2.	Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates affecting the accompanying consolidated financial statements include the valuation of investments and derivative instruments.

Certain prior period amounts have been reclassified to conform to the current period classification.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and all of its subsidiaries. The Company also considers the provisions of FASB ASC Topic 810, Consolidation, in determining whether consolidation is appropriate for any interests held in variable interest entities. All significant intercompany balances and transactions have been eliminated.

The Company consolidates a securitization trust, also known as a collateralized financing entity (“CFE”) that purchased individual whole mortgage loans from one of the Company’s subsidiaries and issued MBS that are backed by the loans. This securitization occurred in December 2015. An owner of a variable interest in a variable interest entity (“VIE”) must consolidate the VIE if that owner has: (i) the power to direct the activities that most significantly impact the VIE’s economic performance (“power”), and (ii) the obligation to absorb losses of, or to receive benefits from, the VIE that could potentially be significant to the VIE. Because the Company purchased the majority of the MBS that were issued by the CFE, including all the subordinate tranches, and because a subsidiary of the Company continues to be the named servicer of the loans in the trust, the criteria for consolidation of the CFE are met. See Note 3 for further information related to the CFE.

PLS, which meets the definition of a business pursuant to GAAP, has also been determined to be a VIE. Further, PLS has structured its operations, and the funding and capitalization thereof, into three pools of assets and liabilities referred to as “silos.” Owners of variable interests in a given PLS silo are entitled to all of the returns and risk of loss on the investments and operations in that silo and have no substantive recourse to assets contained in any other silo. While the Company has power over all PLS silos because it owns 100% of the voting interests of PLS, it only has variable interests in two of the three silos. In the two silos in which it has a variable interest, the Company holds 100% of the variable interests, making it the primary beneficiary thereof. These silos have been included in the Company’s consolidated financial statements. The Company’s consolidated financial statements exclude the PLS silo in which the Company has no variable interest.

The Company is required to reassess the consolidation of VIEs quarterly, and changes in facts and circumstances may change the Company’s determination. This could result in a material impact to the Company’s consolidated financial statements during subsequent reporting periods.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The carrying amounts of cash equivalents approximate their fair value. Cash and cash equivalents includes cash pledged to derivative counterparties, which is held in margin accounts at various counterparties as collateral related to interest rate swaps, Eurodollar Futures Contracts (“Futures Contracts”) and forward commitments to purchase to-be-announced (“TBA”) securities.

Financial Instruments

The Company considers its cash and cash equivalents, MBS and agency credit risk transfer (“CRT”) securities (settled and unsettled), mortgage loans, forward purchase commitments, debt security held-to-maturity, receivable for securities sold, accrued interest receivable, principal payments receivable, payable for unsettled securities, derivative instruments, borrowings and accrued interest payable to meet the definition of financial instruments. The carrying amount of cash and cash equivalents, receivable for securities sold, accrued interest receivable and payable for unsettled securities approximate their fair value due to the short maturities of these instruments and would be valued using Level 1 inputs. The carrying amount of repurchase agreements is deemed to approximate fair value given their short-term duration and would be valued using Level 2 inputs. See Note 5 for discussion of the fair value of MBS and agency CRT securities. See Note 6 for discussion of the fair value of mortgage loans. See Note 8 for discussion of the fair value of the held-to-maturity debt security. See Note 10 for discussion of the fair value of derivative instruments, including forward purchase commitments.

The Company limits its exposure to credit losses on its portfolio of securities by purchasing predominantly agency securities. In addition, the Company’s portfolio is diversified to avoid undue exposure to loan originator, geographic and other types of concentration. The Company manages the risk of prepayments of the underlying mortgages by creating a diversified portfolio with a variety of expected prepayment characteristics. See Note 5 for additional information on MBS.

The Company is engaged in various trading and brokerage activities including repurchase agreements, dollar roll transactions, interest rate swap agreements, interest rate swaptions and Futures Contracts in which counterparties primarily include broker-dealers, banks, and other financial institutions. In the event counterparties do not fulfill their obligations, the Company may be exposed to risk of loss. The risk of default depends on the creditworthiness of the counterparty and/or issuer of the instrument. It is the Company’s policy to review, as necessary, the credit standing for each counterparty and retain collateral when appropriate. See Note 9 for additional information on repurchase agreements and Note 10 for additional information on dollar roll transactions, interest rate swap agreements, interest rate swaptions and Futures Contracts.

Mortgage-Backed Securities and Agency CRT Securities

The Company invests primarily in MBS representing interests in or obligations backed by pools of single-family residential mortgage loans. GAAP requires the Company to classify its investments as either trading, available-for-sale or held-to-maturity securities. Management determines the appropriate classifications of the securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date. The Company currently classifies all of its MBS as available-for-sale. All assets that are classified as available-for-sale are carried at fair value and unrealized gains and losses are included in other comprehensive income (loss). Agency CRT securities are credit risk transfer securities issued by government sponsored entities, which are designed to synthetically transfer mortgage credit risk from Fannie Mae and Freddie Mac to private investors. The Company has elected to account for agency CRT securities under the fair value option, which simplifies accounting for these particular securities due to the potential for embedded derivatives therein. The estimated fair values of MBS and agency CRT securities are determined by management utilizing valuations obtained from independent sources. Security purchase and sale transactions are recorded on the trade date. Gains or losses realized from the sale of securities are included in income and are determined using the specific identification method.

Forward purchase commitments to acquire “when issued” or TBA securities are recorded at fair value in accordance with FASB ASC Topic 815, Derivatives and Hedging (“ASC 815”). The fair value of these forward purchase commitments is included in derivative assets or derivative liabilities in the accompanying consolidated balance sheets. If the Company intends to take physical delivery of the securities, as is the case for forward purchase commitments to acquire TBA securities from mortgage originators, the commitment is designated as an all-in-one cash flow hedge and its unrealized gains and losses are recorded in other comprehensive income. If the Company does not intend to take physical delivery of the securities, as is the case with most TBA dollar roll transactions, the commitment is not designated as an accounting hedge and unrealized gains and losses are recorded in “Gain (loss) on derivative instruments, net.” See Note 10 for additional information on forward purchase commitments.

The Company assesses its available-for-sale securities for other-than-temporary impairment on at least a quarterly basis. When the fair value of an investment is less than its amortized cost at the balance sheet date the impairment is designated as either “temporary” or “other-than-temporary.” In deciding on whether or not a security is other-than-temporarily impaired, the Company uses a two-step evaluation process. First, the Company determines whether it has made any decision to sell a security that is in an unrealized loss position, or, if not, the Company determines whether it is more likely than not that the Company will be required to sell the security prior to recovering its amortized cost basis. If the answer to either of these questions is “yes” then the security is considered other-than-temporarily impaired. See Note 5 for discussion of an other-than temporary impairment recognized during the year ended December 31, 2013.

Mortgage Loans Held for Investment

The Company does not originate any loans, but purchases individual prime jumbo adjustable-rate whole mortgage loans with the intention of holding them as investments. In order to finance its investment in the loans, the Company may securitize the loans into MBS not issued or guaranteed by a U.S. Government agency or U.S. Government-sponsored entity. The Company would then purchase the majority of the MBS that the securitization trusts would issue, and would expect to consolidate the trusts pursuant to GAAP. The Company completed such a securitization transaction during 2015.

The Company has elected to account for these loans under the fair value option, pursuant to FASB ASC Topic 825, Financial Instruments (“ASC 825’). As a result of electing the fair value option, the mortgage loans are carried at fair value with changes therein reflected in consolidated net income (loss), consistent with the accounting for the related hedging instruments, thereby enhancing the usefulness of the Company’s financial statements. See “Interest Income” below for discussion of the recognition of the interest income on mortgage loans. Other changes in fair value are reported in “Net gain (loss) on mortgage loans” in the consolidated statements of income Given the Company’s intent to hold the mortgage loans as investments, purchases and sales or paydowns of mortgage loans held for investment are classified as investing cash flows in the consolidated statements of cash flows.

Mortgage Loans Held for Investment in Securitization Trusts

As discussed under “Principles of Consolidation,” the Company consolidates a CFE that securitized individual prime jumbo adjustable-rate whole mortgage loans it had purchased from a subsidiary of the Company. These securitized mortgage loans are legally isolated from the Company, are beyond the reach of the Company’s creditors, and may only be used to settle obligations of the CFE. The Company has elected to account for the assets and liabilities of the CFE under the fair value option, pursuant to ASC 825. As a result, mortgage loans held for investment in securitization trusts are carried at fair value. See “Interest Income” below for discussion of the recognition of the interest income on mortgage loans. Paydowns on these mortgage loans are classified as investing cash flows in the consolidated statements of cash flows. See Note 3 for further information regarding the CFE.

Mortgage Loans Held for Sale

The Company purchases certain individual whole loans with the intention of selling them to Ginnie Mae for inclusion in securitizations. The Company has elected to account for these loans under the fair value option, pursuant to ASC 825, because it better reflects the short-term nature of the Company’s holdings in these loans. As a result of electing the fair value option, the mortgage loans are carried at fair value with changes therein reflected in consolidated net income (loss). Changes in fair value are reported in “Net gain (loss) on mortgage loans” in the consolidated statements of income. Cash flows related to mortgage loans held for sale are classified as operating cash flows in the consolidated statements of cash flows.

Mortgage Servicing Rights

The Company purchases MSR with the intention of holding them as investments. The Company and its subsidiaries do not originate or directly service mortgage loans. Rather, it utilizes duly licensed subservicers to perform substantially all servicing functions for the loans underlying the MSR. The Company has elected to account for its investments in MSR at fair value pursuant to FASB ASC Topic 860, Transfers and Servicing. As a result, MSR are carried at fair value with changes therein reported in “Net gain on mortgage servicing rights” in the consolidated statements of income. Servicing income and expenses are reported on a gross basis in the consolidated statements of income.

Derivative Instruments

The Company manages economic risks, including interest rate, liquidity and credit risks, primarily by managing the amount, sources, cost and duration of its debt funding. The objectives of the Company’s risk management strategy are 1) to attempt to mitigate the risk of the cost of its variable rate liabilities increasing during a period of rising interest rates, and 2) to reduce fluctuations in net book value over a range of interest rate scenarios. The principal instruments that the Company uses to achieve these objectives are interest rate swaps and Eurodollar Futures Contracts (“Futures Contracts”). The Company uses Futures Contracts to approximate the economic hedging results achieved with interest rate swaps. The Company does not enter into any of these transactions for speculative purposes.

The Company accounts for derivative instruments in accordance with ASC 815, which requires an entity to recognize all derivatives as either assets or liabilities and to measure those instruments at fair value. The accounting for changes in the fair value of derivative instruments depends on whether the instruments are designated and qualify as part of a hedging relationship pursuant to ASC 815. Changes in fair value related to derivatives not in hedge designated relationships are recorded in “Gain (loss) on derivative instruments, net” in the Company’s consolidated statements of income, whereas changes in fair value related to derivatives in hedge designated relationships are initially recorded in other comprehensive income (loss) and later reclassified to income at the time that the hedged transactions affect earnings. Any portion of the changes in fair value due to hedge ineffectiveness is immediately recognized in the income statement.

Derivative instruments in a gain position are reported as derivative assets and derivative instruments in a loss position are reported as derivative liabilities in the Company’s consolidated balance sheets. In the Company’s consolidated statements of cash flows, cash receipts and payments related to derivative instruments are classified according to the underlying nature or purpose of the derivative transaction, generally in the operating section if the derivatives are designated as accounting hedges and in the investing section otherwise. The use of derivatives creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments in an asset position fail to perform their obligations under the contracts. The Company attempts to minimize this risk by limiting its counterparties to major financial institutions with acceptable credit ratings, monitoring positions with individual counterparties and adjusting posted collateral as required.

The Company’s interest rate swaps have historically been accounted for as cash flow hedges under ASC 815. However, on September 30, 2013, the Company discontinued hedge accounting for its interest rate swap agreements by de-designating the interest rate swaps as cash flow hedges. No interest rate swaps were terminated in conjunction with this action, and the Company’s risk management and hedging practices were not impacted. As a result of discontinuing hedge accounting, beginning October 1, 2013 changes in the fair value of the Company's interest rate swap agreements are recorded in “Gain (loss) on derivative instruments, net” in the Company's consolidated statements of income, rather than in other comprehensive income (loss). Also, net interest paid or received under the interest rate swaps, which up through September 30, 2013 was recognized in “interest expense,” is instead recognized in “Gain (loss) on derivative instruments, net.” These interest rate swaps continue to be reported as assets or liabilities on the Company's consolidated balance sheets at their fair value.

As long as the forecasted transactions that were being hedged (i.e. rollovers of the Company’s repurchase agreement borrowings) are still expected to occur, the balance in accumulated other comprehensive income (AOCI) from interest rate swap activity up through September 30, 2013 remains in AOCI and is recognized in the Company's consolidated statements of income as "interest expense" over the remaining term of the interest rate swaps. See Note 10 for further information.

The Company may also enter into forward purchase commitments as a means of investing in and financing agency securities via TBA dollar roll transactions. TBA dollar roll transactions involve moving the settlement of a TBA contract out to a later date by entering into an offsetting short position (referred to as a "pair off"), net settling the paired-off positions for cash, and simultaneously purchasing a similar TBA contract for a later settlement date. The agency securities purchased at the later settlement date are typically priced at a discount to securities for settlement in the current month. This difference is referred to as the “price drop.” The price drop represents compensation to the Company for foregoing net interest margin (interest income less repurchase agreement financing cost) and is referred to as “dollar roll income,” which the Company classifies in “Gain (loss) on derivative instruments, net.” Realized and unrealized gains and losses related to TBA dollar roll transactions are also recognized in “Gain (loss) on derivative instruments, net.” TBA dollar roll transactions represent off-balance sheet financing.

Repurchase Agreements

The Company finances the acquisition of its MBS through the use of repurchase agreements. Under these repurchase agreements, the Company sells securities to a lender and agrees to repurchase the same securities in the future for a price that is higher than the original sales price. The difference between the sale price that the Company receives and the repurchase price that the Company pays represents interest paid to the lender. Although structured as a sale and repurchase obligation, a repurchase agreement operates as a financing under which the Company pledges its securities as collateral to secure a loan which is equal in value to a specified percentage of the estimated fair value of the pledged collateral. The Company records repurchase agreements on the consolidated balance sheets at the amount of cash received (or contract value), with accrued interest recorded separately. The Company retains beneficial ownership of the pledged collateral. At the maturity of a repurchase agreement, the Company is required to repay the loan and concurrently receives back its pledged collateral from the lender or, with the consent of the lender, the Company may renew such agreement at the then-prevailing financing rate. These repurchase agreements may require the Company to pledge additional assets to the lender in the event the estimated fair value of the existing pledged collateral declines.

Warehouse Lines of Credit

Warehouse lines of credit include borrowings under mortgage loan warehouse facilities with various counterparties that expire within one year. These borrowings are collateralized by mortgage loans. If the value of the underlying collateral (as determined by the counterparty) securing these borrowings decreases, the Company may be subject to margin calls during the period the borrowing is outstanding. To satisfy these margin calls, the Company may have to pledge additional collateral or repay portions of the borrowings.

Federal Home Loan Bank Advances

During the third quarter of 2015, a wholly-owned subsidiary of the Company became a member of the Federal Home Loan Bank of Atlanta (the “FHLB”). The FHLB offers a variety of products and services, including short-term and long-term secured advances. FHLB advances are carried at their contractual amounts. Based on the current status of recent rulemaking by the Federal Housing Finance Agency (“FHFA”), the Company will need to surrender its membership in the FHLB in 2016.

Collateralized Borrowings in Securitization Trusts, at Fair Value

As discussed under “Principles of Consolidation,” the Company consolidates a CFE that securitized individual prime jumbo adjustable-rate whole mortgage loans it had purchased from a subsidiary of the Company. Investors in the collateralized borrowings issued by the CFE have recourse against the assets within the CFE, but have no recourse against the Company itself. The Company has elected to account for the assets and liabilities of the CFE under the fair value option, pursuant to ASC 825. As a result, collateralized borrowings in securitization trusts are carried at fair value. The debt certificates issued by the CFE are tradeable MBS, and the fair value of the debt is determined by management by obtaining valuations from independent sources, consistent with how the Company values its investment portfolio. Paydowns on this debt are classified as financing cash flows in the consolidated statements of cash flows. See Note 3 for further information regarding the CFE.

Offsetting of Assets and Liabilities

The Company’s derivative agreements and repurchase agreements generally contain provisions that allow for netting or the offsetting of receivables and payables with each counterparty. The Company reports amounts in its consolidated balance sheets on a gross basis without regard for such rights of offset or master netting arrangements.

Interest Income

Interest income on MBS and agency CRT securities is earned and recognized based on the outstanding principal amount of the investment securities and their contractual terms. Premiums and discounts associated with the purchase of MBS are amortized or accreted into interest income over the actual lives of the securities using the effective interest method. Interest income on agency CRT securities, which are accounted for under the fair-value option, is recognized based on their stated coupon rates.

The Company recognizes interest income on mortgage loans held for investment and mortgage loans held for investment in securitization trusts based on their stated coupon rates. If a loan becomes 90 days past due, it is considered non-performing and is placed in non-accrual status. Accrual of interest income ceases and any existing interest receivables are reversed. Any cash received while a loan is in non-accrual status is first applied to unpaid principal and then to unpaid interest. In general, non-performing loans are only restored to accrual status when no principal or interest remains due and unpaid.

Income Taxes

The Company has elected to be taxed as a REIT under the Code. The Company will generally not be subject to federal income tax to the extent that it distributes 100% of its taxable income, after application of available tax attributes, within the time limits prescribed by the Code and as long as it satisfies the ongoing REIT requirements including meeting certain asset, income and stock ownership tests. The Company has made an election to treat certain of its subsidiaries as TRSs. These TRSs are taxable as domestic C corporations and are subject to federal, state and local income taxes based upon their taxable income.

Share-Based Compensation

Share-based compensation is accounted for under the guidance included in FASB ASC Topic 718, Stock Compensation. For share and share-based awards issued to employees, a compensation charge is recorded in earnings based on the fair value of the award. For transactions with non-employees in which services are performed in exchange for the Company’s common stock or other equity instruments, the transactions are recorded on the basis of the fair value of the service received or the fair value of the equity instruments issued, whichever is more readily measurable at the date of issuance. The Company’s share-based compensation transactions resulted in compensation expense of $4,256, $3,612, and $2,594 for the years ended December 31, 2015, 2014, and 2013, respectively.

Earnings Per Common Share (EPS)

Basic EPS is computed by dividing net income less preferred stock dividends to arrive at net income available to holders of common stock by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed using the two class method, as described in FASB ASC Topic 260, Earnings Per Share, which takes into account certain adjustments related to participating securities. Participating securities are unvested share-based awards that contain rights to receive nonforfeitable dividends, such as those awarded under the Company’s equity incentive plans. Net income available to holders of common stock after deducting dividends on unvested participating securities if antidilutive, is divided by the weighted average shares of common stock and common equivalent shares outstanding during the period. For the diluted EPS calculation, common equivalent shares outstanding includes the weighted average number of shares of common stock outstanding adjusted for the effect of dilutive unexercised stock options, if any.

Other Comprehensive Income

Other comprehensive income refers to revenue, expenses, gains, and losses that are recorded directly as an adjustment to shareholders’ equity. Other comprehensive income for the Company generally arises from unrealized gains or losses generated from changes in market values of the securities held as available-for-sale and derivative instruments that have been designated as accounting hedges.

Recent Accounting Pronouncements

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 modifies the principals for consolidation of limited partnerships and similar legal entities (such as limited liability companies) including whether such entities represent variable interest entities or voting interest entities. ASU 2015-02 eliminates the presumption that a general partner (or a managing member, in the case of an LLC) should consolidate a limited partnership. It also changes the conditions under which fees paid to a decision maker or a service provider by a legal entity represent a variable interest in that legal entity. ASU 2015-02 is effective January 1, 2016 for calendar year companies and early adoption is permitted. The Company early adopted this standard effective July 1, 2015. The adoption of this standard did not have any impact on previous consolidation evaluations.

In August 2014, the FASB issued ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity (“ASU 2014-13”). ASU 2014-13 provides a practical expedient that allows an entity to measure both the financial assets and financial liabilities of a CFE it consolidates using the fair value of either the CFE’s financial assets or the financial liabilities, whichever is more observable. This approach eliminates the potential for a non-economic accounting mismatch that could arise if the financial assets and the financial liabilities were valued independently. ASU 2014-13 is effective January 1, 2016 for calendar year companies and early adoption is permitted. The Company is still assessing the potential impacts of ASU 2014-13.

In January 2016, the FASB issued ASU 2016-1, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-1”). Among other things, ASU 2016-1 modifies accounting and impairment assessments for equity investments, eliminates certain disclosures related to financial instruments carried at amortized cost, and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset. ASU 2016-1 is effective January 1, 2018 for calendar year companies and early adoption is permitted. The Company is still assessing the potential impacts of ASU 2016-1, but it is not expected to have a material impact on the Company’s consolidated financial statements.