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```11111

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 001-34374

 

ARLINGTON ASSET INVESTMENT CORP.

(Exact name of Registrant as specified in its charter)

 

 

Virginia

 

54-1873198

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

6862 Elm Street, Suite 320

McLean, VA

 

22101

(Address of Principal Executive Offices)

 

(Zip Code)

 

(703) 373-0200

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Small reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes  No 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Class A Common Stock

 

AAIC

 

NYSE

7.00% Series B Cumulative Perpetual Redeemable Preferred Stock

 

AAIC PrB

 

NYSE

8.250% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock

 

AAIC PrC

 

NYSE

6.625% Senior Notes due 2023

 

AIW

 

NYSE

6.75% Senior Notes due 2025

 

AIC

 

NYSE

 

Number of shares outstanding of each of the registrant’s classes of common stock, as of April 30, 2021:

 

Title

 

Outstanding

Class A Common Stock

 

33,481,181 shares

 

 


 

 

ARLINGTON ASSET INVESTMENT CORP.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2021

INDEX

 

 

 

 

 

 

 

Page

PART I — FINANCIAL INFORMATION

 

 

 

 

Item 1.

 

Consolidated Financial Statements and Notes — (unaudited)

 

1

 

 

 

 

Consolidated Balance Sheets

 

1

 

 

 

 

Consolidated Statements of Comprehensive Income

 

2

 

 

 

 

Consolidated Statements of Changes in Equity

 

3

 

 

 

 

Consolidated Statements of Cash Flows

 

4

 

 

 

 

Notes to Consolidated Financial Statements

 

5

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

27

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

47

 

 

Item 4.

 

Controls and Procedures

 

52

PART II — OTHER INFORMATION

 

 

 

 

Item 1.

 

Legal Proceedings

 

53

 

 

Item 1A.

 

Risk Factors

 

53

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

53

 

 

Item 3.

 

Defaults Upon Senior Securities

 

53

 

 

Item 4.

 

Mine Safety Disclosures

 

53

 

 

Item 5.

 

Other Information

 

54

 

 

Item 6.

 

Exhibits

 

54

 

 

 

 

Signatures

 

56

 

 

 

i


 

 

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

ARLINGTON ASSET INVESTMENT CORP.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

 

 

 

March 31, 2021

 

 

December 31, 2020

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

48,198

 

 

$

28,796

 

Restricted cash of consolidated VIE

 

 

12,557

 

 

 

11,169

 

Interest receivable of consolidated VIE

 

 

309

 

 

 

545

 

Sold securities receivable

 

 

109,068

 

 

 

 

Agency mortgage-backed securities, at fair value

 

 

515,674

 

 

 

970,880

 

Mortgage credit securities, at fair value

 

 

16,405

 

 

 

26,660

 

Mortgage loans of consolidated VIE, at fair value

 

 

57,467

 

 

 

93,283

 

Mortgage loans, at fair value

 

 

44,914

 

 

 

45,000

 

MSR financing receivable, at fair value

 

 

36,005

 

 

 

9,346

 

Derivative assets, at fair value

 

 

2,280

 

 

 

258

 

Deposits

 

 

25,421

 

 

 

6,306

 

Other assets

 

 

15,046

 

 

 

20,146

 

Total assets

 

$

883,344

 

 

$

1,212,389

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Repurchase agreements

 

$

505,550

 

 

$

655,212

 

Secured debt of consolidated VIE, at fair value

 

 

58,654

 

 

 

93,627

 

Interest payable of consolidated VIE

 

 

201

 

 

 

321

 

Derivative liabilities, at fair value

 

 

4,267

 

 

 

221

 

Purchased securities payable

 

 

 

 

 

139,013

 

Other liabilities

 

 

2,111

 

 

 

4,698

 

Long-term unsecured debt

 

 

73,074

 

 

 

73,027

 

Total liabilities

 

 

643,857

 

 

 

966,119

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Series B Preferred stock, $0.01 par value, 336,273 shares issued

   and outstanding (liquidation preference of $8,407)

 

 

7,933

 

 

 

7,933

 

Series C Preferred stock, $0.01 par value, 1,117,034 shares issued

   and outstanding (liquidation preference of $27,926)

 

 

27,356

 

 

 

27,356

 

Class A common stock, $0.01 par value, 450,000,000 shares authorized, 33,481,181

   and 33,517,018 shares issued and outstanding, respectively

 

 

335

 

 

 

335

 

Additional paid-in capital

 

 

2,040,898

 

 

 

2,040,918

 

Accumulated deficit

 

 

(1,837,035

)

 

 

(1,830,272

)

Total stockholders’ equity

 

 

239,487

 

 

 

246,270

 

Total liabilities and stockholders’ equity

 

$

883,344

 

 

$

1,212,389

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2021

 

 

December 31, 2020

 

Assets and liabilities of consolidated VIE

 

 

 

 

 

 

 

 

Restricted cash

 

$

12,557

 

 

$

11,169

 

Interest receivable

 

 

309

 

 

 

545

 

Mortgage loans, at fair value

 

 

57,467

 

 

 

93,283

 

Secured debt, at fair value

 

 

(58,654

)

 

 

(93,627

)

Interest payable

 

 

(201

)

 

 

(321

)

Net investment in consolidated VIE

 

$

11,478

 

 

$

11,049

 

 

See notes to consolidated financial statements.

1


 

ARLINGTON ASSET INVESTMENT CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Interest income

 

 

 

 

 

 

 

 

Agency mortgage-backed securities

 

$

2,784

 

 

$

23,388

 

Mortgage credit securities

 

 

566

 

 

 

731

 

Loans

 

 

703

 

 

 

711

 

Mortgage loans of consolidated VIE

 

 

1,687

 

 

 

 

MSR financing receivable

 

 

358

 

 

 

 

Interest and other income

 

 

161

 

 

 

143

 

Total interest income

 

 

6,259

 

 

 

24,973

 

Interest expense

 

 

 

 

 

 

 

 

Short-term secured debt

 

 

488

 

 

 

14,592

 

Long-term unsecured debt

 

 

1,151

 

 

 

1,240

 

Secured debt of consolidated VIE

 

 

862

 

 

 

 

Total interest expense

 

 

2,501

 

 

 

15,832

 

Net interest income

 

 

3,758

 

 

 

9,141

 

Investment (loss) gain, net

 

 

 

 

 

 

 

 

(Loss) gain on mortgage investments, net

 

 

(21,665

)

 

 

3,094

 

Gain (loss) from derivative instruments, net

 

 

14,545

 

 

 

(102,600

)

Other, net

 

 

357

 

 

 

(562

)

Total investment (loss) gain, net

 

 

(6,763

)

 

 

(100,068

)

General and administrative expenses

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

1,395

 

 

 

1,858

 

Other general and administrative expenses

 

 

1,242

 

 

 

1,385

 

Total general and administrative expenses

 

 

2,637

 

 

 

3,243

 

Loss before income taxes

 

 

(5,642

)

 

 

(94,170

)

Income tax provision

 

 

398

 

 

 

 

Net loss

 

 

(6,040

)

 

 

(94,170

)

Dividend on preferred stock

 

 

(723

)

 

 

(774

)

Net loss attributable to common stock

 

$

(6,763

)

 

$

(94,944

)

Basic loss per common share

 

$

(0.20

)

 

$

(2.59

)

Diluted loss per common share

 

$

(0.20

)

 

$

(2.59

)

Weighted-average common shares outstanding

  (in thousands)

 

 

 

 

 

 

 

 

Basic

 

 

33,181

 

 

 

36,711

 

Diluted

 

 

33,181

 

 

 

36,711

 

 

See notes to consolidated financial statements.

2


 

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, 2019

 

 

354,039

 

 

$

8,270

 

 

 

1,200,000

 

 

$

28,944

 

 

 

36,755,387

 

 

$

368

 

 

$

2,049,292

 

 

$

(1,759,626

)

 

$

327,248

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(94,170

)

 

 

(94,170

)

Issuance of Class A common

  stock under stock-based

  compensation plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

60,374

 

 

 

 

 

 

62

 

 

 

 

 

 

62

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

393

 

 

 

 

 

 

393

 

Other

 

 

 

 

 

(6

)

 

 

 

 

 

(10

)

 

 

 

 

 

 

 

 

(6

)

 

 

 

 

 

(22

)

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(702

)

 

 

(702

)

Balances, March 31, 2020

 

 

354,039

 

 

$

8,264

 

 

 

1,200,000

 

 

$

28,934

 

 

 

36,815,761

 

 

$

368

 

 

$

2,049,741

 

 

$

(1,854,498

)

 

$

232,809

 

 

 

 

 

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, 2020

 

 

336,273

 

 

$

7,933

 

 

 

1,117,034

 

 

$

27,356

 

 

 

33,517,018

 

 

$

335

 

 

$

2,040,918

 

 

$

(1,830,272

)

 

$

246,270

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,040

)

 

 

(6,040

)

Issuance of Class A common

  stock under stock-based

  compensation plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101,818

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

Repurchase of Class A

  common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(137,655

)

 

 

(1

)

 

 

(522

)

 

 

 

 

 

(523

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

503

 

 

 

 

 

 

503

 

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(723

)

 

 

(723

)

Balances, March 31, 2021

 

 

336,273

 

 

$

7,933

 

 

 

1,117,034

 

 

$

27,356

 

 

 

33,481,181

 

 

$

335

 

 

$

2,040,898

 

 

$

(1,837,035

)

 

$

239,487

 

 

See notes to consolidated financial statements.

 

 

3


 

 

ARLINGTON ASSET INVESTMENT CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(6,040

)

 

$

(94,170

)

Adjustments to reconcile net loss to net cash provided by operating activities

 

 

 

 

 

 

 

 

Total investment loss, net

 

 

6,763

 

 

 

100,068

 

Net (discount) premium (accretion) amortization

 

 

(357

)

 

 

4,587

 

Other

 

 

564

 

 

 

521

 

Changes in operating assets

 

 

 

 

 

 

 

 

Interest receivable

 

 

510

 

 

 

4,536

 

Other assets

 

 

(90

)

 

 

(86

)

Changes in operating liabilities

 

 

 

 

 

 

 

 

Interest payable and other liabilities

 

 

1,091

 

 

 

(3,282

)

Accrued compensation and benefits

 

 

(1,754

)

 

 

(2,794

)

Net cash provided by operating activities

 

 

687

 

 

 

9,380

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of agency mortgage-backed securities

 

 

(354,417

)

 

 

(149,781

)

Purchases of mortgage credit securities

 

 

 

 

 

(49,353

)

Purchases of MSR financing receivables

 

 

(21,279

)

 

 

 

Proceeds from sales of agency mortgage-backed securities

 

 

517,200

 

 

 

1,762,433

 

Proceeds from sales of mortgage credit securities

 

 

11,978

 

 

 

30,054

 

Receipt of principal payments on agency mortgage-backed securities

 

 

14,305

 

 

 

121,715

 

Receipt of principal payments on mortgage credit securities

 

 

 

 

 

1

 

Receipt of principal payments on loans

 

 

85

 

 

 

 

Receipt of principal payments on mortgage loans of consolidated VIE

 

 

36,529

 

 

 

 

Payments for derivatives and deposits, net

 

 

(2,543

)

 

 

(100,818

)

Other

 

 

4,154

 

 

 

 

Net cash provided by investing activities

 

 

206,012

 

 

 

1,614,251

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayments of repurchase agreements, net

 

 

(149,662

)

 

 

(1,544,771

)

Repayments of secured debt of consolidated VIE, net

 

 

(34,994

)

 

 

 

Repurchase of common stock

 

 

(523

)

 

 

 

Repurchase of long-term unsecured debt

 

 

(7

)

 

 

 

Dividends paid

 

 

(723

)

 

 

(9,098

)

Other

 

 

 

 

 

(22

)

Net cash used in financing activities

 

 

(185,909

)

 

 

(1,553,891

)

Net increase in cash, cash equivalents and restricted cash

 

 

20,790

 

 

 

69,740

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

39,965

 

 

 

19,636

 

Cash, cash equivalents and restricted cash, end of period

 

$

60,755

 

 

$

89,376

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash payments for interest

 

$

2,434

 

 

$

19,243

 

Cash payments for taxes

 

$

 

 

$

 

 

See notes to consolidated financial statements.

 

 

 

4


 

 

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.  The Company may also invest in other asset classes that its management team believes may offer attractive risk adjusted returns, such as real estate assets or investments outside the real estate or mortgage asset classes.  The Company’s investment capital is currently allocated between agency mortgage-backed securities (“MBS”), mortgage credit investments and mortgage servicing right (“MSR”) related assets.

The Company’s agency MBS consist of residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by either 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”), or by a U.S. government agency, such as the Government National Mortgage Association (“Ginnie Mae”).  The Company’s mortgage 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”).  The principal and interest of the Company’s mortgage credit investments are not guaranteed by a GSE or a U.S government agency.  The Company’s MSR related assets represent investments for which the return is based on the economic performance of a pool of specific MSRs.

Arlington Asset 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 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 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, which may extend into the subsequent taxable year.

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, 2020.

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 from these estimates materially.

Certain amounts in the consolidated financial statements and notes for prior periods 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.

 

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 March 31, 2021 and December 31, 2020, approximately 99% of the Company’s cash

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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 and Mortgage Loans of a Consolidated VIE

The Company recognizes interest income for its investments in agency MBS and mortgage loans of a consolidated variable interest entity (“VIE”) 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 to its investments in agency MBS and mortgage loans of a consolidated VIE, 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 a consolidated VIE, 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.  When a loan is placed in non-accrual status, all accrued but uncollected contractual interest as well as any discount accreted during the period of delinquency are reversed.  While a loan is in non-accrual status, the Company recognizes interest income only when interest payments occur.

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

The Company recognizes interest income for its investments in mortgage credit securities 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 mortgage loans that serve as collateral for its investment, including assumptions about the timing and amount of prepayments and credit losses.  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 mortgage credit securities and MSR financing receivables:

 

 Scenario: