Cost of Funds(1)
Borrowings
Repurchase agreements$506,601 $3,659 2.90 %
Convertible senior unsecured notes, net115,785 2,500 8.66 %
Securitized debt2,047,853 27,183 5.32 %
Total borrowings$2,670,239 $33,342 5.01 %
Net interest income and net interest margin(2)
$6,235 0.85 %
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Period Ended 
Average
Amortized
Cost of
Assets
 
Total
Interest
Income
 Yield on Average Assets 
Average
Balance of
Borrowings
 Total Interest Expense 
Average Cost of Funds(1)
 Net Interest Income 
Net
Interest
Margin
Three months ended September 30, 2017  
  
  
  
  
  
  
  
Agency RMBS $854,526
 $5,891
 2.74% $836,749
 $2,823
 1.34% $3,068
 1.42%
Agency CMBS 1,478,355
 11,181
 3.00% 1,429,116
 4,938
 1.37% 6,243
 1.68%
Non-Agency RMBS 58,919
 943
 6.35% 48,681
 349
 2.84% 594
 4.00%
Non-Agency CMBS 293,959
 6,381
 8.61% 196,467
 1,472
 2.97% 4,909
 6.63%
Residential Whole-Loans 196,001
 2,002
 4.05% 159,247
 1,412
 3.52% 590
 1.19%
Residential Bridge Loans 61,953
 1,331
 8.52% 53,310
 576
 4.29% 755
 4.83%
Securitized commercial loan 24,974
 575
 9.13% 17,803
 306
 6.82% 269
 4.27%
Other Securities 124,657
 2,624
 8.35% 55,689
 487
 3.47% 2,137
 6.80%
Total $3,093,344
 $30,928
 3.97% $2,797,062
 $12,363
 1.75% $18,565
 2.38%
                 
Three months ended September 30, 2016  
  
  
  
  
  
  
  
Agency RMBS $1,725,322
 $10,269
 2.37% $1,602,770
 $3,042
 0.76% $7,227
 1.67%
Agency CMBS 9,621
 172
 7.11% 14,895
 64
 1.71% 108
 4.47%
Non-Agency RMBS 363,042
 7,404
 8.11% 275,900
 1,569
 2.26% 5,835
 6.39%
Non-Agency CMBS 401,588
 7,975
 7.90% 270,633
 1,562
 2.30% 6,413
 6.35%
Residential Whole-Loans 180,641
 1,562
 3.44% 158,315
 976
 2.45% 586
 1.29%
Securitized commercial loan 25,000
 575
 9.15% 18,011
 303
 6.69% 272
 4.33%
Other Securities 48,842
 1,197
 9.75% 25,171
 169
 2.67% 1,028
 8.37%
Total $2,754,056
 $29,154
 4.21% $2,365,695
 $7,685
 1.29% $21,469
 3.10%

(1) Average cost of funds does not include the interest expense related to our derivatives. In accordance with GAAP, such costs are included in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.

(2) Since we do not apply hedge accounting, our net interest margin in this table does not reflect the benefit / cost of our interest rate swaps. See "Non-GAAP Financial Measures" for net investment income table that includes the benefit / cost from our interest rate swaps.

Interest Income

For the three months ended SeptemberJune 30, 20172023, and SeptemberJune 30, 2016,2022, we earned interest income on our investments of approximately $30.9$40.2 million and $29.2$39.6 million, respectively, and incurred interest expense, which primarily related to our repurchase agreement borrowingsrespectively. The increase of approximately $12.4$645 thousand was mainly due to an increase in interest rates.
Interest Expense

Interest expense increased from $33.3 million and $7.7 million, respectively.  While our yield on average assets for the three months ended SeptemberJune 30, 2017 decreased2022 to 3.97% from 4.21% for three months ended September 30, 2016, our interest income increased. The increase was primarily the result of a larger average investment portfolio in the third quarter of 2017. The decrease in the average yield on our investments was a result of the repositioning of our investments from Agency RMBS and Non-Agency RMBS to Agency CMBS and Residential Whole and Bridge Loans, which in combination were slightly low yielding assets. We believe these investments will provide greater book value stability.

The reduction of our exposure from Agency RMBS to Agency CMBS was based on our expectation of continued interest rate volatility coupled with the anticipation of the Federal Reserve reducing its balance sheet, resulting in continued spread widening for Agency RMBS securities. Agency CMBS are not held on the Federal Reserve's balance sheet and would not be subject to technical pressures that Agency RMBS may experience. Our Agency CMBS are subject to limited prepayment risk as compared to Agency RMBS. We also reduced our exposure to Non-Agency RMBS, IO's and IIO's, which recovered their anticipated value, in a further effort to reduce volatility in our book value. Our higher borrowing costs$36.2 million for the three months ended SeptemberJune 30, 2017 were a result of: (i) the2023. The increase in interest rates, (ii)expense was primarily attributable to increased interestborrowing costs associated with financingon our Residential Whole and Bridge Loans, which generally have higherrepurchase facilities due to increasing market interest rates, than repurchase agreements on Agency RMBS and Agency CMBS, and (iii) higher average repurchase agreement borrowings.  Our average borrowings increased from $2.4 billion for the three months ended September 30, 2016offset by a decrease in interest expense incurred when compared to $2.8 billion for the three months ended September 30, 2017 and our the average cost of funds for the same period increased from 1.29% forin the three months ended September 30, 2016 to 1.75% forprior year as the three months ended September 30, 2017.  As a result of the movements in interest income and interest expense discussed above,balance on our net interest margin decreased to 2.38% for the three months ended September 30, 2017 from 3.10% for the three months ended September 30, 2016. outstanding repurchase agreements declined period over period.

Other income (loss), net
 
Realized gain (loss) on investments, net
 
Our Manager regularly reviewsRealized gain (loss) represents the characteristics ofnet gain (loss) on sales or settlements from our investment portfolio and may make changes to our portfolio in order to adjust such portfolio characteristics in response to and/or anticipation of changing market conditions in an effort to achieve the appropriate risk reward ratio.  Accordingly, due to changes in market conditions or expected changes in market conditions, we repositioned our portfolio and sold Agency RMBS and redeployed our capital into Agency CMBS and credit sensitive investments.
debt. The following table presents the sales and realized gains (losses) of our investments and debt for each of the three months ended SeptemberJune 30, 20172023 and SeptemberJune 30, 20162022 (dollars in thousands):
 For the three months ended June 30, 2023For the three months ended June 30, 2022
 Proceeds (Payments)Gross GainsGross LossesNet Gain  (Loss)Proceeds (Payments)Gross GainsGross LossesNet Gain (Loss)
Non-Agency CMBS$— $— $(1,237)$(1,237)$10,152 $— $(43,934)$(43,934)
Non-Agency RMBS— — (48)(48)27,729 255 (1,425)(1,170)
Other securities8,694 649 (463)186 4,406 — (478)(478)
Convertible senior unsecured notes(1)
— — — — (7,281)— (79)(79)
Total$8,694 $649 $(1,748)$(1,099)$35,006 $255 $(45,916)$(45,661)

 For the three months ended September 30, 2017 For the three months ended September 30, 2016
 Proceeds Gross Gains Gross Losses Net Gain  (Loss) Proceeds Gross Gains Gross Losses Net Gain (Loss)
Agency RMBS (1)
$(2,906) $(3) $51
 $48
 $42,427
 $—
 $(138) $(138)
Agency CMBS—
 —
 —
 —
 8,216
 45
 —
 45
Non-Agency RMBS—
 —
 —
 —
 15,209
 1,306
 —
 1,306
Non-Agency CMBS10,597
 1,641
 (278) 1,363
 9,194
 —
 (1,452) (1,452)
Other securities10,419
 419
 $—
 419
 14,485
 1,678
 —
 1,678
Total$18,110
 $2,057
 $(227) $1,830
 $89,531
 $3,029
 $(1,590) $1,439
(1)Realized gains/losses recognized on the extinguishment of the 2022 Notes. See Note 7, "Financings" to the Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for additional details.

(1)Reflects a reclassification of proceeds from a sale recorded on the trade date to reflect subsequent Agency RMBS paydowns. Excludes Interest-Only Strips, accounted for as derivatives.

Other than temporary impairment
We evaluate securities for 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 subjective and objective factors. As a result, the timing and amount of an OTTI constitutes an accounting estimate that may change materially over time.

The increase in OTTI was mainly attributable to Agency RMBS securities. Normally unrealized losses on Agency securities, with explicit guarantee of principal and interest by the governmental sponsored entity are not credit losses but rather 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. However, at September 30, 2017 we had the intention to sell 47 Agency RMBS securities that were in a $4.7 million unrealized loss position and accordingly we were required to record the unrealized losses as OTTI.


The following table presents the other-than-temporary impairments we recorded on our securities portfolio for the three months ended September 30, 2017 and September 30, 2016 (dollars in thousands): 
 Three months ended September 30, 2017 Three months ended September 30, 2016
Agency RMBS$4,760
 $202
Non-Agency RMBS—
 852
Non-Agency CMBS2,344
 3,674
Other securities121
 250
Total$7,225
 $4,978


Unrealized gain (loss), net
 
Our investments and securitized debt, for which we have elected the fair value option, are recorded at fair value with the periodic changes in fair value being recorded in earnings. The change in unrealized gain (loss) is directly attributable to changes in market pricing on the underlying investments and securitized debt during the period. We completed the repositioning

65
Table of our investment portfolio in the third quarter of 2017. The decrease in unrealized gains was a combination of a repositioned portfolio and credit spread widening in our Agency CMBS investments and our credit sensitive investments compared to third quarter 2016.Contents




The following table presents the net unrealized gains (losses) we recorded on our investments and securitized debt for the three months ended September 30, 2017 and September 30, 2016 (dollars in thousands): 
 Three months ended June 30, 2023Three months ended June 30, 2022
Agency RMBS$1 $(3)
Non-Agency CMBS(2,155)42,523 
Non-Agency RMBS(820)(2,490)
Residential whole loans(8,056)(38,312)
Residential bridge loans— (110)
Commercial Loans362 (74)
Securitized Commercial Loan(70,014)(52,218)
Other securities365 (3,894)
Securitized debt73,463 70,763 
Total$(6,854)$16,185 
 Three months ended September 30, 2017 Three months ended September 30, 2016
Agency RMBS$5,806
 $3,735
Agency CMBS(1,367) (34)
Non-Agency RMBS1,778
 3,332
Non-Agency CMBS45
 7,982
Whole-Loans(435) 1,275
Other securities(518) (800)
Securitized debt(60) (198)
Total$5,249
 $15,292


Gain (loss) on derivatives, net


Effective January 2017, variation margin    As of CME cleared derivatives are treated as settlements of the derivative contract rather than cash collateral, accordingly variation margin is treated as a gain or loss of partial settlement of the underlying derivative contract and reported in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations. Also, included in "Gain (loss) on derivative instruments, net" in our Consolidated Statements of Operations are the netJune 30, 2023, we had interest rate swap paymentsswaps with a notional amount of $82.0 million and currency payments (including accrued amounts) associated with these instruments.no forward starting swaps. Our hedging strategy is designed to mitigate our exposure to interest rate volatility.


The following table presents the components of gain (loss) on derivatives for the three months ended SeptemberJune 30, 20172023 and SeptemberJune 30, 20162022 (dollars in thousands):


Realized Gain (Loss), net
DescriptionOther Settlements / ExpirationsVariation Margin SettlementReturn (Recovery) of BasisMark-to-Market
Contractual interest income (expense), net(1)
Total
Three months ended June 30, 2023
Interest rate swaps$— $184 $— $53 $766 $1,003 
Agency and Non-Agency Interest-Only Strips— accounted for as derivatives— — (4)1 14 11 
Total$— $184 $(4)$54 $780 $1,014 
Three months ended June 30, 2022
Interest rate swaps$— $5,781 $— $(671)$(262)$4,848 
Agency and Non-Agency Interest-Only Strips— accounted for as derivatives— — (43)(107)55 (95)
Credit default swaps16 — — (2,103)— (2,087)
TBAs732 — — 1,383 — 2,115 
Total$748 $5,781 $(43)$(1,498)$(207)$4,781 
  Realized Gain (Loss), net        
Description Other Settlements / Expirations Variation Margin Settlement Mark-to-Market Return (Recovery) of Basis 
Contractual interest income (expense), net(1)
 Total
Three months ended September 30, 2017            
Interest rate swaps $(38) $9,564
 $(2,028) $92
 $(1,764) $5,826
Agency and Non-Agency Interest-Only Strips— accounted for as derivatives —
 —
 351
 (1,486) 1,816
 681
Options (957) —
 477
 —
 —
 (480)
Futures contracts (77) —
 —
 —
 —
 (77)
Foreign currency forwards 45
 —
 (15) —
 —
 30
Total return swaps (52) —
 329
 —
 95
 372
TBAs 577
 —
 288
 —
 —
 865
Total $(502) $9,564
 $(598) $(1,394) $147
 $7,217
             
Three months ended September 30, 2016            
Interest rate swaps $(25,179) $—
 $35,878
 $168
 $(6,904) $3,963
Interest rate swaptions —
 —
 —
 —
 —
 —
Agency and Non-Agency Interest-Only Strips— accounted for as derivatives —
 —
 446
 (2,827) 3,503
 1,122
Futures contracts 5,844
 —
 (8,792) —
 —
 (2,948)
Foreign currency forwards 103
 —
 (62) —
 —
 41
Foreign currency swaps 1,409
 —
 (1,852) —
 61
 (382)
Total return swaps 2
 —
 (11) —
 308
 299
TBAs 3,579
 —
 447
 —
 —
 4,026
Total $(14,242) $—
 $26,054
 $(2,659) $(3,032) $6,121


(1) Contractual interest income (expense), net on derivative instruments includes interest settlement paid or received.
(1)Contractual interest income (expense), net on derivative instruments includes interest settlement paid or received.


Other, net

For the three months ended SeptemberJune 30, 20172023 and SeptemberJune 30, 2016,2022, "Other, net" was income of $216$186 thousand and a loss of $60$46 thousand, respectively. The balance is mainly comprised of income on cash balances, miscellaneous net interest income (expense) on cash collateral for our derivativerepurchase agreements and repurchase agreements.derivatives, and miscellaneous fees and expenses on residential mortgage loans.

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Expenses
 
Management Fee Expense
 
We incurred management fee expense of approximately $1.9$1.0 million and $2.6$1.0 million for the three months ended SeptemberJune 30, 20172023 and SeptemberJune 30, 2016,2022, respectively. Pursuant toAlthough the termsManagement Fee remained constant period over period, our Manager waived 25% of the calculated Management Agreement, our Manager is paidFee in fiscal year 2022, which was not extended into fiscal year 2023. The Management Fee incurred for the three months ended June 30, 2023 reflects a reduction in the equity basis for which the management fee equal to 1.5% per annum of our stockholders’ equity (as defined in the Management Agreement),is calculated and payable (in cash) quarterly in arrears. The decrease was mainly a result of the restructuring of our interest rate swaps, which reduced the "Equity" base used to calculate the management fee. Pursuant to the terms of the agreement, unrealized gains and losses are excluded from the "Equity" base used to calculate the management fee. Upon termination of the interest rate swapscomparative period.

the accumulated unrealized losses, which were excluded, became realized thereby reducing the "Equity" base by approximately $155.8 million. In addition, the August 3, 2016 amendment to the Management Agreement amended the definition of "Equity" as defined in the agreement. Under the new definition OTTI will reduce the "Equity" base used to calculate the management fee.

The management fees, expense reimbursements, and the relationship between our Manager and usthe Company are discussed further in Note 9,10, “Related Party Transactions,”Transactions” to the financial statements contained in this Quarterly Report on Form 10-Q.

Other Operating Expenses
 
We incurred other operating expenses of approximately $702$293 thousand and $188$262 thousand for the three months ended SeptemberJune 30, 20172023, and SeptemberJune 30, 2016,2022, respectively. Other operating cost is comprised of derivative transaction costs custodycomprise bank fees, trustee fees, and loan servicing fees. The increase was primarily a result of expenses related to derivative commissions and fees resulting from the increased leverage and asset management/loan servicing fees related tofor loans acquired serving released.

Transaction Costs

We incurred transaction costs of $2.0 million and $344 thousand for the bridge loans, which are a new target assetthree months ended June 30, 2023 and June 30, 2022, respectively. The amounts in 2017.the current and prior period reflect costs incurred in connection with the strategic review process.

General and Administrative Expenses
 
We incurred general and administrative expenses of approximately $1.7$2.7 million and $2.0$2.3 million for the three months ended SeptemberJune 30, 20172023, and SeptemberJune 30, 2016, respectively.2022, respectively. The following describes the key componentsexpense included an increase in compensation expense of general and administrative expenses.
Compensation Expense
Compensation$374 thousand, as we experienced turnover in fiscal year 2022 which resulted in decreased compensation expense decreased from approximately $868 thousand for the three months ended SeptemberJune 30, 2016 to approximately $660 thousand for2022. We did not experience this employee turnover during the three months ended SeptemberJune 30, 2017. The decrease was a result lower stock based compensation, since we did not issue any stock based awards to our Manager or executive officers in 2016 and 2017.2023.

Professional Fees
Professional fees slightly increased to approximately $781 thousand for the three months ended September 30, 2017 from approximately $723 thousand for the three months ended September 30, 2016. 

Other general and administrative expenses

The decrease in other general and administrative expense for three months ended September 30, 2017, was a result of an adjustment to excise tax based on the filing of our 2016 federal tax return.
Comparison of the ninesix months ended SeptemberJune 30, 20172023 to the ninesix months ended SeptemberJune 30, 2016.2022.


General

Our operating results mainly depend uponDuring the difference betweenfirst two quarters of 2023, we continued to make progress towards strengthening our balance sheet, improving liquidity, and the yield on our investments, the costtransition of our borrowing, including our hedging activities,portfolio to residential investments.
During the six months ended June 30, 2023, we sold $15.3 million of Other Securities, $8.8 million in Commercial Loans, and recognized $20.6 million in basis recovery on the composition and changes in market pricesmaturity of one of our portfolio. ForCMBS securities. These sales combined with the nine months ended September 30, 2017, we generatedCMBS maturity resulted in the recognition of a $83.9 million realized loss, offset by an $83.5 million unrealized gain, which was primarily comprised of the reversal of previously-recognized unrealized losses on the sale of the CRE 3 Commercial Loan. An increase in interest expense and transaction costs of $2.6 million incurred in connection with the strategic review process were the primary drivers of a net incomeloss of $63.7$2.1 million, or $1.52 per basic and diluted weighted common share, compared to net income of $13.3 million, or $0.31$0.35 per basic and diluted weighted common share for the ninesix months ended SeptemberJune 30, 2016.  The increase2023.
In contrast, for the six months ended June 30, 2022, the key driver of a net loss of $48.2 million, or $8.00 per basic and diluted weighted common share, was declines in net income was primarily attributable higher prices forfair values of our investments which increased our unrealized gains, realized gains fromdue to the repositioningspread widening.
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Table of our portfolio, lower OTTI, lower loss on our derivatives, as a result of restructuring our hedges and lower operating, and general and administrative expenses offset by lower net interest income. The key components of these changes are discussed in greater detail below.Contents




Net Interest Income


The following table setstables set forth certain information regarding our net interest income on our investment incomeportfolio for the ninesix months ended SeptemberJune 30, 20172023 and SeptemberJune 30, 20162022 (dollars in thousands):
Six Months Ended June 30, 2023Average Amortized
Cost of Assets		Total Interest IncomeYield on Average Assets
Investments
Agency RMBS$59 $6 20.51 %
Non-Agency CMBS91,184 4,232 9.36 %
Non-Agency RMBS30,560 859 5.67 %
Residential Whole Loans1,166,672 26,293 4.54 %
Residential Bridge Loans3,104 24 1.56 %
Commercial Loans80,422 3,589 9.00 %
Securitized Commercial Loan1,301,539 44,781 6.94 %
Other securities26,252 1,295 9.95 %
Total investments$2,699,792 $81,079 6.06 %
Average Carrying ValueTotal Interest Expense
Average Cost of Funds(1)
Borrowings   
Repurchase agreements$171,109 $6,055 7.14 %
Convertible senior unsecured notes, net84,000 3,730 8.95 %
Securitized debt2,288,810 62,929 5.54 %
Total borrowings$2,543,919 $72,714 5.76 %
Net interest income and net interest margin(2)
$8,365 0.62 %
Six Months Ended June 30, 2022Average Amortized
Cost of Assets		Total Interest IncomeYield on Average Assets
Investments
Agency RMBS$59 $7 23.93 %
Non-Agency CMBS158,860 5,100 6.47 %
Non-Agency RMBS47,664 1,191 5.04 %
Residential Whole Loans1,126,074 20,828 3.73 %
Residential Bridge Loans5,740 36 1.26 %
Commercial Loans192,155 2,506 2.63 %
Securitized Commercial Loan1,274,895 43,858 6.94 %
Other securities46,665 1,693 7.32 %
Total investments$2,852,112 $75,219 5.32 %
Average Carrying ValueTotal Interest Expense
Average Cost of Funds(1)
Borrowings
Repurchase agreements$472,721 $6,101 2.60 %
Convertible senior unsecured notes, net117,046 5,097 8.78 %
Securitized debt2,019,682 53,503 5.34 %
Total borrowings$2,609,449 $64,701 5.00 %
Net interest income and net interest margin(2)
$10,518 0.74 %
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Period Ended 
Average
Amortized
Cost of
Assets
 
Total
Interest
Income
 Yield on Average Assets 
Average
Balance of
Borrowings
 Total Interest Expense 
Average Cost of Funds(1)
 Net Interest Income 
Net
Interest
Margin
Nine months ended September 30, 2017  
  
  
  
  
  
  
  
Agency RMBS $960,380
 $19,851
 2.76% $934,923
 $8,037
 1.15% $11,814
 1.64%
Agency CMBS 1,106,847
 25,125
 3.03% 1,049,598
 9,664
 1.23% 15,461
 1.87%
Non-Agency RMBS 91,105
 4,785
 7.02% 71,994
 1,447
 2.69% 3,338
 4.90%
Non-Agency CMBS 334,504
 21,247
 8.49% 223,040
 4,675
 2.80% 16,572
 6.62%
Residential Whole-Loans 206,957
 6,336
 4.09% 168,024
 4,219
 3.36% 2,117
 1.37%
Residential Bridge Loans 44,840
 2,951
 8.80% 37,952
 1,248
 4.40% 1,703
 5.08%
Securitized commercial loan 24,991
 1,706
 9.13% 17,801
 912
 6.85% 794
 4.25%
Other Securities 118,534
 7,412
 8.36% 51,908
 1,305
 3.36% 6,107
 6.89%
Total $2,888,158
 $89,413
 4.14% $2,555,240
 $31,507
 1.65% $57,906
 2.68%
                 
Nine months ended September 30, 2016  
  
  
  
  
  
  
  
Agency RMBS $1,629,762
 $28,472
 2.33% $1,558,747
 $8,782
 0.75% $19,690
 1.61%
Agency CMBS 17,231
 836
 6.48% 21,453
 293
 1.82% 543
 4.21%
Non-Agency RMBS 412,501
 22,993
 7.45% 302,219
 4,942
 2.18% 18,051
 5.85%
Non-Agency CMBS 423,670
 24,783
 7.81% 291,178
 4,731
 2.17% 20,052
 6.32%
Residential Whole-Loans 193,594
 5,254
 3.63% 162,455
 3,046
 2.50% 2,208
 1.52%
Residential Bridge Loans —
 —
 —% —
 —
 —% —
 —%
Securitized commercial loan 25,000
 1,713
 9.15% 17,915
 900
 6.71% 813
 4.34%
Other Securities 66,954
 3,941
 7.86% 35,354
 697
 2.63% 3,244
 6.47%
Total $2,768,712
 $87,992
 4.25% $2,389,321
 $23,391
 1.31% $64,601
 3.12%


(1) Average cost of funds does not include the interest expense related to our derivatives. In accordance with GAAP, such costs are included in "Gain on derivative instruments, net" in the Consolidated Statements of Operations.
(2) Since we do not apply hedge accounting, our net interest margin in this table does not reflect the benefit / cost of our interest rate swaps. See "Non-GAAP Financial Measures" for net investment income table that includes the benefit / cost from our interest rate swaps.


Interest Income

For the ninesix months ended SeptemberJune 30, 20172023, and SeptemberJune 30, 2016,2022, we earned interest income on our investments of approximately $89.4approximately $81.1 million and $88.0$75.2 million, respectively, and incurred interest expense, which primarily related to our borrowings under repurchase agreements,respectively. The increase of approximately $31.5$5.9 million and $23.4 million, respectively. While our average portfolio was slightly larger, our yield on average assets for the nine months ended September 30, 2017 decreasedmainly due to 4.14% from 4.25% for the nine months ended September 30, 2016, resulting in an increase in interest income. The decrease in the average yield on our investments was a result of the repositioning of our investmentrates.
Interest Expense

Interest expense increased from Agency RMBS and Non-Agency RMBS to Agency CMBS and Residential Whole and Bridge Loans, which in combination were slightly low yielding assets. We believe this investments mix will provide greater book value stability.

The reduction of our exposure from Agency RMBS to Agency CMBS was based on the expectation of continued interest rate volatility coupled with the anticipation of the Federal Reserve reducing its balance sheet, resulting in continued spread widening for Agency RMBS securities. Agency CMBS are not held on the Federal Reserve's balance sheet and would not be subject to technical pressures that Agency RMBS may experience. Our Agency CMBS are subject to limited prepayment risk as compared to Agency RMBS. We also reduced our exposure to Non-Agency RMBS, IO's and IIO's, which recovered their anticipated value, in a further effort to reduce volatility in our book value. Our higher borrowing costs$64.7 million for the ninesix months ended SeptemberJune 30, 2017 were a result of: (i)2022 to $72.7 million for the six months ended June 30, 2023. The increase in interest rates, and (ii)expense was primarily a result increased interestborrowing costs associated with financingon our Residential Whole and Bridge Loans, which generally have higherrepurchase facilities due to increasing market interest rates, thanoffset by lower repurchase agreements on Agency RMBS and Agency CMBS, and (iii) higher average repurchase agreement borrowings.  Our average borrowings increasedresulting from $2.4 billion for the nine months ended September 30, 2016 to $2.6 billion for the nine months ended September 30, 2017, while the average cost ofa smaller investment portfolio.


funds for the same periods increased from 1.31% for the nine months ended September 30, 2016 to 1.65% for the nine months ended September 30, 2017, respectively.  As a result of the movements in interest income and interest expense discussed above, our net interest margin decreased to 2.68% for the nine months ended September 30, 2017 from 3.12% for the nine months ended September 30, 2016. 
Other income (loss), net
 
Realized gain (loss) on investments, net
 
The mortgage and structured securities markets remain dynamic and, at times, volatile markets.  Our Manager regularly reviewsRealized gain (loss) represents the characteristics ofnet gain (loss) on sales or settlements from our investment portfolio and may make changes to our portfolio in order to adjust such portfolio characteristics in response to and/or anticipation of changing market conditions in an effort to achieve the appropriate risk reward ratio.  Accordingly, due to changes in market conditions or expected changes in market conditions, we repositioned our portfolio and sold Agency RMBS and Non-Agency RMBS in the nine months ended September 30, 2017 and redeployed our capital into Agency CMBS and Residential Whole and Bridge Loans.
debt. The following table presents the sales and realized gains (losses) of our investments and debt for each of the ninesix months ended SeptemberJune 30, 20172023 and SeptemberJune 30, 20162022 (dollars in thousands):

 For the six months ended June 30, 2023For the six months ended June 30, 2022
 Proceeds (Payments)Gross GainsGross LossesNet Gain  (Loss)Proceeds (Payments)Gross GainsGross LossesNet Gain (Loss)
Non-Agency CMBS$— $— $(1,239)$(1,239)$10,152 $— $(43,934)$(43,934)
Non-Agency RMBS— — (48)(48)27,729 255 (1,425)(1,170)
Other securities15,324 649 (2,028)(1,379)4,406 — (478)(478)
Commercial Loans(1)
8,776 — (81,223)(81,223)— — — — 
Disposition of REO(2)
(28)— (28)(28)54,681 12,198 — 12,198 
Convertible senior unsecured notes(3)
— — — — (10,689)— (132)(132)
Total$24,072 $649 $(84,566)$(83,917)$86,279 $12,453 $(45,969)$(33,516)

 Nine months ended September 30, 2017 Nine months ended September 30, 2016
 Proceeds Gross Gains Gross Losses 
Net Gain
(Loss)
 Proceeds Gross Gains Gross Losses 
Net Gain
(Loss)
Agency RMBS (1)
$862,245
 $4,376
 $(7,314) $(2,938) $358,029
 $5,250
 $(5,764) $(514)
Agency CMBS—
 —
 —
 —
 18,637
 54
 (55) (1)
Non-Agency RMBS (1)
243,811
 24,389
 (2,242) 22,147
 120,649
 3,100
 (4,559) (1,459)
Non-Agency CMBS45,634
 2,377
 (1,351) 1,026
 34,188
 —
 (4,381) (4,381)
Other securities33,365
 419
 (54) 365
 764,711
 3,496
 (2,109) 1,387
Total$1,185,055
 $31,561
 $(10,961) $20,600
 $1,296,214
 $11,900
 $(16,868) $(4,968)


(1)Excludes Interest-Only Strips, accounted for as derivatives.
(1)Realized gains/losses recognized on the sale of the CRE 3 loan in February 2023. See Note 6, "Commercial Loans" to the Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for additional details.
Other than temporary impairment(2)Realized gains/losses recognized in connection with the sale of the hotel REO.
(3)Realized gains/losses recognized on the extinguishment of the 2022 Notes. See Note 7, "Financings" to the Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for additional details.
We evaluate securities for 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 subjective and objective factors. As a result, the timing and amount of an OTTI constitutes an accounting estimate that may change materially over time.

Normally unrealized losses on Agency securities (excluding Agency IO's), are not credit losses but rather 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. However, at September 30, 2017 our intention was to sell these securities and accordingly we were required to record the unrealized losses as OTTI.


The following table presents the other-than-temporary impairments we recorded on our securities portfolio for the nine months ended September 30, 2017 and September 30, 2016 (dollars in thousands): 
 Nine months ended September 30, 2017 Nine months ended September 30, 2016
Agency RMBS$5,420
 $1,226
Non-Agency RMBS—
 8,081
Non-Agency CMBS12,658
 9,213
Other securities1,823
 3,611
Total$19,901
 $22,131


Unrealized gain (loss), net
 
Our investments, and securitized debt, for which we have elected the fair value option are recorded at fair value with the periodic changes in fair value being recorded in earnings. The change in unrealized gain (loss) is directly attributable to changes in market pricing on the underlying investments and securitized debt during the period coupled with  the repositionperiod.
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Table of our investment portfolio in the first half of 2017.Contents




The following table presents the net unrealized gains (losses) we recorded on our investments and securitized debt for the nine months ended September 30, 2017 and September 30, 2016 (dollars in thousands): 
 Six months ended June 30, 2023Six months ended June 30, 2022
Agency RMBS$2 $(51)
Non-Agency CMBS(4,970)43,497 
Non-Agency RMBS128 (5,914)
Residential Whole Loans6,444 (80,155)
Residential Bridge Loans8 (83)
Commercial Loans80,417 (2,147)
Securitized Commercial Loans(74,050)(125,782)
Other securities1,543 (6,268)
Securitized debt73,940 154,185 
Total$83,462 $(22,718)
 Nine months ended September 30, 2017 Nine months ended September 30, 2016
Agency RMBS$12,203
 $33,409
Agency CMBS11,338
 (661)
Non-Agency RMBS(11,415) 21,238
Non-Agency CMBS15,369
 (7,962)
Whole-Loans848
 546
Other securities7,129
 621
Securitized debt(346) 380
Total$35,126
 $47,571


Gain (loss) on derivatives, net


Effective January 2017, variation margin    As of CME cleared derivatives are treated as settlements of the derivative contract rather than cash collateral, accordingly variation margin is treated as a gain or loss of partial settlement of the underlying derivative contract and reported in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations. Also, included in "Gain (loss) on derivative instruments, net" in our Consolidated Statements of Operations are the net interest rate swap payments and currency payments (including accrued amounts) associated with these instruments.

In April 2017,June 30, 2023, we restructured our interest rate swaps effectively terminating fixed-payhad interest rate swaps with a notional valueamount of approximately $3.2 billion$82.0 million, and variable-payno forward starting swaps. Our hedging strategy is designed to mitigate our exposure to interest rate swaps with a notional value of approximately $2.0 billion to reduce hedging costs. The effects of the terminations is reflected in the table below for the nine months ended September 30, 2017 in interest rate swaps Other Settlements/ Expiration and Mark to Market.volatility.


The following table presents the components of gain (loss) on derivatives for the ninesix months ended SeptemberJune 30, 20172023 and SeptemberJune 30, 20162022 (dollars in thousands):



Realized Gain (Loss), net
DescriptionOther Settlements / ExpirationsVariation Margin SettlementReturn (Recovery) of BasisMark-to-Market
Contractual interest income (expense), net(1)
Total
Six months ended June 30, 2023
Interest rate swaps$— $(2,000)$— $(8)$1,986 $(22)
Agency and Non-Agency Interest-Only Strips— accounted for as derivatives— — (2)65 23 86 
Total$— $(2,000)$(2)$57 $2,009 $64 
Six months ended June 30, 2022
Interest rate swaps$— $11,321 $— $(1,120)$(553)$9,648 
Agency and Non-Agency Interest-Only Strips— accounted for as derivatives— — (115)(216)144 (187)
Credit default swaps31 — — 110 — 141 
TBAs732 — — 1,383 — 2,115 
Total$763 $11,321 $(115)$157 $(409)$11,717 
(1)Contractual interest income (expense), net on derivative instruments includes interest settlement paid or received.
  Realized Gain (Loss), net        
Description Other Settlements / Expirations Variation Margin Settlement Mark-to-Market Return (Recovery) of Basis 
Contractual interest income (expense), net(1)
 Total
Nine months ended September 30, 2017            
Interest rate swaps $(150,593) $(7,966) $156,102
 $378
 $(12,662) $(14,741)
Interest rate swaptions (115) —
 —
 —
 —
 (115)
Agency and Non-Agency Interest-Only Strips— accounted for as derivatives 526
 —
 (783) (5,055) 6,229
 917
Options (892) —
 (134) —
 —
 (1,026)
Futures contracts (9,230) —
 2,416
 —
 —
 (6,814)
Foreign currency forwards 25
 —
 43
 —
 —
 68
Total return swaps (552) —
 1,673
 —
 469
 1,590
TBAs 3,148
 —
 938
 —
 —
 4,086
Total $(157,683) $(7,966) $160,255
 $(4,677) $(5,964) $(16,035)
             
Nine months ended September 30, 2016            
Interest rate swaps $(28,784) $—
 $(35,393) $502
 $(22,409) $(86,084)
Interest rate swaptions (1,035) —
 1,631
 —
 —
 596
Agency and Non-Agency Interest-Only Strips— accounted for as derivatives (155) —
 (4,480) (8,930) 11,113
 (2,452)
Options 4,756
 —
 —
 —
 —
 4,756
Futures contracts 19,253
 —
 704
 —
 —
 19,957
Foreign currency forwards (90) —
 8
 —
 —
 (82)
Foreign currency swaps 5,351
 —
 (5,883) —
 268
 (264)
Total return swaps 17
 —
 (2,171) —
 836
 (1,318)
TBAs 12,166
 —
 (489) —
 —
 11,677
Total $11,479
 $—
 $(46,073) $(8,428) $(10,192) $(53,214)

(1)Contractual interest income (expense), net on derivative instruments includes interest settlement paid or received.


Other, net
 
For the ninesix months ended SeptemberJune 30, 20172023 and SeptemberJune 30, 2016,2022, "Other, net" was an income of $841$243 thousand and a loss of $158$191 thousand, respectively,respectively. The balance is mainly comprised of which $1 thousand and $905 thousand was related to net foreign currency loss, respectively, and the balance comprised ofincome on cash balances, miscellaneous net interest income
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(expense) on cash collateral for our derivative and repurchase agreements. Generally, our foreign currency denominated investments are financed with repurchase agreements in the same currency.  We recognize a gain or loss in foreign currency exchange, dependingand derivatives, and miscellaneous fees and expenses on the movement of the exchange rates during the period.residential mortgage loans.


Expenses
 
Management Fee Expense
 
We incurred management fee expense of approximately $6.2$1.9 million and $7.9$2.1 million for the ninesix months ended SeptemberJune 30, 20172023 and SeptemberJune 30, 2016,2022, respectively. Pursuant toThe decline in management fees reflects a reduction in the terms ofequity basis from which the Management Agreement, our Manager is paid a management fee equal to 1.5% per annum of our stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears. The decrease is mainly a result of the restructuring of our interest rate swaps, whichcalculated.

reduced the "Equity" base used to calculate the management fee. Pursuant to the terms of the agreement, unrealized gains and losses are excluded from the "Equity" base used to calculate the management fee. Upon termination of the interest rate swaps the accumulated unrealized losses, which were excluded, became realized thereby reducing the "Equity" base by approximately $155.8 million. In addition, the August 3, 2016 amendment to the Management Agreement amended the definition of "Equity" as defined in the agreement. Under the new definition, OTTI will reduce the equity base used to calculate the management fee.

The management fees, expense reimbursements and the relationship between our Manager and us are discussed further in Note 9,10, “Related Party Transactions,”Transactions” to the financial statements contained in this Quarterly Report on Form 10-Q.

Other Operating Expenses
 
We incurred other operating expenses of approximately $1.9 million$579 thousand and $809$558 thousand for the ninesix months ended SeptemberJune 30, 20172023, and SeptemberJune 30, 2016,2022, respectively. Other operating cost is comprised of derivative transaction costs custodycomprise bank fees, trustee fees and servicing fees. The increase was primarily a result of expenses related to derivative commissions and fees resulting from the restructuring of the interest rate swaps and asset management/loan servicing fees for loans acquired serving released. Formerly, transaction and financing costs were included in this expense category.

Transaction costs

We incurred transaction costs of $2.6 million and $3.0 million for the six months ended June 30, 2023 and June 30, 2022, respectively. The decrease in transaction costs was related to costs to securitize Arroyo 2022-1 and Arroyo 2022-2 (securitized in July 2022), in the bridge loans,first six months of 2022, which are a new target assetwere higher than the transaction costs incurred in 2017.connection with our strategic review process in the first six months of 2023.

General and Administrative Expenses
 
We incurred general and administrative expenses of approximately $5.6$5.1 million and $7.4$4.8 million for the ninesix months ended SeptemberJune 30, 20172023, and SeptemberJune 30, 2016,2022, respectively. The following describes the key componentsThis increase is primarily attributable to an increase in compensation expense of general and administrative expenses.
Compensation Expense
Compensation expense was relatively flat at approximately at $2.1 million and $2.3 million$387 thousand for the ninesix months ended SeptemberJune 30, 2017 and September 30, 2016, respectively.
Professional Fees
Professional fees decreased from approximately $3.9 million for2023, as we did not experience the ninesame employee turnover that we experienced during the six months ended SeptemberJune 30, 2016 to approximately $2.5 million for the nine month ended September 30, 2017. The decrease was primarily related to the following: i) consulting fees attributable to the outsourced interim chief financial officer position prior to hiring a permanent replacement in June of 2016 , ii) higher 2016 audit fees, and iii) other one-time professional fees incurred in the first half of 2016.2022.


Other general and administrative expenses

Other general and administrative decreased from approximately $1.2 million for the nine months ended September 30, 2016 to approximately $1.0 million for the nine month ended September 30, 2017. The decrease was mainly attributable to a reduction in the cost of our D&O insurance policy and an adjustment to excise tax based on the filing our 2016 federal tax return.

Book Value Per Share
As of September 30, 2017 and December 31, 2016, our book value per common share was $10.88 and $10.27, respectively.

Non-GAAP Financial Measures

Total interest income including interest income on Agency and Non-Agency Interest-Only Strips classified as derivatives and Effective Cost of Funds (as defined below) for the three and nine months ended September 30, 2017 and September 30, 2016, constitute a Non-GAAP financial measures within the meaning of Regulation G promulgated by the SEC.  We believe that theour non-GAAP measures presented in this Quarterly Report on Form 10-Q,(described below), when considered together with U.S. GAAP, financial measures, provide supplemental information that is useful to investors in understandingevaluating the results of our borrowing costs andoperations. Our presentations of such non-GAAP measures may not be comparable to similarly-titled measures of other companies, who may use different calculations. As a result, such non-GAAP measures should not be considered as substitutes for our GAAP net interest income, as viewed by us.  An analysis of any Non-GAAP financial measure should be made in conjunction with results presented in accordance with GAAP.


For purposes of evaluating operating results, we believe it is useful to present investors with additional information pertaining to the net interest margin generated by our portfolio.  Net interest margin is gross interest income, adjusted for amortization/accretion of investment premium/discount, less interest expense or financing cost.  GAAP requires that certainmeasures of our Agency and Non-Agency Interest Only Strips be treated as derivatives and, accordingly, the interest income associated with these securities be included with "Gain (loss) on derivative instruments, net" in our Consolidated Statements of Operations. Accordingly, in order to determine the gross interest income generated by our IO and IIO securities which are classified as derivatives, we calculate the interest income on these securities as if they were not derivatives.  In addition, we include the net interest income on foreign currency swaps and total return swaps in Non-GAAP total interest income.
The following table sets forth certain information regarding our net investment income for the three and nine months ended September 30, 2017 and September 30, 2016 (dollars in thousands): 
Period Ended 
Average Amortized Cost of Assets(1)
 
Total
Interest
Income(2)
 
Yield on
Average
Assets(1)
 
Average
Balance of
Borrowings
 
Total Interest Expense(3)
 
Average
Effective
Cost of
Funds
 Net Interest Income 
Net
Interest
Margin
Three months ended September 30, 2017  
  
  
  
  
  
  
  
Agency RMBS $865,145
 $6,156
 2.82% $836,749
 $2,823
 1.34% $3,333
 1.53 %
Agency CMBS 1,485,287
 11,246
 3.00% 1,429,116
 4,938
 1.37% 6,308
 1.68 %
Non-Agency RMBS 58,919
 943
 6.35% 48,681
 349
 2.84% 594
 4.00 %
Non-Agency CMBS 293,959
 6,381
 8.61% 196,467
 1,472
 2.97% 4,909
 6.63 %
Residential Whole-Loans 196,001
 2,002
 4.05% 159,247
 1,412
 3.52% 590
 1.19 %
Residential Bridge Loans 61,953
 1,331
 8.52% 53,310
 576
 4.29% 755
 4.83 %
Securitized commercial loan 24,974
 575
 9.13% 17,803
 306
 6.82% 269
 4.27 %
Other Securities 124,657
 2,624
 8.35% 55,689
 487
 3.47% 2,137
 6.80 %
Total return swaps 2,884
 95
 13.07% n/a
 n/a
 n/a
 95
 13.07 %
Interest rate swaps n/a
 n/a
 n/a
 n/a
 1,672
 0.24% (1,672) (0.21)%
Total $3,113,779
 $31,353
 4.00% $2,797,062
 $14,035
 1.99% $17,318
 2.21 %
                 
Three months ended September 30, 2016  
  
  
  
  
  
  
  
Agency RMBS $1,754,014
 $10,721
 2.43% $1,602,770
 $3,042
 0.76% $7,679
 1.74 %
Agency CMBS 19,427
 252
 5.16% 14,895
 64
 1.71% 188
 3.85 %
Non-Agency RMBS 365,447
 7,548
 8.22% 275,900
 1,569
 2.26% 5,979
 6.51 %
Non-Agency CMBS 401,588
 8,036
 7.96% 270,633
 1,562
 2.30% 6,474
 6.41 %
Residential Whole-Loans 180,641
 1,562
 3.44% 158,315
 976
 2.45% 586
 1.29 %
Commercial Whole-Loans 25,000
 575
 9.15% 18,011
 303
 6.69% 272
 4.33 %
Other Securities 48,842
 1,197
 9.75% 25,171
 169
 2.67% 1,028
 8.37 %
Total return swaps 9,719
 308
 12.61% n/a
 n/a
 n/a
 308
 12.61 %
Interest rate swaps n/a
 n/a
 n/a
 n/a
 6,736
 1.14% (6,736) (0.96)%
Total $2,804,678
 30,199
 4.28% $2,365,695
 $14,421
 2.43% $15,778
 2.24 %

Period Ended 
Average Amortized Cost of Assets(1)
 
Total
Interest
Income(2)
 
Yield on
Average
Assets(1)
 
Average
Balance of
Borrowings
 
Total Interest Expense(3)
 
Average
Effective
Cost of
Funds
 Net Interest Income 
Net
Interest
Margin
Nine months ended September 30, 2017  
  
  
  
  
  
  
  
Agency RMBS $974,051
 $20,801
 2.86% $934,923
 $8,037
 1.15% $12,764
 1.75 %
Agency CMBS 1,115,406
 25,310
 3.03% 1,049,598
 9,664
 1.23% 15,646
 1.88 %
Non-Agency RMBS 91,445
 4,824
 7.05% 71,994
 1,447
 2.69% 3,377
 4.94 %
Non-Agency CMBS 334,504
 21,247
 8.49% 223,040
 4,675
 2.80% 16,572
 6.62 %
Residential Whole-Loans 206,957
 6,336
 4.09% 168,024
 4,219
 3.36% 2,117
 1.37 %
Residential Bridge Loans 44,840
 2,951
 8.80% 37,952
 1,248
 4.40% 1,703
 5.08 %
Securitized commercial loan 24,991
 1,706
 9.13% 17,801
 912
 6.85% 794
 4.25 %
Other Securities 118,534
 7,412
 8.36% 51,908
 1,305
 3.36% 6,107
 6.89 %
Total return swaps 4,718
 469
 13.29% n/a
 n/a
 n/a
 469
 13.29 %
Interest rate swaps n/a
 n/a
 n/a
 n/a
 12,284
 0.64% (12,284) (0.56)%
Total $2,915,446
 $91,056
 4.18% $2,555,240
 $43,791
 2.29% $47,265
 2.17 %
                 
Nine months ended September 30, 2016  
  
  
  
  
  
  
  
Agency RMBS $1,667,560
 $29,979
 2.40% $1,558,747
 $8,782
 0.75% $21,197
 1.70 %
Agency CMBS 28,042
 1,122
 5.34% 21,453
 293
 1.82% 829
 3.95 %
Non-Agency RMBS 415,254
 23,383
 7.52% 302,219
 4,942
 2.18% 18,441
 5.93 %
Non-Agency CMBS 423,670
 25,051
 7.90% 291,178
 4,731
 2.17% 20,320
 6.41 %
Residential Whole-Loans 193,594
 5,254
 3.63% 162,455
 3,046
 2.50% 2,208
 1.52 %
Commercial Whole-Loans 25,000
 1,713
 9.15% 17,915
 900
 6.71% 813
 4.34 %
Other Securities 66,954
 3,941
 7.86% 35,354
 697
 2.63% 3,244
 6.47 %
Total return swaps 8,726
 836
 12.80% n/a
 n/a
 n/a
 836
 12.80 %
Interest rate swaps n/a
 n/a
 n/a
 n/a
 21,907
 1.22% (21,907) (1.03)%
Total $2,828,800
 91,279
 4.31% $2,389,321
 $45,298
 2.53% $45,981
 2.17 %
(1)Includes Agency and Non-Agency Interest-Only Strips accounted for as derivatives.
(2)Refer to below table for components of interest income.
(3)Includes the net amount paid, including accrued amounts and premium amortization for MAC interest rate swaps during the periods included in loss on derivative instruments for GAAP.

The following table reconciles total interest income to adjusted interest income, which includes interest income on Agency and Non-Agency Interest-Only Strips classified as derivatives (Non-GAAP financial measure) for the three and nine months ended September 30, 2017 and September 30, 2016:

(dollars in thousands) Three months ended September 30, 2017 Three months ended September 30, 2016 Nine months ended September 30, 2017 Nine months ended September 30, 2016
Coupon interest income:        
Agency RMBS $8,886
 $16,525
 $30,513
 $50,693
Agency CMBS 11,071
 677
 24,408
 2,194
Non-Agency RMBS 571
 8,575
 4,482
 27,098
Non-Agency CMBS 4,242
 6,021
 14,675
 19,270
Residential Whole-Loans 2,268
 2,107
 7,145
 6,890
Residential Bridge Loans 1,450
 —
 3,179
 —
Securitized commercial loan 575
 575
 1,706
 1,713
Other Securities 2,160
 464
 5,300
 1,656
Subtotal coupon interest 31,223
 34,944
 91,408
 109,514
Premium accretion, discount amortization and amortization of basis, net:        
Agency RMBS (2,995) (6,255) (10,662) (22,220)
Agency CMBS 110
 (505) 717
 (1,358)
Non-Agency RMBS 372
 (1,172) 303
 (4,106)
Non-Agency CMBS 2,139
 1,954
 6,572
 5,513
Residential Whole-Loans (266) (544) (809) (1,635)
Residential Bridge Loans (119) —
 (228) —
Securitized commercial loan —
 —
 —
 —
Other Securities 464
 732
 2,112
 2,284
Subtotal accretion and amortization (295) (5,790) (1,995) (21,522)
Interest income $30,928
 $29,154
 $89,413
 $87,992
Contractual interest income, net of amortization of basis on Agency and Non-Agency Interest-Only Strips, classified as derivatives(1):
  
  
    
Coupon interest income $1,816
 $3,503
 $6,229
 $11,113
Amortization of basis (Non-GAAP Financial Measure) (1,486) (2,827) (5,055) (8,930)
Contractual interest income, net on Foreign currency swaps(1)
 —
 61
 —
 268
Total return swaps 95
 308
 469
 836
Subtotal 425
 1,045
 1,643
 3,287
Total adjusted interest income $31,353
 $30,199
 $91,056
 $91,279
(1)Reported in "Gain (loss) on derivative instruments, net" in our Consolidated Statements of Operations.
Effective Cost of Funds includes the net interest component related to our interest rate.  While we have not elected hedge accounting for these instruments, such derivative instruments are viewed by us as an economic hedge against increases in future market interest rates on our liabilities and are characterized as hedges for purposes of satisfying the REIT requirements and therefore the Effective Cost of Funds reflects interest expense adjusted to include the realized loss (i.e., the interest expense component) for allperformance or any measure of our interest rate swaps.liquidity under GAAP.


The following table reconciles the Effective Cost of Funds (Non-GAAP financial measure) with interest expense for the three and nine months ended September 30, 2017 and September 30, 2016:
  Three months ended September 30, 2017 Three months ended September 30, 2016 Nine months ended September 30, 2017 Nine months ended September 30, 2016
(dollars in thousands) Reconciliation 
Cost of Funds/
Effective Borrowing Costs
 Reconciliation 
Cost of Funds/
Effective Borrowing Costs
 Reconciliation 
Cost of Funds/
Effective Borrowing Costs
 Reconciliation 
Cost of Funds/
Effective Borrowing Costs
Interest expense $12,363
 1.75% $7,685
 1.29% $31,507
 1.65% $23,391
 1.31%
Net interest paid - interest rate swaps 1,672
 0.24% 6,736
 1.14% 12,284
 0.64% 21,907
 1.22%
Effective Borrowing Costs $14,035
 1.99% $14,421
 2.43% $43,791
 2.29% $45,298
 2.53%
Weighted average borrowings $2,797,062
  
 $2,365,695
  
 $2,555,240
  
 $2,389,321
  
CoreDistributable Earnings

Distributable Earnings (formerly referred to as Core EarningsEarnings) is a Non-GAAPnon-GAAP financial measure that is used by us to approximate cash yield or income associated with our portfolio and is defined as GAAP net income (loss) as adjusted, excluding: (i) net realized gain (loss) on investments and termination of derivative contracts; (ii) net unrealized gain (loss) on investments;investments and debt; (iii) net unrealized gain (loss) resulting from mark-to-market adjustments on derivative contracts; (iv) other than temporary impairment; (v) provision for income taxes; (vi)(v) non-cash stock-based compensation expense; (vi) non-cash amortization of the convertible senior unsecured notes discount; (vii) one-time charges such as acquisition costs and (vii)impairment on loans; and (viii) one-time events pursuant to changes in GAAP and certain other non-cash charges after discussions between us, our Manager and our independent directors and after approval by a majority of the our independent directors.


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We utilize CoreDistributable Earnings as a key metric to evaluate the effective yield of the portfolio. CoreDistributable Earnings allows us to reflect the net investment income of our portfolio as adjusted to reflect the net interest rate swap interest expense.  CoreDistributable Earnings allows us to isolate the interest expense associated with our interest rate swaps in order to monitor and project our borrowing costs and interest rate spread.
We believe that It is one metric of several used in determining the Non-GAAP measure, when considered with GAAP, provides supplemental information usefulappropriate distributions to investors in evaluating the results of our operations. Our presentation of Core Earnings may not be comparable to similarly-titled measures of other companies, who may use different calculations.  As a result, Core Earnings should not be considered as a substitute for our GAAP net income, as a measure of our financial performance or any measure of our liquidity under GAAP.shareholders.
   
The table below reconciles Net Income (Loss) to CoreDistributable Earnings for the three and ninesix months ended SeptemberJune 30, 20172023 and SeptemberJune 30, 2016:2022:

(dollars in thousands)Three months ended June 30, 2023Three months ended June 30, 2022Six months ended June 30, 2023Six months ended June 30, 2022
Net income (loss) attributable to common stockholders and participating securities$(8,633)$(22,387)$(2,066)$(48,240)
Income tax provision (benefit)(12)(46)— 10 
Net income (loss) before income taxes(8,645)(22,433)(2,066)(48,230)
Adjustments:
Investments:
Net unrealized (gain) loss on investments and securitized debt6,854 (16,185)(83,462)22,718 
Net realized loss on investments1,099 45,582 83,917 36,869 
One-time transaction costs1,987 336 2,627 3,076 
Derivative Instruments:
Net realized (gain) loss on derivatives(184)(6,513)2,000 (12,053)
Net unrealized (gain) on derivatives(54)1,498 (57)(157)
Other:
Realized loss on extinguishment of convertible senior unsecured notes— 79 — 132 
Amortization of discount on convertible senior unsecured notes171 216 343 439 
Non-cash stock-based compensation expense100 70 200 235 
Total adjustments9,973 25,083 5,568 51,259 
Distributable Earnings$1,328 $2,650 $3,502 $3,029 


72
(dollars in thousands) Three months ended September 30, 2017 Three months ended September 30, 2016 Nine months ended September 30, 2017 Nine months ended September 30, 2016
Net Income $22,767
 $32,282
 $63,693
 $13,281
Income tax provision (benefit) (1,155) 2,239
 1,272
 2,239
Income before income taxes 21,612
 34,521
 64,965
 15,520
         
Adjustments:      
  
Investments:      
  
Unrealized (gain) loss on investments and securitized debt (5,249) (15,292) (35,126) (47,571)
Other than temporary impairment 7,225
 4,978
 19,901
 22,131
Realized (gain) loss on sale of investments (1,830) (1,439) (20,600) 4,968
Realized (gain) loss on foreign currency transactions (1) 149
 1
 266
Unrealized (gain) loss on foreign currency transactions —
 195
 —
 639
         
Derivative Instruments:      
  
Net realized (gain) loss on derivatives (9,062) 14,242
 165,649
 (11,479)
Net unrealized (gain) loss on derivatives 598
 (26,054) (160,255) 46,073
         
Non-cash stock-based compensation expense 218
 433
 795
 1,351
Total adjustments (8,101) (22,788) (29,635) 16,378
Core Earnings $13,511
 $11,733
 $35,330
 $31,898
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Alternatively, our CoreDistributable Earnings can also be derived as presented in the table below by starting with Adjustedadjusted net interest income, which includes interest income on Interest-Only Strips accounted for as derivatives and other derivatives, and net interest expense incurred on interest rate swaps and foreign currency swaps and forwards (a Non-GAAP financial measure), subtracting Operating Expenses,Total expenses, adding Non-cash stock based compensation, adding one-time transaction costs, adding amortization of discount on convertible senior notes and adding Interestinterest income on cash balances and other income (loss), net:
(dollars in thousands)Three months ended June 30, 2023Three months ended June 30, 2022Six months ended June 30, 2023Six months ended June 30, 2022
Net interest income$4,010 $6,235 $8,365 $10,518 
Interest income from IOs and IIOs accounted for as derivatives10 12 21 29 
Net interest income (expense) from interest rate swaps766 (262)1,986 (553)
Adjusted net interest income4,786 5,985 10,372 9,994 
Total expenses(5,899)(3,927)(10,279)(10,424)
Non-cash stock-based compensation100 70 200 235 
One-time transaction costs1,987 336 2,627 3,076 
Amortization of discount on convertible unsecured senior notes171 216 343 439 
Interest income on cash balances and other income (loss), net186 (30)243 (160)
Income attributable to non-controlling interest(3)— (4)(131)
Distributable Earnings$1,328 $2,650 $3,502 $3,029 

Reconciliation of GAAP Book Value to Non-GAAP Economic Book Value

"Economic book value" is a non-GAAP financial measure of our financial position on an unconsolidated basis. We own certain securities that represent a controlling variable interest, which under GAAP requires consolidation; however, our economic exposure to these variable interests is limited to the fair value of the individual investments. Economic book value is calculated by taking the GAAP book value and 1) adding the fair value of the retained interest or acquired security of the VIEs held by us and 2) removing the asset and liabilities associated with each of consolidated trusts (CSMC USA, Arroyo 2019-2, Arroyo 2020-1, Arroyo 2022-1, and Arroyo 2022-2). Management believes that Economic book value provides investors with a useful supplemental measure to evaluate our financial position as it reflects the actual financial interest of these investments irrespective of the variable interest consolidation model applied for GAAP reporting purposes. Economic book value does not represent and should not be considered as a substitute for Stockholders' Equity, as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies.

The table below is a reconciliation of the GAAP Book Value to Non-GAAP Economic Book Value (dollars in thousands - except per share data):
$ AmountPer Share
GAAP Book Value at June 30, 2023$88,713 $14.69 
Adjustments to deconsolidate VIEs and reflect the Company's interest in the securities owned
Deconsolidation of VIEs assets(2,075,179)(343.68)
Deconsolidation of VIEs liabilities1,952,893 323.43 
Interest in securities of VIEs owned, at fair value145,554 24.11 
Economic Book Value at June 30, 2023$111,981 $18.54 

Adjusted Net Investment Income and Net Interest Margin

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(dollars in thousands) Three months ended September 30, 2017 Three months ended September 30, 2016 Nine months ended September 30, 2017 Nine months ended September 30, 2016
Adjusted net interest income $17,318
 $15,778
 $47,265
 $45,981
Total Expenses (4,240) (4,762) (13,572) (16,181)
Non-cash stock based compensation 218
 433
 795
 1,351
Interest income on cash balances and other income (loss), net 215
 284
 842
 747
Core Earnings $13,511
 $11,733
 $35,330
 $31,898
Adjusted net investment income is a non-GAAP financial measure that is an adjustment to net income which excludes the net interest income for third-party consolidated VIEs, and includes premium amortization for interest rate swaps included in gain/loss on derivative instruments. Adjusted net investment income is used as an input when calculating net interest margin in the below tables and gives investors another view of portfolio performance. Adjusted net investment income may not be comparable to similar measures presented by other companies, as it is a non-GAAP financial measure that is not based on a comprehensive set of accounting rules or principles and therefore may be defined differently by other companies. Adjusted net investment income should be considered in addition to, not as a substitute for, or superior to, financial measures determined in accordance with GAAP.


Net interest margin is a non-GAAP financial measure calculated by dividing annualized adjusted net investment income for the period by adjusted total investments for the period. Net interest margin provides investors visibility into the Company’s profitability of interest income versus interest expense after excluding consolidating VIEs and adding the net effect of our interest rate swaps and derivatives. However, since net interest margin is an adjusted measure derived from net investment income (non-GAAP), and differs from net income (loss) as computed in accordance with GAAP, which may not be comparable to similar measures provided by other companies, it should be considered as supplementary to, and not as a substitute for, net income margin computed by net income (loss) in accordance with GAAP.

The following tables set forth certain information regarding our non-GAAP adjusted net investment income and net interest margin which includes interest income on Agency and Non-Agency Interest-Only Strips classified as derivatives and excludes the interest expense for third-party consolidated VIEs for the three and six months ended June 30, 2023 and June 30, 2022 (dollars in thousands):

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Three Months Ended June 30, 2023
Average Amortized
Cost of Assets(1)
Total Interest Income(2)
Yield on Average Assets
Investments
Agency RMBS$926 $13 5.63 %
Non-Agency CMBS86,391 1,959 9.10 %
Non-Agency RMBS30,354 425 5.62 %
Residential Whole Loans1,152,246 12,995 4.52 %
Residential Bridge Loans3,091 — — %
Commercial Loans80,357 1,832 9.14 %
Securitized Commercial Loan1,308,695 22,451 6.88 %
Other securities21,894 557 10.20 %
Total investments2,683,954 40,232 6.01 %
Adjustments:
Securitized Commercial Loan from consolidated VIE(1,308,695)(22,451)6.88 %
Investments in consolidated VIE eliminated in consolidation14,255 223 6.27 %
Adjusted total investments$1,389,514 $18,004 5.20 %
Average Carrying ValueTotal Interest ExpenseAverage Effective Cost of Funds
Borrowings   
Repurchase agreements$140,422 $2,923 8.35 %
Convertible senior unsecured notes, net84,204 1,865 8.88 %
Securitized debt2,278,207 31,424 5.53 %
Interest rate swapsn/a(766)(0.12)%
Total borrowings2,502,833 35,446 5.68 %
Adjustments:
Securitized debt from consolidated VIE(3)
(1,289,449)(21,601)6.72 %
Adjusted total borrowings$1,213,384 $13,845 4.58 %
Adjusted net investment income and net interest margin$4,159 1.20 %
(1)Includes Agency and Non-Agency Interest-Only Strips accounted for as derivatives.
(2)Refer to below table for components of interest income.
(3)Includes only the third-party sponsored securitized debt from CSMC USA.

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Three Months Ended June 30, 2022
Average Amortized
Cost of Assets(1)
Total Interest Income(2)
Yield on Average Assets
Investments
Agency RMBS$946 $15 6.36 %
Non-Agency CMBS151,288 2,530 6.71 %
Non-Agency RMBS54,816 661 4.84 %
Residential whole loans1,199,076 12,082 4.04 %
Residential bridge loans5,682 16 1.13 %
Commercial Loans192,154 1,260 2.63 %
Securitized Commercial Loan1,281,594 21,986 6.88 %
Other securities45,467 1,039 9.17 %
Total investments2,931,023 39,589 5.42 %
Adjustments:
Securitized Commercial Loan from consolidated VIE(1,281,594)(21,986)6.88 %
Investments in consolidated VIE eliminated in consolidation14,022 220 6.29 %
Adjusted total investments$1,663,451 $17,823 4.30 %
Average Carrying ValueTotal Interest ExpenseAverage Effective Cost of Funds
Borrowings   
Repurchase agreements$506,601 $3,659 2.90 %
Convertible senior unsecured notes, net115,785 2,500 8.66 %
Securitized debt2,047,853 27,183 5.32 %
Interest rate swapsn/a262 0.04 %
Total borrowings2,670,239 33,604 5.05 %
Adjustments:
Securitized debt from consolidated VIE(3)
(1,264,922)(20,979)6.65 %
Adjusted total borrowings$1,405,317 $12,625 3.60 %
Adjusted net investment income and net interest margin$5,198 1.25 %


(1)Includes Agency and Non-Agency Interest-Only Strips accounted for as derivatives.
(2)Refer to below table for components of interest income.
(3)Includes only the third-party sponsored securitized debt from CSMC USA.

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Six months ended June 30, 2023
Average Amortized
Cost of Assets(1)
Total Interest Income(2)
Yield on Average Assets
Investments
Agency RMBS$921 $27 5.91 %
Non-Agency CMBS91,184 4,232 9.36 %
Non-Agency RMBS30,560 859 5.67 %
Residential whole loans1,166,672 26,293 4.54 %
Residential bridge loans3,104 24 1.56 %
Commercial Loans80,422 3,589 9.00 %
Securitized Commercial Loan1,301,539 44,781 6.94 %
Other securities26,252 1,295 9.95 %
Total investments2,700,654 81,100 6.06 %
Adjustments:
Securitized Commercial Loan from consolidated VIE(1,301,539)(44,781)6.94 %
Investments in consolidated VIE eliminated in consolidation14,196 446 6.34 %
Adjusted total investments$1,413,311 $36,765 5.25 %
Average Carrying ValueTotal Interest ExpenseAverage Effective Cost of Funds
Borrowings   
Repurchase agreements$171,109 $6,055 7.14 %
Convertible senior unsecured notes, net84,000 3,730 8.95 %
Securitized debt2,288,810 62,929 5.54 %
Interest rate swapsn/a(1,986)(0.16)%
Total borrowings2,543,919 70,728 5.61 %
Adjustments:
Securitized debt from consolidated VIE(3)
(1,286,225)(43,037)6.75 %
Adjusted total borrowings$1,257,694 $27,691 4.44 %
Adjusted net investment income and net interest margin$9,074 1.29 %

(1)Includes Agency and Non-Agency Interest-Only Strips accounted for as derivatives.
(2)Refer to below table for components of interest income.
(3)Includes only the third-party sponsored securitized debt from CSMC USA.

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Six months ended June 30, 2022
Average Amortized
Cost of Assets(1)
Total Interest Income(2)
Yield on Average Assets
Investments
Agency RMBS$1,022 $36 7.10 %
Non-Agency CMBS158,860 5,100 6.47 %
Non-Agency RMBS47,664 1,191 5.04 %
Residential whole loans1,126,074 20,828 3.73 %
Residential bridge loans5,740 36 1.26 %
Commercial Loans192,155 2,506 2.63 %
Securitized Commercial Loan1,274,895 43,858 6.94 %
Other securities46,665 1,693 7.32 %
Total investments2,853,075 75,248 5.32 %
Adjustments:
Securitized Commercial Loan from consolidated VIE(1,274,895)(43,858)6.94 %
Investments in consolidated VIE eliminated in consolidation13,966 439 6.34 %
Adjusted total investments$1,592,146 $31,829 4.03 %
Average Carrying ValueTotal Interest ExpenseAverage Effective Cost of Funds
Borrowings   
Repurchase agreements$472,721 $6,101 2.60 %
Convertible senior unsecured notes, net117,046 5,097 8.78 %
Securitized debt2,019,682 53,503 5.34 %
Interest rate swaps— 553 0.04 %
Total borrowings2,609,449 65,254 5.04 %
Adjustments:
Securitized debt from consolidated VIE(3)
(1,262,035)(41,808)6.68 %
Adjusted total borrowings$1,347,414 $23,446 3.51 %
Adjusted net investment income and net interest margin$8,383 1.06 %
(1)Includes Agency and Non-Agency Interest-Only Strips accounted for as derivatives.
(2)Refer to below table for components of interest income.
(3)Includes only the third-party sponsored securitized debt from CSMC USA.


The following table reconciles total interest income to adjusted interest income, which includes interest income on Agency and Non-Agency Interest-Only Strips classified as derivatives (Non-GAAP financial measure) for the three and six months ended June 30, 2023 and June 30, 2022:
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(dollars in thousands)Three months ended June 30, 2023Three months ended June 30, 2022Six months ended June 30, 2023Six months ended June 30, 2022
Coupon interest income:
Agency RMBS$— $5 $— $13 
Non-Agency CMBS1,621 2,129 3,577 5,101 
Non-Agency RMBS615 813 1,204 1,358 
Residential Whole Loans13,731 13,860 27,750 25,143 
Residential Bridge Loans— 16 24 36 
Commercial Loans1,820 1,260 3,523 2,506 
Securitized Commercial Loan15,340 15,340 30,513 30,513 
Other securities656 767 1,496 1,655 
Subtotal coupon interest33,783 34,190 68,087 66,325 
Premium accretion, discount amortization and amortization of basis, net:
Agency RMBS3 (2)6 (6)
Non-Agency CMBS338 401 655 (1)
Non-Agency RMBS(190)(152)(345)(167)
Residential Whole Loans(736)(1,778)(1,457)(4,315)
Residential Bridge Loans— — — — 
Commercial Loans12 — 66 — 
Securitized Commercial Loan7,111 6,646 14,268 13,345 
Other securities(99)272 (201)38 
Subtotal accretion and amortization6,439 5,387 12,992 8,894 
Interest income$40,222 $39,577 $81,079 $75,219 
Contractual interest income, net of amortization of basis on Agency and Non-Agency Interest-Only Strips, classified as derivatives(1):
  
Coupon interest income$14 $55 $23 $144 
Amortization of basis(4)(43)(2)(115)
Subtotal10 12 21 29 
Total adjusted interest income$40,232 $39,589 $81,100 $75,248 

(1)Reported in "Gain on derivative instruments, net" in our Consolidated Statements of Operations.
Effective Cost of Funds

Effective Cost of Funds includes the net interest component related to our interest rate swaps, as well as the impact of our foreign currency swaps and forwards. While we have not elected hedge accounting for these instruments, such derivative instruments are viewed by us as an economic hedge against increases in future market interest rates on our liabilities and changes in foreign currency exchange rates on our assets and liabilities and are characterized as hedges for purposes of satisfying the REIT requirements and therefore the Effective Cost of Funds reflects interest expense adjusted to include the realized gain/loss (i.e., the interest income/expense component) for all of our interest rate swaps and the impact of our foreign currency swaps and forwards.
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The following table reconciles the Effective Cost of Funds (Non-GAAP financial measure) with interest expense for the three and six months ended June 30, 2023 and June 30, 2022:

 Three months ended June 30, 2023Three months ended June 30, 2022Six months ended June 30, 2023Six months ended June 30, 2022
(dollars in thousands)ReconciliationCost of Funds/
Effective Borrowing Costs		ReconciliationCost of Funds/
Effective Borrowing Costs		ReconciliationCost of Funds/
Effective Borrowing Costs		ReconciliationCost of Funds/
Effective Borrowing Costs
Interest expense$36,212 5.80 %$33,342 5.01 %$72,714 5.76 %$64,701 5.00 %
Adjustments:
Interest expense on Securitized debt from consolidated VIE(21,601)(6.72)%(20,979)(6.65)%(43,037)(6.75)%(41,808)(6.68)%
Net interest (received) paid - interest rate swaps(766)(0.12)%262 0.04 %(1,986)(0.16)%553 0.04 %
Effective Cost of Funds$13,845 4.58 %$12,625 3.60 %$27,691 4.44 %$23,446 3.51 %
Weighted average borrowings$1,213,384  $1,405,317  $1,257,694 $1,347,414 


Liquidity and Capital Resources
 
General
 
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders, and other general business needs.  To maintain our REIT qualifications under the Internal Revenue Code, we must distribute annually at least 90% of our taxable income, excluding capital gains and, such distributions requirements limit our ability to retain earnings and increase capital for operations. We believe that our significant capital resources and access to financing will provide us with financial flexibility at levels sufficient to meet current and anticipated capital requirements, including funding new investment opportunities, paying distributions to our stockholders and servicing our debt obligations.

Our liquidity and capital resources are managed on a daily basis to ensure that we have sufficient liquidity to absorb market events that could negatively impact collateral valuations and result in margin calls as well as to ensure that we have the flexibility to manage our investment portfolio to take advantage of market opportunities. Our principal sources of cashfunds generally consist of borrowings under repurchase agreements, Residential Whole Loan securitizations, payments of principal and interest we receive on our investment portfolio, and cash generated from operations.investment sales, and to the extent such transactions are entered into, proceeds from capital market and unsecured convertible note transactions.

Under our repurchase agreements and derivative contracts, counterparties retain the right to determine the fair value of the collateral pledged, or in the case of cleared swaps the required collateral may be determined by clearinghouse rules.  A reduction in the value of the collateral pledged will require us to provide additional collateral or fund cash margin calls.  Alternatively, since margins calls for our interest rate swaps and swaptions generally are inversely correlated to those of our repurchase agreements, our interest rate swap and swaptions counterparties would likely be required to post collateral with us during a period in which we were required to post collateral with our repurchase agreement counterparties.  Similarly, we would likely be required to post collateral with swap and swaption counterparties during periods in which our repurchase agreement counterparties are required to post collateral with us.  In an instance of severe volatility, or where the additional stress on liquidity resulting from volatility is sustained over an extended period of time, we could be required to sell securities, possibly even at a loss to generate sufficient liquidity to satisfy collateral and margin requirements which could have a material adverse effect on our financial position, results of operations and cash flows.
As part of our risk management process, our Manager closely monitors our liquidity position. This includes the development and evaluation of various alternative processes and procedures, which continue to be updated with regard to scenario testing for purposes of assessing our liquidity in the face of different economic and market developments.  We believe we have sufficient current liquidity and access to additional liquidity to meet financial obligationscapital resources available, for at least the next 12 months.months, to fund our operations, meet our financial obligations, purchase our target assets, and make dividend payments to maintain our REIT qualifications. As of June 30, 2023, we had $17.4 million in cash and cash equivalents. Our other sources of liquidity include unencumbered investments and unused borrowing capacity in certain borrowing facilities since the amount borrowed is less than the maximum advance rate.
At September 30, 2017, ourSources of Liquidity
Our primary sources of cash consisted of borrowings under our repurchase agreements, principal repayments and net interest margin generated from our investment portfolio.

Borrowings Under Various Financing Arrangements
As of September 30, 2017, we had master repurchase agreements with 27 counterparties.  We had borrowings under repurchase agreements with 17 counterparties of approximately $3.3 billion at September 30, 2017.  The following tables present our repurchase agreement borrowings by type of collateral pledged, as of September 30, 2017 and September 30, 2016, and the respective effective cost of funds (Non-GAAP financial measure) for the three and nine months ended September 30, 2017 and September 30, 2016, respectively.  See “Non-GAAP Financial Measures” (dollars in thousands):
 September 30, 2017 Three months ended September 30, 2017 Nine months ended September 30, 2017  
Collateral
Borrowings
Outstanding
 
Value of
Collateral
Pledged (1)
 
Weighted
Average
Interest Rate
end of period
 
Weighted
Average Cost
of Funds
 
Weighted Average Effective Cost of Funds 
(Non-GAAP)(2)
 
Weighted
Average Cost
of Funds
 
Weighted Average Effective Cost of Funds
(Non-GAAP)(2)
 
Weighted
Average
Haircut
end of period
Agency RMBS, at fair value$792,520
 $823,403
 1.39% 1.34% 1.34% 1.15% 1.15% 4.79%
Agency CMBS, at fair value2,019,010
 2,109,202
 1.39% 1.37% 1.37% 1.23% 1.23% 5.06%
Non-Agency RMBS, at fair value48,443
 64,348
 2.85% 2.84% 2.84% 2.69% 2.69% 23.29%
Non-Agency CMBS, at fair value192,015
 278,095
 2.96% 2.97% 2.97% 2.80% 2.80% 30.38%
Residential Whole-Loans, at fair value(3)
156,751
 191,439
 3.48% 3.52% 3.52% 3.36% 3.36% 20.00%
Residential Bridge Loans(3)

51,074
 54,912
 4.29% 4.29% 4.29% 4.40% 4.40% 20.00%
Securitized commercial loan, at fair value(3)
6,809
 13,973
 3.09% 3.20% 3.20% 3.28% 3.28% 50.00%
Other securities, at fair value69,634
 122,651
 3.36% 3.47% 3.47% 3.36% 3.36% 39.68%
Interest rate swapsn/a
 n/a
 n/a
 n/a
 0.24% n/a
 0.64% n/a
Total$3,336,256
 $3,658,023
 1.69% 1.72% 2.00% 1.62% 2.30% 8.46%

(1)Excludes approximately $25.0 million of cash collateral posted.
(2)The effective cost of funds for the period presented is calculated on an annualized basis and includes interest expense for the period and net periodic interest payments on interest rate swaps, net of premium amortization on MAC swaps, of approximately $1.7 million and $12.3 million for the three and nine months ended September 30, 2017.  While interest rate swaps are not accounted for using hedge accounting, such instruments are viewed by us as an economic hedge against increases in interest rates on our liabilities and are treated as hedges for purposes of satisfying the REIT requirements.  See “Non-GAAP Financial Measures”.
(3)Repurchase agreement borrowings collateralized by Whole-Loans and securitized commercial loan owned through trust certificates.  The trust certificates are eliminated upon consolidation.

 September 30, 2016 Three months ended September 30, 2016 Nine months ended September 30, 2016  
Collateral
Borrowings
Outstanding
 
Fair Value of
Collateral
Pledged (1)
 
Weighted
Average
Interest Rate
end of period
 
Weighted
Average Cost
of Funds
 
Weighted
Average
Effective Cost of
Funds (Non-GAAP)(2)
 
Weighted
Average Cost
of Funds
 
Weighted
Average
Effective Cost of
Funds (Non-GAAP)(2)
 
Weighted
Average
Haircut
end of period
Agency RMBS$1,784,448
 $1,841,935
 0.75% 0.76% 0.76% 0.75% 0.75% 4.35%
Agency CMBS10,725
 13,737
 1.66% 1.71% 1.71% 1.82% 1.82% 24.28%
Non-Agency RMBS270,060
 395,064
 2.32% 2.26% 2.26% 2.18% 2.18% 28.95%
Non-Agency CMBS(3)
256,544
 358,481
 2.36% 2.30% 2.30% 2.17% 2.17% 27.20%
Residential Whole-Loans(4)
167,111
 204,882
 2.77% 2.45% 2.45% 2.50% 2.50% 20.00%
Securitized commercial loan(4)
6,790
 13,517
 3.05% 2.95% 2.95% 2.96% 2.96% 50.00%
Other securities27,858
 50,912
 3.05% 2.67% 2.67% 2.63% 2.63% 43.53%
Interest rate swapsn/a
 n/a
 n/a
 n/a
 1.14% n/a
 1.22% n/a
Total$2,523,536
 $2,878,528
 1.25% 1.26% 2.43% 1.27% 2.53% 10.98%
(1)Excludes approximately $30.5 million of cash collateral posted.
(2)The effective cost of funds for the period presented is calculated on an annualized basis and includes interest expense for the period and net periodic interest payments on interest rate swaps, net of premium amortization on MAC swaps, of approximately $6.7 million and $21.9 million for the three and nine months ended September 30, 2016, respectively.  While interest rate swaps are not accounted for using hedge accounting, such instruments are viewed by us as an economic hedge against increases in interest rates on our liabilities and are treated as hedges for purposes of satisfying the REIT requirements.  See “Non-GAAP Financial Measures”.
(3)Including Non U.S. CMBS pledged as collateral and Non U.S. repurchase agreement borrowings.
(4)Repurchase agreement borrowings collateralized by Whole-Loans and securitized commercial loan owned through trust certificates.  The trust certificates are eliminated upon consolidation.

As of September 30, 2017, our repurchase agreements require collateral in excess of the loan amount, or haircuts, ranging from a low of 3.0% to a high of 5.0% for Agency RMBS, exclusive of IOs and IIOs for which the haircutsliquidity are as high as 20.0% and Agency CMBS haircuts are 5.0%, exclusive of IOs and IIOs for which haircuts are as high as 25.0%. For Non-Agency RMBS haircuts range from a low of 20.0% to a high of 26.0% and Non-Agency CMBS haircuts range from a low of 15.0% to a high of 60.0%. Haircuts for Whole-Loans range from a low of 20.0% to a high of 50.0% and other securities range from a low of 22.5% to a high of 50.0%.  Declines in the value of our portfolio can trigger margin calls by our counterparties under our repurchase agreements.  Margin calls could adversely affect our liquidity. Our inability to post adequate collateral for a margin call by the counterparty could result in a condition of default under our repurchase agreements.  An event of default or termination event would give some of our counterparties the option to terminate all existing repurchase transactions with us and require any amount due to the counterparties by us to be payable immediately.  If this were to occur, we may be forced to sell assets under adverse market conditions or through foreclosure which may have a material adverse consequence on our business, financial position, our results of operations and cash flows.  During the nine months ended September 30, 2017, we were able to satisfy margin calls using cash on hand, unlevered or underleveraged securities, cash from rehypothecation of securities received as incremental collateral and cash from our repurchase agreement borrowings.follows:

Under the repurchase agreements, the respective counterparties, subject to the terms of the individual agreements, retain the right to determine the fair value of the underlying collateral.  A reduction in the value of pledged assets requires us to provide additional collateral or fund margin calls.  In addition, certain of the repurchase agreements may be terminated by our counterparties if we do not maintain certain equity and leverage metrics.  For our repurchase agreements with outstanding borrowings, we were in compliance with the terms of such financial tests as of September 30, 2017. 
We are also required to pledge cash or securities as collateral as part of a margin arrangement for our derivative contracts, calculated daily, subject either to the terms of individual agreements for bilateral agreements and the clearinghouse rules in the case of cleared swaps. The amount of margin that we are required to post will vary and generally reflects collateral posted with respect to swaps that are in an unrealized loss position to us and a percentage of the aggregate notional amount of swaps per counterparty as well as margin posted with our clearing broker, pursuant to clearinghouse rules and practices, for cleared swaps.  Conversely, if our bilateral swaps and swaptions are in an unrealized gain position, our counterparties are required to post collateral with us, under the same terms that we post collateral with them.  On occasion we may enter into a MAC interest rate swap in which we may receive or make a payment at the time of entering such interest rate swap to compensate for the out of the market nature of such interest rate swap.  Similar to all other interest rate swaps, these interest rate swaps are also subject to margin requirements.
Cash Generated from and used in Operations

For the ninesix months ended SeptemberJune 30, 2017,2023, net cash fromprovided by operating activities was approximately $15.6 million, this$630 thousand. This was primarily attributable to interest received on investments held by the Company as interest rates continued to rise. For the six months ended June 30, 2022, net cash provided by operating activities was approximately $8.5 million. This was primarily attributable to margin settlements of interest rate swaps and the net interest income we earned on our investments, less operating expenses, general and administrative expenses and margin settlements of interest rate swaps. For the nine months ended September 30, 2016, net cash used by operating activities was approximately $2.1 million, which was primarily attributable to the lower net interest income we earned on our investments coupled with higher operating expenses, general and administrative expenses.  The change period over period was mainly attributable to the settlement of interest rate swaps.

Cash Provided by and Used in Investing Activities
 
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For the ninesix months ended SeptemberJune 30, 2017,2023, net cash usedprovided by investing activities was approximately $1.2 billion. This was primarily attributable to our investment acquisitions, which was partially offset by proceeds from sales and receipts of principal payments on our investments. For the nine months ended September 30, 2016, our investing activities increased our cash balance by approximately $142.6$97.9 million. This was primarily attributable to our proceeds from sales and receiptthe maturity of a CMBS bond held by the REIT, plus principal payments made on our investments,outstanding loans and MBS securities, supplemented by cash received from the sales of the CRE 3 loan and Other Securities. For the six months ended June 30, 2022, net cash used in investing activities was approximately $179.3 million. This was primarily attributable to purchases of Non-Agency RMBS and Residential Whole Loans during the period, which was partially offset by receipts of principal payments and payoffs on our investment acquisitions.investments and the sale of an REO hotel.

Cash Provided by and Used in Financing Activities
 
For the ninesix months ended SeptemberJune 30, 2017,2023, net cash used in financing activities was approximately $99.4 million. This was primarily attributable to repayments on repurchase agreement borrowings, coupled with repayments on securitized debt. For the six months ended June 30, 2022, net cash provided by financing activities was approximately $1.1 billion.$146.5 million. This was primarily attributable to higher weighted average borrowings as a result of investment acquisitions and a decrease in cash collateral posted,the Arroyo Trust 2022-1 securitization, which was partially offset by dividends paida net decrease in repurchase agreement borrowings, paydowns in our securitized debt, and extinguishment of convertible senior unsecured notes.
Repurchase Agreements
As of June 30, 2023, we had borrowings under four of our master repurchase agreements of approximately $147.9 million. The following tables present our repurchase agreement borrowings by type of collateral pledged, as of June 30, 2023 and June 30, 2022, and the respective effective cost of funds (Non-GAAP financial measure) for the three and six months ended June 30, 2023 and June 30, 2022, respectively (dollars in thousands). See “Non-GAAP Financial Measures” for more information:

June 30, 2023Three months ended June 30, 2023Six months ended June 30, 2023
CollateralBorrowings
Outstanding		Value of
Collateral
Pledged		Weighted
Average
Interest Rate
end of period		Weighted
Average Cost
of Funds
Weighted
Average
Effective Cost of
Funds (Non-GAAP)(1)
Weighted
Average Cost
of Funds
Weighted
Average
Effective Cost of
Funds (Non-GAAP)(1)
Weighted
Average
Haircut
end of period
Agency RMBS, at fair value$274 $278 5.84 %5.79 %5.79 %5.72 %5.72 %25.00 %
Non-Agency CMBS, at fair value(2)
36,720 56,222 7.61 %7.27 %7.27 %6.77 %6.77 %37.03 %
Non-Agency RMBS, at fair value49,572 83,811 8.05 %8.01 %8.01 %6.96 %6.96 %52.81 %
Residential Whole Loans, at fair value(3)(4)
4,401 5,632 7.32 %7.02 %7.02 %6.19 %6.19 %43.00 %
Commercial Loans, at fair value(3)
48,032 66,059 7.32 %10.74 %10.74 %7.99 %7.99 %28.23 %
Other securities, at fair value8,861 15,375 7.94 %7.33 %7.33 %6.87 %6.87 %42.72 %
Interest rate swapsn/an/an/a— (2.19)%n/a(2.34)%n/a
Total$147,860 $227,377 7.67 %8.35 %6.16 %7.14 %4.80 %39.96 %

(1)The effective cost of funds for the period presented is calculated on an annualized basis and includes interest expense for the period and net periodic interest payments on interest rate swaps of approximately $766 thousand and $2.0 million received for the three and six months ended June 30, 2023. While interest rate swaps are not accounted for using hedge accounting, such instruments are viewed by us as an economic hedge against increases in interest rates on our common stock. Forliabilities and are treated as hedges for purposes of satisfying the nineREIT requirements. See “Non-GAAP Financial Measures.”
(2)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation.
(3)Repurchase agreement borrowings collateralized by Whole Loans, Bridge Loans, and Commercial Loans owned through trust certificates. The trust certificates are eliminated upon consolidation.
(4)Value of collateral pledged includes one REO property with a carrying value of $2.3 million at June 30, 2023.

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June 30, 2022Three months ended June 30, 2022Six months ended June 30, 2022
CollateralBorrowings
Outstanding
Fair Value of
Collateral
Pledged(3)
Weighted
Average
Interest Rate
end of period		Weighted
Average Cost
of Funds
Weighted
Average
Effective Cost of
Funds (Non-GAAP)(1)
Weighted
Average Cost
of Funds
Weighted Average Effective Cost of Funds
(Non-GAAP)(1)
Weighted
Average
Haircut
end of period
Agency RMBS, at fair value$329 $264 1.82 %2.37 %2.37 %1.36 %1.36 %25.00 %
Non-Agency CMBS, at fair value(2)
55,155 94,809 2.28 %2.25 %2.25 %1.97 %1.97 %40.00 %
Non-Agency RMBS, at fair value53,571 63,469 2.96 %2.73 %2.73 %2.63 %2.63 %39.16 %
Residential Whole Loans, at fair value(3)
345,660 402,870 3.61 %3.06 %3.06 %2.76 %2.76 %10.00 %
Residential Bridge Loans(3)
4,166 5,095 4.13 %3.30 %3.30 %2.98 %2.98 %20.00 %
Commercial Loans, at fair value(3)
70,121 101,487 2.83 %3.06 %3.06 %2.80 %2.80 %29.73 %
Other securities, at fair value26,074 40,534 2.43 %2.45 %2.45 %2.14 %2.14 %37.04 %
Interest rate swapsn/an/an/an/a0.21 %n/a0.24 %n/a
Total$555,076 $708,528 3.27 %2.90 %3.10 %2.60 %2.84 %19.66 %

(1)The effective cost of funds for the period presented is calculated on an annualized basis and includes interest expense for the period and net periodic interest payments on interest rate swaps of approximately $262 thousand and $553 thousand for the three and six months ended SeptemberJune 30, 2016, our financing activities decreased our cash balance2022. While interest rate swaps are not accounted for using hedge accounting, such instruments are viewed by approximately $134.3 million.  This was primarily attributable to a decreaseus as an economic hedge against increases in our net borrowings under repurchase agreements from investment sales and lower leverage from principal paymentsinterest rates on our investments .liabilities and are treated as hedges for the purposes of satisfying the REIT requirements. See "Non-GAAP Financial Measures."
(2)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation.
Other Potential Sources of Financing(3)Repurchase agreement borrowings collateralized by Whole Loans, Bridge Loans, and Commercial Loans owned through trust certificates. The trust certificates are eliminated upon consolidation.

We held cash of approximately $36.7 million and $31.0 million at September 30, 2017 and September 30, 2016, respectively.  Our primary sources of cash currently consist of repurchase facility borrowings, investment income, principal repayments on investments and the proceeds of any future securities offering, to the extent available in the capital markets.  In the future, we expect our primary sources of liquidity to consist of payments of principal and interest we receive on our portfolio assets, unused borrowing capacity under our financing sources and future issuances of equity and debt securities.


Contractual Obligations and Commitments
 
Our contractual obligations as of SeptemberJune 30, 20172023 are as follows (dollars in thousands):
 Less than 1
year		1 to 3
years		3 to 5
years		More than
5 years		Total
Borrowings under repurchase agreements$147,860 $— $— $— $147,860 
Contractual interest on repurchase agreements6,003 — — — 6,003 
Convertible senior unsecured notes— 86,250 — — 86,250 
Contractual interest on convertible senior unsecured notes5,822 2,911 — — 8,733 
Securitized debt(2)
— 1,370,692 — 986,781 2,357,473 
Contractual interest on securitized debt91,838 141,580 71,418 967,616 1,272,452 
Total$251,523 $1,601,433 $71,418 $1,954,397 $3,878,771 
 
Less than 1
year
 
1 to 3
years
 
3 to 5
years
 
More than
5 years
 Total
Borrowings under repurchase agreements$3,336,256
 —
 —
 —
 $3,336,256
Investment related payables296,317
 —
 —
 —
 296,317
Total: GAAP Basis - Excluding TBA - long positions3,632,573
 —
 —
 —
 3,632,573
TBA - long positions207,016
 —
 —
 —
 207,016
Total: Non-GAAP Basis$3,839,589
 —
 —
 —
 $3,839,589

(1)The table above does not include amounts due under the Management Agreement (as defined herein) with our Manager, as those obligations do not have fixed and determinable payments.
(1)The table above does not include amounts due under the Management Agreement (as defined herein) with our Manager, as those obligations do not have fixed and determinable payments.
Repurchase Agreements
As of September 30, 2017, we have an obligation for approximately $10.4 million in contractual interest payments related to our repurchase agreements through the respective maturity date of each repurchase agreement.
Securitized Debt

At September 30, 2017, we had securitized debt related to the consolidated VIEs, with a principal balance of $11.0 million (and a fair value of $11.0 million).  (2)The securitized debt is non-recourse to us and related interest payments of the VIEs can only be settled with the securitized commercial loanloans that serve as collateral. The collateral for the securitized debt has a principal balance of the VIE and$2.5 billion. Assumes entire outstanding principal balance at June 30, 2023 is non-recourse to us.paid at maturity.


Management Agreement
 
On May 9, 2012, we entered into a management agreement (the “Management Agreement”) with our Manager which describes the services to be provided by our Manager and compensation for such services. Our Manager is responsible for managing our operations, including: (i) performing all of our day-to-day functions; (ii) determining investment criteria in conjunction with our Board of Directors; (iii) sourcing, analyzing and executing investments, asset sales and financings; (iv) performing asset management duties; and (v) performing financial and accounting management, subject to the direction and oversight of our Board of Directors. Pursuant to the terms of the Management Agreement, our Manager is paid a management fee equal to 1.50% per annum of our stockholders’ equity, (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears.
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In December 2021, the Manager agreed to voluntarily waive 25% of its management fee solely for the duration of calendar year 2022 in order to support our earnings potential and our transition to a residential focused investment portfolio. Future waivers, if any, will be at the Manager's discretion.
 
Off-Balance Sheet Arrangements
As of September 30, 2017, we held contracts to purchase (“long position”) and sell (“short position”) TBAs on a forward basis.  If a counterparty to one of the TBAs that we enter into defaults on its obligations, we may not receive payments or securities due under the TBA agreement, and thus, we may lose any unrealized gain associated with that TBA transaction.

We do not have any relationships with any entities or financial partnerships, such as entities often referred to as structured investment vehicles, or special purpose or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes.
 
Further, other than guaranteeing certain obligations of our wholly-owned taxable REIT subsidiary or TRS and the obligations of our wholly-owned subsidiary, WMC CRE LLC, we have not guaranteed any obligations of any entities or entered into any commitment to provide additional funding to any such entities.
See Note 11 “Stockholders' Equity - Warrants” to the financial statements contained in this Quarterly Report on Form 10-Q, for a description of our outstanding warrants.


Dividends
 
We intend to make regular quarterly dividend distributions to holders ofTo maintain our common stock.qualification as a REIT, U.S. federal income tax law generally requires that a REITwe distribute annually, in accordance with the REIT regulations, at least 90% of itsour REIT taxable income for the taxable year,annually, determined without regard to the deduction for dividends paid and excluding net capital gains as well as undistributed taxable income retained by a TRS.  Togains. We must pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our net taxable income, in accordance with the REIT regulations, for any given year, we will pay tax on such amount at the regular corporate rates.  income.

We intendevaluate each quarter to determine our ability to pay regular quarterly dividends to our stockholders based on our net taxable income if and to the extent authorized by our Board of Directors. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our repurchase agreements and other debts payable.payments. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distributiondistribution.


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Recent Developments

In October 2017, we issued $115 million aggregate principal amount of 6.75% convertible senior unsecured notes, including the underwriter’s overallotment option to purchase an additional $15 million aggregate principal amount of the notes. The notes pay interest semiannually in arrears. We received proceeds of $111.6 million from the offering, net of underwriting discounts and commissions, which will be amortized through interest expense over the life of the notes. The notes mature on October 1, 2022, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by us except during the final three months prior to maturity.

The notes are convertible into, at our election, cash, shares of our common stock or a combination of both, subject to the satisfaction of certain conditions and during specified periods. The conversion rate is subject to adjustment upon the occurrence of certain specified events and the holders may require us to repurchase all or any portion of their notes for cash equal to 100%

of the principal amount of the notes, plus accrued and unpaid interest, if we undergo a fundamental change as specified in the agreement. The initial conversion rate was 83.1947 shares of common stock per $1,000 principal amount of notes and represented a conversion price of $12.02 per share of common stock.

ASC 470-20 "Debt/Debt with Conversion and Other Options" requires that convertible debt instruments with cash settlement features, including partial cash settlement, account for the liability component and equity component (conversion feature) of the instrument separately. The initial value of the liability component will reflect the present value of the discounted cash flows using the nonconvertible debt borrowing rate at the time of issuance. The debt discount represents the difference between the proceeds received from the issuance and the initial carrying value of the liability component, which is accreted back to the notes principal amount through interest expense over the life of the notes.


ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     
We seek to manage the risks related to the credit quality of our assets, interest rates, liquidity, prepayment speeds and market values while, at the same time, seeking to provide an opportunity to stockholders to realize attractive risk-adjusted returns from our assets through ownership of our common stock. While we do not seek to avoid risk completely, our Manager seeks to actively manage risk for us, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake.
 
Credit Risk
 
We are subject to varying degrees of credit risk in connection with our assets. Although we do not expect to encounter credit risk in our Agency CMBS and Agency RMBS, we are exposed to the risk of potential credit losses from general credit spread widening related to Non-Agency RMBS, Non-Agency CMBS, Residential Whole Loans, Residential Bridge Loans, Commercial Loans, and other portfolio investments in addition to unexpected increase in borrower defaults on these securities, as well as our Whole-Loans.investments. Investment decisions are made following a bottom-up credit analysis and specific relevant risk assumptions. As part of the risk management process, our Manager uses detailed proprietary models, applicable to evaluate, depending on the asset class, house price appreciation and depreciation by region, prepayment speeds and foreclosure/default frequency, cost and timing. If our Manager determines that the proposed investment can meet the appropriate risk and return criteria as well as complement our existing asset portfolio, the investment will undergo a more thorough analysis.
 
As of SeptemberJune 30, 2017, 172023, four of the counterparties thatwith which we had outstanding repurchase agreement borrowings held collateral which we posted as security for such borrowings in excess of 5% of our Stockholders’stockholders’ equity. Prior to entering into a repurchase agreement with any particular institution, our Manager does a thorough review of such potential counterparty.  Such review, however, does not assure the creditworthiness of such counterparty nor that the financial wherewithal of the counterparty will not deteriorate in the future.
 
Interest Rate Risk
 
Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We are subject to interest rate risk in connection with our assets and our related financing obligations. In general, we expect to finance the acquisition of our assets through financings in the form of repurchase agreements, warehouse facilities, securitizations, resecuritizations, bank credit facilities (including term loans and revolving facilities) and public and private equity and debt issuances in addition to transaction or asset specific funding arrangements. Subject to maintaining our qualification as a REIT for U.S. federal income tax purposes, we may utilize derivative financial instruments to hedge the interest rate risk associated with our borrowings. These hedging activities may not be effective. We also may engage in a variety of interest rate management techniques that seek to mitigate changes in interest rates or other potential influences on the values of our assets.
 
Interest Rate Effect on Net Interest Income
 
Our operating results will depend in large part on differences between the income earned on our assets and our borrowing costs. The cost of our borrowings is generally based on prevailing market interest rates. During a period of rising interest rates, our borrowing costs generally will increase and the yields earned on our leveraged fixed-rate mortgage assets will remain static. Further, the cost of such financing could increase at a faster pace than the yields earned on our leveraged ARM and hybrid ARM assets. This could result in a decline in our net interest spread and net interest margin. The severity of any such decline would depend on our asset/liability composition at the time as well as the magnitude and duration of the interest rate increase. Further, an increase in short-term interest rates could also have a negative impact on the market value of our assets. If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could adversely affect our liquidity and results of operations.
 
Interest Rate Cap Risk
 
To the extent we invest in adjustable-rate RMBS and whole loans, such securities are generallyinstruments may be subject to interest rate caps, which potentially could cause such RMBSinstruments to acquire many of the characteristics of fixed-rate securities if interest rates were to rise above the cap levels. This issue is magnified to the extent we acquire ARM and hybrid ARM assets that are not based on mortgages which are fully indexed. In addition, ARM and hybrid ARM assets may be subject to periodic payment caps that result in some portion of

the interest being deferred and added to the principal outstanding or a portion of the
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incremental interest rate increase being deferred. To the extent we invest in such ARM and/or hybrid ARM assets, we could potentially receive less cash income on such assets than we would need to pay the interest cost on our related borrowings. To mitigate interest rate mismatches, we may utilize the hedging strategies discussed above under “Interest Rate Risk.”


Interest Rate Effects on Fair value
 
Another component of interest rate risk is the effect that changes in interest rates will have on the market value of the assets that we acquire. We face the risk that the market value of our assets will increase or decrease at different rates than those of our liabilities, including our hedging instruments. See “Market Risk” below.
 
The impact of changing interest rates on fair value can change significantly when interest rates change materially. Therefore, the volatility in the fair value of our assets could increase significantly in the event interest rates change materially. In addition, other factors impact the fair value of our interest rate-sensitive investments and hedging instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, changes in actual interest rates may have a material adverse effect on us.
 
Market Risk
 
Our MBS and other assets are reflected at their fair value with unrealized gains and losses included in earnings. The fair value of our investments fluctuates primarily due to changes in interest rates and other factors. Generally, in a rising interest rate environment, the fair value of these assets would be expected to decrease; conversely, in a decreasing interest rate environment, the fair value of these securities would be expected to increase.
 
The sensitivity analysis table presented below shows the estimated impact of an instantaneous parallel shift in the yield curve, up and down 50 and 100 basis points, on the market value of our interest rate-sensitive investments, including interest rate swaps, Interest-Only Strips, and net interest income at SeptemberJune 30, 2017,2023, assuming a static portfolio of assets. When evaluating the impact of changes in interest rates, prepayment assumptions and principal reinvestment rates are adjusted based on our Manager’s expectations. The analysis presented utilizes our Manager’s assumptions, models and estimates, which are based on our Manager’s judgment and experience.
Change in Interest Rates 
Percentage Change in Projected
Net Interest Income
 
Percentage Change in Projected
Portfolio Value
+1.00% (16.53)% (0.92)%
+0.50% (8.95)% (0.44)%
-0.50% 8.33 % 0.40 %
-1.00% 12.22 % 0.75 %
Change in Interest RatesPercentage Change in Projected
Net Interest Income		Percentage Change in Projected
Portfolio Value
+1.00%(39.16)%(1.39)%
+0.50%(19.60)%(0.70)%
-0.50%19.61 %0.72 %
-1.00%39.31 %1.46 %
 
While the table above reflects the estimated immediate impact of interest rate increases and decreases on a static portfolio, we may rebalance our portfolio from time to time either to seek to take advantage of or reduce the impact of changes in interest rates. It is important to note that the impact of changing interest rates on market value and net interest income can change significantly when interest rates change beyond 100 basis points from current levels. Therefore, the volatility in the market value of our assets could increase significantly when interest rates change beyond amounts shown in the table above. In addition, other factors impact the market value of and net interest income from our interest rate-sensitive investments and derivative instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, interest income would likely differ from that shown above and such difference might be material and adverse to our stockholders.
 
Certain assumptions have been made in connection with the calculation of the information set forth in the table above and, as such, there can be no assurance that assumed events will occur or that other events will not occur that would affect the outcomes.  The base interest rate scenario assumes interest rates at SeptemberJune 30, 2017.2023. The analysis presented utilizes assumptions and estimates based on our Manager’s judgment and experience. Furthermore, while we generally expect to retain such assets and the associated interest rate risk, future purchases and sales of assets could materially change our interest rate risk profile.



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Prepayment Risk


The value of our Agency and Non-Agency RMBS and our Residential Whole-LoansWhole Loans may be affected by prepayment rates on the underlying residential mortgage. We acquire RMBS and Residential Whole-LoansWhole Loans and anticipate that the underlying residential mortgages will prepay at a projected rate generating an expected yield. If we purchase assets at a premium to par value, when borrowers prepay their residential mortgage loans faster than expected, the corresponding prepayments may reduce the expected yield on our residential mortgage assets because we will have to amortize the related premium on an accelerated basis and, in the case of Agency RMBS, other than interest-only strips, and certain other investment grade rated securities, we are required to make a retrospective adjustment to historical amortization. Conversely, if we purchase assets at a discount to par value, when borrowers prepay their residential mortgage loans slower than expected, such decrease may reduce the expected yield on such assets because we will not be able to accrete the related discount as quickly as originally anticipated and, in the case of Agency RMBS, other than interest-only strips, and certain other investment grade rated securities, we will be required to make a retrospective adjustment to historical amortization.
 
The value of our Agency and Non-Agency CMBS, as well as Commercial Whole-Loans,commercial whole loans, will also be affected by prepayment rates,rates; however, commercial mortgages frequently limit the ability of the borrower to prepay, thereby providing a certain level of prepayment protection.  Common restrictions include yield maintenance and prepayment penalties, the proceeds of which are generally at least partially allocable to these securities, as well as defeasance.
 
Likewise, the value of our ABS and other structured securities will also be affected by prepayment rates. The collateral underlying such securities may, similar to most residential mortgages, allow the borrower to prepay at any time or, similar to commercial mortgages, limit the ability of the borrower to prepay by imposing lock-out provisions, prepayment penalties and/or make whole provisions.
 
Extension Risk
 
Most residential mortgage loans do not prohibit the partial or full prepayment of principal outstanding.  Accordingly, while the stated maturity of a residential mortgage loan may be 30 years, or in some cases even longer, historically the vast majority of residential mortgage loans are satisfied prior to their maturity date. In periods of rising interest rates, borrowers have less incentive to refinance their existing mortgages and mortgage financing may not be as readily available. This generally results in a slower rate of prepayments and a corresponding longer weighted average life for RMBS.RMBS and Residential Whole Loans. The increase, or extension, in weighted average life is commonly referred to as “Extension Risk” which can negatively impact our portfolio. To the extent we receive smaller pre-payments of principal, we will have less capital to invest in new assets. This is extremely detrimental in periods of rising interest rates as we will be unable to invest in new higher coupon investments and a larger portion of our portfolio will remain invested in lower coupon investments. Further, our borrowing costs are generally short-term and, even if hedged, are likely to increase in a rising interest rate environment, thereby reducing our net interest margin. Finally, to the extent we acquired securities at a discount to par, a portion of the overall return on such investments is based on the recovery of this discount.  Slower principal prepayments will result in a longer recovery period and a lower overall return on our investment.
 
Prepayment rates on Agency and Non-Agency CMBS, as well as Commercial Whole-Loans,commercial whole loans, are generally less volatile than residential mortgage assets as commercial mortgages usually limit the ability of the borrower to prepay the mortgage prior to maturity or a period shortly before maturity. Accordingly, extension risk for Agency and Non-Agency CMBS and Commercial Whole-Loanscommercial whole loans is generally less than RMBS and Residential Whole-LoansWhole Loans as it presumed that other than defaults (i.e., involuntary prepayments), most commercial mortgages will remain outstanding for the contractual term of the mortgage.
 
Prepayment rates on ABS and our other structured securities will be determined by the underlying collateral. The extension risk of such securities will generally be less than residential mortgages, but greater than commercial mortgages.


Real Estate Risk

Residential and commercial property values are subject to volatility and may be adversely affected by a number of factors, including, but not limited to: national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as the supply of housing stock); changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to
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building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds availableavailable to a borrower to repay our loans, which could also cause us to suffer losses.


Counterparty Risk
 
The following discussion on counterparty risk reflects how these transactions are structured, rather than how they are presented for financial reporting purposes.
 
When we engage in repurchase transactions, we generally sell securities to lenders (i.e., repurchase agreement counterparties) and receive cash from the lenders. The lenders are obligated to resell the same securities back to us at the end of the term of the transaction. Because the cash we receive from the lender when we initially sell the securities to the lender is less than the value of those securities (this difference is the haircut), if the lender defaults on its obligation to resell the same securities back to us, we could incur a loss on the transaction up to the amount of the haircut (assuming there was no change in the value of the securities).


If a counterparty to a bi-lateral interest rate swap cannot perform under the terms of the interest rate swap, we may not receive payments due under that agreement, and thus, we may lose any unrealized gain associated with the interest rate swap. We may also risk the loss of any collateral we have pledged to secure our obligations under an interest rate swap if the counterparty becomes insolvent or files for bankruptcy. In the case of a cleared swap, if our clearing broker were to default, become insolvent or file for bankruptcy, we may also risk the loss of any collateral we have posted to the clearing broker unless we were able to transfer or “port” our positions and held collateral to another clearing broker. In addition, the interest rate swap would no longer mitigate the impact of changes in interest rates as intended. Most of our interest swaps are currently cleared through a central clearing house which reduces but does not eliminate the aforementioned risks. Also see “Liquidity Risk” below.
As of September 30, 2017, we have entered into five master securities forward trading agreements, or MSFTAs, which may govern the trading of some or all TBA transactions.  Pursuant to the terms of these MSFTAs, we and our counterparties would be required to post margin to the other when the mark to market exposure of the TBA transactions executed under the agreement exceed certain thresholds.  We expect to continue to negotiate and enter into MSFTAs with additional TBA counterparties.  The margin provisions of the MSFTA help to mitigate, but do not eliminate, counterparty risk associated with TBA transactions.  If a counterparty to a TBA transaction cannot perform under the terms of the trade, we may not receive securities we have agreed to purchase or payment for securities we have agreed to sell, and thus, we may lose any unrealized gain associated with such transaction.
Prior to entering into a trading agreement or transaction with any particular institution where we take on counterparty risk, our Manager does a thorough review of such potential counterparty. Such review, however, does not assure the creditworthiness of such counterparty nor that the financial wherewithal of the counterparty will not deteriorate in the future.
Funding Risk
We have financed a substantial majority of our assets with repurchase agreement financing. Over time, as market conditions change, in addition to these financings, we may use other forms of leverage. Changes in the regulatory environment, as well as, weakness in the financial markets, the residential mortgage markets, the commercial mortgage markets, the asset-backed securitization markets and the economy generally could adversely affect one or more of our potential lenders and could cause one or more of our potential lenders to be unwilling or unable to provide us with financing or to increase the costs of that financing.
 
Liquidity Risk
 
Our liquidity risk is principally associated with the financing of long-maturity assets with short-term borrowings in the form of repurchase agreements. Although the interest rate adjustments of these assets and liabilities fall within the guidelines established by our operating policies, maturities are not required to be, nor are they, matched.
 
Should the value of our assets pledged as collateral suddenly decrease, margin calls relating to our repurchase agreements could increase, causing an adverse change in our liquidity position. Our inability to post adequate collateral for a margin call by the counterparty could result in a condition of default under our repurchase agreements, thereby enabling the counterparty to liquidate the collateral pledged by us, which may have a material adverse consequence on our business and results of operations.
 
In an instance of severe volatility, or where the additional stress on liquidity resulting from volatility is sustained over an extended period of time, we could be required to sell securities, possibly even at a loss to generate sufficient liquidity to satisfy

collateral and margin requirements which could have a material adverse effect on our financial position, results of operations and cash flows.


Additionally, if one or more of our repurchase agreement counterparties chose not to provide on-going funding, our ability to finance would decline or exist at possibly less advantageous terms. Further, if we are unable to renew, replace or expand repurchase financing with other sources of financing on substantially similar terms, it may have a material adverse effect on our business, financial position, results of operations and cash flows, due to the long term nature of our investments and relatively short-term maturities of our repurchase agreements. As such, there is no assurance that we will always be able to roll over our repurchase agreements.
 
The costs associated with our borrowings are generally based on prevailing market interest rates. During a period of rising interest rates, our borrowing costs generally will increase while the yields earned on our existing portfolio of leveraged fixed-rate MBS and other fixed rate assets will remain static. Further, certain of our floating rate assets may contain annual or
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lifetime interest rate caps as well as limit the frequency or timing of changes to the underlying interest rate index. This could result in a decline in our net interest spread and net interest margin. The severity of any such decline would depend on our asset/liability composition at the time, as well as the magnitude and duration of the interest rate increase. Further, an increase in short-term interest rates could also have a negative impact on the market value of our assets. If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could have a material adverse effect on our liquidity and results of operations.
 
In addition, the assets that comprise our investment portfolio are not traded on a public exchange. A portion of these assets may be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly-traded securities. The illiquidity of our assets may make it difficult for us to sell such assets if the need or desire arises, including in response to changes in economic and other conditions.  Recent regulatory changes have imposed new capital requirements and other restrictions on banks and other market intermediaries’ ability and desire to hold assets on their balance sheets and otherwise make markets in fixed income securities and other assets resulting in reduced liquidity in many sectors of the market. This regulatory trend is expected to continue. As a result of these developments, it may become increasingly difficult for us to sell assets in the market, especially in credit oriented sectors such as Non-Agency RMBS and CMBS, ABS and Whole-Loans.Whole Loans.
 
We enter into interest rate swaps to manage our interest rate risk. We are required to pledge cash or securities as collateral as part of a margin arrangement, calculated daily, in connection with the interest rate swaps. The amount of margin that we are required to post will vary and generally reflects collateral required to be posted with respect to interest rate swaps that are in an unrealized loss position to us and is generally based on a percentage of the aggregate notional amount of interest rate swaps per counterparty.  Margin calls could adversely affect our liquidity. Our inability to post adequate collateral for a margin call could result in a condition of default under our interest rate swap agreements, thereby resulting in liquidation of the collateral pledged by us, which may have a material adverse consequence on our business, financial position, results of operations and cash flows. Conversely, if our interest rate swaps are in an unrealized gain position, our counterparties to bilateral swaps are required to post collateral with us, under the same terms that we post collateral with them.  On occasion, we mayWe at times enter into a MAC interest rate swap in which we may receive or make a payment at the time of entering such interest rate swap to compensate for the out of the market nature of such interest rate swap. Similar to all other interest rate swaps, MAC interest rate swaps are also subject to the margin requirements previously described.

Funding Risk
We have financed a substantial majority of our assets with repurchase agreement financing. Over time, as market conditions change, in addition to these financings, we may use other forms of leverage. Changes in the regulatory environment, as well as, weakness in the financial markets, the residential mortgage markets, the commercial mortgage markets, the asset-backed securitization markets and the economy generally could adversely affect one or more of our potential lenders and could cause one or more of our potential lenders to be unwilling or unable to provide us with financing or to increase the costs of that financing.
 
Inflation Risk
 
Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more so than does inflation. Changes in interest rates do not necessarily directly correlate with inflation rates or changes in inflation rates. Our consolidated financial statements are prepared in accordance with GAAP and our distributions will be determined by our Board of Directors consistent with our obligation to distribute to our stockholders at least 90% of our net taxable income on an annual basis, in accordance with the REIT regulations, in order to maintain our REIT qualification.  In each case, our activities and consolidated balance sheets are measured with reference to historical cost and/or fair market value without considering inflation.
 

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Foreign Investment riskRisk
 
We have invested in non U.S. CMBS transactions and, in the future, we may make other investments in non U.S. issuers and transactions. These investments present certain unique risks, including those resulting from future political, legal, and economic developments, which could include favorable or unfavorable changes in currency exchange rates, exchange control regulations (including currency blockage), expropriation, nationalization, or confiscatory taxation of assets, adverse changes in investment capital or exchange control regulations (which may include suspension of the ability to transfer currency from a country), political changes, diplomatic developments, difficulty in obtaining and enforcing judgments against non U.S. entities, the possible imposition of the applicable country’s governmental laws or restrictions, and the reduced availability of public information concerning issuers. In the event of a nationalization, expropriation, or other confiscation of assets, we could lose our entire investment in a security. Legal remedies available to investors in certain jurisdictions may be more limited than those available to investors in the United States. Issuers of non U.S. securities may not be subject to the same degree of regulation as U.S. issuers.


Furthermore, non U.S. issuers are not generally subject to uniform accounting, auditing, and financial reporting standards or other regulatory practices and requirements comparable to those applicable to U.S. issuers. There is generally less government supervision and regulation of non U.S. exchanges, brokers, and issuers than there is in the United States, and there is greater difficulty in taking appropriate legal action in Nonnon U.S. courts. There are also special tax considerations that apply to securities of non U.S. issuers and securities principally traded overseas.
 
To the extent that our investments are denominated in U.S. dollars, these investments are not affected directly by changes in currency exchange rates relative to the dollar and exchange control regulations. We are, however, subject to currency risk with respect to such investments to the extent that a decline in a non U.S. issuer’s or borrower’s own currency relative to the dollar may impair such issuer’s or borrower’s ability to make timely payments of principal and/or interest on a loan or other debt security. To the extent that our investments are in non-dollar denominated securities, the value of the investment and the net investment income available for distribution may be affected favorably or unfavorably by changes in currency exchange rates relative to the dollar and exchange control regulations.
 
Currency exchange rates can be volatile and affected by, among other factors, the general economics of a country, the actions of governments or central banks and the imposition of currency controls and speculation. In addition, a security may be denominated in a currency that is different from the currency where the issuer is domiciled.
 
Currency Risk
 
We have and may continue in the future to invest in assets which are denominated in a currency other than U.SU.S. dollars and may finance such investments with repurchase financing or other forms of financing which may also be denominated in a currency other than U.S. dollars. To the extent we make such investments and/or enter into such financing arrangements, we may utilize foreign currency swaps, forwards or other derivative instruments to hedge our exposure to foreign currency risk.  Despite being economic hedges, we have elected not to treat such derivative instruments as hedges for accounting purposes and therefore the changes in the value of such instruments, including actual and accrued payments, will be included in our Consolidated Statements of Operations. While such transactions are entered into in an effort to minimize our foreign currency risk, there can be no assurance that they will perform as expected. If actual prepayments of the foreign denominated asset are faster, or slower, than expected, the hedge instrument is unlikely to fully protect us from changes in the valuation of such foreign currency. Further, as with interest rate swaps, there is counterparty risk associated with the future creditworthiness of such counterparty.

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ITEM 4. Controls and ProceduresCONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures: Our management is responsible for establishing and maintaining disclosure controls and procedures that are designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that the required information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
 
We have evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of SeptemberJune 30, 2017.2023. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
No change occurred in our internal control over financial reporting (as defined in Rule13a-15(f) and Rule 15d-15(f) of the Exchange Act) during the three months ended SeptemberJune 30, 20172023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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PART II — OTHER INFORMATION


ITEM 1. Legal ProceedingsLEGAL PROCEEDINGS
 
From time to time, the Company may be involved in various claims and legal actions arising in the ordinary course of business.  As of SeptemberDuring the three months ended June 30, 2017,2023, the Company was not involved in any material legal proceedings.


ITEM 1A. Risk FactorsRISK FACTORS
     
Other than the additional risk factor presentedas set forth below, there were no material changes during the period covered by this report to the risk factors previously disclosed in our annual reportAnnual Report on Form 10-K for the year ended December 31, 2016,2022, as filed with the SEC on March 7, 2017.13, 2023. Additional risks not presently known, or that we currently deem immaterial, also may have a material adverse effect on our business, financial condition and results of operation.operations.


WeRisks Related to the Merger

The failure to complete the Merger in a timely manner or at all could be materially and adversely affected by poor market conditions where the properties securing the mortgage loans underlying our investments are geographically concentrated.

Our performance depends on the economic conditions in markets in which the properties securing the mortgage loans underlying our investments are concentrated. As of September 30, 2017, a substantial portion of our investments had underlying properties in California. Our financial condition, results of operations,negatively impact the market price of our common stock as well as adversely affect our business, financial condition, operating results and cash flows.

On August 8, 2023, we entered into an Agreement and Plan of Merger (the “MITT Merger Agreement”) with AG Mortgage Investment Trust, Inc., a Maryland corporation (“MITT”), AGMIT Merger Sub, LLC, a Delaware limited liability company and wholly owned subsidiary of MITT (“Merger Sub”), the Company, and, solely for the purposes of Section 3.3(a), Section 3.3(i), Article V, Section 6.13, Section 7.2, Section 7.3 and Article IX therein, AG REIT Management, LLC, a Delaware limited liability company (“MITT Manager”), pursuant to which the Company will merge with and into Merger Sub, with Merger Sub surviving as a wholly owned subsidiary of MITT (the “Merger”). Pursuant to the MITT Merger Agreement, each share of the common stock, par value $0.01 per share, of the Company outstanding at the effective time of the Merger (the “Effective Time”) will be converted into the right to receive (i) shares of the common stock, par value $0.01 per share, of MITT (“MITT Common Stock”) pursuant to a fixed exchange ratio of 1.5 shares of MITT Common Stock per share (subject to adjustment for transaction expenses) and (ii) the per share portion of a cash payment from the MITT Manager equal to the lesser of $7 million or approximately 9.9% of the aggregate per share merger consideration (prongs (i) and (ii), the “Merger Consideration”) (any difference between $7 million and the 9.9% cap would be used to benefit the combined company post-closing by offsetting reimbursable expenses that would otherwise be payable to the MITT Manager).

Completion of the Merger is subject to several conditions beyond our control that may prevent, delay or otherwise adversely affect its completion in a material way, including the approval of our stockholders. The Merger cannot be completed until the conditions to closing are satisfied or (if permissible under applicable law) waived. We cannot guarantee that the closing conditions set forth in the MITT Merger Agreement will be satisfied or, even if satisfied, that no event of termination will take place. In addition, developments beyond our control, including but not limited to changes in domestic or global economic conditions, may affect the timing or success of the Merger. In the event that the Merger is not completed for any reason, the holders of our common stock will not receive any consideration for their shares of common stock in connection with the proposed Merger. Instead, we will remain an independent public company and the holders of our common stock will continue to own their shares of common stock.

If the Merger or a similar transaction is not completed, the share price of our common stock may drop to the extent that the current market price of our common stock reflects an assumption that a transaction will be completed. In addition, in the event the Merger is not consummated, under circumstances specified in the MITT Merger Agreement, we may be required to pay a termination fee of $3.0 million, a failure to complete the Merger may result in negative publicity, negative impressions of us in the financial markets and investment community and negative responses from employees, partners and other third parties. Any disruption to our business resulting from the announcement and pendency of the Merger and from intensifying competition from our competitors, including any adverse changes in our relationships with our employees, partners and other third parties, could continue or accelerate in the event of a failure to complete the Merger. There can be no assurance that our business, financial condition, operating results and cash flows will not be adversely affected, as compared to the condition prior to the announcement of the Merger, if the Merger is not consummated.

The MITT Merger Agreement contains provisions that could discourage or deter a potential competing acquirer that might be willing to pay more to effect an alternative transaction with us.
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Under the MITT Merger Agreement, we are generally not permitted to solicit or discuss takeover proposals with third parties, subject to certain exceptions. Further, subject to limited exceptions, the MITT Merger Agreement contains restrictions on our ability to make distributions to our stockholders could be materially and adversely affected by this geographic concentration if market conditions, such as an oversupply of space or a reduction in demand for real estate in an area, deteriorate in California. Moreover, duepursue other alternatives to the geographic concentrationMerger and, in specified circumstances, could require us to pay MITT a termination fee of properties securing the mortgages underlying our investments, the Company$3.0 million. Such restrictions may discourage or deter a third party that may be disproportionately affectedwilling to pay more than MITT for our common stock from considering or proposing an alternative transaction with us. Notwithstanding the foregoing, in no event will the termination fee be paid to MITT more than once.

We may be subject to litigation challenging the Merger.

Any litigation challenging the Merger may require significant management time and attention and significant legal expenses and may result in unfavorable outcomes, which could delay or prevent the Merger from being completed or have a material adverse effect on our business, financial condition, results of operations and cash flows.

The completion of the transaction contemplated by the MITT Merger Agreement may trigger change in control or other similar provisions in certain agreements to which we are a party.

If we are unable to negotiate waivers of those provisions, the counterparties may exercise their rights and remedies under the agreements, potentially terminating the agreements or seeking monetary damages. Even if we are able to negotiate waivers, the counterparties may require a fee for such waivers or seek to renegotiate the agreements on terms less favorable to us.

We will incur substantial transaction fees and costs in connection with the Merger.

We expect to incur significant costs, expenses and fees for professional services and other transaction costs in connection with the Merger. A material portion of these expenses are payable by us whether or not the Merger is completed. Further, while we have assumed that a certain amount of transaction expenses will be incurred, factors beyond our control could affect the total amount or the timing of these expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately. These expenses may exceed the costs historically borne by us. These costs could adversely affect our business, financial condition, operating results and cash flows.

The U.S. and global capital markets are subject to systemic risk that could adversely affect our business, financial condition and results of operations.

Issuers, national and regional banks, financial institutions and other participants in the U.S. and global capital markets are closely interrelated as a result of credit, trading, clearing, technology and other relationships. A significant adverse development (such as a bank run, insolvency, bankruptcy or default) with one or more national or regional banks, financial institutions, or other participants in the financial or capital markets may spread to others and lead to significant concentrated or market-wide problems (such as defaults, liquidity problems, impairment charges, additional bank runs and/or losses) for other participants in these markets. Future developments, including actions taken by the U.S. Department of Treasury, FDIC, Federal Reserve Board, and systemic risk in the U.S. and global banking sectors and broader economies in general, risks such as natural disasters, including major fires, floodsare difficult to assess and earthquakes, severe or inclement weather,quantify, and actsthe form and magnitude of terrorism should such developments occuror other actions of the U.S. Department of Treasury, FDIC and Federal Reserve Board may remain unknown for significant periods of time and could have an adverse effect on our business, financial condition and results of operations.

For example, in response to the rapidly declining financial condition of regional banks Silicon Valley Bank (“SVB”) Signature Bank (“Signature”) and First Republic Bank ("First Republic"), the California Department of Financial Protection and Innovation (the “CDFPI”) and the New York State Department of Financial Services (the “NYSDFS”) closed SVB, Signature and First Republic on March 10, 2023, March 12, 2023 and May 1, 2023, respectively, and the Federal Deposit Insurance Corporation (“FDIC”) was appointed as receiver for SVB, Signature and First Republic. Although the U.S. Department of the Treasury, the Federal Reserve and the FDIC have taken measures to stabilize the financial system, uncertainty and liquidity concerns in the broader financial services industry remain. Additionally, should there be additional systemic pressure on the financial system and capital markets, we cannot assure you of the response of any government or nearregulator, and any response may not be as favorable to industry participants as the measures currently being pursued. In addition, highly publicized issues related to the U.S. and global capital markets in Californiathe past have led to significant and widespread investor concerns over the integrity of the capital markets. The current situation related to SVB, Signature and First
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Republic could in whichthe future lead to further rules and regulations for public companies, banks, financial institutions and other participants in the U.S. and global capital markets, and complying with the requirements of any such properties are located.rules or regulations may be burdensome. Even if not adopted, evaluating and responding to any such proposed rules or regulations could results in increased costs and require significant attention from management.


ITEM 2. Unregistered Sales of Equity Securities and Use of ProceedsUNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None.
 
ITEM 3. Defaults Upon Senior SecuritiesDEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4. Mine Safety DisclosuresMINE SAFETY DISCLOSURES
 
Not Applicable.
 
ITEM 5. Other InformationOTHER INFORMATION
 
None.



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ITEM 6. ExhibitsEXHIBITS


The following exhibits are filed as part of this report.
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Exhibit No.Description
2.1*
Agreement and Plan of Merger, dated as of June 27, 2023, by and among Western Asset Mortgage Capital Corporation, Maverick Merger Sub, LLC, and Terra Property Trust, Inc., incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K, filed on June 28, 2023.**
2.2*
Agreement and Plan of Merger, dated as of August 8, 2023, by and among Western Asset Mortgage Capital Corporation, AG Mortgage Investment Trust, Inc., AGMIT Merger Sub, LLC and AG REIT Management, LLC, incorporated by reference to Exhibit No.
Description2.1 to the Current Report on Form 8-K, filed on August 9, 2023).**
3.1*
Amended and restated certificate of incorporation of Western Asset Mortgage Capital Corporation, incorporated by reference to Exhibit 3.1 to Amendment No. 10 Form S-11 (Registration Statement No. 333-159962), filed May 8, 2012.
3.2*
Amendment to the amended and restated certificate of incorporation of Western Asset Mortgage Capital Corporation, dated June 3, 2016, incorporated by reference to Exhibit 3.3 to the Annual Report on Form 10-K, filed March 7, 2017.
3.3*
Amendment to the amended and restated certificate of incorporation of Western Asset Mortgage Capital Corporation, dated July 8, 2022, incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K, filed on July 11, 2022.
3.4*
Amended and restated bylaws of Western Asset Mortgage Capital Corporation, incorporated by reference to Exhibit 3.2 to Amendment No. 10 to Form S-11 (Registration Statement No. 333-159962), filed May 8, 2012
4.1*
Specimen Common Stock Certificate of Western Asset Mortgage Capital Corporation, incorporated by reference to Exhibit 4.1 to Amendment No. 10 to Form S-11 (Registration Statement No. 333-159962), filed May 8, 2012.
4.2*
Indenture, dated as of October 2, 2017, between Western Asset Mortgage Capital Corporation and Wells Fargo Bank, National Association, incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed on October 3, 2017.
4.3*
First Supplemental Indenture, dated as of October 2, 2017, between Western Asset Mortgage Capital Corporation and Wells Fargo Bank, National Association, incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K, filed on October 3, 2017.
4.4*
Form of 6.75% Convertible Senior Notes due 2022 (attached as Exhibit A to the First Supplemental Indenture filed as Exhibit 4.3 hereto), incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K, filed on October 3, 2017.
10.1*4.5*
Amendment to the Management AgreementSecond Supplemental Indenture, dated as of September 14, 2021, between Western Asset Mortgage Capital Corporation and Western Asset Management Company, dated August 3, 2016,Wells Fargo Bank, National Association, incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q, filed on August 5, 2016.
10.2*
Form of Warrant, incorporated by reference to Exhibit 10.2 to Amendment No. 9 Form S-11 (Registration Statement No. 333-159962), filed April 30, 2012.
10.3*
Management Agreement, dated May 9, 2012, between Western Asset Mortgage Capital Corporation and Western Asset Management Company, incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q, filed August 14, 2012.
10.4*
Registration Rights Agreement, dated May 15, 2012, among Western Asset Mortgage Capital Corporation, Western Asset Management Company and certain individual holders named therein, incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q, filed August 14, 2012.
10.5*
Western Asset Mortgage Capital Corporation Equity Plan, incorporated by reference to Exhibit 10.5 to Amendment No. 9 Form S-11 (Registration Statement No. 333-159962), filed April 30, 2012.
10.6*
Western Asset Mortgage Capital Corporation Manager Equity Plan, incorporated by reference to Exhibit 10.6 to Amendment No. 9 Form S-11 (Registration Statement No. 333-159962), filed April 30, 2012.
10.7*
Form of Indemnification Agreement between Western Asset Mortgage Capital Corporation and a director, incorporated by reference to Exhibit 10.7 to Amendment No. 9 Form S-11 (Registration Statement No. 333-159962), filed April 30, 2012.
10.8*
Restricted Stock Award Agreement, dated May 15, 2012, for Western Asset Management Company, incorporated by reference to Exhibit 10.9 to the Quarterly Report on Form 10-Q, filed August 14, 2012.
10.9*
Form of Restricted Stock Award Agreement for independent directors, incorporated by reference to Exhibit 10.2 to the Form S-8 dated May 15, 2012 (File No. 1-35543).

10.10*
Equity Distribution Agreement, dated March 6, 2017, among Western Asset Mortgage Capital Corporation, Western Asset Management Company and JMP Securities LLC, incorporated by reference to Exhibit 1.14.2 to the Current Report on Form 8-K, filed March 9,on October 3, 2017.
31.14.6*
Form of 6.75% Convertible Senior Notes due 2024 (attached as Exhibit A to the Second Supplemental Indenture filed as Exhibit 4.5 hereto), incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K, filed on October 3, 2017.
31.1
Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer.
31.2
Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer.
32.1
Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.
101.INS101XBRL Instance DocumentThe following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022; (ii) the Consolidated Statements of Operations for the three and six months ended June 30, 2023 and 2022; (iii) the Consolidated Statements of Changes in Equity for the three and six months ended June 30, 2023 and 2022; (iv) the Consolidated Statements of Cash Flows for the three and six months ended June 30, 2023 and 2022; and (v) the Notes to Consolidated Financial Statements.
101.SCH104
Cover Page Interactive Data File (the cover page XBRL Taxonomy Extension Schema Documenttags are embedded within the iXBRL document).

101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
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Amended and restated certificate of incorporation of Western Asset Mortgage Capital Corporation, incorporated by reference to Exhibit 3.1 to Amendment No. 10 Form S-11 (Registration Statement No. 333-159962), filed May 8, 2012

*Fully or partly previously filed.


** The schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally a copy of such schedules and exhibits, or any section thereof, to the SEC upon request.

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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By:/s/ JENNIFER W. MURPHYBONNIE M. WONGTRAKOOL
Jennifer W. MurphyBonnie M. Wongtrakool
President, Chief Executive Officer and Director (Principal Executive Officer)
November 7, 2017August 9, 2023
By:/s/ LISA MEYERROBERT W. LEHMAN
Lisa MeyerRobert W. Lehman
Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
November 7, 2017August 9, 2023



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