SIGNIFICANT ACCOUNTING POLICIES (Tables)

9 Months Ended

Sep. 30, 2018

Schedule of Significant Accounting Policies

The Company’s significant accounting policies are described below or are included in the following notes:



Notes
Note 1. Description of Business	Note 9. Real Estate	Note 17. Income Taxes
Note 2. Basis of Presentation	Note 10. Derivative Instruments	Note 18. Risk Management
Note 3. Significant Accounting Policies	Note 11. Fair Value Measurements	Note 19. Related Party Transactions
Note 4. Financial Instruments	Note 12. Goodwill and Intangible Assets, Net	Note 20. Lease Commitments and Contingencies
Note 5. Securities	Note 13. Secured Financing	Note 21. Arcola Regulatory Requirements
Note 6. Loans	Note 14. Capital Stock	Note 22. Acquisition of MTGE Investment Corp.
Note 7. Mortgage Servicing Rights	Note 15. Interest Income and Interest Expense	Note 23. Subsequent Events
Note 8. Variable Interest Entities	Note 16. Net Income (Loss) Per Common Share

Summary of Interest Income Recognition Methodology for Residential Investment Securities

The following table summarizes the interest income recognition methodology for Residential Securities:



	Interest Income Methodology
Agency
Fixed-rate pass-through ⁽¹⁾	Effective yield ⁽³⁾
Adjustable-rate pass-through ⁽¹⁾	Effective yield ⁽³⁾
Multifamily ⁽¹⁾	Contractual Cash Flows
Collateralized Mortgage Obligation (“CMO”) ⁽¹⁾	Effective yield ⁽³⁾
Reverse mortgages ⁽²⁾	Prospective
Interest-only ⁽²⁾	Prospective
Residential Credit
CRT ⁽²⁾	Prospective
Alt-A ⁽²⁾	Prospective
Prime ⁽²⁾	Prospective
Subprime ⁽²⁾	Prospective
NPL/RPL ⁽²⁾	Prospective
Prime Jumbo ⁽²⁾	Prospective
Prime Jumbo interest-only ⁽²⁾	Prospective


⁽¹⁾	Changes in fair value are recognized in Other comprehensive income (loss) on the accompanying

Consolidated Statements of Comprehensive Income (Loss).


⁽²⁾	Changes in fair value are recognized in Net unrealized gains (losses) on instruments measured at fair

value through earnings on the accompanying Consolidated Statements of Comprehensive Income (Loss).


⁽³⁾	Effective yield is recalculated for differences between estimated and actual prepayments and the

amortized cost is adjusted as if the new effective yield had been applied since inception.

Schedule of Finite-Lived Intangible Assets

The following table presents the activity of finite lived intangible assets for the nine months ended September 30, 2018.



Intangible Assets, net
(dollars in thousands)
Balance at December 31, 2017	$	23,220
Intangible assets acquired	14,483
Less: amortization expense	(6,475		)
Balance at September 30, 2018	$	31,228

Schedule of Useful Lives of Investments in Commercial Real Estate

Real estate investments are depreciated using the straight-line method over the estimated useful lives of the assets, summarized as follows:



Category	Term
Building and building improvements	1 - 44 years
Furniture and fixtures	1 - 4 years

Recent Accounting Pronouncements

ASUs not listed below were not applicable, not expected to have a significant impact on the Company’s consolidated financial statements when adopted, or did not have a significant impact on the Company’s consolidated financial statements upon adoption.



Standard	Description	Effective Date	Effect on the Financial Statements or Other Significant Matters
Standards that are not yet adopted
ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments	This ASU updates the existing incurred loss model to a current expected credit loss (“CECL”) model for financial assets and net investments in leases that are not accounted for at fair value through earnings. The amendments affect loans, held-to-maturity debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures and any other financial assets not excluded from the scope. There are also limited amendments to the impairment model for available-for-sale debt securities.	January 1, 2020 (early adoption permitted)	The Company currently plans to adopt the new standard on its effective date. While the Company is continuing to assess the impact the ASU will have on the consolidated financial statements, the measurement of expected credit losses under the CECL model will be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts of the financial assets in scope of the model. The Company needs to complete the development of an appropriate allowance methodology, assess the impact on the consolidated financial statements and determine appropriate internal controls and financial statement disclosures. Further, based on the amended guidance for available-for-sale debt securities, the Company: • will be required to use an allowance approach to recognize credit impairment, with the allowance to be limited to the amount by which the security’s fair value is less than its amortized cost basis; • may not consider the length of time fair value has been below amortized cost, and • may not consider recoveries of fair value after the balance sheet date when assessing whether a credit loss exists.

Standard	Description	Effective Date	Effect on the Financial Statements or Other Significant Matters
Standards that were adopted
ASU 2017-01 Business Combinations (Topic 805): Clarifying the Definition of a Business	This update provides a screen to determine and a framework to evaluate when a set of assets and activities is a business.	January 1, 2018	The amendments are expected to result in fewer transactions being accounted for as business combinations.
ASU 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments	This update provides specific guidance on certain cash flow classification issues, including classification of cash receipts and payments that have aspects of more than one class of cash flows. If cash flows cannot be separated by source or use, the appropriate classification should depend on the activity that is likely to be the predominant source or use of cash flows.	January 1, 2018	As a result of adopting this standard, the Company reclassified its cash flows on reverse repurchase and repurchase agreements entered into by Arcola Securities, Inc. from operating activities to investing and financing activities, respectively, in the Consolidated Statements of Cash Flows. The Company applied the retrospective transition method, which resulted in reclassification of comparative periods.