SEC Info - Arlington Asset Investment Corp.

2022

2023

2022

Interest income

MSR financing receivables

i 4,709

i 3,983

i 9,394

i 7,365

Agency mortgage-backed securities

i 5,040

i 2,065

i 10,016

i 3,557

Credit securities and loans

i 2,802

i 991

i 5,564

i 1,844

Mortgage loans of consolidated VIEs

i 56

i 1,611

i 1,454

i 2,965

Other

i 109

i 113

i 288

i 438

Total interest and other income

i 12,716

i 8,763

i 26,716

i 16,169

Rent revenues from single-family properties

i —

i 2,137

i —

i 3,201

Interest expense

Repurchase agreements

i 6,604

i 763

i 12,729

i 1,039

Long-term debt secured by single-family properties

i —

i 718

i —

i 1,126

Long-term unsecured debt

i 1,561

i 1,400

i 3,102

i 2,770

Secured debt of consolidated VIEs

i —

i 1,578

i 681

i 2,766

Total interest expense

i 8,165

i 4,459

i 16,512

i 7,701

Single-family property operating expenses

i —

i 1,915

i —

i 3,446

Net operating income

i 4,551

i 4,526

i 10,204

i 8,223

Investment and derivative gain (loss), net

i 6,417

i 370

i 2,566

( i 457

)

General and administrative expenses

Compensation and benefits

i 2,037

i 2,324

i 4,292

i 4,389

Other general and administrative expenses

i 2,676

i 1,463

i 4,332

i 2,682

Total general and administrative expenses

i 4,713

i 3,787

i 8,624

i 7,071

Income before income taxes

i 6,255

i 1,109

i 4,146

i 695

Income tax provision

i 1,387

i 802

i 1,496

i 3,089

Net income (loss)

i 4,868

i 307

i 2,650

( i 2,394

)

Dividend on preferred stock

( i 660

)

( i 707

)

( i 1,320

)

( i 1,449

)

Net income (loss) available (attributable) to
common stock

i 4,208

( i 400

)

i 1,330

( i 3,843

)

Basic earnings (loss) per common share

i 0.15

( i 0.01

)

i 0.05

( i 0.13

)

Diluted earnings (loss) per common share

i 0.15

( i 0.01

)

i 0.05

( i 0.13

)

Weighted-average common shares outstanding
(in thousands)

Basic

i 28,081

i 28,766

i 28,043

i 29,296

Diluted

i 28,709

i 28,766

i 28,594

i 29,296

See notes to consolidated financial statements.

ARLINGTON ASSET INVESTMENT CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Dollars in thousands)

(Unaudited)

Series B
Preferred
Stock
(#)

Series B
Preferred
Amount
($)

Series C
Preferred
Stock
(#)

Series C
Preferred
Amount
($)

Class A
Common
Stock
(#)

Class A
Amount
($)

Additional
Paid-In
Capital

Accumulated
Deficit

Total

Balances, December 31, 2021

i 373,610

i 8,852

i 1,117,034

i 27,356

i 30,676,931

i 307

i 2,030,315

( i 1,842,703

)

i 224,127

Net loss

—

( i 2,701

)

( i 2,701

)

Issuance of Class A common
stock under stock-based
compensation plans

—

i 404,746

i 4

( i 4

)

—

Forfeiture of Class A common
stock under stock-based
compensation plans

—

( i 12,167

)

—

Repurchase of Class A
common stock

—

( i 1,009,566

)

( i 10

)

( i 3,487

)

—

( i 3,497

)

Issuance of preferred stock

i 6,058

i 149

—

i 149

Stock-based compensation

—

i 761

—

i 761

Dividends declared

—

( i 742

)

( i 742

)

Balances, March 31, 2022

i 379,668

i 9,001

i 1,117,034

i 27,356

i 30,059,944

i 301

i 2,027,585

( i 1,846,146

)

i 218,097

Net income

—

i 307

Repurchase of Class A
common stock

—

( i 947,570

)

( i 10

)

( i 3,232

)

—

( i 3,242

)

Repurchase of preferred stock

—

( i 72,363

)

( i 1,749

)

—

( i 1,749

)

Stock-based compensation

—

i 992

—

i 992

Dividends declared

—

( i 707

)

( i 707

)

Balances, June 30, 2022

i 379,668

i 9,001

i 1,044,671

i 25,607

i 29,112,374

i 291

i 2,025,345

( i 1,846,546

)

i 213,698

Series B
Preferred
Stock
(#)

Series B
Preferred
Amount
($)

Series C
Preferred
Stock
(#)

Series C
Preferred
Amount
($)

Class A
Common
Stock
(#)

Class A
Amount
($)

Additional
Paid-In
Capital

Accumulated
Deficit

Total

Balances, December 31, 2022

i 379,668

i 9,001

i 957,133

i 23,820

i 28,186,827

i 282

i 2,024,298

( i 1,840,061

)

i 217,340

Net loss

—

( i 2,218

)

( i 2,218

)

Issuance of Class A common
stock under stock-based
compensation plans

—

i 198,324

i 2

( i 2

)

—

Repurchase of Class A
  common stock under
  stock-based
  compensations plans

—

( i 24,704

)

—

( i 74

)

—

( i 74

)

Stock-based compensation

—

i 757

—

i 757

Dividends declared

—

( i 660

)

( i 660

)

Balances, March 31, 2023

i 379,668

i 9,001

i 957,133

i 23,820

i 28,360,447

i 284

i 2,024,979

( i 1,842,939

)

i 215,145

Net income

—

i 4,868

Stock-based compensation

—

i 659

—

i 659

Dividends declared

—

( i 660

)

( i 660

)

Balances, June 30, 2023

i 379,668

i 9,001

i 957,133

i 23,820

i 28,360,447

i 284

i 2,025,638

( i 1,838,731

)

i 220,012

See notes to consolidated financial statements.

ARLINGTON ASSET INVESTMENT CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)


	Six Months Ended June 30,
	2023			2022
Cash flows from operating activities:
Net income (loss)	$	i 2,650		$	( i 2,394	)
Adjustments to reconcile net income (loss) to net cash used in operating activities
Investment and derivative (gain) loss, net		( i 2,566	)		i 457
Net discount accretion		( i 9,218	)		( i 3,694	)
Other		i 1,559			i 3,316
Changes in operating assets
Interest receivable		( i 261	)		i 67
Other assets		( i 284	)		( i 2,743	)
Changes in operating liabilities
Interest payable and other liabilities		( i 665	)		i 3,693
Accrued compensation and benefits		( i 2,246	)		( i 1,337	)
Net cash used in operating activities		( i 11,031	)		( i 2,635	)
Cash flows from investing activities:
Purchases of agency mortgage-backed securities		( i 64,790	)		( i 400,331	)
Purchases of credit securities		i —			( i 120,335	)
Purchases of MSR financing receivables		( i 16,201	)		( i 21,220	)
Purchases of single-family residential real estate		i —			( i 121,919	)
Proceeds from sales of agency mortgage-backed securities		i 26,016			i 586,693
Proceeds from sales of credit securities		i 22,578			i 10,395
(Payments) proceeds from sales of single-family residential real estate		( i 120	)		i 351
Receipt of principal payments on agency mortgage-backed securities		i 13,830			i 20,463
Receipt of principal payments on credit securities		i 2,269			i 862
Receipt of principal payments on loans		i 8,185			i 212
Receipt of principal payments on mortgage loans of consolidated VIE		i 5,659			i 29,278
Receipt of distributions on MSR financing receivables		i 15,584			i 64,552
Restricted cash balance of VIE upon consolidation		i —			i 9,637
Restricted cash balance of VIE upon deconsolidation		( i 2,719	)		i —
Proceeds from derivatives and deposits, net		i 4,087			i 5,979
Other		i 145			i 6,231
Net cash provided by investing activities		i 14,523			i 70,848
Cash flows from financing activities:
Repayments of repurchase agreements, net		( i 15,609	)		( i 116,630	)
Repayments of secured debt of consolidated VIE		( i 3,515	)		( i 31,652	)
Repurchase of common stock		i —			( i 6,739	)
Repurchase of preferred stock		i —			( i 1,749	)
Proceeds from issuance of preferred stock		i —			i 149
Proceeds from long-term debt secured by single-family properties		i —			i 83,565
Dividends paid		( i 1,319	)		( i 1,449	)
Net cash used in financing activities		( i 20,443	)		( i 74,505	)
Net decrease in cash, cash equivalents and restricted cash		( i 16,951	)		( i 6,292	)
Cash, cash equivalents and restricted cash, beginning of period		i 30,212			i 21,786
Cash, cash equivalents and restricted cash, end of period	$	i 13,261		$	i 15,494
Supplemental cash flow information:
Cash payments for interest	$	i 15,966		$	i 6,625
Cash payments for income taxes	$	i 72		$	i 753
Non-cash investing activity:
Assets of VIE upon consolidation	$	i —		$	i 287,282
Assets of VIE upon deconsolidation	$	( i 189,360	)	$	i —
Non-cash financing activity:
Liabilities of VIE upon consolidation	$	i —		$	i 266,697
Liabilities of VIE upon deconsolidation	$	( i 166,783	)	$	i —

See notes to consolidated financial statements.

ARLINGTON ASSET INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(Unaudited)

Note 1. Organization and Basis of Presentation

Arlington Asset Investment Corp. (“Arlington Asset”) and its consolidated subsidiaries (unless the context otherwise provides, collectively, the “Company”) is an investment firm that focuses primarily on investing in mortgage related assets and residential real estate. The Company’s investment capital is currently allocated between mortgage servicing rights (“MSR”) related assets, credit investments and agency mortgage-backed securities (“MBS”).

The Company’s MSR related assets represent investments for which the return is based on the economic performance of a pool of specific MSRs. The Company’s credit investments generally include investments in mortgage loans secured by either residential or commercial real property or MBS collateralized by residential or commercial mortgage loans (“non-agency MBS”) or asset-backed securities (“ABS”) collateralized by residential solar panel loans. The Company’s agency MBS consist of residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by a U.S. government sponsored enterprise (“GSE”), such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”).

The Company also previously allocated investment capital to a strategy of investing in single-family residential ("SFR") properties that consisted of acquiring, leasing and operating single-family residential homes as rental properties. During 2022, the Company sold its portfolio of SFR properties and is currently no longer anticipating allocating capital to its SFR investment strategy.

The Company is a Virginia corporation. The Company is internally managed and does not have an external investment advisor.

The Company has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). As a REIT, the Company is required to distribute annually i 90% of its REIT taxable income (subject to certain adjustments). So long as the Company continues to qualify as a REIT, it will generally not be subject to U.S. Federal or state corporate income taxes on its taxable income that it distributes to its shareholders on a timely basis. At present, it is the Company’s intention to distribute i 100% of its taxable income, although the Company will not be required to do so. The Company intends to make distributions of its taxable income within the time limits prescribed by the Internal Revenue Code.

The unaudited interim consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. The Company’s unaudited interim consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

The Company’s consolidated financial statements include the accounts of Arlington Asset and all other entities in which the Company has a controlling financial interest. All intercompany accounts and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Although the Company bases these estimates and assumptions on historical experience and all other reasonably available information that the Company believes to be relevant under the circumstances, such estimates frequently require management to exercise significant subjective judgment about matters that are inherently uncertain. Actual results may differ materially from these estimates.

Certain prior period amounts in the consolidated financial statements and the accompanying notes may have been reclassified to conform to the current year’s presentation. These reclassifications had no impact on the previously reported net income, total assets or total liabilities.

Proposed Plan of Merger

On May 29, 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ellington Financial Inc. (“EFC”), EF Merger Sub Inc., a wholly owned subsidiary of EFC (“Merger Sub”) and, solely for the limited purposes set forth in the Merger Agreement, Ellington Financial Management LLC (“EFC Manager”) pursuant to which the Company will merge with and into Merger Sub (the “Merger”), with Merger Sub continuing as the surviving corporation of the Merger.

Immediately following the Merger, the surviving corporation of the Merger will be contributed to Ellington Financial Operating Partnership LLC, EFC’s operating partnership subsidiary (the “EFC Operating Partnership”), in exchange for limited liability company interests in the EFC Operating Partnership. As a result of the contribution, the surviving corporation of the Merger will become a wholly owned subsidiary of the EFC Operating Partnership. The consummation of the Merger is subject to standard closing conditions, including approval by the Company’s common shareholders, and is expected to close in the fourth quarter of 2023.

Pursuant to the terms of the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of the Company’s common stock will be converted into the right to receive (i) from EFC, i 0.3619 shares of common stock of EFC and (ii) from EFC Manager, $ i 0.09 in cash (collectively, the “Per Share Common Merger Consideration”).

Each outstanding share of the Company’s restricted common stock issued under the Company’s long-term incentive compensation plans will become fully vested and, as of the effective time of the Merger, be considered outstanding for all purposes of the Merger Agreement, including the right to receive the Per Share Common Merger Consideration. (See Note 16 – Long-Term Incentive Plan.)

Each outstanding Performance-based Stock Award, other than the outstanding Stock Price Awards, issued under the Company’s long-term incentive compensation plans will become earned and fully vested with respect to the number of shares of the Company’s common stock subject to such award immediately prior to the effective time of the Merger based on the achievement of the applicable performance goals at maximum performance levels and, as of the effective time of the Merger, will be treated as a share of the Company’s common stock for all purposes of the Merger Agreement, including the right to receive the Per Share Common Merger Consideration. Each outstanding Stock Price Award issued under the Company’s long-term incentive compensation plans will become earned and fully vested with respect to the number of shares of the Company’s common stock subject to such award immediately prior to the effective time of the Merger based on the achievement of the applicable performance goals at the actual level of performance in connection with the Merger, and, as of the effective time of the Merger, will be treated as a share of the Company’s common stock for all purposes of the Merger Agreement, including the right to receive the Per Share Common Merger Consideration. (See Note 16 – Long-Term Incentive Plan.)

Each outstanding award of deferred stock units issued to a non-employee director under the Company’s long-term incentive compensation plans will become fully vested and, as of the effective time of the Merger, be treated as a share of the Company’s common stock for all purposes of the Merger Agreement, including the right to receive the Per Share Common Merger Consideration. (See Note 16 – Long-Term Incentive Plan.)

As of the effective time of the Merger, it is expected that there will be i 32,360,432 shares of the Company’s common stock eligible to receive the Per Share Merger Consideration comprised of (i) i 28,360,447 outstanding shares of common stock, including i 828,127 outstanding shares of restricted common stock, (ii) i 3,451,713 shares of common stock earned under outstanding Performance-based Stock Awards, and (iii) i 548,272 shares of deferred stock units issued to non-employee directors.

In addition, at the effective time of the Merger, (a) each share of the Company’s Series B Preferred Stock issued and outstanding immediately prior to the effective time will be automatically converted into the right to receive one share of newly designated i 7.00% Series D Cumulative Perpetual Redeemable Preferred Stock of EFC and (b) each share of the Company’s Series C Preferred Stock issued and outstanding immediately prior to the effective time will be automatically converted into the right to receive one share of newly designated i 8.250% Series E Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock of EFC. (See Note 15 – Stockholders’ Equity.)

By virtue of the Merger, all debts, obligations and liabilities of the Company will become the debts, obligations and liabilities of the surviving corporation, including the Company’s outstanding trust preferred securities, i 6.75% Senior Notes due 2025 and i 6.000% Senior Notes due 2026. (See Note 9 – Borrowings.)

Note 2. Summary of Significant Accounting Policies

Cash Equivalents

Cash equivalents include demand deposits with banks, money market accounts and highly liquid investments with original maturities of three months or less. As of June 30, 2023 and December 31, 2022, approximately i 98% and i 84%, respectively, of the Company’s cash equivalents were invested in money market funds that invest primarily in U.S. Treasuries and other securities backed by the U.S. government.

Investment Security Purchases and Sales

Purchases and sales of investment securities are recorded on the settlement date of the transfer unless the trade qualifies as a “regular-way” trade and the associated commitment qualifies for an exemption from the accounting guidance applicable to derivative instruments. A regular-way trade is an investment security purchase or sale transaction that is expected to settle within the period of time following the trade date that is prevalent or traditional for that specific type of security. Any amounts payable or receivable for unsettled security trades are recorded as “sold securities receivable” or “purchased securities payable” in the consolidated balance sheets.

Interest Income Recognition for Investments in Agency MBS, Mortgage Loans of Consolidated VIEs and Credit Securities of High Credit Quality

The Company recognizes interest income for its investments in agency MBS, mortgage loans of consolidated variable interest entities (“VIEs”) and credit securities that are considered to be of high credit quality (that is, those with a Standard & Poor's rating of AA or higher or an equivalent rating from another rating agency) by applying the “interest method” permitted by GAAP, whereby purchase premiums and discounts are amortized and accreted, respectively, as an adjustment to contractual interest income accrued at each investment’s stated interest rate. The interest method is applied at the individual instrument level based upon each instrument’s effective interest rate. The Company calculates each instrument’s effective interest rate at the time of purchase or initial recognition by solving for the discount rate that equates the present value of that instrument's remaining contractual cash flows (assuming no principal prepayments) to its purchase cost. Because each instrument’s effective interest rate does not reflect an estimate of future prepayments, the Company refers to this manner of applying the interest method as the “contractual effective interest method.” When applying the contractual effective interest method, as principal prepayments occur, a proportional amount of the unamortized premium or unaccreted discount is recognized in interest income such that the contractual effective interest rate on any remaining security or loan balance is unaffected.

For mortgage loans of consolidated VIEs, the Company ceases the accrual of interest income (i.e., places the loan in non-accrual status) when it believes collectability of principal and interest in full is not reasonably assured, which generally occurs when a loan is three or more monthly payments past due, unless the loan is well secured and in the process of collection based upon an individual loan assessment. Upon placing a loan in non-accrual status, any previously accrued but uncollected interest is derecognized and a corresponding reduction to current period interest income is recorded. While a loan is in non-accrual status, the Company recognizes interest income only when interest payments occur.

Interest Income Recognition for Investments in Other Credit Securities and MSR Financing Receivables

The Company recognizes interest income for its investments in credit securities (other than those considered to be of high credit quality) and MSR financing receivables by applying the prospective level-yield methodology required by GAAP for financial assets that are either not of high credit quality at the time of acquisition or can be contractually prepaid or otherwise settled in such a way that the Company would not recover substantially all of its recorded investment. The amount of periodic interest income recognized is determined by applying the investment’s effective interest rate to its amortized cost basis (or “reference amount”). At the time of acquisition, the investment’s effective interest rate is calculated by solving for the single discount rate that equates the present value of the Company’s best estimate of the amount and timing of the cash flows expected to be collected from the investment to its purchase cost. To prepare its best estimate of cash flows expected to be collected, the Company develops a number of assumptions about the future performance of the pool of loans that serve as collateral for its investment, including assumptions about the timing and amount of prepayments and credit losses. For investments in MSR financing receivables, the Company's estimate of cash flows expected to be collected reflects all components of its mortgage servicing counterparty's payment obligation, which is comprised of cash flows referenced to the monthly net cash flows of the underlying reference pool of MSRs net of (i) the counterparty's periodic interest payments and principal repayments related to advances obtained via its third-party secured financing facility collateralized by MSRs to which the Company's MSR financing receivables are referenced and (ii) fees payable to the counterparty. In each subsequent quarterly reporting period, the amount and timing of cash flows expected to be collected from the investment are re-estimated based upon current information and events. The following table provides a description of how periodic changes in the estimate of cash flows expected to be collected affect interest income recognition prospectively for investments in credit securities and MSR financing receivables:

Scenario:

Effect on Interest Income Recognition for Investments

in Credit Securities and MSR Financing Receivables:


A positive change in cash flows occurs. Actual cash flows exceed prior estimates and/or a positive change occurs in the estimate of expected remaining cash flows.			A revised effective interest rate is calculated and applied prospectively such that the positive change in cash flows is recognized as incremental interest income over the remaining life of the investment.
			The amount of periodic interest income recognized over the remaining life of the investment will be reduced accordingly. Generally, the investment’s effective interest rate is reduced accordingly and applied on a prospective basis. However, if the revised effective interest rate is negative, the investment’s existing effective interest rate is retained while the reference amount to which the existing effective interest rate will be prospectively applied is reduced to the present value of cash flows expected to be collected, discounted at the investment’s existing effective interest rate.
An adverse change in cash flows occurs. Actual cash flows fall short of prior estimates and/or an adverse change occurs in the estimate of expected remaining cash flows.

Other Significant Accounting Policies

Certain of the Company’s other significant accounting policies are summarized in the following notes:


Investments in agency MBS, subsequent measurement	Note 3
Investments in credit securities, subsequent measurement Loans held for investment, subsequent measurement Investments in MSR financing receivables, subsequent measurement Investments in SFR properties	Note 4 Note 5 Note 6 Note 7
Consolidation of variable interest entities Borrowings	Note 8 Note 9
To-be-announced agency MBS transactions, including “dollar rolls”	Note 10
Derivative instruments	Note 10
Balance sheet offsetting	Note 11
Fair value measurements Income taxes	Note 12 Note 13
Stock-based compensation	Note 16

Refer to the Company’s 2022 Annual Report on Form 10-K for a complete inventory and summary of the Company’s significant accounting policies.

Recent Accounting Pronouncements

The following table provides a brief description of recently issued accounting pronouncements and their actual or expected effect on the Company’s consolidated financial statements:


Standard	Description	Date of Adoption	Effect on the Consolidated Financial Statements
Recently Issued Accounting Guidance Not Yet Adopted
ASU Nos. 2020-04, 2021-01, and 2022-06, Reference Rate Reform (Topic 848)	The amendments in these updates provide optional practical expedients and exceptions for applying GAAP to the modification of receivables, debt or lease contracts as well as cash flow and fair value hedge accounting relationships that reference a rate, such as the London Interbank Offered Rate (“LIBOR”), that has been discontinued because of reference rate reform. The practical expedients and exceptions provided by these updates are effective from March 12, 2020 through December 31, 2024.	Not yet adopted.	No material modifications due to reference rate reform were necessary for the Company's receivables, debt, derivative or lease contracts. The Company has not elected to apply hedge accounting for financial reporting purposes. Accordingly, ASU Nos. 2020-04, 2021-01 and 2022-06 did not have a material effect on the Company's consolidated financial statements.

Note 3. Investments in Agency MBS

i The Company has elected to classify its investments in agency MBS as trading securities. Accordingly, the Company’s investments in agency MBS are reported in the accompanying consolidated balance sheets at fair value. As of June 30, 2023 and December 31, 2022, the fair value of the Company’s investments in agency MBS was $ i 467,503 and $ i 443,540, respectively. / As of June 30, 2023, all the Company’s investments in agency MBS represent undivided (or “pass-through”) beneficial interests in specified pools of fixed-rate mortgage loans.

All periodic changes in the fair value of agency MBS that are not attributed to interest income are recognized as a component of “investment and derivative gain (loss), net” in the accompanying consolidated statements of comprehensive income. i The following table provides additional information about the gains and losses recognized as a component of “investment and derivative gain (loss), net” in the Company’s consolidated statements of comprehensive income for the periods indicated with respect to investments in agency MBS:


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Net gains (losses) recognized in earnings for:
Agency MBS still held at period end	$	( i 8,015	)	$	( i 3,921	)	$	( i 987	)	$	( i 3,922	)
Agency MBS sold during the period		i —			( i 6,670	)		( i 245	)		( i 32,626	)
Total	$	( i 8,015	)	$	( i 10,591	)	$	( i 1,232	)	$	( i 36,548	)

The Company also invests in and finances fixed-rate agency MBS on a generic pool basis through sequential series of to-be-announced security transactions commonly referred to as “dollar rolls.” Dollar rolls are accounted for as a sequential series of derivative instruments. Refer to “Note 10. Derivative Instruments” for further information about dollar rolls.

Note 4. Investments in Credit Securities

i The Company has elected to classify its investments in credit securities as trading securities. Accordingly, the Company’s investments in credit securities are reported in the accompanying consolidated balance sheets at fair value. As of June 30, 2023 and December 31, 2022, the fair value of the Company’s investments in credit securities was $ i 102,203 and $ i 104,437, respectively. / As of June 30, 2023, the Company’s investments in credit securities primarily consist of non-agency MBS collateralized by pools of business purpose residential mortgage loans or commercial mortgage loans and ABS collateralized by pools of residential solar panel loans.

All periodic changes in the fair value of credit securities that are not attributed to interest income are recognized as a component of “investment and derivative gain (loss), net” in the accompanying consolidated statements of comprehensive income. i The following table provides additional information about the gains and losses recognized as a component of “investment and derivative gain (loss), net” in the Company’s consolidated statements of comprehensive income for the periods indicated with respect to investments in credit securities:


	Three Months Ended June 30,					Six Months Ended June 30,
	2023		2022			2023			2022
Net gains (losses) recognized in earnings for:
Credit securities still held at period end	$	i 521	$	( i 321	)	$	( i 168	)	$	( i 675	)
Credit securities sold during the period		i —		( i 482	)		i —			( i 970	)
Total	$	i 521	$	( i 803	)	$	( i 168	)	$	( i 1,645	)

Note 5. Loans Held for Investment

As of June 30, 2023 and December 31, 2022, the Company held a position in a syndicated loan secured by a first lien position in healthcare facilities and guaranteed by the operator of the facilities. As of June 30, 2023 and December 31, 2022, the total outstanding principal balance was $ i 76,901 and $ i 86,579, respectively, of which the Company held a pari-passu position of $ i 25,992 and $ i 29,264, respectively. The loan bears interest at a floating note rate equal to one-month term i SOFR plus 5.61%. The loan had a maturity date

of i March 23, 2023. On March 23, 2023, the loan was amended to grant the borrower a three-month extension of the maturity date to i June 23, 2023 and to grant the borrower an option for an additional three-month extension of the maturity date to i September 22, 2023. On June 23, 2023, the borrower exercised its three-month extension option resulting in a new maturity date of September 22, 2023. The loan has monthly principal amortization based upon a 30-year amortization schedule with the remaining principal balance due at loan maturity.

As of December 31, 2022, the Company was party to a participation agreement pursuant to which the Company had committed to fund up to $ i 30,000 of a $ i 130,000 revolving credit facility that matures on i July 7, 2024. Under the terms of the participation agreement, the Company was required to fund the last $ i 30,000 of advances under the revolving credit facility. Any draws under the revolving credit facility bore interest at i SOFR plus 3.86% with a SOFR floor of i 1.00% and were secured by a first lien on all accounts receivable and a second lien on all other assets of the borrower. The borrower was also required to pay an unused commitment fee of i 0.50%. As of December 31, 2022, the Company’s funded loan advances were $ i 4,914, which is included in the line item "other assets" in the accompanying consolidated balance sheets. On February 27, 2023, the Company's $ i 30,000 commitment was terminated.

i The Company has elected to account for its loans held for investment at fair value on a recurring basis with periodic changes in fair value recognized as a component of “investment and derivative gain (loss), net” in the accompanying consolidated statements of comprehensive income. As of June 30, 2023 and December 31, 2022, the Company’s investments were $ i 25,992 and $ i 34,178, respectively, at fair value. The Company recognizes interest income on its loans held for investment based upon the effective interest rate of the loans which is equal to the contractual note rate of each loan.

Note 6. Investments in MSR Financing Receivables

The Company does not hold the requisite licenses to purchase or hold MSRs directly. However, the Company has entered into agreements with a licensed, GSE approved residential mortgage loan servicer that enable the Company to garner the economic return of an investment in an MSR purchased by the mortgage servicing counterparty through an MSR financing transaction. Under the terms of the arrangement, for an MSR acquired by the mortgage servicing counterparty (i) the Company purchases the “excess servicing spread” from the mortgage servicer counterparty, entitling the Company to monthly distributions of the servicing fees collected by the mortgage servicing counterparty in excess of i 12.5 basis points per annum (and to distributions of corresponding proceeds of sale of the MSRs), and (ii) the Company funds the balance of the MSR purchase price to the parent company of the mortgage servicing counterparty and, in exchange, has an unsecured right to payment of certain amounts determined by reference to the MSR, generally equal to the servicing fee revenue less the excess servicing spread and the costs of servicing (and to distributions of corresponding proceeds of sale of the MSRs), net of fees earned by the mortgage servicing counterparty and its affiliates including an incentive fee equal to a percentage of the total return of the MSR in excess of a hurdle rate of return. During the three month period ended June 30, 2023, the Company's mortgage servicing counterparty agreed to accept an early payment in full satisfaction of the Company's remaining incentive fee payment obligations for the three-year performance periods ending December 31, 2023 and April 1, 2024 (see "Note 12. Fair Value Measurements" for further information). The Company has committed to invest a total minimum of $ i 50,000 in capital with the counterparty with $ i 25,000 of the minimum commitment expiring on i December 31, 2023 and $ i 25,000 of the minimum commitment expiring on i April 1, 2024. As of June 30, 2023, the Company has fully funded its minimum capital commitment.

Under the arrangement, the Company is obligated to provide funds to the mortgage servicing counterparty to fund the counterparty’s advances of payments on the serviced pool of mortgage loans. The mortgage servicing counterparty is required to return to the Company subsequent servicing advances collected from the underlying borrowers. The mortgage servicing counterparty is entitled to reimbursement from the GSEs of any servicing advances that are not subsequently collected from the underlying borrowers. As of June 30, 2023 and December 31, 2022, the Company had provided funds of $ i 3,283 and $ i 6,046, respectively, to its mortgage servicing counterparty related to the counterparty’s servicing advances made pursuant to the MSRs to which the Company’s MSR financing receivables are referenced.

As a means to increase potential returns to the Company, at the Company’s election, it can request the mortgage servicing counterparty utilize leverage on the MSRs to which the Company’s MSR financing receivables are referenced to finance the purchase of additional MSRs. As of June 30, 2023 and December 31, 2022, the Company’s counterparty had drawn $ i 0 and $ i 7,863, respectively, of financing secured by the MSRs to which the Company’s MSR financing receivables are referenced.

The Company accounts for transactions executed under its arrangement with the mortgage servicing counterparty as financing transactions and reflects the associated financing receivables in the line item “MSR financing receivables” on its consolidated balance sheets. The Company has elected to account for its MSR financing receivables at fair value with changes in fair value that are not attributed to interest income recognized as a component of “investment and derivative gain (loss), net” in the accompanying consolidated statements of comprehensive income. As described in further detail in “Note 2. Summary of Significant Accounting

Policies,” the Company recognizes interest income for MSR financing receivables by applying the prospective level-yield methodology required by GAAP for financial assets that are either not of high credit quality at the time of acquisition or can be contractually prepaid or otherwise settled in such a way that the Company would not recover substantially all of its recorded investment.

As of June 30, 2023 and December 31, 2022, the fair value of the Company’s investments in MSR financing receivables was $ i 195,893 and $ i 180,365, respectively. i The following table presents activity related to the carrying value of the Company’s investments in MSR financing receivables for the periods indicated:

Three Months Ended June 30,

Six Months Ended June 30,

2022

2023

2022

Balance at period beginning

i 183,058

i 139,225

i 180,365

i 125,018

Capital investments

i 10,126

i 18,032

i 16,201

i 21,219

Capital distributions

( i 10,652

)

( i 49,432

)

( i 15,584

)

( i 64,552

)

Accretion of interest income

i 4,709

i 3,983

i 9,394

i 7,365

Changes in valuation inputs and assumptions

i 8,652

i 8,452

i 5,517

i 31,210

Balance at period end

i 195,893

i 120,260

i 195,893

i 120,260

Note 7. Investments in SFR Properties

The Company previously allocated investment capital to a strategy of investing in SFR properties that consisted of acquiring, leasing and operating single-family residential homes as rental properties. During 2022, the Company sold its portfolio of SFR properties and is currently no longer anticipating allocating capital to an SFR investment strategy. The Company conducted its SFR investment strategy through a wholly-owned subsidiary, McLean SFR Investment, LLC ("McLean SFR").

To execute its strategy of investing in SFR properties, the Company entered into an agreement with a third-party investment advisory firm to identify, acquire and manage investments in SFR properties on behalf of the Company. Under the terms of the agreement, the Company had committed to fund up to $ i 55,000 of capital to fund the acquisition of SFR properties. On January 18, 2023, the Company's capital commitment amount was reduced to zero as a result of its sale of its remaining portfolio of SFR properties on December 1, 2022. Under the terms of the advisory agreement, the Company was obligated to pay the third-party firm a minimum fee plus an incentive fee equal to a percentage of the total investment return in excess of a hurdle rate of return. The Company terminated its agreement with the third-party investment advisory firm on April 28, 2023. Upon the termination of the agreement, the Company paid a termination fee equal to a fixed amount less inception to date minimum fees paid to the third-party firm as well as the incentive fee earned.

The Company’s investments in SFR properties were initially recognized on the settlement date of their acquisition at cost. The Company allocated the initial acquisition cost of each property to land and building on the basis of their relative fair values at the time of acquisition. To determine the relative fair value of land and building at the time of acquisition, the Company used available market data, such as property specific county tax assessment records.

Subsequent to the acquisition of a property, expenditures which improved or extended the life of the property were capitalized as a component of the property’s cost basis. Expenditures for ordinary maintenance and repairs were recognized as an expense as incurred and were reported as a component of “single-family property operating expenses” in the Company’s consolidated statements of comprehensive income.

The Company subsequently recognized depreciation of each property’s buildings and capitalized improvements over the expected useful lives of those assets. The Company calculated depreciation on a straight-line basis over a useful life of i 27.5 years for buildings and useful lives ranging from five to i 27.5 years for capitalized improvements. The Company reported depreciation expense as a component of “single-family property operating expenses” in the Company’s consolidated statements of comprehensive income.

Pursuant to its SFR investment strategy, the Company leased its SFR properties to tenants who occupied the properties. The leases generally had terms of one year or more and were classified as operating leases. Rental revenue, net of any concessions, was recognized over the term of each lease on a straight-line basis. If the Company determined that collectability of lease payments was not probable, any lease receivables previously recognized were reversed and rental revenue was limited to cash received.

Costs directly associated with the origination of a lease, such as a commission paid to a property manager when a lease agreement was obtained, were deferred at the commencement of the lease and subsequently recognized ratably as an expense over the

lease term, consistent with the recognition of rental revenue from the lease. The ratable expense recognition of lease direct costs was reported as a component of “single-family property operating expenses” in the Company’s consolidated statements of comprehensive income. In addition to the expense items previously mentioned, “single-family property operating expenses” also included accruals for, but not limited to, third-party property management fees, local real estate tax assessments, utilities, homeowners’ association dues and property insurance.

The Company evaluated its SFR properties for impairment whenever circumstances indicated that their carrying amounts may not be recoverable. Significant indicators of potential impairment included, but were not limited to, declines in home values, adverse changes in rental or occupancy rates and relevant unfavorable changes in the broader economy. If indicators of potential impairment existed, the Company performed a recoverability test by comparing the property’s net carrying amount to its estimate of the undiscounted future net cash flows expected to be obtained from the use and eventual disposition of the property. If the property’s carrying amount exceeded the Company’s estimate of the undiscounted future net cash flows expected to be obtained from the property, the Company would have recognized an impairment loss equal to the amount that the property’s net carrying amount exceeded the property’s estimated fair value.

From time to time, the Company identified SFR properties to be sold. At the time that any such properties were identified, the Company performed an evaluation to determine whether or not such properties should be classified as held for sale. Factors considered as part of the Company's held for sale evaluation process included whether the following conditions had been met: (i) the Company had committed to a plan to sell a property; (ii) the property was immediately available for sale in its present condition; (iii) an active program to locate a buyer and other actions required to complete the plan to sell a property had been initiated; (iv) the sale of a property was probable within one year (generally determined based upon listing for sale); (v) the property was being actively marketed for sale at a price that was reasonable in relation to its current fair value; and (vi) actions required to complete the plan indicated that it is unlikely that significant changes to the plan would be made or that the plan would be withdrawn. To the extent that these factors were all present, the Company ceased depreciating the property, measured the property at the lower of its carrying amount or its fair value less estimated costs to sell, and presented the property separately on its consolidated balance sheets.

On August 19, 2022, the Company completed a sale of i 371 SFR properties for a gross sale price of $ i 130,026 for a gain of $ i 14,391 that is net of accrued incentive fees to the Company's third-party investment firm.

On December 1, 2022, the Company completed a sale of McLean SFR, which included all of the Company's remaining investments in SFR properties and its long-term debt facility secured by SFR properties, for a gross sale price of $ i 87,050, including the assumption of the debt liability (see Note 9 "Borrowings"), for a gain of $ i 1,789 that is net of accrued incentive fees and termination fees to the Company's third-party investment advisory firm.

During the three and six months ended June 30, 2022, the Company recognized $ i 604 and $ i 1,319, respectively, of depreciation expense related to its SFR properties.

Note 8. Consolidation of Variable Interest Entities

The vehicles that issue the Company’s investments in securitized mortgage assets are considered VIEs. The Company is required to consolidate any VIE in which it holds a variable interest if it determines that it holds a controlling financial interest in the VIE and is, therefore, determined to be the primary beneficiary of the VIE. The Company is determined to be the primary beneficiary of a VIE in which it holds a variable interest if it both (i) holds the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The economic performance of the trusts that issue the Company’s investments in securitized mortgage assets is most significantly impacted by the performance of the mortgage loans that are held by the trusts. The party that is determined to have the most power to direct the loss mitigation actions that are taken with respect to delinquent or otherwise troubled mortgage loans held by the trust is, therefore, deemed to hold the most power to direct the activities that most significantly impact the trust’s economic performance. As a passive investor, the Company does not have the power to direct the loss mitigation activities of most of the trusts that have issued its securitized mortgage assets.

On September 30, 2020, the Company acquired for $ i 10,693 an investment that represents a majority interest in the first loss position of a securitized pool of business purpose residential mortgage loans. As majority holder of the first loss position, the Company is required to approve any material loss mitigation action proposed by the servicer with respect to a troubled loan. The Company also has the option (but not the obligation) to purchase delinquent loans from the trust. As a result of these contractual rights, the Company determined that it is the party with the most power to direct the loss mitigation activities and, therefore, the economic performance of the trust. As holder of the majority of the first loss position issued by the trust, the Company has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the trust. Accordingly, the Company

determined that it is the primary beneficiary of the trust and consolidated the trust’s assets and liabilities owed to third parties onto its consolidated balance sheets.

On February 3, 2022, the Company acquired for $ i 20,585 investments in the first loss position and the excess interest-only strip of a securitized pool of recently originated, performing “non-qualified” residential mortgage loans. The Company’s investment in the excess interest-only strip provided it with the option (but not the obligation) to purchase delinquent loans from the trust. As a result of this contractual right, the Company determined that it had the power to circumvent the loss mitigation activities that would otherwise be performed by the servicer and, therefore, was the party with the most power to impact the economic performance of the trust. As a result of its investments, the Company also had the obligation to absorb losses or the right to receive benefits that could potentially be significant to the trust. Accordingly, the Company determined that it was the primary beneficiary of the trust and consolidated the trust’s assets and liabilities owed to third parties onto its consolidated balance sheets. On March 7, 2023, the Company sold all of its investments in the securitized pool of "non-qualified" residential mortgage loans and, as a result, deconsolidated the issuing securitization trust.

The carrying values of the assets and liabilities of the consolidated VIEs, net of elimination entries, are as follows as of the dates indicated:

VIE of Business Purpose Residential Mortgage Loans

VIE of Residential Mortgage Loans

Total

Cash of consolidated VIEs

i 229

i —

i 229

Restricted cash of consolidated VIEs (1)

i 12

i —

i 12

Mortgage loans of consolidated VIEs, at fair value

i 910

i —

i 910

Other assets of consolidated VIEs

i 1,114

i —

i 1,114

Secured debt of consolidated VIEs, at fair value

( i 113

)

i —

( i 113

)

Other liabilities of consolidated VIEs

i —

Net investment in consolidated VIEs

i 2,152

i —

i 2,152

(1)

Restricted cash represents cash collected by the trust that must be used solely to satisfy the liabilities of the VIE in the month following collection.

VIE of Business Purpose Residential Mortgage Loans

VIE of Residential Mortgage Loans

Total

Cash of consolidated VIEs

i 296

i —

i 296

Restricted cash of consolidated VIEs (1)

i 16

i 2,175

i 2,191

Mortgage loans of consolidated VIEs, at fair value

i 2,320

i 191,637

i 193,957

Other assets of consolidated VIEs

i 1,389

i 678

i 2,067

Secured debt of consolidated VIEs, at fair value

( i 200

)

( i 169,145

)

( i 169,345

)

Other liabilities of consolidated VIEs

( i 1

)

( i 261

)

( i 262

)

Net investment in consolidated VIEs

i 3,820

i 25,084

i 28,904

(1)

Restricted cash represents cash collected by the trust that must be used solely to satisfy the liabilities of the VIE in the month following collection.

The debt of the Company’s consolidated VIEs have recourse solely to the assets of the respective VIE; it has no recourse to the general credit of the Company.

Consolidated VIE of Business Purpose Residential Mortgage Loans

The pool of business purpose residential mortgage loans held by the consolidated VIE consists of fixed-rate, short-term, interest-only mortgage loans (with the full amount of principal due at maturity) made to professional real estate investors and are secured by first lien positions in non-owner occupied residential real estate. The properties that secure these mortgage loans often require construction, repair or rehabilitation. The repayment of the mortgage loans is often largely based on the ability of the borrower to sell the mortgaged property or to convert the property for rental purposes and obtain refinancing in the form of a longer-term loan.

Consolidated VIE of Residential Mortgage Loans

On March 7, 2023, the Company sold all of its investments in the securitized pool of residential mortgage loans and, as a result, deconsolidated the issuing securitization trust. The pool of mortgage loans of the previously consolidated VIE consisted of performing, first lien “non-qualified” residential mortgage loans. “Non-qualified” residential mortgage loans are loans that do not fully comply with the “ability-to-repay” rule and related guidelines of the Truth-in-Lending Act established by the Consumer Finance Protection Bureau pursuant to the authority granted under the Dodd-Frank Act. A “qualified” residential mortgage loan (i.e., a residential mortgage loan that fully complies with the “ability-to-repay” rule of the Truth-in-Lending Act) must meet certain debt-to-income ratio requirements and cannot have certain features, such as an interest-only period, negative amortization, balloon payments or terms longer than 30 years. Qualified mortgage loans have limited upfront fees and points and, generally, cannot have prepayment penalties except for limited circumstances. Lenders of qualified mortgage loans are afforded certain legal protections not available to non-qualified mortgage loan lenders.

Accounting for Consolidated VIEs

The Company has elected to account for the mortgage loans and debt of its consolidated VIEs at fair value with changes in fair value that are not attributed to interest income or interest expense, respectively, recognized as a component of “investment and derivative gain (loss), net” in the accompanying consolidated statements of comprehensive income.

As described in further detail in “Note 2. Summary of Significant Accounting Policies,” the Company recognizes interest income for the mortgage loans of its consolidated VIEs by applying the “interest method” permitted by GAAP, whereby the premium or discount recognized at the initial recognition of each loan is amortized or accreted as an adjustment to contractual interest income accrued at the loan’s contractual interest rate. The Company ceases the accrual of interest income for a mortgage loan (i.e., places the loan in non-accrual status) when it believes collectability of principal and interest in full is not reasonably assured, which generally occurs when a loan is three or more monthly payments past due, unless the loan is well secured and in the process of collection based upon an individual loan assessment. Upon placing a loan in non-accrual status, any previously accrued but uncollected interest is derecognized and a corresponding reduction to current period interest income is recorded.

The following table presents information about the accrual status of the loans of the Company’s consolidated VIE of business purpose residential mortgage loans as of June 30, 2023:

Aggregate Fair Value

Aggregate Unpaid Principal Balance

Difference

Less than 90 days past due and in accrual status

i —

—

90 days or more past due and in non-accrual status

i 910

i 970

( i 60

)

Total mortgage loans of consolidated VIE

i 910

i 970

( i 60

)

Note 9. Borrowings

Repurchase Agreements

i The Company finances the purchase of mortgage investments through repurchase agreements, which are accounted for as collateralized borrowing arrangements. In a repurchase transaction, the Company sells a mortgage investment to a counterparty under a master repurchase agreement in exchange for cash and concurrently agrees to repurchase the same asset at a future date in an amount equal to the cash initially exchanged plus an agreed-upon amount of interest. Mortgage investments sold under agreements to repurchase remain on the Company’s consolidated balance sheets because the Company maintains effective control over such assets throughout the duration of the arrangement. Throughout the contractual term of a repurchase agreement, the Company recognizes a “repurchase agreement” liability on its consolidated balance sheets to reflect the obligation to repay to the counterparty the proceeds received upon the initial transfer of the mortgage investment. The difference between the proceeds received by the Company upon the initial transfer of the mortgage investment and the contractually agreed-upon repurchase price is recognized as interest expense ratably over the term of the repurchase arrangement.

Amounts borrowed pursuant to repurchase agreements are equal in value to a specified percentage of the fair value of the pledged collateral. The Company retains beneficial ownership of the pledged collateral throughout the term of the repurchase agreement. The counterparty to the repurchase agreements may require that the Company pledge additional securities or cash as additional collateral to secure borrowings when the value of the collateral declines.

The Company’s MBS repurchase agreement arrangements generally carry a fixed rate of interest and are short-term in nature with contract durations generally ranging from i 30 to i 60 days, but may be as short as one day or as long as one year. The Company’s mortgage loan repurchase agreement arrangement has a maturity date of i October 23, 2023 and an interest rate that resets monthly at a

rate equal to i SOFR plus i 2.61% / . Under the terms of the Company’s mortgage loan repurchase agreement, the Company may request extensions of the maturity date of the agreement for up to i 364 days, subject to the lender’s approval.

As of June 30, 2023 and December 31, 2022, the Company had no amount at risk with a single repurchase agreement counterparty or lender greater than 10% of equity. i The following table provides information regarding the Company’s outstanding repurchase agreement borrowings as of the dates indicated:


	June 30, 2023			December 31, 2022
Agency MBS repurchase financing:
Repurchase agreements outstanding	$	i 403,160		$	i 406,072
Agency MBS collateral, at fair value		i 423,409			i 425,023
Net amount (1)		i 20,249			i 18,951
Weighted-average rate		i 5.31	%		i 4.47	%
Weighted-average term to maturity	i 13.0 days			i 12.0 days
Non-agency MBS repurchase financing:
Repurchase agreements outstanding	$	i 79,493		$	i 88,953
MBS collateral, at fair value		i 88,716			i 98,933
Net amount (1)		i 9,223			i 9,980
Weighted-average rate		i 5.84	%		i 5.02	%
Weighted-average term to maturity	i 19.0 days			i 20.0 days
Mortgage loans repurchase financing:
Repurchase agreements outstanding	$	i 17,247		$	i 20,485
Mortgage loans collateral, at fair value		i 25,992			i 29,264
Net amount (1)		i 8,745			i 8,779
Weighted-average rate		i 7.75	%		i 6.84	%
Weighted-average term to maturity	i 115.0 days			i 235.0 days
Total mortgage investments repurchase financing:
Repurchase agreements outstanding	$	i 499,900		$	i 515,510
Mortgage investments collateral, at fair value		i 538,117			i 553,220
Net amount (1)		i 38,217			i 37,710
Weighted-average rate		i 5.48	%		i 4.66	%
Weighted-average term to maturity	i 17.5 days			i 22.2 days

(1)

Net amount represents the value of collateral in excess of corresponding repurchase obligation. The amount of collateral at-risk is limited to the outstanding repurchase obligation and not the entire collateral balance.

The following table provides information regarding the Company’s outstanding repurchase agreement borrowings during the three and six months ended June 30, 2023 and 2022:


	June 30, 2023			June 30, 2022
Weighted-average outstanding balance during the three months ended	$	i 490,524		$	i 282,725
Weighted-average rate during the three months ended		i 5.33	%		i 1.07	%
Weighted-average outstanding balance during the six months ended	$	i 497,947		$	i 312,544
Weighted-average rate during the six months ended		i 5.08	%		i 0.66	%

Long-Term Unsecured Debt

As of June 30, 2023 and December 31, 2022, the Company had $ i 86,611 and $ i 86,405, respectively, of outstanding long-term unsecured debentures, net of unamortized debt issuance costs of $ i 1,070 and $ i 1,276, respectively. The Company’s long-term unsecured debentures consisted of the following as of the dates indicated:

Senior
Notes Due 2025

Senior
Notes Due 2026

Trust
Preferred Debt

Senior
Notes Due 2025

Senior
Notes Due 2026

Trust
Preferred Debt

Outstanding
Principal

i 34,931

i 37,750

i 15,000

i 34,931

i 37,750

i 15,000

Annual
Interest Rate

i 6.75

i 6.000

i Three Month Term SOFR +
2.51 - 3.26 %

i 6.75

i 6.000

i Three Month LIBOR+
2.25 - 3.00 %

Interest Payment
Frequency

i Quarterly

Weighted-Average
Interest Rate

i 6.75

i 6.000

i 8.01

i 6.75

i 6.000

i 6.83

Maturity

i 2033 - i 2035

i 2033 - i 2035

The Senior Notes due 2025 and the Senior Notes due 2026 are publicly traded on the New York Stock Exchange under the ticker symbols “AIC” and “AAIN,” respectively. The Senior Notes due 2025 and Trust Preferred Debt may be redeemed in whole or in part at any time and from time to time at the Company’s option at a redemption price equal to the principal amount plus accrued and unpaid interest. The Senior Notes due 2026 may be redeemed in whole or in part at any time and from time to time at the Company’s option on or after August 1, 2023 at a redemption price equal to the principal amount plus accrued and unpaid interest. The indenture governing the Senior Notes contains certain covenants, including limitations on the Company’s ability to merge or consolidate with other entities or sell or otherwise dispose of all or substantially all of the Company’s assets.

Long-Term Debt Secured by Single-family Properties

On September 28, 2021, McLean SFR, a wholly-owned subsidiary of Arlington Asset, entered into a loan agreement with a third-party lender to fund McLean SFR’s purchases of SFR properties. As a result of the sale of McLean SFR on December 1, 2022, the obligations under the loan agreement were assumed by the acquiror of McLean SFR (see Note 7 "Investments in Single-Family Residential Properties").

Under the terms of the loan agreement, loan advances were available to be drawn up to i 74% of the fair value of eligible SFR properties up to a maximum loan amount of $ i 150,000. Advances under the loan agreement were able to be drawn during the advance period, which would end on the earlier of the date the outstanding principal balance equals the maximum loan amount or March 28, 2023. The outstanding principal balance was due on i October 9, 2026 and advances under the loan agreement bore interest at a fixed rate of i 2.76%. The loan was secured by a first priority interest in all the assets of McLean SFR and a first priority pledge of the equity interest of McLean SFR.

Note 10. Derivative Instruments

In the normal course of its operations, the Company is a party to financial instruments that are accounted for as derivative instruments. Derivative instruments are recorded at fair value as either “other assets” or “other liabilities” in the consolidated balance sheets, with all periodic changes in fair value reflected as a component of “investment and derivative gain (loss), net” in the consolidated statements of comprehensive income. Cash receipts or payments related to derivative instruments are classified as investing activities within the consolidated statements of cash flows.

Types and Uses of Derivative Instruments

Interest Rate Hedging Instruments

The Company is party to interest rate hedging instruments that are intended to economically hedge changes, attributable to changes in benchmark interest rates, in agency MBS and MSR financing receivable fair values and future interest cash flows on the Company’s short-term financing arrangements. Interest rate hedging instruments may include centrally cleared interest rate swaps, exchange-traded instruments, such as U.S. Treasury note futures, Eurodollar futures, interest rate swap futures and options on futures, and non-exchange-traded instruments such as options on agency MBS. While the Company uses its interest rate hedging instruments

to economically hedge a portion of its interest rate risk, it has not designated such contracts as hedging instruments for financial reporting purposes.

The Company exchanges cash “variation margin” with the counterparties to its interest rate hedging instruments on a daily basis based upon daily changes in fair value as measured by the Chicago Mercantile Exchange (“CME”), the central clearinghouse through which those instruments are cleared. In addition, the CME requires market participants to deposit and maintain an “initial margin” amount which is determined by the CME and is generally intended to be set at a level sufficient to protect the CME from the maximum estimated single-day price movement in that market participant’s contracts. However, futures commission merchants may require “initial margin” in excess of the CME’s requirement. Receivables recognized for the right to reclaim cash initial margin posted in respect of interest rate hedging instruments are included in the line item “deposits” in the accompanying consolidated balance sheets.

The daily exchange of variation margin associated with a centrally cleared or exchange-traded hedging instrument is legally characterized as the daily settlement of the instrument itself, as opposed to a pledge of collateral. Accordingly, the Company accounts for the daily receipt or payment of variation margin associated with its interest rate swaps and futures as a direct reduction to the carrying value of the derivative asset or liability, respectively. The carrying amount of interest rate swaps and futures reflected in the Company’s consolidated balance sheets is equal to the unsettled fair value of such instruments; because variation margin is exchanged on a one-day lag, the unsettled fair value of such instruments generally represents the change in fair value that occurred on the last trading day of the reporting period.

To-Be-Announced Agency MBS Transactions, Including “Dollar Rolls”

In addition to interest rate hedging instruments that are used for interest rate risk management, the Company is a party to derivative instruments that economically serve as investments, such as forward commitments to purchase fixed-rate “pass-through” agency MBS on a non-specified pool basis, which are known as to-be-announced (“TBA”) securities. A TBA security is a forward commitment for the purchase or sale of a fixed-rate agency MBS at a predetermined price, face amount, issuer, coupon, and stated maturity for settlement on an agreed upon future date. The specific agency MBS that will be delivered to satisfy the TBA trade is not known at the inception of the trade. The specific agency MBS to be delivered is determined 48 hours prior to the settlement date. The Company accounts for TBA securities as derivative instruments because the Company cannot assert that it is probable at inception and throughout the term of an individual TBA commitment that its settlement will result in physical delivery of the underlying agency MBS, or the individual TBA commitment will not settle in the shortest time period possible.

The Company’s agency MBS investment portfolio may include net purchase (or “net long”) positions in TBA securities, which are primarily the result of executing sequential series of “dollar roll” transactions. The Company executes dollar roll transactions as a means of investing in and financing non-specified fixed-rate agency MBS. Such transactions involve effectively delaying (or “rolling”) the settlement of a forward purchase of a TBA agency MBS by entering into an offsetting sale with the same counterparty prior to the settlement date, net settling the “paired-off” positions in cash, and contemporaneously entering, with the same counterparty, another forward purchase of a TBA agency MBS of the same characteristics for a later settlement date. TBA securities purchased for a forward settlement month are generally priced at a discount relative to TBA securities sold for settlement in the current month. This discount, often referred to as the dollar roll “price drop,” reflects compensation for the net interest income (interest income less financing costs) that is foregone as a result of economically relinquishing beneficial ownership of the MBS for the duration of the dollar roll (also known as “dollar roll income”). By executing a sequential series of dollar roll transactions, the Company is able to create the economic experience of investing in an agency MBS, financed with a repurchase agreement, over a period of time. Forward purchases and sales of TBA securities are accounted for as derivative instruments in the Company’s financial statements. Accordingly, dollar roll income is recognized as a component of “investment and derivative gain (loss), net” along with all other periodic changes in the fair value of TBA commitments.

In addition to transacting in net long positions in TBA securities for investment purposes, the Company may also, from time to time, transact in net sale (or “net short”) positions in TBA securities for the purpose of economically hedging a portion of the sensitivity of the fair value of the Company’s investments in agency MBS to changes in interest rates.

In addition to TBA transactions, the Company may, from time to time, enter into commitments to purchase or sell specified agency MBS that do not qualify as regular-way security trades. Such commitments are also accounted for as derivative instruments.

Under the terms of commitments to purchase or sell TBAs or specified agency MBS, the daily exchange of variation margin may occur based on changes in the fair value of the underlying agency MBS if a party to the transaction demands it. Receivables recognized for the right to reclaim cash collateral posted by the Company in respect of agency MBS purchase or sale commitments is included in the line item “deposits” in the accompanying consolidated balance sheets. Liabilities recognized for the obligation to

return cash collateral received by the Company in respect of agency MBS purchase or sale commitments is included in the line item “other liabilities” in the accompanying consolidated balance sheets.

Derivative Instrument Population and Fair Value

The following table presents the fair value of the Company’s derivative instruments as of the dates indicated:

Assets

Liabilities

Assets

Liabilities

Interest rate swaps

i —

( i 3

)

i 8

i —

TBA commitments

i 1,857

( i 353

)

i 5,652

( i 22

)

Total

i 1,857

( i 356

)

i 5,660

( i 22

)

Interest Rate Swaps

The Company’s Secured Overnight Financing Rate (“SOFR”) based interest rate swap agreements represent agreements to make (or receive) annual interest payments based upon a fixed interest rate and receive (or make) annual variable interest payments based upon the daily SOFR over the preceding annual period.

The following table presents information about the Company’s interest rate swap agreements that were in effect as of June 30, 2023:

Weighted-average:

Notional
Amount

Fixed Receive
(Pay) Rate

Variable (Pay)
Receive Rate

Net (Pay)
Receive Rate

Remaining
Life (Years)

Fair
Value

Receive-fixed

i 60,000

i 3.58

( i 5.06

( i 1.48

i 4.4

( i 1

)

Pay-fixed

i 25,000

( i 4.20

i 5.06

i 0.86

i 1.6

( i 2

)

Total / weighted-average

i 85,000

i 1.29

( i 2.08

( i 0.79

i 3.6

( i 3

)

The following table presents information about the Company’s interest rate swap agreements that were in effect as of December 31, 2022:

Weighted-average:

Notional
Amount

Fixed Receive
(Pay) Rate

Variable (Pay)
Receive Rate

Net (Pay)
Receive Rate

Remaining
Life (Years)

Fair
Value

Receive-fixed

i 60,000

i 3.58

( i 4.30

( i 0.72

i 4.9

i 8

TBA Commitments

The following tables present information about the Company’s TBA commitments as of the dates indicated:

Notional Amount:
Net Purchase (Sale)
Commitment

Contractual Forward Price

Market Price

Fair Value

3.0% 30-year MBS sale commitments

( i 67,000

)

( i 59,315

)

( i 58,944

)

i 371

4.0% 30-year MBS purchase commitments

i 40,000

i 37,875

i 37,522

( i 353

)

4.0% 30-year MBS sale commitments

( i 90,000

)

( i 84,818

)

( i 84,424

)

i 394

4.5% 30-year MBS sale commitments

( i 247,000

)

( i 238,482

)

( i 237,390

)

i 1,092

Total TBA commitments, net

( i 364,000

)

( i 344,740

)

( i 343,236

)

i 1,504

Notional Amount:
Net Purchase (Sale)
Commitment

Contractual Forward Price

Market Price

Fair Value

3.0% 30-year MBS sale commitments

( i 70,000

)

( i 62,828

)

( i 61,516

)

i 1,312

4.0% 30-year MBS sale commitments

( i 150,000

)

( i 142,255

)

( i 140,830

)

i 1,425

4.5% 30-year MBS sale commitments

( i 205,000

)

( i 200,365

)

( i 197,472

)

i 2,893

Total TBA commitments, net

( i 425,000

)

( i 405,448

)

( i 399,818

)

i 5,630

Derivative Instrument Gains and Losses

The following tables provide information about the derivative gains and losses recognized within the periods indicated:

Three Months Ended June 30,

Six Months Ended June 30,

2022

2023

2022

Interest rate derivatives:

Interest rate swaps:

Net interest expense (1)

( i 172

)

( i 282

)

( i 290

)

( i 573

)

Unrealized (losses) gains, net

( i 1,114

)

i 3,231

( i 322

)

i 6,697

Gains realized upon early termination, net

i —

i 288

i 385

i 3,449

Total interest rate swap (losses) gains, net

( i 1,286

)

i 3,237

( i 227

)

i 9,573

U.S. Treasury note futures, net

i —

( i 782

)

Options on U.S. Treasury note futures, net

i —

( i 4

)

Total interest rate derivative (losses) gains, net

( i 1,286

)

i 3,237

( i 227

)

i 8,787

TBA commitments:

TBA dollar roll income (2)

i 683

i 280

i 757

i 1,103

Other gains (losses) on TBA commitments, net

i 6,564

( i 263

)

i 21

( i 4,969

)

Total gains (losses) on TBA commitments, net

i 7,247

i 17

i 778

( i 3,866

)

Total derivative gains, net

i 5,961

i 3,254

i 551

i 4,921

(1)

Represents the periodic net interest settlement incurred during the period (often referred to as “net interest carry”). Also includes “price alignment interest” income earned or expense incurred on cumulative variation margin paid or received, respectively, associated with centrally cleared interest rate swap agreements.

(2)

Represents the price discount of forward-settling TBA purchases (sales) relative to a contemporaneously executed “spot” TBA sale (purchase), which economically equates to net interest income (expense) that is earned (incurred) ratably over the period beginning on the settlement date of the sale (purchase) and ending on the settlement date of the forward-settling purchase (sale).

Derivative Instrument Activity

The following tables summarize the volume of activity, in terms of notional amount, related to derivative instruments for the periods indicated:

For the Three Months Ended June 30, 2023

Beginning of
Period

Additions

Scheduled
Settlements

Early
Terminations

End of Period

Interest rate swaps

i 85,000

i —

i 85,000

TBA commitments, net

i 389,000

i 1,205,000

( i 1,230,000

)

i —

i 364,000

For the Three Months Ended June 30, 2022

Beginning of
Period

Additions

Scheduled Settlements

Early
Terminations

End of Period

Interest rate swaps

i 175,000

i 75,000

i —

( i 20,000

)

i 230,000

TBA commitments, net

i —

i 430,000

( i 275,000

)

i —

i 155,000

For the Six Months Ended June 30, 2023

Beginning of
Period

Additions

Scheduled
Settlements

Early
Terminations

End of Period

Interest rate swaps

i 60,000

i 50,000

i —

( i 25,000

)

i 85,000

TBA commitments, net

i 425,000

i 2,558,000

( i 2,619,000

)

i —

i 364,000

For the Six Months Ended June 30, 2022

Beginning of
Period

Additions

Scheduled Settlements

Early
Terminations

End of Period

Interest rate swaps

i 150,000

i 145,000

i —

( i 65,000

)

i 230,000

10-year U.S. Treasury note futures

i 25,000

i 50,000

( i 50,000

)

( i 25,000

)

i —

Purchased call options on 10-year U.S.
Treasury note futures

i 25,000

i —

( i 25,000

)

i —

TBA commitments, net

i —

i 755,000

( i 600,000

)

i —

i 155,000

Cash Collateral Posted and Received for Derivative and Other Financial Instruments

The following table presents information about the cash collateral posted by the Company in respect of its derivative and other financial instruments, which is included in the line item “deposits” in the accompanying consolidated balance sheets, for the dates indicated:


	June 30, 2023		December 31, 2022
Cash collateral posted for:
Interest rate swaps (cash initial margin)	$	i 1,643	$	i 1,823
TBA commitments, net		i 778		i —
Total cash collateral posted, net	$	i 2,421	$	i 1,823

Note 11. Offsetting of Financial Assets and Liabilities

The agreements that govern certain of the Company’s derivative instruments and collateralized short-term financing arrangements provide for a right of setoff in the event of default or bankruptcy with respect to either party to such transactions. The Company presents derivative assets and liabilities as well as collateralized short-term financing arrangements on a gross basis.

Receivables recognized for the right to reclaim cash initial margin posted in respect of interest rate derivative instruments are included in the line item “deposits” in the accompanying consolidated balance sheets.

The daily exchange of variation margin associated with a centrally cleared or exchange-traded derivative instrument is legally characterized as the daily settlement of the derivative instrument itself, as opposed to a pledge of collateral. Accordingly, the Company accounts for the daily receipt or payment of variation margin associated with its interest rate swaps and futures as a direct reduction to the carrying value of derivative asset or liability, respectively. The carrying amount of interest rate swaps and futures reflected in the Company’s consolidated balance sheets is equal to the unsettled fair value of such instruments; because variation margin is exchanged on a one-day lag, the unsettled fair value of such instruments generally represents the change in fair value that occurred on the last day of the reporting period.

The following tables present information, as of the dates indicated, about the Company’s derivative instruments, short-term borrowing arrangements, and associated collateral, including those subject to master netting (or similar) arrangements:

As of June 30, 2023

Gross Amount
Recognized

Amount Offset
in the
Consolidated
Balance Sheets

Net Amount
Presented in the
Consolidated
Balance Sheets

Gross Amount Not Offset in the
Consolidated Balance Sheets

Net
Amount

Financial
Instruments (1)

Cash
Collateral (2)

Assets:

Derivative instruments:

TBA commitments

i 1,857

i —

i 1,857

( i 353

)

i —

i 1,504

Total derivative instruments

i 1,857

i —

i 1,857

( i 353

)

i —

i 1,504

Total assets

i 1,857

i —

i 1,857

( i 353

)

i —

i 1,504

Liabilities:

Derivative instruments:

Interest rate swaps

i 3

i —

i 3

i —

( i 3

)

i —

TBA commitments

i 353

i —

i 353

( i 353

)

i —

Total derivative instruments

i 356

i —

i 356

( i 353

)

( i 3

)

i —

Repurchase agreements

i 499,900

i —

i 499,900

( i 499,900

)

i —

Total liabilities

i 500,256

i —

i 500,256

( i 500,253

)

( i 3

)

i —

As of December 31, 2022

Gross Amount
Recognized

Amount Offset
in the
Consolidated
Balance Sheets

Net Amount
Presented in the
Consolidated
Balance Sheets

Gross Amount Not Offset in the
Consolidated Balance Sheets

Net
Amount

Financial
Instruments (1)

Cash
Collateral (2)

Assets:

Derivative instruments:

TBA commitments

i 5,652

i —

i 5,652

( i 22

)

i —

i 5,630

Interest rate swaps

i 8

i —

i 8

i —

i 8

Total derivative instruments

i 5,660

i —

i 5,660

( i 22

)

i —

i 5,638

Total assets

i 5,660

i —

i 5,660

( i 22

)

i —

i 5,638

Liabilities:

Derivative instruments:

TBA commitments

i 22

i —

i 22

( i 22

)

i —

Total derivative instruments

i 22

i —

i 22

( i 22

)

i —

Repurchase agreements

i 515,510

i —

i 515,510

( i 515,510

)

i —

Total liabilities

i 515,532

i —

i 515,532

( i 515,532

)

i —

(1)

Does not include the fair value amount of financial instrument collateral pledged in respect of repurchase agreements that exceeds the associated liability presented in the consolidated balance sheets.

(2)

Does not include the amount of cash collateral pledged in respect of derivative instruments and repurchase agreements that exceeds the associated liability presented in the consolidated balance sheets.

Note 12. Fair Value Measurements

Fair Value of Financial Instruments

The accounting principles related to fair value measurements define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial Accounting Standards Board Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, giving the highest

priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3) as described below:


	Level 1 Inputs -	Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible by the Company at the measurement date;


	Level 2 Inputs -	Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and


	Level 3 Inputs -	Unobservable inputs for the asset or liability, including significant judgments made by the Company about the assumptions that a market participant would use.

The Company measures the fair value of the following assets and liabilities:

Investments in Financial Assets

Agency MBS – The Company’s investments in agency MBS are classified within Level 2 of the fair value hierarchy. Inputs to fair value measurements of the Company’s investments in agency MBS include price estimates obtained from third-party pricing services. In determining fair value, third-party pricing services use a market approach. The inputs used in the fair value measurements performed by the third-party pricing services are based upon readily observable transactions for securities with similar characteristics (such as issuer/guarantor, coupon rate, stated maturity, and collateral pool characteristics) occurring on the measurement date. The Company makes inquiries of the third-party pricing sources and reviews their documented valuation methodologies to understand the significant inputs and assumptions used to determine prices. The Company reviews the various third-party fair value estimates and performs procedures to validate their reasonableness, including comparison to recent trading activity for similar securities and an overall review for consistency with market conditions observed as of the measurement date.

Credit securities – The Company's investments in commercial MBS are classified within Level 2 of the fair value hierarchy. Inputs to fair value measurements of the Company's investments in commercial MBS include quoted prices for similar assets in recent market transactions and estimates obtained from third-party sources including pricing services and dealers. In determining fair value, third-party pricing sources use a market approach. The inputs used in the fair value measurements performed by third-party pricing sources are based upon observable transactions for securities with similar characteristics. The Company reviews the third-party fair value estimates and performs procedures to validate their reasonableness, including comparisons to recent trading activity observed for similar securities as well as an internally derived discounted future cash flow measurement. The Company’s investments in non-agency MBS collateralized by a pool of business purpose residential mortgage loans and ABS collateralized by residential solar panel loans are classified within Level 3 of the fair value hierarchy.

To measure the fair value of the Company’s non-agency MBS investment secured by a pool of business purpose residential mortgage loans, the Company uses an income approach by preparing an estimate of the present value of the amount and timing of the cash flows expected to be collected from the security over its expected remaining life. To prepare the estimate of cash flows expected to be collected, the Company uses significant judgment to develop assumptions about the future performance of the pool of business purpose residential mortgage loans that serve as collateral, including loan-level probabilities of default and loss-given-default. As of June 30, 2023 and December 31, 2022, the remaining population of business purpose residential mortgage loans serving as collateral to the Company's non-agency MBS investment represented less than i i 5 / % of the original collateral pool. Because the repayment of business purpose residential mortgage loans is often largely based on the ability of the borrower to sell the mortgaged property or to convert the property for rental purposes and obtain refinancing in the form of a longer-term loan, relatively high delinquency and default rates are common and expected attributes of this asset class. i The following table presents the weighted-average of the significant inputs to the fair value measurement of the Company’s non-agency MBS secured by business purpose residential mortgage loans as of dates indicated:


	June 30, 2023			December 31, 2022
Probability of default		i 60.7	%		i 27.8	%
Loss-given-default		i 39.7	%		i 18.3	%

Inputs to fair value measurements of the Company’s investments in ABS collateralized by residential solar panel loans includes either quoted prices obtained from dealers or an internally derived discounted future cash flow measurement.

Loans – The Company’s commercial mortgage loan investment is classified within Level 3 of the fair value hierarchy. To measure the fair value of its mortgage loan investment, the Company uses an income approach by preparing an estimate of the present value of the expected future cash flows of the loan over its expected remaining life, discounted at a current market rate. The

significant unobservable inputs to the fair value measurement of the Company’s mortgage loan investment are the estimated probability of default and the discount rate, which is based on current market yields and interest rate spreads for a similar loan. As of June 30, 2023, the estimated probability of default and discount rate for the Company’s mortgage loan investment were i 0% and i 10.8%, respectively. As of December 31, 2022, the estimated probability of default and discount rate for the Company’s mortgage loan investment were i 0% and i 10.0%, respectively.

Mortgage loans and secured debt of consolidated VIEs – The Company has elected to apply a fair value measurement practical expedient permitted by GAAP to measure the fair value of the mortgage loans and debt obligations of its consolidated VIEs. The fair value measurement practical expedient is permitted to be applied to consolidated “collateralized financing entities,” which are VIEs for which the financial liabilities of the VIE have contractual recourse solely to the financial assets of the VIE.

As of June 30, 2023 and December 31, 2022, pursuant to the practical expedient, the Company measured the fair value of both the mortgage loans and the debt obligations of its consolidated VIE of business purpose residential mortgage loans based upon the fair value of the mortgage loans of the VIE. As of December 31, 2022, the senior debt obligations of the consolidated VIE had been fully extinguished and only the subordinate debt obligation of the consolidated VIE remained. The business purpose residential mortgage loans and subordinate debt obligation of the consolidated VIE are classified within Level 3 of the fair value hierarchy. To measure the fair value of the business purpose residential mortgage loans of the consolidated VIE as of June 30, 2023 and December 31, 2022, the Company used significant judgment to develop assumptions about the future performance of each business purpose residential mortgage loan, which included determining loan-level probabilities of default and loss-given-default. As of June 30, 2023 and December 31, 2022, the remaining population of business purpose residential mortgage loans represented less than i i 5 / % of the original collateral pool. Because the repayment of business purpose residential mortgage loans is often largely based on the ability of the borrower to sell the mortgaged property or to convert the property for rental purposes and obtain refinancing in the form of a longer-term loan, relatively high delinquency and default rates are common and expected attributes of this asset class. The following table presents the weighted-average of the significant inputs to the fair value measurement of the business purpose residential mortgage loans of the Company’s consolidated VIE as of the periods indicated:


	June 30, 2023			December 31, 2022
Probability of default		i 71.7	%		i 44.1	%
Loss-given-default		i 23.2	%		i 11.3	%

On March 7, 2023, the Company sold all of its investments in its previously consolidated VIE of residential mortgage loans and, as a result, deconsolidated the VIE. As of December 31, 2022, the Company measured the fair value of both the residential mortgage loans and the debt obligations of its consolidated VIE of residential mortgage loans based upon the fair value of the debt obligations as the fair value of the debt securities issued by the VIE were more observable to the Company than the fair value of the underlying mortgage loans.

The senior and mezzanine debt obligations of the consolidated VIE of residential mortgage loans were classified within Level 2 of the fair value hierarchy. Inputs to the fair value measurements of the senior and mezzanine debt obligations of the consolidated VIE included quoted prices for similar assets in recent market transactions and estimates obtained from third-party pricing sources, including pricing services and dealers. In determining fair value, third-party pricing sources use a market approach. The inputs used in the fair value measurements performed by third-party pricing sources were based upon observable transactions for securities with similar characteristics.

The residential mortgage loans and the subordinate and excess interest-only debt obligations of the consolidated VIE of residential mortgage loans (held by the Company as investments and eliminated against the associated debt of the VIE in consolidation) were classified within Level 3 of the fair value hierarchy. To measure the fair value of the subordinate and excess interest-only debt obligations of the consolidated VIE of residential mortgage loans, the Company used an income approach by preparing an estimate of the present value of the amount and timing of the cash flows expected to be collected from each security over its expected remaining life. To prepare the estimate of cash flows expected to be collected, the Company used significant judgment to develop assumptions about the future performance of the pool of residential mortgage loans that served as collateral, including assumptions about the timing and amount of credit losses and prepayments. The significant unobservable inputs to the fair value measurement included the estimated rate of prepayment, rate of default and loss-given-default for the underlying pool of mortgage loans as well as the discount rate, which represented a market participant’s current required rate of return for a similar instrument. The following table presents the weighted-average of the significant inputs to the fair value measurement of the subordinate and excess interest-only debt obligations of its consolidated VIE of residential mortgage loans as of December 31, 2022:


	Subordinate Debt Obligation			Excess Interest-Only Debt Obligations
Annualized voluntary prepayment rate		i 10.0	%		i 10.0	%
Annualized default rate		i 0.5	%		i 0.5	%
Loss-given-default		i 17.5	%		i 17.5	%
Discount rate		i 7.8	%		i 17.7	%

MSR financing receivables – The Company’s MSR financing receivables are classified within Level 3 of the fair value hierarchy. The Company uses a nationally recognized, independent third-party mortgage analytics and valuation firm to estimate the fair value of the underlying MSRs from which the Company’s MSR financing receivables primarily derive their value. The third-party valuation firm estimates the fair value of the underlying MSRs using a discounted cash flow analysis using their proprietary prepayment models and market analysis. The Company corroborates the third-party valuation firm’s estimate of the fair value of the underlying MSRs and evaluates the estimate for reasonableness. The significant unobservable inputs to the fair value measurement of the underlying MSRs include the following:

•

the discount rate, which represents a market participant’s current required rate of return for similar MSRs;

•

expected rates of prepayment within the serviced pools of mortgage loans; and

•

annual per-loan cost of servicing.

The following table presents the significant unobservable inputs to the fair value measurement of the MSRs underlying the Company’s MSR financing receivables as of the periods indicated:


	June 30, 2023			December 31, 2022
Discount rate		i 9.0	%		i 8.5	%
Annualized prepayment rate		i 6.3	%		i 7.0	%
Annual per-loan cost of servicing (current loans)	$	i 60.00		$	i 65.00

Pursuant to the Company’s MSR financing receivable arrangements, upon the consummation of three-year performance periods ending December 31, 2023 and April 1, 2024, the Company’s mortgage servicing counterparty is entitled to an incentive fee payment equal to a percentage of the total return of the underlying MSRs in excess of a hurdle rate of return. Accordingly, the fair value of the Company’s MSR financing receivables reflects the present value of any expected incentive fee payment that would be owed to its counterparty. The present value of the expected incentive fee payment is estimated based upon the timing and amount of capital contributions from (and cash distributions to) the Company to (from) its mortgage servicing counterparty to date as well as the future expected cash flows from the MSR financing receivables over the remaining performance periods, which is derived from the current fair value of the underlying reference MSRs. As of June 30, 2023 and December 31, 2022, the present value of expected future incentive fee payments reflected in fair value of the Company’s MSR financing receivables was $ i 0 and $ i 12,568, respectively. During the three month period ended June 30, 2023, the Company's mortgage servicing counterparty agreed to accept an early payment of $ i 9,650 in full satisfaction of the Company's remaining incentive fee payment obligations for the three-year performance periods ending December 31, 2023 and April 1, 2024. Cumulatively, the Company paid $ i 10,794 in incentive fee payments to the Company's mortgage servicing counterparty, all of which were paid during the six months ended June 30, 2023.

Derivative instruments

Exchange-traded derivative instruments – Exchange-traded derivative instruments, which include U.S. Treasury note futures, Eurodollar futures, interest rate swap futures, and options on futures, are classified within Level 1 of the fair value hierarchy as they are measured using quoted prices for identical instruments in liquid markets.

Interest rate swaps – Interest rate swaps are classified within Level 2 of the fair value hierarchy. The fair values of the Company’s centrally cleared interest rate swaps are measured using the daily valuations reported by the clearinghouse through which the instrument was cleared. In performing its end-of-day valuations, the clearinghouse constructs forward interest rate curves (for example, SOFR forward rates) from its specific observations of that day’s trading activity. The clearinghouse uses the applicable forward interest rate curve to develop a market-based forecast of future remaining contractually required cash flows for each interest rate swap. Each market-based cash flow forecast is then discounted using the SOFR curve (sourced from the Federal Reserve Bank of New York) to determine a net present value amount which represents the instrument’s fair value.

Forward-settling purchases and sales of TBA securities – Forward-settling purchases and sales of TBA securities are classified within Level 2 of the fair value hierarchy. The fair value of each forward-settling TBA contract is measured using price estimates

obtained from a third-party pricing service, which are based upon readily observable transaction prices occurring on the measurement date for forward-settling contracts to buy or sell TBA securities with the same guarantor, contractual maturity, and coupon rate for delivery on the same forward settlement date as the commitment under measurement.

Other

Long-term unsecured debt - As of June 30, 2023 and December 31, 2022, the carrying value of the Company’s long-term unsecured debt was $ i 86,611 and $ i 86,405, respectively, net of unamortized debt issuance costs, and consists of Senior Notes and trust preferred debt issued by the Company. The Company’s estimate of the fair value of long-term unsecured debt is $ i 80,056 and $ i 79,900 as of June 30, 2023 and December 31, 2022, respectively. The Company’s Senior Notes, which are publicly traded on the New York Stock Exchange, are classified within Level 1 of the fair value hierarchy. Trust preferred debt is classified within Level 2 of the fair value hierarchy as the fair value is estimated based on the quoted prices of the Company’s publicly traded Senior Notes.

Investments in equity securities of publicly-traded companies – As of June 30, 2023 and December 31, 2022, the Company had investments in equity securities of publicly-traded companies at fair value of $ i 186 and $ i 234, respectively, which is included in the line item “other assets” in the accompanying consolidated balance sheets. Investments in publicly traded stock are classified within Level 1 of the fair value hierarchy as their fair value is measured based on unadjusted quoted prices in active exchange markets for identical assets.

Investments in equity securities of non-public companies and investment funds – As of June 30, 2023 and December 31, 2022, the Company had investments in equity securities of non-public companies and investment funds measured at fair value of $ i 2,860 and $ i 2,964, respectively, which are included in the line item “other assets” in the accompanying consolidated balance sheets.

Investments in equity securities of non-public companies and investment funds are classified within Level 3 of the fair value hierarchy. The fair values of the Company’s investments in equity securities of non-public companies and investment funds are not readily determinable. Accordingly, the Company estimates fair value by estimating the enterprise value of the investee which it then allocates to the investee’s securities in the order of their preference relative to one another. To estimate the enterprise value of the investee, the Company uses traditional valuation methodologies based on income and market approaches, including the consideration of recent investments in, or tender offers for, the equity securities of the investee, a discounted cash flow analysis and a comparable guideline public company valuation. The primary unobservable inputs used in estimating the fair value of an equity security of a non-public company include (i) a stock price to net asset multiple for similar public companies that is applied to the entity’s net assets, (ii) a discount factor for lack of marketability and control, and (iii) a cost of equity discount rate, used to discount to present value the equity cash flows available for distribution and the terminal value of the entity. As of June 30, 2023, the stock price to net asset multiple for similar public companies, the discount factor for lack of marketability and control, and the cost of equity discount rate used as inputs were i 100 percent, i 20 percent, and i 17 percent, respectively. As of December 31, 2022, the stock price to net asset multiple for similar public companies, the discount factor for lack of marketability and control, and the cost of equity discount rate used as inputs were i 97 percent, i 15 percent, and i 16 percent, respectively.

Financial assets and liabilities for which carrying value approximates fair value - Cash and cash equivalents, restricted cash, deposits, receivables, repurchase agreements, payables, and other assets (aside from those previously discussed) and liabilities are generally reflected in the consolidated balance sheets at their cost, which, due to the short-term nature of these instruments and their limited inherent credit risk, approximates fair value.

Fair Value Hierarchy

Financial Instruments Measured at Fair Value on a Recurring Basis

The following tables set forth financial instruments measured at fair value by level within the fair value hierarchy as of June 30, 2023 and December 31, 2022. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Total

Level 1

Level 2

Level 3

Financial assets:

Agency MBS

i 467,503

i —

i 467,503

i —

MSR financing receivables

i 195,893

i —

i 195,893

Loans

i 25,992

i —

i 25,992

Credit securities

i 102,203

i —

i 99,657

i 2,546

Mortgage loans of consolidated VIEs

i 910

i —

i 910

Derivative assets

i 1,857

i —

i 1,857

i —

Other assets

i 3,046

i 186

i —

i 2,860

Financial liabilities:

Secured debt of consolidated VIEs

i 113

i —

i 113

Derivative liabilities

i 356

i —

i 356

i —

Total

Level 1

Level 2

Level 3

Financial assets:

Agency MBS

i 443,540

i —

i 443,540

i —

MSR financing receivables

i 180,365

i —

i 180,365

Loans

i 29,264

i —

i 29,264

Credit securities

i 104,437

i —

i 98,933

i 5,504

Mortgage loans of consolidated VIE

i 193,957

i —

i 193,957

Derivative assets

i 5,660

i —

i 5,660

i —

Other assets

i 3,198

i 234

i —

i 2,964

Financial liabilities:

Secured debt of consolidated VIE

i 169,345

i —

i 159,464

i 9,881

Derivative liabilities

i 22

i —

i 22

i —

Level 3 Financial Assets and Liabilities

The table below sets forth an attribution of the change in the fair value of the Company’s Level 3 financial assets that are measured at fair value on a recurring basis for the periods indicated:

Three Months Ended June 30,

Six Months Ended June 30,