Ellington Financial Inc. - Quarter Report: 2017 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



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

For the quarterly period ended September 30, 2017



¨	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 001-34569

Ellington Financial LLC

(Exact Name of Registrant as Specified in Its Charter)



Delaware		26-0489289
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
53 Forest Avenue, Old Greenwich, Connecticut 06870
(Address of Principal Executive Office) (Zip Code)

(203) 698-1200

(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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting 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	x
Non-Accelerated Filer (Do not check if a smaller reporting company)	¨	Smaller 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 x

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



Class		Outstanding at November 3, 2017
Common Shares Representing Limited Liability Company Interests, no par value		31,905,840

Table of Contents

ELLINGTON FINANCIAL LLC

INDEX



Part I. Financial Information
	Item 1. Consolidated Financial Statements (unaudited)	3
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	83
	Item 3. Quantitative and Qualitative Disclosures about Market Risk	112
	Item 4. Controls and Procedures	114
Part II. Other Information
	Item 1. Legal Proceedings	115
	Item 1A. Risk Factors	115
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	115
	Item 6. Exhibits	116

Table of Contents

PART 1. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (unaudited)

ELLINGTON FINANCIAL LLC

CONSOLIDATED STATEMENT OF ASSETS, LIABILITIES, AND EQUITY

(UNAUDITED)



	September 30, 2017		December 31, 2016
(In thousands except share amounts)	Expressed in U.S. Dollars
ASSETS
Cash and cash equivalents	$	111,423	$	123,274
Restricted cash	425		655
Investments, financial derivatives, and repurchase agreements:
Investments, at fair value (Cost – $1,758,854 and $1,525,710)	1,756,432		1,505,026
Financial derivatives–assets, at fair value (Net cost – $41,041 and $40,724)	29,896		35,595
Repurchase agreements, at fair value (Cost – $194,265 and $185,205)	193,070		184,819
Total investments, financial derivatives, and repurchase agreements	1,979,398		1,725,440
Due from brokers	108,173		93,651
Receivable for securities sold and financial derivatives	499,053		445,112
Interest and principal receivable	25,006		21,704
Other assets	3,169		3,359
Total Assets	$	2,726,647	$	2,413,195
LIABILITIES
Investments and financial derivatives:
Investments sold short, at fair value (Proceeds – $672,506 and $589,429)	$	675,650	$	584,896
Financial derivatives–liabilities, at fair value (Net proceeds – $28,507 and $12,012)	32,278		18,687
Total investments and financial derivatives	707,928		603,583
Reverse repurchase agreements	1,029,810		1,033,581
Due to brokers	3,613		12,780
Payable for securities purchased and financial derivatives	169,717		85,168
Other secured borrowings (Proceeds – $89,646 and $24,086)	89,646		24,086
Senior notes, net	84,752		—
Accounts payable and accrued expenses	4,230		3,327
Base management fee payable to affiliate	2,161		2,416
Interest and dividends payable	4,868		3,460
Other liabilities	198		17
Total Liabilities	2,096,923		1,768,418
EQUITY	629,724		644,777
TOTAL LIABILITIES AND EQUITY	$	2,726,647	$	2,413,195
Commitments and contingencies (Note 15)
ANALYSIS OF EQUITY:
Common shares, no par value, 100,000,000 shares authorized;
(31,992,177 and 32,294,703 shares issued and outstanding)	$	605,357	$	627,620
Additional paid-in capital – LTIP Units	10,278		10,041
Total Shareholders' Equity	615,635		637,661
Non-controlling interests	14,089		7,116
Total Equity	$	629,724	$	644,777
PER SHARE INFORMATION:
Common shares	$	19.24	$	19.75

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT SEPTEMBER 30, 2017

(UNAUDITED)



Current Principal/Number of Shares		Description	Rate	Maturity	Fair Value
(In thousands)					Expressed in U.S. Dollars
Cash Equivalents—Money Market Funds (9.53%) (a) (b)
North America
Funds
$	40,000	Goldman Sachs Financial Square Funds—Government Fund	0.91%		$	40,000
20,000		Various	0.93%		20,000
Total Cash Equivalents—Money Market Funds (Cost $60,000)					$	60,000



Long Investments (278.92%) (a) (b) (ab)
Mortgage-Backed Securities (177.77%)
Agency Securities (148.83%) (c)
Fixed-rate Agency Securities (135.89%)
Principal and Interest–Fixed-Rate Agency Securities (114.61%)
North America
Mortgage-related—Residential
$	141,070	Federal National Mortgage Association Pools (30 Year)	4.00%	9/39 - 10/47	$	149,859
111,168		Federal Home Loan Mortgage Corporation Pools (30 Year)	4.00%	11/41 - 7/47	117,973
69,470		Federal National Mortgage Association Pools (30 Year)	3.50%	9/42 - 5/47	72,004
62,675		Federal National Mortgage Association Pools (30 Year)	4.50%	10/41 - 7/47	67,923
53,631		Federal National Mortgage Association Pools (15 Year)	3.50%	3/28 - 3/32	56,239
43,951		Federal Home Loan Mortgage Corporation Pools (30 Year)	4.50%	9/43 - 10/47	47,575
38,810		Federal National Mortgage Association Pools (30 Year)	5.00%	10/35 - 12/44	42,616
23,579		Federal Home Loan Mortgage Corporation Pools (30 Year)	3.50%	1/42 - 9/47	24,446
21,436		Federal National Mortgage Association Pools (15 Year)	3.00%	4/30 - 9/32	22,088
18,417		Government National Mortgage Association Pools (30 Year)	4.50%	9/46 - 9/47	19,839
16,004		Government National Mortgage Association Pools (30 Year)	3.50%	7/45 - 10/47	16,679
13,803		Government National Mortgage Association Pools (30 Year)	4.00%	7/45 - 9/47	14,626
9,165		Federal Home Loan Mortgage Corporation Pools (Other)	3.50%	2/30 - 9/46	9,477
8,646		Federal Home Loan Mortgage Corporation Pools (15 Year)	3.50%	9/28 - 3/32	9,078
8,485		Federal National Mortgage Association Pools (15 Year)	4.00%	6/26 - 5/31	8,993
5,683		Federal National Mortgage Association Pools (Other)	5.00%	9/43 - 1/44	6,274
4,125		Federal Home Loan Mortgage Corporation Pools (15 Year)	3.00%	4/30 - 9/32	4,250
3,692		Federal Home Loan Mortgage Corporation Pools (30 Year)	3.00%	7/43 - 10/45	3,694
3,142		Federal National Mortgage Association Pools (Other)	4.50%	5/41	3,326
3,012		Federal National Mortgage Association Pools (15 Year)	4.50%	4/26	3,235
2,918		Government National Mortgage Association Pools (30 Year)	3.75%	7/47	3,049
2,685		Federal Home Loan Mortgage Corporation Pools (Other)	4.50%	5/44	2,914
2,350		Federal National Mortgage Association Pools (30 Year)	5.50%	10/39	2,610
1,962		Federal National Mortgage Association Pools (30 Year)	3.00%	1/42 - 6/45	1,969
1,745		Federal National Mortgage Association Pools (20 Year)	4.00%	12/33	1,860
1,488		Federal Home Loan Mortgage Corporation Pools (15 Year)	4.00%	2/29	1,579
1,320		Federal National Mortgage Association Pools (30 Year)	6.00%	9/39 - 2/40	1,490
1,209		Federal Home Loan Mortgage Corporation Pools (Other)	3.00%	6/28 - 3/30	1,238
1,120		Federal Home Loan Mortgage Corporation Pools (20 Year)	4.50%	12/33	1,214
869		Federal Home Loan Mortgage Corporation Pools (30 Year)	6.00%	5/40	982

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT SEPTEMBER 30, 2017 (CONTINUED)

(UNAUDITED)



Current Principal/Notional Value		Description	Rate	Maturity	Fair Value
(In thousands)					Expressed in U.S. Dollars
(continued)
$	653	Government National Mortgage Association Pools (Other)	3.50%	10/30 - 2/32	$	662
531		Federal Home Loan Mortgage Corporation Pools (30 Year)	5.50%	8/33 - 11/38	584
490		Federal Home Loan Mortgage Corporation Pools (30 Year)	5.00%	7/44	534
508		Federal National Mortgage Association Pools (Other)	3.50%	4/26	524
153		Government National Mortgage Association Pools (Other)	3.00%	6/30	154
112		Federal National Mortgage Association Pools (30 Year)	3.28%	6/42	113
38		Federal National Mortgage Association Pools (Other)	4.00%	6/37	39
					721,709
Interest Only–Fixed-Rate Agency Securities (2.06%)
North America
Mortgage-related—Residential
23,212		Government National Mortgage Association	4.00%	2/45 - 6/45	3,935
6,223		Government National Mortgage Association	6.00%	6/38 - 8/39	1,262
7,055		Federal National Mortgage Association	4.50%	12/20 - 6/44	1,027
5,756		Government National Mortgage Association	4.50%	2/41 - 7/44	977
4,317		Federal National Mortgage Association	5.50%	10/39	955
4,996		Government National Mortgage Association	5.50%	11/43	866
4,547		Federal Home Loan Mortgage Corporation	3.50%	12/32	663
7,706		Federal Home Loan Mortgage Corporation	5.00%	11/38	660
4,594		Federal National Mortgage Association	5.00%	1/38 - 5/40	550
4,587		Federal National Mortgage Association	4.00%	5/39 - 11/43	509
2,151		Federal National Mortgage Association	6.00%	1/40	398
77,632		Government National Mortgage Association	0.26%	6/40	378
2,773		Federal National Mortgage Association	3.00%	9/41	260
1,809		Federal Home Loan Mortgage Corporation	4.50%	7/43	249
1,098		Government National Mortgage Association	4.75%	7/40	194
1,393		Government National Mortgage Association	5.00%	5/37	63
557		Federal Home Loan Mortgage Corporation	5.50%	1/39	49
					12,995
TBA–Fixed-Rate Agency Securities (19.22%)
North America
Mortgage-related—Residential
58,784		Government National Mortgage Association (30 Year)	4.00%	10/17	61,926
27,340		Federal Home Loan Mortgage Corporation (30 Year)	3.50%	10/17	28,190
15,969		Government National Mortgage Association (30 Year)	4.50%	10/17	17,055
8,250		Government National Mortgage Association (30 Year)	4.50%	11/17	8,781
3,600		Government National Mortgage Association (30 Year)	3.00%	10/17	3,648
890		Government National Mortgage Association (30 Year)	3.50%	10/17	926
470		Federal Home Loan Mortgage Corporation (15 Year)	3.00%	10/17	483
					121,009
Total Fixed-Rate Agency Securities (Cost $857,535)					855,713

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT SEPTEMBER 30, 2017 (CONTINUED)

(UNAUDITED)



Current Principal /Notional Value		Description	Rate	Maturity	Fair Value
(In thousands)					Expressed in U.S. Dollars
Floating Rate Agency Securities (12.94%)
Principal and Interest–Floating Rate Agency Securities (10.13%)
North America
Mortgage-related—Residential
$	50,784	Government National Mortgage Association Pools	3.59% - 4.68%	7/61 - 7/67	$	55,172
5,042		Federal National Mortgage Association Pools	2.77% - 3.69%	9/35 - 5/45	5,258
3,230		Federal Home Loan Mortgage Corporation Pools	3.49% - 4.80%	6/37 - 5/44	3,340
					63,770
Interest Only–Floating Rate Agency Securities (2.81%)
North America
Mortgage-related—Residential
275,999		Other Government National Mortgage Association	0.40% - 5.57%	5/37 - 10/66	14,289
19,486		Other Federal National Mortgage Association	4.91% - 6.31%	6/33 - 12/41	2,232
4,490		Other Federal Home Loan Mortgage Corporation	4.77% - 5.40%	3/36 - 8/39	720
12,476		Resecuritization of Government National Mortgage Association (d)	3.26%	8/60	486
					17,727
Total Floating Rate Agency Securities (Cost $81,850)					81,497
Total Agency Securities (Cost $939,385)					937,210
Private Label Securities (28.94%)
Principal and Interest–Private Label Securities (27.54%)
North America (14.18%)
Mortgage-related—Residential
137,964		Various	0.00% - 32.18%	5/19 - 9/46	70,993
Mortgage-related—Commercial
76,636		Various	2.45% - 4.56%	7/45 - 12/49	18,301
Total North America (Cost $78,834)					89,294
Europe (13.36%)
Mortgage-related—Residential
100,495		Various	0.00% - 4.37%	6/25 - 3/50	76,268
Mortgage-related—Commercial
18,686		Various	0.37% - 4.78%	10/20 - 2/41	7,842
Total Europe (Cost $81,646)					84,110
Total Principal and Interest–Private Label Securities (Cost $160,480)					173,404
Interest Only–Private Label Securities (1.40%)
North America
Mortgage-related—Residential
37,830		Various	0.00% - 2.00%	12/30 - 9/47	4,940
Mortgage-related—Commercial
67,125		Various	1.25% - 2.00%	10/47 - 12/49	3,910
Total Interest Only–Private Label Securities (Cost $6,888)					8,850

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT SEPTEMBER 30, 2017 (CONTINUED)

(UNAUDITED)



Current Principal /Notional Value		Description	Rate	Maturity	Fair Value
(In thousands)					Expressed in U.S. Dollars
Other Private Label Securities (0.00%)
North America
Mortgage-related—Residential
$	79,487	Various	—%	6/37	$	—
Mortgage-related—Commercial
—		Various	—%	7/45 - 12/49	—
Total Other Private Label Securities (Cost $215)					—
Total Private Label Securities (Cost $167,583)					182,254
Total Mortgage-Backed Securities (Cost $1,106,968)					1,119,464
Collateralized Loan Obligations (21.45%)
North America (16.72%) (e)
216,533		Various	0.00% - 10.04%	11/17 - 11/57	105,302
Total North America (Cost $109,054)					105,302
Europe (4.73%)
30,070		Various	0.00% - 6.25%	11/21 - 1/27	29,762
Total Europe (Cost $27,186)					29,762
Total Collateralized Loan Obligations (Cost $136,240)					135,064
Consumer Loans and Asset-backed Securities backed by Consumer Loans (18.48%) (f)
North America (18.03%)
Consumer (g) (h)
113,443		Various	5.31% - 60.88%	10/17 - 9/22	113,509
Total North America (Cost $119,375)					113,509
Europe (0.45%)
Consumer
3,653		Various	—%	8/24 - 12/30	2,831
Total Europe (Cost $1,171)					2,831
Total Consumer Loans and Asset-backed Securities backed by Consumer Loans (Cost $120,546)					116,340

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT SEPTEMBER 30, 2017 (CONTINUED)

(UNAUDITED)



Current Principal/Number of Properties/Number of Shares		Description	Rate	Maturity	Fair Value
(In thousands)					Expressed in U.S. Dollars
Corporate Debt (14.18%)
North America (13.89%)
Basic Materials
$	4,720	Various	6.88% - 7.00%	8/25 - 3/27	$	4,838
Communications
19,744		Various	3.40% - 11.50%	6/21 - 8/27	19,502
Consumer
18,820		Various	2.60% - 9.73%	1/19 - 12/34	19,658
Energy
23,270		Various	4.50% - 9.63%	3/19 - 8/25	24,485
Industrial
4,316		Various	3.75% - 5.50%	4/19 - 12/21	3,973
Mortgage-related—Residential (m)
5,776		Various	15.00%	10/19	5,776
Technology
2,930		Various	7.50%	8/22	3,320
Utilities
5,500		Various	7.25%	5/26	5,930
Total North America (Cost $87,735)					87,482
Europe (0.29%)
Consumer
19,700		Various	—%	3/18	173
Industrial
1,709		Various	1.23%	3/21	1,653
Total Europe (Cost $2,589)					1,826
Total Corporate Debt (Cost $90,324)					89,308
Mortgage Loans (36.66%) (f)
North America
Mortgage-related—Commercial (j)
69,535		Various	3.01% - 12.73%	2/18 - 10/37	67,895
Mortgage-related—Residential (l)
166,273		Various	2.00% - 12.63%	4/22 - 7/57	162,963
Total Mortgage Loans (Cost $233,535)					230,858
Real Estate Owned (4.09%) (f) (k)
North America
Real estate-related
4		Single-Family Houses			686
9		Commercial Properties			25,076
Total Real Estate Owned (Cost $26,198)					25,762

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT SEPTEMBER 30, 2017 (CONTINUED)

(UNAUDITED)



Current Principal/Number of Shares		Description	Rate	Maturity	Fair Value
(In thousands)					Expressed in U.S. Dollars
Corporate Equity Investments (6.05%)
North America (6.05%)
Asset-Backed Securities
n/a		Non-Controlling Equity Interest in Limited Liability Company (m)			$	5,588
Communications
7		Non-Exchange Traded Corporate Equity			619
Consumer
n/a		Non-Controlling Equity Interest in Limited Liability Company (i)			5,857
1,540		Non-Exchange Traded Corporate Equity			8
Diversified
166		Non-Exchange Traded Corporate Equity			3,441
Energy
24		Exchange Traded Corporate Equity			790
Mortgage-related—Residential (m)
20		Non-Exchange Traded Preferred Equity Investment in Mortgage Originators			19,000
9,818		Non-Exchange Traded Common Equity Investment in Mortgage Originators			2,814
Total North America (Cost $43,533)					38,117
Europe (0.00%)
Consumer
125		Non-Exchange Traded Corporate Equity			—
Total Europe (Cost $0)					—
Total Corporate Equity Investments (Cost $43,533)					38,117
U.S. Treasury Securities (0.24%)
North America
Government
$	1,510	U.S. Treasury Note	2.00%	12/21	1,519
Total U.S. Treasury Securities (Cost $1,510)					1,519
Total Long Investments (Cost $1,758,854)					$	1,756,432

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT SEPTEMBER 30, 2017 (CONTINUED)

(UNAUDITED)

Current Principal

Description

Rate

Maturity

Fair Value

(In thousands)

Expressed in U.S.

Dollars

Repurchase Agreements (30.66%) (a) (b) (n)

36,488

Bank of America Securities

1.15%

10/17

36,487

Collateralized by Par Value $36,579

U.S. Treasury Note, Coupon 2.25%,

Maturity Date 2/27

16,672

JP Morgan Securities LLC

(0.60)%

10/17

16,672

Collateralized by Par Value $16,260

Sovereign Government Bond, Coupon 0.25%,

Maturity Date 4/18

14,358

Barclays Capital Inc

(0.75)%

10/17

14,358

Collateralized by Par Value $14,008

Sovereign Government Bond, Coupon 0.25%,

Maturity Date 11/20

10,794

JP Morgan Securities LLC

(0.68)%

10/17

10,794

Collateralized by Par Value $10,285

Sovereign Government Bond, Coupon 0.75%,

Maturity Date 7/21

9,895

Barclays Capital Inc

(0.60)%

10/17

9,895

Collateralized by Par Value $9,328

Sovereign Government Bond, Coupon 2.75%,

Maturity Date 4/19

9,809

JP Morgan Securities LLC

(0.60)%

10/17

9,809

Collateralized by Par Value $9,254

Sovereign Government Bond, Coupon 1.15%,

Maturity Date 7/20

9,599

JP Morgan Securities LLC

(0.65)%

10/17

9,599

Collateralized by Par Value $9,254

Sovereign Government Bond, Coupon 0.65%,

Maturity Date 11/20

6,560

Bank of America Securities

1.15%

10/17

6,560

Collateralized by Par Value $6,560

U.S. Treasury Note, Coupon 1.75%,

Maturity Date 5/22

5,707

CILO 2016-LD1 Holdings LLC (o)

2.94%

10/17

5,707

Collateralized by Par Value $9,512

Exchange-Traded Debt, Coupon 5.50%,

Maturity Date 7/22

5,534

Bank of America Securities

1.15%

10/17

5,534

Collateralized by Par Value $5,633

U.S. Treasury Note, Coupon 2.00%,

Maturity Date 11/26

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT SEPTEMBER 30, 2017 (CONTINUED)

(UNAUDITED)

Current Principal

Description

Rate

Maturity

Fair Value

(In thousands)

Expressed in U.S.

Dollars

(continued)

4,921

Barclays Capital Inc

(2.00)%

10/17

4,921

Collateralized by Par Value $4,720

Exchange-Traded Corporate Debt, Coupon 5.88%,

Maturity Date 10/20

4,703

Bank of America Securities

0.78%

10/17

4,703

Collateralized by Par Value $4,715

U.S. Treasury Note, Coupon 2.25%,

Maturity Date 8/27

3,445

JP Morgan Securities LLC

(2.75)%

10/17

3,445

Collateralized by Par Value $3,516

Exchange-Traded Corporate Debt, Coupon 4.88%,

Maturity Date 4/22

3,388

RBC Capital Markets LLC

0.80%

10/17

3,388

Collateralized by Par Value $3,250

Exchange-Traded Corporate Debt, Coupon 2.90%,

Maturity Date 1/22

2,903

RBC Capital Markets LLC

0.80%

10/17

2,903

Collateralized by Par Value $3,425

Exchange-Traded Corporate Debt, Coupon 10.50%,

Maturity Date 9/22

2,889

RBC Capital Markets LLC

0.50%

10/17

2,889

Collateralized by Par Value $2,700

Exchange-Traded Corporate Debt, Coupon 8.00%,

Maturity Date 12/22

2,629

RBC Capital Markets LLC

(0.65)%

10/17

2,629

Collateralized by Par Value $2,480

Exchange-Traded Corporate Debt, Coupon 6.25%,

Maturity Date 3/21

2,598

RBC Capital Markets LLC

(5.75)%

10/17

2,598

Collateralized by Par Value $2,480

Exchange-Traded Corporate Debt, Coupon 8.00%,

Maturity Date 1/25

2,237

RBC Capital Markets LLC

0.80%

10/17

2,237

Collateralized by Par Value $2,120

Exchange-Traded Corporate Debt, Coupon 3.50%,

Maturity Date 7/24

2,086

Barclays Capital Inc

(1.25)%

10/17

2,086

Collateralized by Par Value $2,495

Exchange-Traded Corporate Debt, Coupon 6.25%,

Maturity Date 9/21

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT SEPTEMBER 30, 2017 (CONTINUED)

(UNAUDITED)

Current Principal

Description

Rate

Maturity

Fair Value

(In thousands)

Expressed in U.S.

Dollars

(continued)

1,808

RBC Capital Markets LLC

0.50%

10/17

1,808

Collateralized by Par Value $1,680

Exchange-Traded Corporate Debt, Coupon 5.13%,

Maturity Date 9/24

1,785

RBC Capital Markets LLC

0.80%

10/17

1,785

Collateralized by Par Value $1,680

Exchange-Traded Corporate Debt, Coupon 5.00%,

Maturity Date 5/26

1,761

Barclays Capital Inc

(3.50)%

10/17

1,761

Collateralized by Par Value $1,844

Exchange-Traded Corporate Debt, Coupon 4.88%,

Maturity Date 4/22

1,760

Barclays Capital Inc

(4.25)%

10/17

1,760

Collateralized by Par Value $1,645

Exchange-Traded Corporate Debt, Coupon 8.00%,

Maturity Date 6/27

1,748

RBC Capital Markets LLC

0.20%

10/17

1,748

Collateralized by Par Value $1,710

Exchange-Traded Corporate Debt, Coupon 3.75%,

Maturity Date 2/23

1,624

JP Morgan Securities LLC

(1.00)%

10/17

1,624

Collateralized by Par Value $1,960

Exchange-Traded Corporate Debt, Coupon 6.25%,

Maturity Date 9/21

1,463

Societe Generale

(2.00)%

10/17

1,463

Collateralized by Par Value $1,490

Exchange-Traded Corporate Debt, Coupon 5.80%,

Maturity Date 10/22

1,407

RBC Capital Markets LLC

(1.15)%

10/17

1,407

Collateralized by Par Value $1,685

Exchange-Traded Corporate Debt, Coupon 6.25%,

Maturity Date 9/21

1,380

Barclays Capital Inc

0.75%

10/17

1,380

Collateralized by Par Value $1,340

Exchange-Traded Corporate Debt, Coupon 3.45%,

Maturity Date 7/24

1,278

Barclays Capital Inc

(2.75)%

10/17

1,278

Collateralized by Par Value $1,210

Exchange-Traded Corporate Debt, Coupon 6.75%,

Maturity Date 4/19

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT SEPTEMBER 30, 2017 (CONTINUED)

(UNAUDITED)

Current Principal

Description

Rate

Maturity

Fair Value

(In thousands)

Expressed in U.S.

Dollars

(continued)

1,247

RBC Capital Markets LLC

0.70%

10/17

1,247

Collateralized by Par Value $1,220

Exchange-Traded Corporate Debt, Coupon 3.25%,

Maturity Date 5/22

1,175

Societe Generale

0.85%

10/17

1,175

Collateralized by Par Value $1,070

Exchange-Traded Corporate Debt, Coupon 6.38%,

Maturity Date 10/23

1,156

Societe Generale

0.75%

10/17

1,156

Collateralized by Par Value $1,050

Exchange-Traded Corporate Debt, Coupon 6.38%,

Maturity Date 12/23

1,144

RBC Capital Markets LLC

(2.50)%

10/17

1,144

Collateralized by Par Value $1,130

Exchange-Traded Corporate Debt, Coupon 6.75%,

Maturity Date 4/19

1,095

Barclays Capital Inc

(3.75)%

10/17

1,095

Collateralized by Par Value $990

Exchange-Traded Corporate Debt, Coupon 6.63%,

Maturity Date 10/22

1,072

Societe Generale

0.25%

10/17

1,072

Collateralized by Par Value $990

Exchange-Traded Corporate Debt, Coupon 8.00%,

Maturity Date 12/22

1,049

RBC Capital Markets LLC

0.75%

10/17

1,049

Collateralized by Par Value $980

Exchange-Traded Corporate Debt, Coupon 3.50%,

Maturity Date 7/24

978

Deutsche Bank Securities

(4.50)%

10/17

978

Collateralized by Par Value $1,020

Exchange-Traded Corporate Debt, Coupon 7.38%,

Maturity Date 1/21

935

Barclays Capital Inc

(4.75)%

10/17

935

Collateralized by Par Value $1,000

Exchange-Traded Corporate Debt, Coupon 5.50%,

Maturity Date 10/24

902

RBC Capital Markets LLC

(5.00)%

10/17

902

Collateralized by Par Value $970

Exchange-Traded Corporate Debt, Coupon 5.50%,

Maturity Date 10/24

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT SEPTEMBER 30, 2017 (CONTINUED)

(UNAUDITED)

Current Principal

Description

Rate

Maturity

Fair Value

(In thousands)

Expressed in U.S.

Dollars

(continued)

894

RBC Capital Markets LLC

(4.00)%

10/17

894

Collateralized by Par Value $910

Exchange-Traded Corporate Debt, Coupon 8.00%,

Maturity Date 6/27

879

RBC Capital Markets LLC

0.80%

10/17

879

Collateralized by Par Value $812

Exchange-Traded Corporate Debt, Coupon 6.88%,

Maturity Date 5/23

872

Barclays Capital Inc

(5.50)%

10/17

872

Collateralized by Par Value $820

Exchange-Traded Corporate Debt, Coupon 8.00%,

Maturity Date 6/27

853

RBC Capital Markets LLC

0.80%

10/17

853

Collateralized by Par Value $790

Exchange-Traded Corporate Debt, Coupon 5.88%,

Maturity Date 11/24

818

RBC Capital Markets LLC

(6.38)%

10/17

818

Collateralized by Par Value $960

Exchange-Traded Corporate Debt, Coupon 6.25%,

Maturity Date 10/22

733

RBC Capital Markets LLC

0.70%

10/17

733

Collateralized by Par Value $700

Exchange-Traded Corporate Debt, Coupon 5.25%,

Maturity Date 3/22

583

RBC Capital Markets LLC

0.30%

10/17

583

Collateralized by Par Value $570

Exchange-Traded Corporate Debt, Coupon 3.75%,

Maturity Date 2/23

523

RBC Capital Markets LLC

0.80%

10/17

523

Collateralized by Par Value $500

Exchange-Traded Corporate Debt, Coupon 5.75%,

Maturity Date 10/22

507

Societe Generale

0.80%

10/17

507

Collateralized by Par Value $460

Exchange-Traded Corporate Debt, Coupon 5.88%,

Maturity Date 7/22

504

JP Morgan Securities LLC

(5.25)%

10/17

504

Collateralized by Par Value $620

Exchange-Traded Corporate Debt, Coupon 5.50%,

Maturity Date 10/24

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT SEPTEMBER 30, 2017 (CONTINUED)

(UNAUDITED)

Current Principal

Description

Rate

Maturity

Fair Value

(In thousands)

Expressed in U.S.

Dollars

(continued)

489

RBC Capital Markets LLC

0.00%

10/17

489

Collateralized by Par Value $500

Exchange-Traded Corporate Debt, Coupon 5.25%,

Maturity Date 12/23

456

CS First Boston

(7.00)%

10/17

456

Collateralized by Par Value $464

Exchange-Traded Corporate Debt, Coupon 6.25%,

Maturity Date 10/22

249

Societe Generale

0.85%

10/17

249

Collateralized by Par Value $230

Exchange-Traded Corporate Debt, Coupon 6.00%,

Maturity Date 3/23

248

Bank of America Securities

1.15%

10/17

248

Collateralized by Par Value $281

U.S. Treasury Bond, Coupon 2.25%,

Maturity Date 8/46

243

Barclays Capital Inc

(1.75)%

10/17

243

Collateralized by Par Value $250

Exchange-Traded Corporate Debt, Coupon 4.50%,

Maturity Date 4/22

124

Barclays Capital Inc

(5.25)%

10/17

124

Collateralized by Par Value $120

Exchange-Traded Corporate Debt, Coupon 7.38%,

Maturity Date 1/21

RBC Capital Markets LLC

0.50%

10/17

Collateralized by Par Value $70

Exchange-Traded Corporate Debt, Coupon 3.45%,

Maturity Date 7/24

Societe Generale

0.85%

10/17

Collateralized by Par Value $40

Exchange-Traded Corporate Debt, Coupon 5.75%,

Maturity Date 3/23

Total Repurchase Agreements (Cost $194,265)

193,070

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT SEPTEMBER 30, 2017 (CONTINUED)

(UNAUDITED)



Current Principal			Description	Rate	Maturity	Fair Value
(In thousands)						Expressed in U.S. Dollars
Investments Sold Short (-107.29%) (a) (b)
TBA–Fixed Rate Agency Securities Sold Short (-74.71%) (p)
North America
Government
$	(65,000	)	Federal National Mortgage Association (30 year)	4.50%	11/17	$	(69,695	)
(64,000		)	Federal Home Loan Mortgage Corporation (30 year)	4.00%	11/17	(67,280		)
(60,000		)	Federal National Mortgage Association (30 year)	4.00%	11/17	(63,077		)
(45,188		)	Federal National Mortgage Association (30 year)	3.50%	10/17	(46,588		)
(43,187		)	Federal National Mortgage Association (30 year)	4.00%	10/17	(45,469		)
(35,730		)	Federal National Mortgage Association (30 year)	4.50%	10/17	(38,352		)
(36,000		)	Federal National Mortgage Association (30 year)	3.50%	11/17	(37,049		)
(23,467		)	Federal Home Loan Mortgage Corporation (30 year)	4.00%	10/17	(24,705		)
(21,520		)	Federal National Mortgage Association (15 year)	3.00%	10/17	(22,113		)
(12,810		)	Government National Mortgage Association (30 year)	3.50%	10/17	(13,317		)
(6,860		)	Federal National Mortgage Association (30 year)	5.50%	10/17	(7,591		)
(6,951		)	Federal Home Loan Mortgage Corporation (30 year)	4.50%	10/17	(7,453		)
(7,112		)	Federal National Mortgage Association (30 year)	3.00%	10/17	(7,135		)
(6,700		)	Federal National Mortgage Association (15 year)	3.50%	10/17	(6,978		)
(5,680		)	Federal National Mortgage Association (30 year)	5.00%	10/17	(6,199		)
(5,515		)	Federal Home Loan Mortgage Corporation (30 year)	3.00%	10/17	(5,532		)
(1,870		)	Federal Home Loan Mortgage Corporation (15 year)	3.50%	10/17	(1,954		)
Total TBA–Fixed Rate Agency Securities Sold Short (Proceeds -$471,204)						(470,487		)
Government Debt Sold Short (-19.12%)
North America (-8.01%)
Government
(30,501		)	U.S. Treasury Note	2.25%	2/27	(30,320		)
(6,560		)	U.S. Treasury Note	1.75%	5/22	(6,517		)
(5,633		)	U.S. Treasury Note	2.00%	11/26	(5,490		)
(4,715		)	U.S. Treasury Note	2.25%	8/27	(4,684		)
(1,869		)	U.S. Treasury Note	2.38%	2/27	(1,877		)
(1,350		)	U.S. Treasury Note	1.63%	8/22	(1,332		)
(281		)	U.S. Treasury Bond	2.25%	8/46	(247		)
Total North America (Proceeds -$50,523)						(50,467		)

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT SEPTEMBER 30, 2017 (CONTINUED)

(UNAUDITED)



Current Principal/Number of Shares			Description	Rate	Maturity	Fair Value
(In thousands)						Expressed in U.S. Dollars
Europe (-11.11%)
Government
$	(23,262	)	European Sovereign Bond	0.25% - 0.65%	11/20	$	(23,691	)
(16,260		)	Spanish Sovereign Bond	0.25%	4/18	(16,318		)
(10,285		)	Spanish Sovereign Bond	0.75%	7/21	(10,560		)
(9,328		)	Spanish Sovereign Bond	2.75%	4/19	(9,783		)
(9,254		)	Spanish Sovereign Bond	1.15%	7/20	(9,588		)
Total Europe (Proceeds -$66,592)						(69,940		)
Total Government Debt Sold Short (Proceeds -$117,115)						(120,407		)
Corporate Debt Sold Short (-11.21%)
North America
Basic Materials
(3,310		)	Various	3.75%	2/23	(3,365		)
Communications
(17,690		)	Various	4.25% - 10.50%	9/21 - 11/24	(17,529		)
Consumer
(23,600		)	Various	2.90% - 7.38%	4/19 - 5/26	(23,758		)
Energy
(21,490		)	Various	3.25% - 8.00%	4/22 - 6/27	(21,138		)
Financial
(3,440		)	Various	5.13% -5.25%	3/22 - 9/24	(3,653		)
Technology
(1,050		)	Various	6.38%	12/23	(1,124		)
Total Corporate Debt Sold Short (Proceeds -$70,082)						(70,567		)
Common Stock Sold Short (-2.25%)
North America
Energy
(13		)	Exchange-Traded Equity			(313		)
Financial
(379		)	Exchange-Traded Equity			(13,876		)
Total Common Stock Sold Short (Proceeds -$14,105)						(14,189		)
Total Investments Sold Short (Proceeds -$672,506)						$	(675,650	)

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT SEPTEMBER 30, 2017 (CONTINUED)

(UNAUDITED)



	Primary Risk Exposure	Notional Value			Range of Expiration Dates	Fair Value
(In thousands)						Expressed in U.S. Dollars
Financial Derivatives–Assets (4.75%) (a) (b)
Swaps (4.60%)
Long Swaps:
Credit Default Swaps on Corporate Bond Indices (q)	Credit	$	12,888		12/18 - 6/22	$	631
Interest Rate Swaps (r)	Interest Rates	273,926			12/17 - 1/45	2,762
Credit Default Swaps on Asset-Backed Indices (q)	Credit	1,141			12/37 - 11/59	10
North America
Credit Default Swaps on Corporate Bonds (q)
Basic Materials	Credit	8,670			12/21 - 12/22	1,049
Communications	Credit	12,680			9/19 - 12/22	1,456
Consumer	Credit	29,935			3/19 - 12/22	2,118
Energy	Credit	8,520			6/19 - 6/22	82
Financial	Credit	3,940			12/21 - 6/22	691
Technology	Credit	1,030			6/22	153
Utilities	Credit	850			12/21	73
Total Credit Default Swaps on Corporate Bonds						5,622
Short Swaps:
Credit Default Swaps on Asset-Backed Indices (s)	Credit	(37,495		)	5/46 - 11/59	6,977
Interest Rate Swaps (t)	Interest Rates	(671,920		)	2/18 - 6/27	3,934
Interest Rate Swaps (z)	Interest Rates	(26,600		)	4/18 - 6/19	25
Total Return Swaps
Financial (u)	Equity Market	(10,486		)	7/19	—
Total Total Return Swaps						—
North America
Credit Default Swaps on Asset-Backed Securities (s)
Mortgage-related—residential	Credit	(6,011		)	5/35 - 12/35	4,530
Total Credit Default Swaps on Asset-Backed Securities						4,530
Credit Default Swaps on Corporate Bonds (s)
Basic Materials	Credit	(3,820		)	6/21 - 6/22	130
Communications	Credit	(18,240		)	12/17 - 6/22	2,533
Consumer	Credit	(5,620		)	12/21 - 6/22	172
Energy	Credit	(37,700		)	6/18 - 12/22	1,652
Total Credit Default Swaps on Corporate Bonds						4,487
Total Swaps (Net cost $40,941)						28,978
Options (0.01%)
Purchased Options:
Interest Rate Caps (w)	Interest Rates	113,453			3/18 - 5/19	2
North America
Equity Call Options (y)
Consumer	Equity Market	28			10/17 - 1/18	50
Total Options (Cost $100)						52

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT SEPTEMBER 30, 2017 (CONTINUED)

(UNAUDITED)



	Primary Risk Exposure	Notional Value			Range of Expiration Dates	Fair Value
(In thousands)						Expressed in U.S. Dollars
Futures (0.02%)
Short Futures
U.S. Treasury Note Futures (x)	Interest Rates	$	(6,800	)	12/17	$	143
Total Futures						143
Forwards (0.12%)
Short Forwards:
Currency Forwards (aa)	Currency	(64,613		)	12/17	723
Total Forwards						723
Total Financial Derivatives–Assets (Net cost $41,041)						$	29,896
Financial Derivatives–Liabilities (-5.13%) (a) (b)
Swaps (-5.12%)
Long Swaps:
Credit Default Swaps on Asset-Backed Indices (q)	Credit	$	8,315		3/49 - 5/63	$	(1,495	)
Interest Rate Swaps (r)	Interest Rates	241,517			2/19 - 9/27	(3,826		)
North America
Credit Default Swaps on Corporate Bonds (q)
Basic Materials	Credit	3,820			6/21 - 6/22	(130		)
Communications	Credit	15,665			12/17 - 12/22	(2,414		)
Consumer	Credit	11,306			6/20 - 6/22	(311		)
Energy	Credit	37,037			6/21 - 12/22	(2,610		)
Total Credit Default Swaps on Corporate Bonds						(5,465		)
Total Return Swaps
Financial (u)	Equity Market	63			7/19	—
Total Total Return Swaps						—
Recovery Swaps (v)
Consumer	Credit	2,600			6/19	(8		)
Total Recovery Swaps						(8		)

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT SEPTEMBER 30, 2017 (CONTINUED)

(UNAUDITED)



	Primary Risk Exposure	Notional Value			Range of Expiration Dates	Fair Value
(In thousands)						Expressed in U.S. Dollars
Short Swaps:
Interest Rate Swaps (t)	Interest Rates	$	(256,696	)	12/17 - 12/45	$	(1,477	)
Credit Default Swaps on Corporate Bond Indices (s)	Credit	(261,060		)	12/18 - 6/22	(11,646		)
North America
Credit Default Swaps on Asset-Backed Securities (s)
Mortgage-related—residential	Credit	(3,000		)	3/35	(207		)
Total Credit Default Swaps on Asset-Backed Securities						(207		)
Credit Default Swaps on Corporate Bonds (s)
Basic Materials	Credit	(12,210		)	6/19 - 12/22	(918		)
Communications	Credit	(23,380		)	12/17 - 12/22	(920		)
Consumer	Credit	(51,852		)	12/17 - 12/22	(3,690		)
Energy	Credit	(26,690		)	12/17 - 6/22	(465		)
Financial	Credit	(1,400		)	6/22	(277		)
Industrial	Credit	(4,410		)	6/21 - 12/21	(88		)
Technology	Credit	(4,640		)	6/19 - 12/22	(611		)
Utilities	Credit	(9,680		)	6/19 - 12/22	(1,169		)
Total Credit Default Swaps on Corporate Bonds						(8,138		)
Total Swaps (Net proceeds -$28,507)						(32,262		)
Forwards (-0.01%)
Short Forwards:
Currency Forwards (aa)	Currency	(2,358		)	12/17	(16		)
Total Forwards						(16		)
Total Financial Derivatives–Liabilities (Net proceeds -$28,507)						$	(32,278	)

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT SEPTEMBER 30, 2017 (CONCLUDED)

(UNAUDITED)


(a)	See Note 2 and Note 3 in Notes to Consolidated Financial Statements.


(b)	Classification percentages are based on Total Equity.


(c)	At September 30, 2017, the Company's long investments guaranteed by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Government National Mortgage Association, represented 71.83%, 41.27%, and 35.73% of Total Equity, respectively.


(d)	Private trust 100% backed by interest in Government National Mortgage Association collateralized mortgage obligation certificates.


(e)	Includes investment in collateralized loan obligation notes in the amount of $29.8 million that were issued and are managed by related parties of the Company. See Note 7 to the Notes to the Consolidated Financial Statements.


(f)	Loans and real estate owned are beneficially owned by the Company through participation certificates in the various trusts that hold such investments. See Note 7 to the Notes to the Consolidated Financial Statements.

(g)

Includes investments in participation certificates related to loans titled in the name of a related party of Ellington Financial Management LLC. Through its participation certificates, the Company has beneficial interests in the loan cash flows, net of servicing-related fees and expenses. At September 30, 2017 loans for which the Company has beneficial interests in the net cash flows, totaled $9.7 million. See Note 7 to the Notes to the Consolidated Financial Statements.

(h)

Includes investments in participation certificates related to loans held in a trust owned by a related party of Ellington Management Group, L.L.C. Through its participation certificates, the Company participates in the cash flows of the underlying loans held by the trust. At September 30, 2017 loans held in the related party trust for which the Company has participating interests in the cash flows, totaled $96.1 million. See Note 7 to the Notes to Consolidated Financial Statements.


(i)	Represents the Company's beneficial interest in an entity, which is co-owned by an affiliate of Ellington Management Group, L.L.C. The entity owns subordinated notes issued by, as well as trust certificates representing ownership of, a securitization trust. See Note 7 to the Notes to Consolidated Financial Statements.


(j)	Includes non-performing commercial loans in the amount of $6.6 million whereby principal and/or interest is past due and a maturity date is not applicable.


(k)	Number of properties not shown in thousands, represents actual number of properties owned.


(l)	As of September 30, 2017, the Company had residential mortgage loans that were in the process of foreclosure with a fair value of $5.0 million.


(m)	Represents the Company's investment in a related party. See Note 7 to the Notes to the Consolidated Financial Statements.


(n)	In general, securities received pursuant to repurchase agreements were delivered to counterparties in short sale transactions.

(o)

Repurchase agreement is between the Company and CILO 2016-LD1 Holdings LLC, an entity in which the Company has a beneficial interest and is co-owned by an affiliate of Ellington Management Group, L.L.C. CILO 2016-LD1 Holdings LLC owns subordinated notes issued by, as well as trust certificates representing ownership of, a securitization trust. See Note 7 to the Notes to Consolidated Financial Statements.


(p)	At September 30, 2017, the Company's short investments guaranteed by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Government National Mortgage Association, represented 55.62%, 16.98%, and 2.11% of Total Equity, respectively.


(q)	For long credit default swaps, the Company sold protection.


(r)	For long interest rate swap contracts, the Company pays a floating rate and receives a fixed rate.


(s)	For short credit default swaps, the Company purchased protection.


(t)	For short interest rate swap contracts, the Company pays a fixed rate and receives a floating rate.


(u)	Notional value represents number of underlying shares times the closing price of the underlying security.


(v)	For long recovery swaps the Company receives a specified recovery rate in exchange for the actual recovery rate on the underlying.


(w)	Notional value represents the amount on which interest payments are calculated to the extent the market interest rate exceeds the rate cap on the contract.


(x)	Notional value represents the total face amount of U.S. Treasury Notes underlying all contracts held; as of September 30, 2017, 68 contracts were held.


(y)	Notional value represents the number of common shares we have the option to purchase multiplied by the strike price.


(z)	The Company pays a floating rate and receives a floating rate.


(aa)	Notional value represents U.S. Dollars to be received by the Company at the maturity of the forward contract.

(ab)

The table below shows the ratings on the Company's long investments from Moody's, Standard and Poor's, or Fitch, as well as the Company's long investments that were unrated but guaranteed by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or the Government National Mortgage Association. Ratings tend to be a lagging credit indicator; as a result, the credit quality of the Company's long investment holdings may be lower than the credit quality implied based on the ratings listed below. In situations where an investment has a split rating, the lowest provided rating is used. The ratings descriptions include ratings qualified with a "+," "-," "1," "2," or "3."



Rating Description	Percent of Equity
Unrated but Agency-Guaranteed	148.83	%
A/A/A	0.05	%
Aaa/AAA/AAA	0.24	%
Baa/BBB/BBB	2.59	%
Ba/BB/BB or below	45.48	%
Unrated	81.73	%

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT DECEMBER 31, 2016

(UNAUDITED)



Current Principal/Number of Shares	Description	Rate	Maturity	Fair Value
(In thousands)				Expressed in U.S. Dollars
Cash Equivalents—Money Market Funds (13.96%) (a) (b)
North America
Funds
50,000	BlackRock Liquidity Funds FedFund Portfolio, Institutional Class Shares	0.42%		$	50,000
40,000	Various	0.44% - 0.45%		40,000
Total Cash Equivalents—Money Market Funds (Cost $90,000)				$	90,000



Long Investments (233.42%) (a) (b) (ad)
Mortgage-Backed Securities (168.25%)
Agency Securities (139.27%) (c)
Fixed Rate Agency Securities (134.44%)
Principal and Interest - Fixed Rate Agency Securities (121.61%)
North America
Mortgage-related—Residential
$	147,479	Federal National Mortgage Association Pools (30 Year)	4.00%	2/42 - 1/47	$	156,144
121,756		Federal Home Loan Mortgage Corporation Pools (30 Year)	4.00%	8/43 - 1/47	128,798
67,681		Federal National Mortgage Association Pools (30 Year)	4.50%	10/41 - 3/46	73,305
58,682		Federal National Mortgage Association Pools (30 Year)	3.50%	3/43 - 1/47	60,451
51,402		Federal National Mortgage Association Pools (15 Year)	3.50%	3/28 - 11/31	54,019
44,796		Federal National Mortgage Association Pools (30 Year)	5.00%	10/35 - 12/44	49,062
40,722		Federal Home Loan Mortgage Corporation Pools (30 Year)	4.50%	9/43 - 9/46	44,010
25,244		Federal Home Loan Mortgage Corporation Pools (30 Year)	3.50%	1/42 - 1/47	25,993
21,855		Government National Mortgage Association Pools (30 Year)	4.00%	6/45 - 12/46	23,346
22,073		Federal National Mortgage Association Pools (15 Year)	3.00%	4/30 - 1/32	22,730
10,504		Government National Mortgage Association Pools (Other)	4.60%	12/63 - 11/64	11,351
9,968		Federal National Mortgage Association Pools (15 Year)	4.00%	6/26 - 5/31	10,596
10,120		Federal Home Loan Mortgage Corporation Pools (Other)	3.50%	2/30 - 9/46	10,379
9,219		Federal Home Loan Mortgage Corporation Pools (15 Year)	3.50%	9/28 - 9/30	9,686
6,714		Federal National Mortgage Association Pools (Other)	5.00%	9/43 - 1/44	7,408
6,568		Government National Mortgage Association Pools (30 Year)	4.50%	8/45 - 9/46	7,099
6,200		Government National Mortgage Association Pools (Other)	4.68%	11/63 - 9/64	6,703
6,231		Government National Mortgage Association Pools (30 Year)	3.50%	2/46 - 12/46	6,513
5,219		Government National Mortgage Association Pools (Other)	4.55%	1/65	5,648
4,942		Government National Mortgage Association Pools (Other)	4.44%	11/66	5,383
3,892		Government National Mortgage Association Pools (Other)	4.61%	11/64	4,216
3,619		Federal National Mortgage Association Pools (15 Year)	4.50%	4/26	3,905
3,518		Government National Mortgage Association Pools (Other)	4.42%	7/61	3,741
3,513		Government National Mortgage Association Pools (30 Year)	2.50%	10/46	3,414
3,123		Government National Mortgage Association Pools (Other)	4.48%	11/64	3,361
3,043		Government National Mortgage Association Pools (Other)	4.62%	10/64	3,303
2,896		Federal National Mortgage Association Pools (30 Year)	5.50%	10/39	3,216
2,945		Government National Mortgage Association Pools (Other)	4.57%	1/65	3,186
3,030		Federal Home Loan Mortgage Corporation Pools (15 Year)	3.00%	4/30	3,119

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT DECEMBER 31, 2016 (CONTINUED)

(UNAUDITED)



Current Principal/Notional Value		Description	Rate	Maturity	Fair Value
(In thousands)					Expressed in U.S. Dollars
(continued)
$	3,030	Federal Home Loan Mortgage Corporation Pools (Other)	3.00%	6/28 - 3/30	$	3,109
2,726		Federal Home Loan Mortgage Corporation Pools (Other)	4.50%	5/44	2,968
2,459		Government National Mortgage Association Pools (Other)	4.64%	3/65	2,672
2,433		Government National Mortgage Association Pools (Other)	5.49%	4/60	2,551
2,195		Federal National Mortgage Association Pools (30 Year)	3.00%	1/42 - 6/45	2,193
2,043		Federal National Mortgage Association Pools (20 Year)	4.00%	12/33	2,172
1,943		Government National Mortgage Association Pools (Other)	4.63%	6/64	2,103
1,793		Federal National Mortgage Association Pools (30 Year)	6.00%	9/39 - 2/40	2,049
1,916		Government National Mortgage Association Pools (Other)	5.51%	2/60	2,016
1,734		Federal Home Loan Mortgage Corporation Pools (15 Year)	4.00%	2/29	1,842
1,675		Government National Mortgage Association Pools (Other)	5.57%	2/60	1,756
1,689		Government National Mortgage Association Pools (Other)	3.00%	5/30 - 6/30	1,694
1,369		Federal Home Loan Mortgage Corporation Pools (30 Year)	6.00%	4/39 - 5/40	1,553
1,523		Federal Home Loan Mortgage Corporation Pools (30 Year)	3.00%	7/43 - 10/45	1,518
1,275		Federal National Mortgage Association Pools (Other)	3.00%	6/43	1,258
1,156		Federal Home Loan Mortgage Corporation Pools (20 Year)	4.50%	12/33	1,254
496		Federal Home Loan Mortgage Corporation Pools (30 Year)	5.50%	8/33	551
498		Federal Home Loan Mortgage Corporation Pools (30 Year)	5.00%	7/44	543
165		Government National Mortgage Association Pools (Other)	3.50%	10/30	168
75		Federal National Mortgage Association Pools (Other)	4.00%	6/37	77
					784,132
Interest Only - Fixed Rate Agency Securities (1.89%)
North America
Mortgage-related—Residential
26,883		Government National Mortgage Association	4.00%	2/45 - 6/45	4,547
9,820		Federal National Mortgage Association	4.50%	12/20 - 6/44	1,414
6,303		Government National Mortgage Association	5.50%	11/43	1,137
5,099		Federal Home Loan Mortgage Corporation	3.50%	12/32	808
6,695		Federal National Mortgage Association	5.00%	1/38 - 5/40	806
5,354		Federal National Mortgage Association	4.00%	5/39 - 11/43	648
3,844		Government National Mortgage Association	4.50%	2/41	615
2,661		Federal National Mortgage Association	6.00%	1/40	512
81,664		Government National Mortgage Association	0.26%	6/40	472
3,167		Federal National Mortgage Association	3.00%	9/41	321
1,123		Government National Mortgage Association	6.00%	6/38	263
1,396		Government National Mortgage Association	4.75%	7/40	253
1,201		Federal National Mortgage Association	5.50%	10/40	163
2,289		Government National Mortgage Association	5.00%	5/37	151
763		Federal Home Loan Mortgage Corporation	5.50%	1/39	79
					12,189

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT DECEMBER 31, 2016 (CONTINUED)

(UNAUDITED)



Current Principal/Notional Value		Description	Rate	Maturity	Fair Value
(In thousands)					Expressed in U.S. Dollars
TBA - Fixed Rate Agency Securities (10.94%)
North America
Mortgage-related—Residential
$	28,560	Federal Home Loan Mortgage Corporation (30 Year)	3.50%	1/17	$	29,247
24,540		Government National Mortgage Association (30 Year)	4.00%	1/17	26,047
14,620		Federal National Mortgage Association (15 Year)	3.50%	1/17	15,231
					70,525
Total Fixed Rate Agency Securities (Cost $869,071)					866,846
Floating Rate Agency Securities (4.83%)
Principal and Interest - Floating Rate Agency Securities (2.12%)
North America
Mortgage-related—Residential
5,876		Federal National Mortgage Association Pools	2.55% - 5.94%	9/35 - 5/45	6,129
5,122		Federal Home Loan Mortgage Corporation Pools	3.12% - 5.97%	6/37 - 5/44	5,328
2,097		Government National Mortgage Association Pools	2.89%	11/64	2,231
					13,688
Interest Only - Floating Rate Agency Securities (2.71%)
North America
Mortgage-related—Residential
228,955		Other Government National Mortgage Association	0.40% - 6.09%	5/37 - 11/64	13,831
12,928		Other Federal National Mortgage Association	5.39% - 6.79%	6/33 - 12/41	1,867
15,902		Resecuritization of Government National Mortgage Association (d)	3.95%	8/60	870
5,182		Other Federal Home Loan Mortgage Corporation	5.30% - 5.93%	3/36 - 8/39	865
					17,433
Total Floating Rate Agency Securities (Cost $31,069)					31,121
Total Agency Securities (Cost $900,140)					897,967
Private Label Securities (28.98%)
Principal and Interest - Private Label Securities (28.17%)
North America (20.48%)
Mortgage-related—Residential
233,890		Various	0.00% - 9.35%	5/19 - 9/46	101,737
Mortgage-related—Commercial
119,636		Various	2.31% - 4.41%	7/45 - 12/49	30,334
Total North America (Cost $125,106)					132,071
Europe (7.69%)
Mortgage-related—Residential
63,244		Various	0.00% - 5.15%	6/25 - 3/40	40,898
Mortgage-related—Commercial
9,361		Various	0.00% - 11.00%	6/17 - 2/39	8,680
Total Europe (Cost $59,311)					49,578
Total Principal and Interest - Private Label Securities (Cost $184,417)					181,649

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT DECEMBER 31, 2016 (CONTINUED)

(UNAUDITED)



Current Principal/Notional Value		Description	Rate	Maturity	Fair Value
(In thousands)					Expressed in U.S. Dollars
Interest Only - Private Label Securities (0.81%)
North America
Mortgage-related—Residential
$	36,498	Various	0.50% - 2.00%	6/44 - 9/47	$	973
Mortgage-related—Commercial
72,535		Various	1.25% - 2.71%	10/47 - 12/49	4,254
Total Interest Only - Private Label Securities (Cost $4,963)					5,227
Other Private Label Securities (0.00%)
North America
Mortgage-related—Residential
90,639		Various	—%	6/37	—
Mortgage-related—Commercial
—		Various	—%	7/45 - 12/49	—
Total Other Private Label Securities (Cost $245)					—
Total Private Label Securities (Cost $189,625)					186,876
Total Mortgage-Backed Securities (Cost $1,089,765)					1,084,843
Collateralized Loan Obligations (6.97%)
North America (3.49%)
69,917		Various	0.00% - 7.88%	11/17 - 6/24	22,519
Total North America (Cost $25,860)					22,519
Europe (3.48%)
28,053		Various	0.00% - 3.84%	1/22 - 3/25	22,437
Total Europe (Cost $23,227)					22,437
Total Collateralized Loan Obligations (Cost $49,087)					44,956
Consumer Loans and Asset-backed Securities backed by Consumer Loans (16.62%) (e) (af)
North America (16.15%)
Consumer (f) (g)
103,026		Various	5.31% - 60.28%	1/17 - 12/21	104,108
Total North America (Cost $108,982)					104,108
Europe (0.47%)
Consumer
3,449		Various	—%	8/24 - 3/26	3,049
Total Europe (Cost $2,133)					3,049
Total Consumer Loans and Asset-backed Securities backed by Consumer Loans (Cost $111,115)					107,157

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT DECEMBER 31, 2016 (CONTINUED)

(UNAUDITED)



Current Principal/Number of Properties			Rate	Maturity	Fair Value
(In thousands)					Expressed in U.S. Dollars
Corporate Debt (12.42%)
North America (12.13%)
Communications
$	9,381	Various	6.75% - 9.07%	4/18 - 12/22	$	9,489
Consumer
22,991		Various	3.85% - 11.00%	5/17 - 5/25	24,187
Energy
16,170		Various	6.38% - 9.63%	3/19 - 2/23	16,951
Industrial
12,470		Various	3.75% - 7.75%	5/19 - 12/22	12,709
Mortgage-related—Residential
10,500		Various	15.00%	10/19	9,975
Technology
3,827		Various	6.13% - 7.50%	3/20 - 8/22	3,937
Utilities
840		Various	7.38%	7/21	939
Total North America (Cost $78,482)					78,187
Europe (0.29%)
Consumer
17,618		Various	—%	12/17 - 12/18	380
Industrial
1,867		Various	6.50%	3/21	1,528
Total Europe (Cost $2,554)					1,908
Total Corporate Debt (Cost $81,036)					80,095
Mortgage Loans (22.55%) (e)
North America
Mortgage-related—Commercial (i)
71,020		Various	2.73% - 12.12%	6/17 - 10/37	61,129
Mortgage-related—Residential (k)
89,658		Various	2.00% - 12.63%	4/22 - 7/57	84,290
Total Mortgage Loans (Cost $148,173)					145,419
Real Estate Owned (0.52%) (e) (j)
North America
Real estate-related
9		Single-Family Houses			1,699
1		Commercial Property			1,650
Total Real Estate Owned (Cost $3,539)					3,349

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT DECEMBER 31, 2016 (CONTINUED)

(UNAUDITED)



Current Principal/Number of Shares			Rate	Maturity	Fair Value
(In thousands)					Expressed in U.S. Dollars
Corporate Equity Investments (5.25%) (af)
North America (5.25%)
Consumer
n/a		Non-Controlling Equity Interest in Limited Liability Company (h)			$	7,315
1,557		Non-Exchange Traded Corporate Equity			825
Diversified
191		Non-Exchange Traded Corporate Equity			3,162
Financial
51		Exchange Traded Equity			4,396
Mortgage-related—Commercial
n/a		Non-Controlling Interest in Mortgage-Related Private Partnership			3,090
Mortgage-related—Residential (ae)
1,838		Non-Exchange Traded Preferred Equity Investment in Mortgage Originators			14,325
6,750		Non-Exchange Traded Common Equity Investment in Mortgage Originators			675
Total North America (Cost $37,360)					33,788
Europe (0.00%)
Consumer
125		Non-Exchange Traded Corporate Equity			—
Total Europe (Cost $0)					—
Total Corporate Equity Investments (Cost $37,360)					33,788
U.S. Treasury Securities (0.84%)
North America
Government
$	5,620	U.S. Treasury Note	1.13% - 1.63%	5/21 - 5/26	5,419
Total U.S. Treasury Securities (Cost $5,635)					5,419
Total Long Investments (Cost $1,525,710)					$	1,505,026

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT DECEMBER 31, 2016 (CONTINUED)

(UNAUDITED)

Current Principal

Description

Rate

Maturity

Fair Value

(In thousands)

Expressed in U.S.

Dollars

Repurchase Agreements (28.66%) (a) (b) (l)

46,749

JP Morgan Securities LLC

(1.15)%

1/17

46,749

Collateralized by Par Value $48,133

U.S. Treasury Note, Coupon 2.00%,

Maturity Date 11/26

14,900

JP Morgan Securities LLC

(0.89)%

1/17

14,900

Collateralized by Par Value $14,507

Sovereign Government Bond, Coupon 0.25%,

Maturity Date 4/18

12,912

JP Morgan Securities LLC

(1.10)%

1/17

12,912

Collateralized by Par Value $12,498

Sovereign Government Bond, Coupon 0.25%,

Maturity Date 11/20

11,324

JP Morgan Securities LLC

(0.30)%

1/17

11,324

Collateralized by Par Value $12,160

U.S. Treasury Note, Coupon 1.50%,

Maturity Date 8/26

9,494

JP Morgan Securities LLC

(0.89)%

1/17

9,494

Collateralized by Par Value $9,176

Sovereign Government Bond, Coupon 0.75%,

Maturity Date 7/21

9,165

JP Morgan Securities LLC

(0.80)%

1/17

9,165

Collateralized by Par Value $8,322

Sovereign Government Bond, Coupon 2.75%,

Maturity Date 4/19

8,725

JP Morgan Securities LLC

(0.81)%

1/17

8,725

Collateralized by Par Value $8,257

Sovereign Government Bond, Coupon 1.15%,

Maturity Date 7/20

8,447

JP Morgan Securities LLC

(0.95)%

1/17

8,447

Collateralized by Par Value $8,257

Sovereign Government Bond, Coupon 0.65%,

Maturity Date 11/20

6,166

CILO 2016-LD1 Holdings LLC (m)

2.90%

2/17

6,166

Collateralized by Par Value $9,512

Exchange-Traded Debt, Coupon 5.50%,

Maturity Date 7/22

5,827

RBC Capital Markets LLC

(0.35)%

1/17

5,827

Collateralized by Par Value $6,300

Exchange-Traded Corporate Debt, Coupon 6.25%,

Maturity Date 9/21

4,691

Bank of America Securities

(3.00)%

1/17

4,691

Collateralized by Par Value $4,726

U.S. Treasury Note, Coupon 1.75%,

Maturity Date 11/21

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT DECEMBER 31, 2016 (CONTINUED)

(UNAUDITED)

Current Principal

Description

Rate

Maturity

Fair Value

(In thousands)

Expressed in U.S.

Dollars

(continued)

3,274

RBC Capital Markets LLC

0.30%

1/17

3,274

Collateralized by Par Value $3,274

Exchange-Traded Corporate Debt, Coupon 6.25%,

Maturity Date 7/22

3,147

RBC Capital Markets LLC

(1.00)%

1/17

3,147

Collateralized by Par Value $3,100

Exchange-Traded Corporate Debt, Coupon 8.00%,

Maturity Date 1/25

3,125

Bank of America Securities

0.10%

1/17

3,125

Collateralized by Par Value $3,230

U.S. Treasury Note, Coupon 1.13%,

Maturity Date 8/21

3,006

Barclays Capital Inc

(0.50)%

1/17

3,006

Collateralized by Par Value $3,050

Exchange-Traded Corporate Debt, Coupon 4.00%,

Maturity Date 11/21

2,774

RBC Capital Markets LLC

(4.50)%

1/17

2,774

Collateralized by Par Value $3,032

Exchange-Traded Corporate Debt, Coupon 4.50%,

Maturity Date 4/22

2,534

Societe Generale

(0.50)%

1/17

2,534

Collateralized by Par Value $2,532

Exchange-Traded Corporate Debt, Coupon 4.00%,

Maturity Date 11/21

2,232

JP Morgan Securities LLC

(2.50)%

1/17

2,232

Collateralized by Par Value $2,090

Exchange-Traded Corporate Debt, Coupon 6.25%,

Maturity Date 10/22

1,899

Bank of America Securities

0.10%

1/17

1,899

Collateralized by Par Value $1,968

U.S. Treasury Note, Coupon 1.13%,

Maturity Date 9/21

1,777

Barclays Capital Inc

(2.25)%

1/17

1,777

Collateralized by Par Value $1,864

Exchange-Traded Corporate Debt, Coupon 4.88%,

Maturity Date 4/22

1,573

RBC Capital Markets LLC

(1.50)%

1/17

1,573

Collateralized by Par Value $1,550

Exchange-Traded Corporate Debt, Coupon 8.00%,

Maturity Date 1/25

1,503

JP Morgan Securities LLC

(2.50)%

1/17

1,503

Collateralized by Par Value $1,556

Exchange-Traded Corporate Debt, Coupon 4.88%,

Maturity Date 4/22

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT DECEMBER 31, 2016 (CONTINUED)

(UNAUDITED)

Current Principal

Description

Rate

Maturity

Fair Value

(In thousands)

Expressed in U.S.

Dollars

(continued)

1,435

RBC Capital Markets LLC

0.30%

1/17

1,435

Collateralized by Par Value $1,560

Exchange-Traded Corporate Debt, Coupon 3.88%,

Maturity Date 3/23

1,369

Societe Generale

0.35%

1/17

1,369

Collateralized by Par Value $1,240

Exchange-Traded Corporate Debt, Coupon 9.25%,

Maturity Date 7/21

1,281

Bank of America Securities

0.25%

1/17

1,281

Collateralized by Par Value $1,305

U.S. Treasury Note, Coupon 1.38%,

Maturity Date 4/21

1,214

RBC Capital Markets LLC

0.25%

1/17

1,214

Collateralized by Par Value $1,190

Exchange-Traded Corporate Debt, Coupon 3.88%,

Maturity Date 1/22

1,147

RBC Capital Markets LLC

(1.75)%

1/17

1,147

Collateralized by Par Value $1,300

Exchange-Traded Corporate Debt, Coupon 5.50%,

Maturity Date 10/24

1,119

RBC Capital Markets LLC

0.30%

1/17

1,119

Collateralized by Par Value $1,130

Exchange-Traded Corporate Debt, Coupon 4.13%,

Maturity Date 2/22

975

JP Morgan Securities LLC

(0.65)%

1/17

975

Collateralized by Par Value $1,008

Exchange-Traded Corporate Debt, Coupon 4.00%,

Maturity Date 11/21

909

Societe Generale

0.35%

1/17

909

Collateralized by Par Value $850

Exchange-Traded Corporate Debt, Coupon 3.88%,

Maturity Date 1/22

817

JP Morgan Securities LLC

(0.50)%

1/17

817

Collateralized by Par Value $840

Exchange-Traded Corporate Debt, Coupon 4.00%,

Maturity Date 11/21

795

RBC Capital Markets LLC

(2.50)%

1/17

795

Collateralized by Par Value $780

Exchange-Traded Corporate Debt, Coupon 6.25%,

Maturity Date 10/22

780

JP Morgan Securities LLC

(2.80)%

1/17

780

Collateralized by Par Value $800

U.S. Treasury Note, Coupon 1.25%,

Maturity Date 10/21

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT DECEMBER 31, 2016 (CONTINUED)

(UNAUDITED)

Current Principal

Description

Rate

Maturity

Fair Value

(In thousands)

Expressed in U.S.

Dollars

(continued)

760

Barclays Capital Inc

(4.75)%

1/17

760

Collateralized by Par Value $819

Exchange-Traded Corporate Debt, Coupon 4.50%,

Maturity Date 4/22

674

RBC Capital Markets LLC

0.30%

1/17

674

Collateralized by Par Value $650

Exchange-Traded Corporate Debt, Coupon 5.25%,

Maturity Date 9/22

673

RBC Capital Markets LLC

0.30%

1/17

673

Collateralized by Par Value $620

Exchange-Traded Corporate Debt, Coupon 6.38%,

Maturity Date 4/26

671

RBC Capital Markets LLC

0.30%

1/17

671

Collateralized by Par Value $620

Exchange-Traded Corporate Debt, Coupon 6.88%,

Maturity Date 5/23

587

JP Morgan Securities LLC

(1.50)%

1/17

587

Collateralized by Par Value $620

Exchange-Traded Corporate Debt, Coupon 5.50%,

Maturity Date 10/24

566

JP Morgan Securities LLC

(0.35)%

1/17

566

Collateralized by Par Value $570

Exchange-Traded Corporate Debt, Coupon 4.00%,

Maturity Date 11/21

562

Barclays Capital Inc

(0.10)%

1/17

562

Collateralized by Par Value $550

Exchange-Traded Corporate Debt, Coupon 2.40%,

Maturity Date 12/22

545

RBC Capital Markets LLC

(0.38)%

1/17

545

Collateralized by Par Value $560

Exchange-Traded Corporate Debt, Coupon 4.00%,

Maturity Date 11/21

543

JP Morgan Securities LLC

(0.35)%

1/17

543

Collateralized by Par Value $560

Exchange-Traded Corporate Debt, Coupon 6.25%,

Maturity Date 9/21

533

Bank of America Securities

0.60%

1/17

533

Collateralized by Par Value $549

U.S. Treasury Note, Coupon 1.13%,

Maturity Date 7/21

520

RBC Capital Markets LLC

0.30%

1/17

520

Collateralized by Par Value $500

Exchange-Traded Corporate Debt, Coupon 5.75%,

Maturity Date 10/22

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT DECEMBER 31, 2016 (CONTINUED)

(UNAUDITED)

Current Principal

Description

Rate

Maturity

Fair Value

(In thousands)

Expressed in U.S.

Dollars

(continued)

449

RBC Capital Markets LLC

0.30%

1/17

449

Collateralized by Par Value $430

Exchange-Traded Corporate Debt, Coupon 5.13%,

Maturity Date 10/21

373

RBC Capital Markets LLC

0.30%

1/17

373

Collateralized by Par Value $360

Exchange-Traded Corporate Debt, Coupon 5.13%,

Maturity Date 11/23

278

RBC Capital Markets LLC

(7.00)%

1/17

278

Collateralized by Par Value $270

Exchange-Traded Corporate Debt, Coupon 7.75%,

Maturity Date 6/21

Total Repurchase Agreements (Cost $185,205)

184,819



Investments Sold Short (-90.71%) (a) (b)
TBA - Fixed Rate Agency Securities Sold Short (-62.77%) (n)
North America
Mortgage-related—Residential
$	(87,767	)	Federal Home Loan Mortgage Corporation (30 year)	4.00%	1/17	$	(92,210	)
(50,930		)	Federal National Mortgage Association (30 year)	4.50%	1/17	(54,748		)
(31,620		)	Federal National Mortgage Association (30 year)	5.00%	1/17	(34,426		)
(26,000		)	Federal National Mortgage Association (30 year)	4.00%	2/17	(27,295		)
(24,352		)	Federal National Mortgage Association (30 year)	3.50%	1/17	(24,960		)
(23,151		)	Federal Home Loan Mortgage Corporation (30 year)	4.50%	1/17	(24,840		)
(21,940		)	Government National Mortgage Association (30 year)	3.50%	1/17	(22,819		)
(20,558		)	Federal National Mortgage Association (30 year)	4.00%	1/17	(21,611		)
(20,740		)	Federal National Mortgage Association (15 year)	3.00%	1/17	(21,285		)
(15,770		)	Government National Mortgage Association (30 year)	4.50%	1/17	(17,058		)
(13,510		)	Federal Home Loan Mortgage Corporation (15 year)	3.00%	1/17	(13,869		)
(11,170		)	Federal National Mortgage Association (15 year)	4.00%	1/17	(11,494		)
(8,790		)	Federal Home Loan Mortgage Corporation (15 year)	3.50%	1/17	(9,169		)
(6,860		)	Federal National Mortgage Association (30 year)	5.50%	1/17	(7,622		)
(6,500		)	Government National Mortgage Association (30 year)	3.00%	1/17	(6,568		)
(4,612		)	Federal National Mortgage Association (30 year)	3.00%	1/17	(4,584		)
(3,155		)	Federal Home Loan Mortgage Corporation (30 year)	3.00%	1/17	(3,134		)
(2,530		)	Federal National Mortgage Association (15 year)	3.50%	2/17	(2,633		)
(2,500		)	Government National Mortgage Association (30 year)	3.50%	2/17	(2,597		)
(1,700		)	Government National Mortgage Association (30 year)	4.00%	1/17	(1,806		)
Total TBA - Fixed Rate Agency Securities Sold Short (Proceeds -$404,967)						(404,728		)

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT DECEMBER 31, 2016 (CONTINUED)

(UNAUDITED)



Current Principal/Number of Shares			Description	Rate	Maturity	Fair Value
(In thousands)						Expressed in U.S. Dollars
Government Debt Sold Short (-20.54%)
North America (-10.82%)
Government
$	(48,133	)	U.S. Treasury Note	2.00%	11/26	$	(46,287	)
(12,160		)	U.S. Treasury Note	1.50%	8/26	(11,179		)
(4,726		)	U.S. Treasury Note	1.75%	11/21	(4,690		)
(3,230		)	U.S. Treasury Note	1.13%	8/21	(3,121		)
(1,968		)	U.S. Treasury Note	1.13%	9/21	(1,898		)
(1,305		)	U.S. Treasury Note	1.38%	4/21	(1,280		)
(800		)	U.S. Treasury Note	1.25%	10/21	(776		)
(549		)	U.S. Treasury Note	1.13%	7/21	(531		)
Total North America (Proceeds -$69,946)						(69,762		)
Europe (-9.72%)
Government
(20,754		)	European Sovereign Bond	0.25% - 0.65%	11/20	(21,219		)
(14,507		)	Spanish Sovereign Bond	0.25%	4/18	(14,614		)
(9,176		)	Spanish Sovereign Bond	0.75%	7/21	(9,379		)
(8,322		)	Spanish Sovereign Bond	2.75%	4/19	(8,888		)
(8,257		)	Spanish Sovereign Bond	1.15%	7/20	(8,580		)
Total Europe (Proceeds -$66,800)						(62,680		)
Total Government Debt Sold Short (Proceeds -$136,746)						(132,442		)
Common Stock Sold Short (-1.26%)
North America
Financial
(207		)	Exchange Traded Equity			(8,154		)
Total Common Stock Sold Short (Proceeds -$8,052)						(8,154		)
Corporate Debt Sold Short (-6.14%)
North America
Basic Materials
(8,970		)	Various	3.88% - 5.13%	10/21 - 3/23	(8,717		)
Communications
(8,750		)	Various	5.25% - 9.25%	7/21 - 9/22	(8,551		)
Consumer
(8,930		)	Various	3.88% - 6.88%	1/22 - 4/26	(8,695		)
Energy
(10,597		)	Various	2.40% - 8.00%	6/21 - 1/25	(10,041		)
Financial
(1,130		)	Various	4.13%	2/22	(1,121		)
Utilities
(2,430		)	Various	6.25%	7/22	(2,447		)
Total Corporate Debt Sold Short (Proceeds -$39,664)						(39,572		)
Total Investments Sold Short (Proceeds -$589,429)						$	(584,896	)

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT DECEMBER 31, 2016 (CONTINUED)

(UNAUDITED)



	Primary Risk Exposure	Notional Value			Range of Expiration Dates	Fair Value
(In thousands)						Expressed in U.S.Dollars
Financial Derivatives–Assets (5.52%) (a) (b)
Swaps (5.49%)
Long Swaps:
Credit Default Swaps on Corporate Bond Indices (o)	Credit	$	40,611		12/18 - 12/21	$	2,744
Credit Default Swaps on Asset-Backed Indices (o)	Credit	1,202			12/37	12
Interest Rate Swaps (p)	Interest Rates	215,826			12/17 - 1/45	2,274
North America
Total Return Swaps (t)
Consumer	Credit	3,130			7/19	87
Utilities	Credit	685			2/20	68
Total Total Return Swaps						155
Credit Default Swaps on Corporate Bonds (o)
Basic Materials	Credit	760			3/21	90
Consumer	Credit	8,043			3/19 - 12/21	973
Energy	Credit	4,120			3/19 - 12/21	7
Financial	Credit	1,120			12/21	140
Utilities	Credit	2,060			6/21	151
Total Credit Default Swaps on Corporate Bonds						1,361
Short Swaps:
Credit Default Swaps on Asset-Backed Indices (q)	Credit	(112,999		)	5/46 - 9/58	16,701
Interest Rate Swaps (r)	Interest Rates	(607,499		)	4/17 - 12/45	5,828
North America
Credit Default Swaps on Asset-Backed Securities (q)
Mortgage-related—Residential	Credit	(7,077		)	5/35 - 12/35	5,326
Credit Default Swaps on Corporate Bonds (q)
Consumer	Credit	(2,880		)	12/21	102
Communications	Credit	(1,930		)	6/21	30
Energy	Credit	(20,507		)	6/17 - 6/21	867
Total Credit Default Swaps on Corporate Bonds						999
Total Swaps (Net cost $40,491)						35,400
Futures (0.00%)
Short Futures:
U.S. Treasury Note Futures (ac)	Interest Rates	(7,000		)	3/17	19
Eurodollar Futures (u)	Interest Rates	(13,000		)	9/17	10
Total Futures						29

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT DECEMBER 31, 2016 (CONTINUED)

(UNAUDITED)



	Primary Risk Exposure	Notional Value			Range of Expiration Dates	Fair Value
(In thousands)						Expressed in U.S.Dollars
Options (0.01%)
Purchased Options:
Put Options on Credit Default Swaps on Corporate Bond Indices (x)	Credit	$	10,000		1/17	$	—
Interest Rate Caps (w)	Interest Rates	61,908			3/18 - 10/18	2
North America
Equity Call Options (y)
Consumer	Equity Market	16			4/17	42
Total Options (Cost $133)						44
Forwards (0.00%)
Short Forwards:
Currency Forwards (aa)	Currency	(6,529		)	3/17	16
Total Forwards						16
Warrants (0.02%)
North America
Warrants (v)
Mortgage-related—Residential	Equity Market	1,639				106
Total Warrants (Cost $100)						106
Total Financial Derivatives–Assets (Net cost $40,724)						$	35,595
Financial Derivatives–Liabilities (-2.90%) (a) (b)
Swaps (-2.81%)
Long Swaps:
Credit Default Swaps on Asset-Backed Indices (o)	Credit	$	16,026		1/47 - 5/63	$	(2,899	)
Interest Rate Swaps (p)	Interest Rates	160,248			2/19 - 1/45	(4,396		)
North America
Credit Default Swaps on Corporate Bonds (o)
Basic Materials	Credit	9,480			6/21 - 12/21	(1,107		)
Communications	Credit	9,990			6/21 - 12/21	(430		)
Consumer	Credit	9,736			6/21 - 12/21	(298		)
Energy	Credit	14,317			3/18 - 12/21	(928		)
Total Credit Default Swaps on Corporate Bonds						(2,763		)
Total Return Swaps (t)
Communications	Credit	1,623			7/19	(249		)
Total Total Return Swaps						(249		)
Europe
Credit Default Swaps on Corporate Bonds (o)
Basic Materials	Credit	11			12/19	(6		)

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT DECEMBER 31, 2016 (CONTINUED)

(UNAUDITED)



	Primary Risk Exposure	Notional Value			Range of Expiration Dates	Fair Value
(In thousands)						Expressed in U.S.Dollars
Short Swaps:
Interest Rate Swaps (r)	Interest Rates	$	(154,836	)	8/17 - 11/45	$	(742	)
Interest Rate Swaps (z)	Interest Rates	(100,200		)	6/17 - 6/19	(24		)
Credit Default Swaps on Corporate Bond Indices (q)	Credit	(49,306		)	12/18 - 12/21	(2,840		)
North America
Credit Default Swaps on Asset-Backed Securities (q)
Mortgage-related—Residential	Credit	(3,057		)	10/34 - 3/35	(256		)
Credit Default Swaps on Corporate Bonds (q)
Basic Materials	Credit	(2,260		)	6/17 - 3/21	(93		)
Communications	Credit	(3,140		)	6/20	(44		)
Consumer	Credit	(30,901		)	3/19 - 12/21	(3,097		)
Energy	Credit	(5,150		)	12/17 - 12/21	(80		)
Industrial	Credit	(12,460		)	3/20 - 12/21	(119		)
Technology	Credit	(3,020		)	3/20	(345		)
Utilities	Credit	(860		)	6/21	(107		)
Total Credit Default Swaps on Corporate Bonds						(3,885		)
Total Return Swaps (s)
Financial	Equity	(42,093		)	5/17 - 8/17	(55		)
Total Swaps (Net proceeds -$12,012)						(18,115		)
Futures (-0.01%)
Long Futures:
Eurodollar Futures (u)	Interest Rates	11,000			6/17	(8		)
Short Futures:
Eurodollar Futures (u)	Interest Rates	(49,000		)	3/17 - 9/17	(61		)
Total Futures						(69		)
Forwards (-0.07%)
Short Forwards:
Currency Forwards (aa)	Currency	(48,258		)	3/17	(472		)
Total Forwards						(472		)
Mortgage Loan Purchase Commitments (-0.01%)
North America
Mortgage Loan Purchase Commitments (ab)
Mortgage-related—residential	Interest rate	20,601			2/17	(31		)
Total Mortgage Loan Purchase Commitments						(31		)
Total Financial Derivatives–Liabilities (Net proceeds -$12,012)						$	(18,687	)

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT DECEMBER 31, 2016 (CONTINUED)

(UNAUDITED)


(a)	See Note 2 and Note 3 in Notes to Consolidated Financial Statements.


(b)	Classification percentages are based on Total Equity.


(c)	At December 31, 2016, the Company's long investments guaranteed by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Government National Mortgage Association, represented 73.78%, 42.13%, and 23.36% of Total Equity, respectively.


(d)	Private trust 100% backed by interest in Government National Mortgage Association collateralized mortgage obligation certificates.


(e)	Loans and real estate owned are beneficially owned by the Company through participation certificates in the various trusts that hold such investments. See Note 7 to the Notes to Consolidated Financial Statements.

(f)

Includes investments in participation certificates related to loans titled in the name of a related party of Ellington Management Group L.L.C. Through its participation certificates, the Company has beneficial interests in the loan cash flows, net of servicing-related fees and expenses. At December 31, 2016 loans for which the Company has beneficial interests in the net cash flows, totaled $7.6 million. See Note 7 to the Notes to Consolidated Financial Statements.

(g)

Includes investments in participation certificates related to loans held in a trust owned by a related party of Ellington Management Group, L.L.C. Through its participation certificates, the Company participates in the cash flows of the underlying loans held by the trust. At December 31, 2016 loans held in the related party trust for which the Company has participating interests in the cash flows, totaled $43.2 million. See Note 7 to the Notes to Consolidated Financial Statements.


(h)	Includes the Company's beneficial interest in an entity, which is co-owned by an affiliate of Ellington Management Group, L.L.C., in the amount of $7.3 million as of December 31, 2016. The entity owns subordinated notes issued by, as well as trust certificates representing ownership of, a securitization trust. See Note 7 to the Notes to Consolidated Financial Statements.


(i)	Includes non-performing commercial loans in the amount of $28.6 million whereby principal and/or interest is past due and a maturity date is not applicable.


(j)	Number of properties not shown in thousands, represents actual number of properties owned.


(k)	As of December 31, 2016, the Company had residential mortgage loans that were in the process of foreclosure with a fair value of $3.2 million.


(l)	In general, securities received pursuant to repurchase agreements were delivered to counterparties in short sale transactions.

(m)


(n)	At December 31, 2016, the Company's short investments guaranteed by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Government National Mortgage Association, represented 32.67%, 22.21%, and 7.89% of Total Equity, respectively.


(o)	For long credit default swaps, the Company sold protection.


(p)	For long interest rate swap contracts, the Company pays a floating rate and receives a fixed rate.


(q)	For short credit default swaps, the Company purchased protection.


(r)	For short interest rate swap contracts, the Company pays a fixed rate and receives a floating rate.


(s)	Notional value represents number of underlying shares times the closing price of the underlying security.


(t)	Notional value represents outstanding principal balance on underlying corporate debt.


(u)	Every $1,000,000 in notional value represents one contract.


(v)	Notional value represents number of shares that warrants are convertible into.


(w)	Notional value represents the amount on which interest payments are calculated to the extent the market interest rate exceeds the rate cap on the contract.


(x)	Represents the option on the part of a counterparty to enter into a credit default swap on a corporate bond index whereby the Company would receive a fixed rate and pay credit protection payments.


(y)	Notional value represents the number of common shares we have the option to purchase multiplied by the strike price.


(z)	The Company pays a floating rate and receives a floating rate.


(aa)	Notional value represents U.S. Dollars to be received by the Company at the maturity of the forward contract.


(ab)	Notional value represents principal balance of mortgage loan purchase commitments. Actual loan purchases are contingent upon successful loan closings in accordance with agreed-upon parameters.


(ac)	Notional value represents the total face amount of U.S. Treasury securities underlying all contracts held. As of December 31, 2016, a total of 70 contracts were held.

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AT DECEMBER 31, 2016 (CONCLUDED)

(UNAUDITED)

(ad)

The table below shows the Company's long investment ratings from Moody's, Standard and Poor's, or Fitch, as well as the Company's long investments that were unrated but guaranteed by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or the Government National Mortgage Association. Ratings tend to be a lagging credit indicator; as a result, the credit quality of the Company's long investment holdings may be lower than the credit quality implied based on the ratings listed below. In situations where an investment has a split rating, the lowest provided rating is used. The ratings descriptions include ratings qualified with a "+," "-," "1," "2," or "3."



Rating Description	Percent of Equity
Unrated but Agency-Guaranteed	139.27	%
Aaa/AAA/AAA	0.84	%
Aa/AA/AA	0.03	%
A/A/A	0.05	%
Baa/BBB/BBB	2.60	%
Ba/BB/BB or below	30.24	%
Unrated	60.39	%


(ae)	Represents the Company's investment in a related party. See Note 7 to the Notes to the Consolidated Financial Statements.


(af)	Conformed to current period presentation.

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)



	Three Month Period Ended						Nine Month Period Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
(In thousands except per share amounts)	Expressed in U.S. Dollars
INVESTMENT INCOME
Interest income	$	21,145		$	16,662		$	65,819		$	56,078
Other income	1,232			807			3,043			3,500
Total investment income	22,377			17,469			68,862			59,578
EXPENSES
Base management fee to affiliate (Net of fee rebates of $172, $0, $172, and $0, respectively) ⁽¹⁾	2,161			2,485			6,942			7,649
Interest expense	8,166			4,143			21,794			11,845
Other investment related expenses	1,908			2,068			5,487			6,007
Professional fees	633			679			2,012			2,369
Administration fees	175			290			537			942
Compensation expense	673			589			1,703			1,720
Insurance expense	120			144			378			451
Directors' fees and expenses	66			66			207			204
Share-based LTIP expense	97			101			285			300
Other expenses	476			510			1,408			1,353
Total expenses	14,475			11,075			40,753			32,840
NET INVESTMENT INCOME	7,902			6,394			28,109			26,738
NET REALIZED AND CHANGE IN NET UNREALIZED GAIN (LOSS) ON INVESTMENTS, FINANCIAL DERIVATIVES, AND FOREIGN CURRENCY TRANSACTIONS/TRANSLATION
Net realized gain (loss) on:
Investments	1,087			349			2,372			(398		)
Financial derivatives, excluding currency forwards	(595		)	(23,330		)	(6,222		)	(35,615		)
Financial derivatives—currency forwards	(4,013		)	1,525			(7,357		)	221
Foreign currency transactions	4,726			(1,564		)	6,234			(1,499		)
	1,205			(23,020		)	(4,973		)	(37,291		)
Change in net unrealized gain (loss) on:
Investments	(1,750		)	7,379			6,837			6,363
Financial derivatives, excluding currency forwards	(305		)	9,462			(4,081		)	(15,149		)
Financial derivatives—currency forwards	2,026			(1,855		)	1,162			(1,402		)
Foreign currency translation	(2,483		)	2,190			712			3,108
	(2,512		)	17,176			4,630			(7,080		)

See Notes to Consolidated Financial Statements

Table of Contents



ELLINGTON FINANCIAL LLC
CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
(UNAUDITED)

	Three Month Period Ended						Nine Month Period Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
	Expressed in U.S. Dollars
NET REALIZED AND CHANGE IN NET UNREALIZED GAIN (LOSS) ON INVESTMENTS, FINANCIAL DERIVATIVES, AND FOREIGN CURRENCY TRANSACTIONS/TRANSLATION	(1,307		)	(5,844		)	(343		)	(44,371		)
NET INCREASE (DECREASE) IN EQUITY RESULTING FROM OPERATIONS	6,595			550			27,766			(17,633		)
LESS: NET INCREASE IN EQUITY RESULTING FROM OPERATIONS ATTRIBUTABLE TO NON-CONTROLLING INTERESTS	400			34			1,229			66
NET INCREASE (DECREASE) IN SHAREHOLDERS' EQUITY RESULTING FROM OPERATIONS	$	6,195		$	516		$	26,537		$	(17,699	)
NET INCREASE (DECREASE) IN SHAREHOLDERS' EQUITY RESULTING FROM OPERATIONS PER SHARE:
Basic and Diluted	$	0.19		$	0.02		$	0.81		$	(0.53	)
CASH DIVIDENDS PER SHARE:
Dividends declared	$	0.45		$	0.50		$	1.35		$	1.50


(1)	See Note 7 for further details on management fee rebates.

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(UNAUDITED)



	Nine Month Period Ended September 30, 2017									Nine Month Period Ended September 30, 2016
	Shareholders' Equity			Non-controlling Interest			Total Equity			Shareholders' Equity			Non-controlling Interest			Total Equity
(In thousands)	Expressed in U.S. Dollars
BEGINNING EQUITY (12/31/2016 and 12/31/2015, respectively)	$	637,661		$	7,116		$	644,777		$	732,049		$	6,903		$	738,952
CHANGE IN EQUITY RESULTING FROM OPERATIONS
Net investment income							28,109									26,738
Net realized gain (loss) on investments, financial derivatives, and foreign currency transactions							(4,973		)							(37,291		)
Change in net unrealized gain (loss) on investments, financial derivatives, and foreign currency translation							4,630									(7,080		)
Net increase (decrease) in equity resulting from operations	26,537			1,229			27,766			(17,699		)	66			(17,633		)
CHANGE IN EQUITY RESULTING FROM TRANSACTIONS
Contributions from non-controlling interests				14,201			14,201						4,747			4,747
Dividends⁽¹⁾	(44,050		)	(286		)	(44,336		)	(49,938		)	(318		)	(50,256		)
Distributions to non-controlling interests				(8,178		)	(8,178		)				(2,560		)	(2,560		)
Adjustment to non-controlling interest	(6		)	6			—			(10		)	10			—
Shares repurchased	(4,791		)				(4,791		)	(8,797		)				(8,797		)
Share-based LTIP awards	284			1			285			298			2			300
Net increase (decrease) in equity from transactions	(48,563		)	5,744			(42,819		)	(58,447		)	1,881			(56,566		)
Net increase (decrease) in equity	(22,026		)	6,973			(15,053		)	(76,146		)	1,947			(74,199		)
ENDING EQUITY (9/30/2017 and 9/30/2016, respectively)	$	615,635		$	14,089		$	629,724		$	655,903		$	8,850		$	664,753


(1)	For the nine month periods ended September 30, 2017 and 2016, dividends totaling $1.35 and $1.50 respectively, per common share and convertible unit outstanding, were declared and paid.

See Notes to Consolidated Financial Statements

Table of Contents

ELLINGTON FINANCIAL LLC

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)



	Nine Month Period Ended September 30,
	2017			2016
(In thousands)	Expressed in U.S. Dollars
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
NET INCREASE (DECREASE) IN EQUITY RESULTING FROM OPERATIONS	$	27,766		$	(17,633	)
Cash flows provided by (used in) operating activities:
Reconciliation of the net increase (decrease) in equity resulting from operations to net cash provided by (used in) operating activities:
Net realized (gain) loss on investments, financial derivatives, and foreign currency transactions	13,018			36,073
Change in net unrealized (gain) loss on investments and financial derivatives, and foreign currency translation	(7,472		)	9,706
Amortization of premiums and accretion of discounts (net)	23,010			19,053
Purchase of investments	(1,847,795		)	(1,862,704		)
Proceeds from disposition of investments	1,378,115			1,795,924
Proceeds from principal payments of investments	214,636			188,378
Proceeds from investments sold short	1,456,930			1,098,986
Repurchase of investments sold short	(1,382,642		)	(1,175,609		)
Payments on financial derivatives	(76,667		)	(315,221		)
Proceeds from financial derivatives	79,207			345,997
Amortization of deferred debt issuance costs	30			—
Share-based LTIP expense	285			300
Repurchase agreements	(8,251		)	(59,348		)
(Increase) decrease in assets:
Receivable for securities sold and financial derivatives	(53,941		)	142,286
Due from brokers	(14,522		)	15,350
Interest and principal receivable	(3,302		)	3,067
Restricted cash	230			(753		)
Other assets	190			(24,638		)
Increase (decrease) in liabilities:
Due to brokers	(9,167		)	(99,197		)
Payable for securities purchased and financial derivatives	84,549			63,847
Accounts payable and accrued expenses	515			(730		)
Other liabilities	181			(665		)
Interest and dividends payable	1,408			1,472
Base management fee payable to affiliate	(255		)	(288		)
Net cash provided by (used in) operating activities	(123,944		)	163,653

See Notes to Consolidated Financial Statements

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ELLINGTON FINANCIAL LLC
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(UNAUDITED)

	Nine Month Period Ended September 30,
	2017			2016
(In thousands)	Expressed in U.S. Dollars
Cash flows provided by (used in) financing activities:
Contributions from non-controlling interests	$	14,201		$	4,747
Shares repurchased	(4,791		)	(8,797		)
Dividends paid	(44,336		)	(50,256		)
Distributions to non-controlling interests	(8,178		)	(2,560		)
Proceeds from issuance of other secured borrowings	94,878			40,921
Principal payments on other secured borrowings	(21,020		)	(10,151		)
Proceeds from issuance of senior notes	86,000			—
Debt issuance costs paid	(890		)	—
Borrowings under reverse repurchase agreements	8,663,470			4,740,559
Repayments of reverse repurchase agreements	(8,667,241		)	(4,882,407		)
Net cash provided by (used in) financing activities	112,093			(167,944		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(11,851		)	(4,291		)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	123,274			183,909
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	111,423		$	179,618
Supplemental disclosure of cash flow information:
Interest paid	$	19,683		$	10,996
Share-based LTIP awards (non-cash)	285			300
Aggregate TBA trade activity (buys + sells) (non-cash)	17,198,330			17,241,758
Purchase of investments (non-cash)	(25,318		)	(27,502		)
Proceeds from principal payments of investments (non-cash)	6,815			—
Proceeds from the disposition of investments (non-cash)	26,800			80,029
Proceeds from issuance of other secured borrowings (non-cash)	17,175			13,088
Principal payments on other secured borrowings (non-cash)	(25,473		)	(13,088		)
Payments made to open financial derivatives (non-cash)	—			(4,000		)
Repayments of reverse repurchase agreements (non-cash)	—			(48,527		)

See Notes to Consolidated Financial Statements

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ELLINGTON FINANCIAL LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(UNAUDITED)

1. Organization and Investment Objective

Ellington Financial LLC was formed as a Delaware limited liability company on July 9, 2007 and commenced operations on August 17, 2007. Ellington Financial Operating Partnership LLC (the "Operating Partnership"), a 99.4% owned consolidated subsidiary of Ellington Financial LLC, was formed as a Delaware limited liability company on December 14, 2012 and commenced operations on January 1, 2013. All of the Company's operations and business activities are conducted through the Operating Partnership. Ellington Financial LLC, the Operating Partnership, and their consolidated subsidiaries are hereafter collectively referred to as the "Company." All intercompany accounts are eliminated in consolidation.

The Company is a specialty finance company that primarily acquires and manages mortgage-related and consumer-related assets, including residential mortgage-backed securities, or "RMBS," residential and commercial mortgage loans, consumer loans and asset-backed securities, or "ABS," backed by consumer loans, commercial mortgage-backed securities, or "CMBS," real property, and mortgage-related derivatives. The Company also invests in corporate debt and equity, including distressed debt, collateralized loan obligations, or "CLOs," non-mortgage-related derivatives, and other financial assets, including private debt and equity investments in mortgage-related entities.

Ellington Financial Management LLC ("EFM" or the "Manager") is an SEC-registered investment adviser and a registered commodity pool operator that serves as the Manager to the Company pursuant to the terms of its sixth amended and restated management agreement (the "Management Agreement"). EFM is an affiliate of Ellington Management Group, L.L.C., ("Ellington") an investment management firm that is registered as both an investment adviser and a commodity pool operator. In accordance with the terms of the Management Agreement, the Manager implements the investment strategy and manages the business and operations on a day-to-day basis for the Company and performs certain services for the Company, subject to oversight by the Company's Board of Directors ("Board of Directors").

2. Significant Accounting Policies

(A) Basis of Presentation: The Company's unaudited interim consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, or "U.S. GAAP," for investment companies, ASC 946, Financial Services—Investment Companies ("ASC 946"). The Company has determined that it meets the definition of an investment company under ASC 946. ASC 946 requires, among other things, that investments be reported at fair value in the financial statements. Additionally under ASC 946 the Company generally will not consolidate its interest in any company other than in its subsidiaries that qualify as investment companies under ASC 946. The consolidated financial statements include the accounts of the Company, the Operating Partnership, and its subsidiaries. All intercompany balances and transactions have been eliminated. The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In management's opinion, all material adjustments considered necessary for a fair statement of the Company's interim consolidated financial statements have been included and are only of a normal recurring nature. Interim results are not necessarily indicative of the results that may be expected for the entire fiscal year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

(B) Valuation: The Company applies ASC 820-10, Fair Value Measurement ("ASC 820-10"), to its holdings of financial instruments. ASC 820-10 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the observability of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:


•	Level 1—inputs to the valuation methodology are observable and reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Currently, the types of financial instruments the Company generally includes in this category are listed equities, exchange-traded derivatives, and cash equivalents;

•

Level 2—inputs to the valuation methodology other than quoted prices included in Level 1 are observable for the asset or liability, either directly or indirectly. Currently, the types of financial instruments that the Company generally includes in this category are Agency RMBS, U.S. Treasury securities and sovereign debt, certain non-Agency RMBS and CMBS, CLOs, and corporate debt, and actively traded derivatives, such as interest rate swaps and foreign currency forwards, and certain other over-the-counter derivatives; and

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•

Level 3—inputs to the valuation methodology are unobservable and significant to the fair value measurement. The types of financial instruments that the Company generally includes in this category are certain RMBS, CMBS, and CLOs; ABS, credit default swaps, or "CDS," on individual ABS, distressed corporate debt, and total return swaps on distressed corporate debt, in each case where there is less price transparency. Also included in this category are residential and commercial mortgage loans, consumer loans, non-listed equities, and private corporate debt and equity investments.

For certain financial instruments, the various inputs that management uses to measure fair value for such financial instrument may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for such financial instrument is based on the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the various inputs that management uses to measure fair value with the highest priority to inputs that are observable and reflect quoted prices (unadjusted) for identical assets or liabilities in active markets (Level 1) and the lowest priority to inputs that are unobservable and significant to the fair value measurement (Level 3). The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. The Company may use valuation techniques consistent with the market and income approaches to measure the fair value of its assets and liabilities. The market approach uses third-party valuations and information obtained from market transactions involving identical or similar assets or liabilities. The income approach uses projections of the future economic benefit of an instrument to determine its fair value, such as in the discounted cash flow methodology. The inputs or methodology used for valuing financial instruments are not necessarily an indication of the risk associated with investing in these financial instruments. The leveling of each financial instrument is reassessed at the end of each period. Transfers between levels of the fair value hierarchy are assumed to occur at the end of the reporting period.

Summary Valuation Techniques

For financial instruments that are traded in an "active market," the best measure of fair value is the quoted market price. However, many of the Company's financial instruments are not traded in an active market. Therefore, management generally uses third-party valuations when available. If third-party valuations are not available, management uses other valuation techniques, such as the discounted cash flow methodology. The following are summary descriptions, for various categories of financial instruments, of the valuation methodologies management uses in determining fair value of the Company's financial instruments in such categories. Management utilizes such methodologies to assign a good faith fair value (the estimated price that, in an orderly transaction at the valuation date, would be received to sell an asset, or paid to transfer a liability, as the case may be) to each such financial instrument.

For mortgage-backed securities, or "MBS," including To Be Announced MBS, or "TBAs," CLOs, and distressed and non-distressed corporate debt and equity, management seeks to obtain at least one third-party valuation, and often obtains multiple valuations when available. Management has been able to obtain third-party valuations on the vast majority of these instruments and expects to continue to solicit third-party valuations in the future. Management generally values each financial instrument at the average of third-party valuations received and not rejected as described below. Third-party valuations are not binding, and while management generally does not adjust the valuations it receives, management may challenge or reject a valuation when, based on its validation criteria, management determines that such valuation is unreasonable or erroneous. Furthermore, based on its validation criteria, management may determine that the average of the third-party valuations received for a given instrument does not result in what management believes to be the fair value of such instrument, and in such circumstances management may override this average with its own good faith valuation. The validation criteria may take into account output from management's own models, recent trading activity in the same or similar instruments, and valuations received from third parties. The use of proprietary models requires the use of a significant amount of judgment and the application of various assumptions including, but not limited to, assumptions concerning future prepayment rates and default rates. Valuations for fixed-rate MBS pass-throughs issued by a U.S. government agency or government-sponsored enterprise are typically based on observable pay-up data (pay-ups are price premiums for specified categories of fixed-rate pools relative to their TBA counterparts) or models that use observable market data, such as interest rates and historical prepayment speeds, and are validated against third-party valuations. Given their relatively high level of price transparency, Agency RMBS pass-throughs are typically designated as Level 2 assets. Non-Agency MBS, Agency interest only and inverse interest only RMBS, and CLOs are generally classified as either Level 2 or Level 3 based on analysis of available market data and/or third-party valuations. The Company's investments in distressed corporate debt can be in the form of loans as well as total return swaps on loans. These investments as well as related non-listed equity investments are generally designated as Level 3 assets. Valuations for total return swaps are typically based on prices of the underlying loans received from widely used third-party pricing services. Investments in non-distressed corporate bonds are generally also valued based on prices received from third-party pricing services, and many of these bonds, because they are very liquid with readily observable data, are generally classified as Level 2 holdings. Furthermore, the methodology used by the third-party valuation providers is reviewed at least annually by management, so as to ascertain whether such providers are utilizing observable market data to determine the valuations that they provide.

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For residential and commercial mortgage loans, consumer loans, and real estate owned properties, or "REO," management determines fair value by taking into account both external pricing data, when available, and internal pricing models. Non-performing mortgage loans and REO are typically valued based on management's estimates of the value of the underlying real estate, using various information including general economic data, broker price opinions, or "BPOs," recent sales, property appraisals, and bids. Performing mortgage loans and consumer loans are typically valued using discounted cash flows based on market assumptions and mortgage loans that are not deemed "qualified mortgage," or "QM," loans under the rules of the Consumer Financial Protection Bureau, or "non-QM loans," are valued using matrix pricing. Cash flow assumptions typically include projected default and prepayment rates and loss severities, and may include adjustments based on appraisals and BPOs. Mortgage and consumer loans and REO properties are classified as Level 3 assets.

For financial derivatives with greater price transparency, such as CDS on asset-backed indices, CDS on corporate indices, certain options on the foregoing, and total return swaps on publicly traded equities, market-standard pricing sources are used to obtain valuations; these financial derivatives are generally designated as Level 2 instruments. Interest rate swaps, swaptions, and foreign currency forwards are typically valued based on internal models that use observable market data, including applicable interest rates and foreign currency rates in effect as of the measurement date; the model-generated valuations are then typically compared to counterparty valuations for reasonableness. These financial derivatives are also generally designated as Level 2 instruments. Financial derivatives with less price transparency, such as CDS on individual ABS, are generally valued based on internal models, and are typically designated as Level 3 instruments. In the case of CDS on individual ABS, the valuation process typically starts with an estimation of the value of the underlying ABS. In valuing its derivatives, the Company also considers the creditworthiness of both the Company and its counterparties, along with collateral provisions contained in each derivative agreement.

Investments in private operating entities, such as mortgage originators, are valued based on available metrics, such as relevant market multiples and comparable company valuations, company specific-financial data including actual and projected results and independent third party valuation estimates. These investments are designated as Level 3 assets.

The Company's repurchase agreements are carried at fair value based on their contractual amounts as the debt is short-term in nature. The Company's reverse repurchase agreements are carried at cost, which approximates fair value. Repurchase and reverse repurchase agreements are classified as Level 2 assets and liabilities based on the adequacy of the collateral and their short term nature.

The Company's valuation process, including the application of validation criteria, is overseen by the Manager's Valuation Committee ("Valuation Committee"). The Valuation Committee includes senior level executives from various departments within the Manager, and each quarter, the Valuation Committee reviews and approves the valuations of the Company's investments. The valuation process also includes a monthly review by the Company's third-party administrator. The goal of this review is to replicate various aspects of the Company's valuation process based on the Company's documented procedures.

Because of the inherent uncertainty of valuation, the estimated fair value of the Company's financial instruments may differ significantly from the values that would have been used had a ready market for the financial instruments existed, and the differences could be material to the Company's consolidated financial statements.

(C) Purchase and Sales of Investments and Investment Income: Purchases and sales of investments are generally recorded on trade date, and realized and unrealized gains and losses are calculated based on identified cost. The Company amortizes premiums and accretes discounts on its debt investments. Coupon interest income on fixed-income investments is generally accrued based on the outstanding principal balance or notional value and the current coupon interest rate.

For Agency RMBS and debt securities that are deemed to be of high credit quality at the time of purchase, premiums and discounts are amortized into interest income over the life of such securities using the effective interest method. For securities whose cash flows vary depending on prepayments, an effective yield retroactive to the time of purchase is periodically recomputed based on actual prepayments and changes in projected prepayment activity, and a catch-up adjustment is made to amortization to reflect the cumulative impact of the change in effective yield.

For debt securities (including non-Agency MBS) that are deemed not to be of high credit quality at the time of purchase, interest income is recognized based on the effective interest method. For purposes of determining the effective interest rate, management estimates the future expected cash flows of its investment holdings based on assumptions including, but not limited to, assumptions for future prepayment rates, default rates, and loss severities (each of which may in turn incorporate various macro-economic assumptions, such as future housing prices). These assumptions are re-evaluated not less than quarterly. Principal write-offs are generally treated as realized losses. Changes in projected cash flows, as applied to the current amortized cost of the security, may result in a prospective change in the yield/interest income recognized on such securities.

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For each loan purchased with the expectation that both interest and principal will be paid in full, the Company generally amortizes or accretes any premium or discount over the life of the loan utilizing the effective interest method. However, on at least a quarterly basis based on current information and events, the Company re-assesses the collectability of interest and principal, and designates a loan as impaired either when any payments have become 90 or more days past due, or when, in the opinion of management, it is probable that the Company will be unable to collect either interest or principal in full. Once a loan is designated as impaired, as long as principal is still expected to be collectable in full, interest payments are recorded as interest income only when received (i.e., under the cash basis method); accruals of interest income are only resumed when the loan becomes contractually current and performance is demonstrated to be resumed. However, if principal is not expected to be collectable in full, the cost recovery method is used (i.e., no interest income is recognized, and all payments received—whether contractually interest or principal—are applied to cost).

For each loan purchased with evidence of credit deterioration since origination and the expectation that either principal or interest will not be paid in full, interest income is generally recognized using the effective interest method for as long as the cash flows can be reasonably estimated. Here, instead of amortizing the purchase discount (i.e., the excess of the unpaid principal balance over the purchase price) over the life of the loan, the Company effectively amortizes the accretable yield (i.e., the excess of the Company's estimate of the total cash flows to be collected over the life of the loan over the purchase price). Not less than quarterly, the Company updates its estimate of the cash flows expected to be collected over the life of the loan, and revised yields are prospectively applied. To the extent that cash flows cannot be reasonably estimated, these loans are generally accounted for under the cost recovery method.

For certain groups of consumer loans that the Company considers as having sufficiently homogeneous characteristics, the Company aggregates such loans into pools, and accounts for each such pool as a single asset. The pool is then treated analogously to a debt security deemed not to be of high credit quality, in that (i) the aggregate premium or discount for the pool is amortized or accreted into interest income based on the pool's effective interest rate; (ii) the effective interest rate is determined based on the net expected cash flows of the pool, taking into account estimates of prepayments, defaults, and loss severities; and (iii) estimates are updated not less than quarterly and revised yields are prospectively applied.

In estimating future cash flows on the Company's debt investments, there are a number of assumptions that will be subject to significant uncertainties and contingencies, including, in the case of MBS, assumptions relating to prepayment rates, default rates, loan loss severities, and loan repurchases. These estimates require the use of a significant amount of judgment.

The Company receives dividend income on certain of its equity investments and rental income on certain of its REO properties. These items of income are included on the Consolidated Statement of Operations in, "Other income."

(D) Cash and Cash Equivalents: Cash and cash equivalents include cash and short term investments with original maturities of three months or less at the date of acquisition. Cash and cash equivalents typically include amounts held in an interest bearing overnight account and amounts held in money market funds, and these balances generally exceed insured limits. The Company holds its cash at institutions that it believes to be highly creditworthy. Restricted cash represents cash that the Company can use only for specific purposes. The Company's investments in money market funds are included in the Consolidated Condensed Schedule of Investments. See Note 13 for further discussion of restricted cash balances.

(E) Financial Derivatives: The Company enters into various types of financial derivatives. The Company's financial derivatives are predominantly subject to bilateral collateral arrangements or clearing in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Company may be required to deliver or receive cash or securities as collateral upon entering into derivative transactions. In addition, changes in the relative value of derivative transactions may require the Company or the counterparty to post or receive additional collateral. In the case of cleared derivatives, the clearinghouse becomes the Company's counterparty and a futures commission merchant acts as an intermediary between the Company and the clearinghouse with respect to all facets of the related transaction, including the posting and receipt of required collateral. Cash collateral received by the Company is reflected on the Consolidated Statement of Assets, Liabilities, and Equity as "Due to Brokers." Conversely, cash collateral posted by the Company is reflected as "Due from Brokers" on the Consolidated Statement of Assets, Liabilities, and Equity. The major types of derivatives utilized by the Company are swaps, futures, options, and forwards.

Swaps: The Company may enter into various types of swaps, including interest rate swaps, credit default swaps, and total return swaps. The primary risk associated with the Company's interest rate swap activity is interest rate risk. The primary risk associated with the Company's credit default swaps is credit risk and the primary risks associated with the Company's total return swap activity are equity market risk and credit risk.

The Company is subject to interest rate risk exposure in the normal course of pursuing its investment objectives. Primarily to help mitigate interest rate risk, the Company enters into interest rate swaps. Interest rate swaps are contractual agreements whereby one party pays a floating interest rate on a notional principal amount and receives a fixed-rate payment on

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the same notional principal, or vice versa, for a fixed period of time. Interest rate swaps change in value with movements in interest rates.

The Company enters into credit default swaps. A credit default swap is a contract under which one party agrees to compensate another party for the financial loss associated with the occurrence of a "credit event" in relation to a "reference amount" or notional value of a credit obligation (usually a bond, loan, or a basket of bonds or loans). The definition of a credit event may vary from contract to contract. A credit event may occur (i) when the underlying reference asset(s) fails to make scheduled principal or interest payments to its holders, (ii) with respect to credit default swaps referencing mortgage/asset-backed securities and indices, when the underlying reference obligation is downgraded below a certain rating level, or (iii) with respect to credit default swaps referencing corporate entities and indices, upon the bankruptcy of the underlying reference obligor. The Company typically writes (sells) protection to take a "long" position or purchases (buys) protection to take a "short" position with respect to underlying reference assets or to hedge exposure to other investment holdings.

The Company enters into total return swaps in order to take a "long" or "short" position with respect to an underlying reference asset. The Company is subject to market price volatility of the underlying reference asset. A total return swap involves commitments to pay interest in exchange for a market-linked return based on a notional value. To the extent that the total return of the corporate debt, security, group of securities or index underlying the transaction exceeds or falls short of the offsetting interest obligation, the Company will receive a payment from or make a payment to the counterparty.

Swaps change in value with movements in interest rates, credit quality, or total return of the reference securities. During the term of swap contracts, changes in value are recognized as unrealized gains or losses. When a contract is terminated, the Company realizes a gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Company's basis in the contract, if any. Periodic payments or receipts required by swap agreements are recorded as unrealized gains or losses when accrued and realized gains or losses when received or paid. Upfront payments paid and/or received by the Company to open swap contracts are recorded as an asset and/or liability on the Consolidated Statement of Assets, Liabilities, and Equity and are recorded as a realized gain or loss on the termination date.

Futures Contracts: A futures contract is an exchange-traded agreement to buy or sell an asset for a set price on a future date. The Company enters into Eurodollar and/or U.S. Treasury security futures contracts to hedge its interest rate risk. The Company may also enter into various other futures contracts, including equity index futures. Initial margin deposits are made upon entering into futures contracts and can generally be either in the form of cash or securities. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by marking-to-market to reflect the current market value of the contract. Variation margin payments are made or received periodically, depending upon whether unrealized losses or gains are incurred. When the contract is closed, the Company records a realized gain or loss equal to the difference between the proceeds of the closing transaction and the Company's basis in the contract.

Options: The Company may purchase or write put or call options contracts or enter into swaptions. The Company enters into options contracts typically to help mitigate overall market, credit, or interest rate risk depending on the type of options contract. However, the Company also enters into options contracts from time to time for speculative purposes. When the Company purchases an options contract, the option asset is initially recorded at an amount equal to the premium paid, if any, and is subsequently marked-to-market. Premiums paid for purchasing options contracts that expire unexercised are recognized on the expiration date as realized losses. If an options contract is exercised, the premium paid is subtracted from the proceeds of the sale or added to the cost of the purchase to determine whether the Company has realized a gain or loss on the related transaction. When the Company writes an options contract, the option liability is initially recorded at an amount equal to the premium received, if any, and is subsequently marked-to-market. Premiums received for writing options contracts that expire unexercised are recognized on the expiration date as realized gains. If an options contract is exercised, the premium received is subtracted from the cost of the purchase or added to the proceeds of the sale to determine whether the Company has realized a gain or loss on the related investment transaction. When the Company enters into a closing transaction, the Company will realize a gain or loss depending upon whether the amount from the closing transaction is greater or less than the premiums paid or received. The Company may also enter into options contracts that contain forward-settling premiums. In this case, no money is exchanged upfront. Instead the agreed-upon premium is paid by the buyer upon expiration of the option, regardless of whether or not the option is exercised.

Forward Currency Contracts: A forward currency contract is an agreement between two parties to purchase or sell a specific quantity of currency with the delivery and settlement at a specific future date and exchange rate. During the period the forward currency contract is open, changes in the value of the contract are recognized as unrealized gains or losses. When the contract is settled, the Company records a realized gain or loss equal to the difference between the proceeds of the closing transaction and the Company's basis in the contract.

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Commitments to Purchase Residential Mortgage Loans: The Company has entered into forward purchase commitments under flow agreements, whereby the Company commits to purchasing the loans based on pre-defined underwriting guidelines and at stated interest rates. Actual loan purchases are contingent upon successful loan closings. These commitments to purchase mortgage loans are classified as derivatives on the Company's Consolidated Statement of Assets, Liabilities, and Equity and are, therefore, recorded as assets or liabilities measured at fair value. Until the purchase commitment expires or the underlying loan closes, changes in the estimated fair value of such commitments are recognized as unrealized gains or losses in the Consolidated Statement of Operations.

Financial derivatives disclosed on the Consolidated Condensed Schedule of Investments include: credit default swaps on asset-backed securities, credit default swaps on asset-backed indices, credit default swaps on corporate bond indices, credit default swaps on corporate bonds, interest rate swaps, total return swaps, futures contracts, foreign currency forwards, options contracts, warrants, and mortgage loan purchase commitments.

Financial derivative assets are included in Financial derivatives—assets, at fair value on the Consolidated Statement of Assets, Liabilities, and Equity. Financial derivative liabilities are included in Financial derivatives—liabilities, at fair value on the Consolidated Statement of Assets, Liabilities, and Equity. In addition, financial derivative contracts are summarized by type on the Consolidated Condensed Schedule of Investments.

(F) Investments Sold Short: When the Company sells securities short, it typically satisfies its security delivery settlement obligation by obtaining the security sold short from the same or a different counterparty. The Company generally is required to deliver cash or securities as collateral to the counterparty for the Company's obligation to return the borrowed security. The amount by which the market value of the obligation falls short of or exceeds the proceeds from the short sale is treated as an unrealized gain or loss, respectively. A realized gain or loss will be recognized upon the termination of a short sale if the market price is less or greater than the proceeds originally received.

(G) Reverse Repurchase Agreements: The Company enters into reverse repurchase agreements with third-party broker-dealers whereby it sells securities under agreements to be repurchased at an agreed-upon price and date. The Company accounts for reverse repurchase agreements as collateralized borrowings, with the initial sale price representing the amount borrowed, and with the future repurchase price consisting of the amount borrowed plus interest, at the implied interest rate of the reverse repurchase agreement, on the amount borrowed over the term of the reverse repurchase agreement. The interest rate on a reverse repurchase agreement is based on competitive rates (or competitive market spreads, in the case of agreements with floating interest rates) at the time such agreement is entered into. When the Company enters into a reverse repurchase agreement, the lender establishes and maintains an account containing cash and/or securities having a value not less than the repurchase price, including accrued interest, of the reverse repurchase agreement. Reverse repurchase agreements are carried at their contractual amounts, which approximate fair value as the debt is short-term in nature.

(H) Repurchase Agreements: The Company enters into repurchase agreement transactions whereby it purchases securities under agreements to resell at an agreed-upon price and date. In general, securities received pursuant to repurchase agreements are delivered to counterparties of short sale transactions. The interest rate on a repurchase agreement is based on competitive rates (or competitive market spreads, in the case of agreements with floating interest rates) at the time such agreement is entered into. Assets held pursuant to repurchase agreements are reflected as assets on the Consolidated Statement of Assets, Liabilities, and Equity. Repurchase agreements are carried at fair value based on their contractual amounts as the debt is short-term in nature.

Repurchase and reverse repurchase agreements that are conducted with the same counterparty may be reported on a net basis if they meet the requirements of ASC 210-20, Balance Sheet Offsetting. There are no repurchase and reverse repurchase agreements reported on a net basis in the Company's consolidated financial statements.

(I) Transfers of Financial Assets: The Company enters into transactions whereby it transfers financial assets to third parties. Upon such a transfer of financial assets, the Company will sometimes retain or acquire interests in the related assets. The Company evaluates transferred assets pursuant to ASC 860-10, Transfers of Financial Assets, or "ASC 860-10," which requires that a determination be made as to whether a transferor has surrendered control over transferred financial assets. That determination must consider the transferor's continuing involvement in the transferred financial asset, including all arrangements or agreements made contemporaneously with, or in contemplation of, the transfer, even if they were not entered into at the time of the transfer. When a transfer of financial assets does not qualify as a sale, ASC 860-10 requires the transfer to be accounted for as a secured borrowing with a pledge of collateral. ASC 860-10 is a standard that requires the Company to exercise significant judgment in determining whether a transaction should be recorded as a "sale" or a "financing."

(J) When-Issued/Delayed Delivery Securities: The Company may purchase or sell securities on a when-issued or delayed delivery basis. Securities purchased or sold on a when-issued basis are traded for delivery beyond the normal settlement date at a stated price or yield, and no income accrues to the purchaser prior to settlement. Purchasing or selling securities on a when-

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issued or delayed delivery basis involves the risk that the market price or yield at the time of settlement may be lower or higher than the agreed-upon price or yield, in which case a realized loss may be incurred.

The Company transacts in the forward settling TBA market. The Company typically does not take delivery of TBAs, but rather settles the associated receivable and payable with its trading counterparties on a net basis. Transactions with the same counterparty for the same TBA that result in a reduction of the position are treated as extinguished. The market value of the securities that the Company is required to purchase pursuant to a TBA transaction may decline below the agreed-upon purchase price. Conversely, the market value of the securities that the Company is required to sell pursuant to a TBA transaction may increase above the agreed upon sale price. As part of its TBA activities, the Company may "roll" its TBA positions, whereby the Company may sell (buy) securities for delivery (receipt) in an earlier month and simultaneously contract to repurchase (sell) similar, but not identical, securities at an agreed-upon price on a fixed date in a later month (with the later-month price typically lower than the earlier-month price). The Company accounts for its TBA transactions (including those related to TBA rolls) as purchases and sales.

(K) REO: When the Company obtains possession of real property in connection with a foreclosure or similar action, the Company de-recognizes the associated mortgage loan according to ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure ("ASU 2014-04"). Under the provisions of ASU 2014-04, the Company is deemed to have received physical possession of real estate property collateralizing a mortgage loan when it obtains legal title to the property upon completion of a foreclosure or when the borrower conveys all interest in the property to it through a deed in lieu of foreclosure or similar legal agreement. The Company holds all REO at fair value.

(L) Investments in Operating Entities: The Company has made and may in the future make non-controlling investments in operating entities such as mortgage originators. Investments in such operating entities may be in the form of preferred and/or common equity, debt, or some other form of investment. The Company carries its investments in such entities at fair value. In cases where the operating entity provides services to the Company, the Company is required to use the equity method of accounting.

(M) Offering Costs/Underwriters' Discount: Offering costs and underwriters' discount are charged against shareholders' equity. Offering costs typically include legal, accounting, printing, and other fees associated with the cost of raising capital.

(N) Debt Issuance Costs: Costs associated with the issuance of long-term debt are amortized over the life of the debt and are included in Interest expense on the Consolidated Statement of Operations. Deferred debt issuance costs are presented on the Consolidated Statement of Assets, Liabilities, and Equity as a direct deduction from the related debt liability. Debt issuance costs can include legal and accounting fees, purchasers' or underwriters' discount, as well as other fees associated with the cost of the issuance of debt.

(O) Expenses: Expenses are recognized as incurred on the Consolidated Statement of Operations.

(P) Other Investment Related Expenses: Other investment related expenses consist of expenses directly related to specific financial instruments. Such expenses generally include dividend expense on common stock sold short, servicing fees and corporate and escrow advances on mortgage and consumer loans, and various other expenses and fees related directly to the Company's financial instruments. Other investment related expenses are generally recognized as incurred on the Consolidated Statement of Operations; dividend expense on common stock sold short is recognized on the ex-dividend date.

(Q) LTIP Units: Long term incentive plan units ("LTIP Units") have been issued to the Company's dedicated or partially dedicated personnel and independent directors as well as the Manager. Costs associated with LTIP Units issued to dedicated or partially dedicated personnel, or to independent directors, are measured as of the grant date based on the closing stock price on the New York Stock Exchange and are amortized over the vesting period in accordance with ASC 718-10, Compensation—Stock Compensation. The vesting periods for LTIP Units are typically one year from issuance for independent directors, and are typically one year to two years from issuance for dedicated or partially dedicated personnel.

(R) Non-controlling interests: Non-controlling interests include the interest in the Operating Partnership owned by an affiliate of the Manager and certain related parties and consist of units convertible into the Company's common shares. Non-controlling interests also include the interests of joint venture partners in certain of our consolidated subsidiaries. The joint venture partners' interests do not consist of units convertible into the Company's common shares. The Company adjusts the non-controlling interests owned by an affiliate of the Manager and certain related parties to align their carrying value with the share of total outstanding operating partnership units ("OP Units") issued by the Operating Partnership to the non-controlling interest. Any such adjustments are reflected in "Adjustment to non-controlling interest" on the Consolidated Statement of Changes in Equity. See Note 9 for further discussion of non-controlling interests.

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(S) Dividends: Dividends payable by the Company are recorded on the ex-dividend date. Dividends are typically declared and paid on a quarterly basis in arrears.

(T) Shares Repurchased: Common shares that are repurchased by the Company subsequent to issuance are immediately retired upon settlement and decrease the total number of shares outstanding and issued.

(U) Earnings Per Share ("EPS"): Basic EPS is computed using the two class method by dividing net increase (decrease) in shareholders' equity resulting from operations after adjusting for the impact of LTIP Units which are participating securities, by the weighted average number of common shares outstanding calculated including LTIP Units. Because the Company's LTIP Units are participating securities, they are included in the calculation of basic and diluted EPS. OP Units relating to a non-controlling interest are also participating securities and, accordingly, are included in the calculation of both basic and diluted EPS.

(V) Foreign Currency: Assets and liabilities denominated in foreign currencies are translated into U.S. dollars at current exchange rates at the following dates: (i) assets, liabilities, and unrealized gains/losses—at the valuation date; and (ii) income, expenses, and realized gains/losses—at the accrual/transaction date. The Company isolates the portion of realized and change in unrealized gain (loss) resulting from changes in foreign currency exchange rates on investments and financial derivatives from the fluctuations arising from changes in fair value of investments and financial derivatives held. Changes in realized and change in unrealized gain (loss) due to foreign currency are included in Foreign currency transactions and Foreign currency translation, respectively, on the Consolidated Statement of Operations.

(W) Income Taxes: The Company has been and continues to expect to be treated as a partnership for U.S. federal income tax purposes. Certain of the Company's subsidiaries are not consolidated for U.S. federal income tax purposes, but are also treated as partnerships. In general, partnerships are not subject to entity-level tax on their income, but the income of a partnership is taxable to its owners on a flow-through basis. In addition, certain subsidiaries of the Company have elected to be treated as corporations for U.S. federal income tax purposes, and one has elected to be taxed as a real estate investment trust, or "REIT."

The Company follows the authoritative guidance on accounting for and disclosure of uncertainty on tax positions, which requires management to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For uncertain tax positions, the tax benefit to be recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The Company did not have any additions to unrecognized tax benefits resulting from tax positions related either to the current period or to 2016, 2015, or 2014 (its open tax years), and no reductions resulting from tax positions of prior years or due to settlements, and thus had no unrecognized tax benefits or reductions since inception. The Company does not expect any change in unrecognized tax benefits within the next fiscal year. There were no amounts accrued for tax penalties or interest as of or during the periods presented in these consolidated financial statements.

The Company may take positions with respect to certain tax issues which depend on legal interpretation of facts or applicable tax regulations. Should the relevant tax regulators successfully challenge any of such positions, the Company might be found to have a tax liability that has not been recorded in the accompanying consolidated financial statements. Also, management's conclusions regarding ASC 740-10 may be subject to review and adjustment at a later date based on factors including, but not limited to, further implementation guidance from the Financial Accounting Standards Board, or "FASB," and ongoing analyses of tax laws, regulations and interpretations thereof.

(X) Recent Accounting Pronouncements: In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows—Restricted Cash ("ASU 2016-18"). This amends ASC 230, Statement of Cash Flows, to require that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The adoption of ASU 2016-18 is not expected to have a material impact on the Company's consolidated financial statements.

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3. Valuation

The table below reflects the value of the Company's Level 1, Level 2, and Level 3 financial instruments at September 30, 2017:



Description	Level 1			Level 2			Level 3		Total
Assets:	(In thousands)
Cash equivalents	$	60,000		$	—		$	—	$	60,000
Investments, at fair value-
Agency residential mortgage-backed securities	$	—		$	931,391		$	5,819	$	937,210
U.S. Treasury securities	—			1,519			—		1,519
Private label residential mortgage-backed securities	—			78,553			73,648		152,201
Private label commercial mortgage-backed securities	—			18,421			11,632		30,053
Commercial mortgage loans	—			—			67,895		67,895
Residential mortgage loans	—			—			162,963		162,963
Collateralized loan obligations	—			108,146			26,918		135,064
Consumer loans and asset-backed securities backed by consumer loans	—			—			116,340		116,340
Corporate debt	—			76,400			12,908		89,308
Real estate owned	—			—			25,762		25,762
Corporate equity investments	790			—			37,327		38,117
Total investments, at fair value	790			1,214,430			541,212		1,756,432
Financial derivatives–assets, at fair value-
Credit default swaps on asset-backed securities	—			—			4,530		4,530
Credit default swaps on corporate bond indices	—			631			—		631
Credit default swaps on corporate bonds	—			10,109			—		10,109
Credit default swaps on asset-backed indices	—			6,987			—		6,987
Interest rate swaps	—			6,721			—		6,721
Options	50			2			—		52
Futures	143			—			—		143
Forwards	—			723			—		723
Total financial derivatives–assets, at fair value	193			25,173			4,530		29,896
Repurchase agreements	—			193,070			—		193,070
Total investments and financial derivatives–assets, at fair value and repurchase agreements	$	983		$	1,432,673		$	545,742	$	1,979,398
Liabilities:
Investments sold short, at fair value-
Agency residential mortgage-backed securities	$	—		$	(470,487	)	$	—	$	(470,487	)
Government debt	—			(120,407		)	—		(120,407		)
Corporate debt	—			(70,567		)	—		(70,567		)
Common stock	(14,189		)	—			—		(14,189		)
Total investments sold short, at fair value	(14,189		)	(661,461		)	—		(675,650		)

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Description	Level 1			Level 2			Level 3			Total
(continued)	(In thousands)
Financial derivatives–liabilities, at fair value-
Credit default swaps on corporate bond indices	$	—		$	(11,646	)	$	—		$	(11,646	)
Credit default swaps on corporate bonds	—			(13,611		)	—			(13,611		)
Credit default swaps on asset-backed indices	—			(1,495		)	—			(1,495		)
Credit default swaps on asset-backed securities	—			—			(207		)	(207		)
Interest rate swaps	—			(5,303		)	—			(5,303		)
Forwards	—			(16		)	—			(16		)
Total financial derivatives–liabilities, at fair value	—			(32,071		)	(207		)	(32,278		)
Total investments sold short and financial derivatives–liabilities, at fair value	$	(14,189	)	$	(693,532	)	$	(207	)	$	(707,928	)

The following table identifies the significant unobservable inputs that affect the valuation of the Company's Level 3 assets and liabilities as of September 30, 2017:



	Fair Value		Valuation Technique	Unobservable Input	Range						Weighted Average
Description	Fair Value		Valuation Technique	Unobservable Input	Min			Max			Weighted Average
	(In thousands)
Private label residential mortgage-backed securities	$	23,182	Market Quotes	Non Binding Third-Party Valuation	$	46.28		$	478.10		$	95.08
Collateralized loan obligations	24,586		Market Quotes	Non Binding Third-Party Valuation	3.10			440.00			122.21
Corporate debt and non-exchange traded corporate equity	9,782		Market Quotes	Non Binding Third-Party Valuation	0.88			99.50			81.87
Private label commercial mortgage-backed securities	7,721		Market Quotes	Non Binding Third-Party Valuation	5.36			42.00			18.18
Agency interest only residential mortgage-backed securities	502		Market Quotes	Non Binding Third-Party Valuation	16.89			18.44			17.85
Private label residential mortgage-backed securities	50,466		Discounted Cash Flows	Yield	1.7		%	25.6		%	9.8		%
				Projected Collateral Prepayments	2.5		%	84.6		%	44.0		%
				Projected Collateral Losses	1.3		%	18.2		%	9.0		%
				Projected Collateral Recoveries	0.0		%	13.9		%	6.4		%
				Projected Collateral Scheduled Amortization	12.9		%	90.7		%	40.6		%
											100.0		%
Private label commercial mortgage-backed securities	3,911		Discounted Cash Flows	Yield	9.1		%	50.1		%	23.1		%
				Projected Collateral Losses	0.1		%	5.1		%	2.2		%
				Projected Collateral Recoveries	1.3		%	14.8		%	8.0		%
				Projected Collateral Scheduled Amortization	80.1		%	98.6		%	89.8		%
											100.0		%
Corporate debt and non-exchange traded corporate equity	7,194		Discounted Cash Flows	Yield	8.7		%	16.1		%	15.0		%

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(continued)	Fair Value		Valuation Technique	Unobservable Input	Range				Weighted Average
Description	Fair Value		Valuation Technique	Unobservable Input	Min		Max		Weighted Average
	(In thousands)
Collateralized loan obligations	$	2,332	Discounted Cash Flows	Yield	11.2	%	58.7	%	26.9	%
				Projected Collateral Prepayments	67.8	%	68.7	%	68.4	%
				Projected Collateral Losses	18.8	%	21.0	%	19.5	%
				Projected Collateral Recoveries	7.8	%	12.5	%	10.9	%
				Projected Collateral Scheduled Amortization	—	%	3.5	%	1.2	%
									100.0	%
Consumer loans and asset-backed securities backed by consumer loans	116,340		Discounted Cash Flows	Yield	9.0	%	18.4	%	10.3	%
				Projected Collateral Prepayments	0.0	%	51.4	%	36.5	%
				Projected Collateral Losses	0.0	%	95.0	%	7.2	%
				Projected Collateral Scheduled Amortization	5.0	%	100.0	%	56.3	%
									100.0	%
Performing commercial mortgage loans	61,339		Discounted Cash Flows	Yield	8.0	%	15.4	%	11.1	%
Non-performing commercial mortgage loans and commercial real estate owned	31,632		Discounted Cash Flows	Yield	4.5	%	23.2	%	12.9	%
				Months to Resolution	3.0		12.0		8.7
Performing residential mortgage loans	153,709		Discounted Cash Flows	Yield	1.6	%	24.7	%	6.2	%
Non-performing residential mortgage loans and residential real estate owned	9,940		Discounted Cash Flows	Yield	0.7	%	42.9	%	11.3	%
				Months to Resolution⁽¹⁾	3.0		34.1		12.6
Credit default swaps on asset-backed securities	4,323		Net Discounted Cash Flows	Projected Collateral Prepayments	19.6	%	26.6	%	22.7	%
				Projected Collateral Losses	14.4	%	24.6	%	21.3	%
				Projected Collateral Recoveries	5.6	%	15.1	%	9.5	%
				Projected Collateral Scheduled Amortization	44.2	%	53.3	%	46.5	%
									100.0	%
Agency interest only residential mortgage-backed securities	5,317		Option Adjusted Spread ("OAS")	LIBOR OAS⁽²⁾	423		1,950		729
				Projected Collateral Prepayments	8.7	%	100.0	%	71.3	%
				Projected Collateral Scheduled Amortization	0.0	%	91.3	%	28.7	%
									100.0	%
Non-exchange traded common equity investment in mortgage-related entity	2,814		Enterprise Value	Equity Price-to-Book⁽³⁾	1.8x		1.8x		1.8x
Non-exchange traded preferred equity investment in mortgage-related entity	19,000		Enterprise Value	Equity Price-to-Book⁽³⁾	1.0x		1.0x		1.0x
Non-controlling equity interest in limited liability company	5,588		Market Quotes	Non Binding Third-Party Valuation of the Underlying Assets⁽⁴⁾	100.00		100.00		100.00
Non-controlling equity interest in limited liability company	5,857		Discounted Cash Flows	Yield⁽⁴⁾	9.0%		9.0%		9.0%


(1)	Excludes certain loans that are re-performing.


(2)	Shown in basis points.


(3)	Represent an estimation of where market participants might value an enterprise on a price-to-book basis.


(4)	Represents the significant unobservable inputs used to fair value the financial instruments of the limited liability company. The fair value of such financial instruments is the largest component of the valuation of the limited liability company as a whole.

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Third-party non-binding valuations are validated by comparing such valuations to internally generated prices based on the Company's models and to recent trading activity in the same or similar instruments.

For those instruments valued using discounted and net discounted cash flows, collateral prepayments, losses, recoveries, and scheduled amortization are projected over the remaining life of the collateral and expressed as a percentage of the collateral's current principal balance. Averages are weighted based on the fair value of the related instrument. In the case of credit default swaps on asset-backed securities, averages are weighted based on each instrument's bond equivalent value. Bond equivalent value represents the investment amount of a corresponding position in the reference obligation, calculated as the difference between the outstanding principal balance of the underlying reference obligation and the fair value, inclusive of accrued interest, of the derivative contract. For those assets valued using the LIBOR Option Adjusted Spread ("OAS") valuation methodology, cash flows are projected using the Company's models over multiple interest rate scenarios, and these projected cash flows are then discounted using the LIBOR rates implied by each interest rate scenario. The LIBOR OAS of an asset is then computed as the unique constant yield spread that, when added to all LIBOR rates in each interest rate scenario generated by the model, will equate (a) the expected present value of the projected asset cash flows over all model scenarios to (b) the actual current market price of the asset. LIBOR OAS is therefore model-dependent. Generally speaking, LIBOR OAS measures the additional yield spread over LIBOR that an asset provides at its current market price after taking into account any interest rate options embedded in the asset. The Company considers the expected timeline to resolution in the determination of fair value for its non-performing commercial and residential loans.

Material changes in any of the inputs above in isolation could result in a significant change to reported fair value measurements. Additionally, fair value measurements are impacted by the interrelationships of these inputs. For example, for instruments subject to prepayments and credit losses, such as non-Agency RMBS and consumer loans and ABS backed by consumer loans, a higher expectation of collateral prepayments will generally be accompanied by a lower expectation of collateral losses. Conversely, higher losses will generally be accompanied by lower prepayments. Because the Company's credit default swaps on asset-backed security holdings represent credit default swap contracts whereby the Company has purchased credit protection, such credit default swaps on asset-backed securities generally have the directionally opposite sensitivity to prepayments, losses, and recoveries as compared to the Company's long securities holdings. Prepayments do not represent a significant input for the Company's commercial mortgage-backed securities and commercial mortgage loans. Losses and recoveries do not represent a significant input for the Company's Agency RMBS interest only securities, given the guarantee of the issuing government agency or government-sponsored enterprise.

The table below reflects the value of the Company's Level 1, Level 2, and Level 3 financial instruments at December 31, 2016:



Description	Level 1		Level 2		Level 3		Total
Assets:	(In thousands)
Cash equivalents	$	90,000	$	—	$	—	$	90,000
Investments, at fair value-
Agency residential mortgage-backed securities	$	—	$	868,345	$	29,622	$	897,967
U.S. Treasury securities	—		5,419		—		5,419
Private label residential mortgage-backed securities	—		53,525		90,083		143,608
Private label commercial mortgage-backed securities	—		—		43,268		43,268
Commercial mortgage loans	—		—		61,129		61,129
Residential mortgage loans	—		—		84,290		84,290
Collateralized loan obligations	—		—		44,956		44,956
Consumer loans and asset-backed securities backed by consumer loans⁽¹⁾	—		—		107,157		107,157
Corporate debt	—		55,091		25,004		80,095
Real estate owned	—		—		3,349		3,349
Corporate equity investments⁽¹⁾	4,396		—		29,392		33,788
Total investments, at fair value	4,396		982,380		518,250		1,505,026

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Description	Level 1			Level 2			Level 3			Total
(continued)	(In thousands)
Financial derivatives–assets, at fair value-
Credit default swaps on asset-backed securities	$	—		$	—		$	5,326		$	5,326
Credit default swaps on corporate bond indices	—			2,744			—			2,744
Credit default swaps on corporate bonds	—			2,360			—			2,360
Credit default swaps on asset-backed indices	—			16,713			—			16,713
Interest rate swaps	—			8,102			—			8,102
Total return swaps	—			—			155			155
Options	42			2			—			44
Futures	29			—			—			29
Forwards	—			16			—			16
Warrants	—			—			106			106
Total financial derivatives–assets, at fair value	71			29,937			5,587			35,595
Repurchase agreements	—			184,819			—			184,819
Total investments and financial derivatives–assets, at fair value and repurchase agreements	$	4,467		$	1,197,136		$	523,837		$	1,725,440
Liabilities:
Investments sold short, at fair value-
Agency residential mortgage-backed securities	$	—		$	(404,728	)	$	—		$	(404,728	)
Government debt	—			(132,442		)	—			(132,442		)
Corporate debt	—			(39,572		)	—			(39,572		)
Common stock	(8,154		)	—			—			(8,154		)
Total investments sold short, at fair value	(8,154		)	(576,742		)	—			(584,896		)
Financial derivatives–liabilities, at fair value-
Credit default swaps on corporate bond indices	—			(2,840		)	—			(2,840		)
Credit default swaps on corporate bonds	—			(6,654		)	—			(6,654		)
Credit default swaps on asset-backed indices	—			(2,899		)	—			(2,899		)
Credit default swaps on asset-backed securities	—			—			(256		)	(256		)
Interest rate swaps	—			(5,162		)	—			(5,162		)
Total return swaps	—			(55		)	(249		)	(304		)
Futures	(69		)	—			—			(69		)
Forwards	—			(472		)	—			(472		)
Mortgage loan purchase commitments	—			(31		)	—			(31		)
Total financial derivatives–liabilities, at fair value	(69		)	(18,113		)	(505		)	(18,687		)
Total investments sold short, and financial derivatives–liabilities, at fair value	$	(8,223	)	$	(594,855	)	$	(505	)	$	(603,583	)


(1)	Conformed to current period presentation.

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The following table identifies the significant unobservable inputs that affect the valuation of the Company's Level 3 assets and liabilities as of December 31, 2016:



	Fair Value			Valuation Technique	Unobservable Input	Range						Weighted Average
Description	Fair Value			Valuation Technique	Unobservable Input	Min			Max			Weighted Average
	(In thousands)
Private label residential mortgage-backed securities	$	47,024		Market Quotes	Non Binding Third-Party Valuation	$	2.00		$	101.02		$	67.51
Collateralized loan obligations	37,517			Market Quotes	Non Binding Third-Party Valuation	9.42			100.25			83.36
Corporate debt and non-exchange traded corporate equity	19,017			Market Quotes	Non Binding Third-Party Valuation	1.88			102.25			87.14
Private label commercial mortgage-backed securities	27,283			Market Quotes	Non Binding Third-Party Valuation	5.17			77.75			40.88
Agency interest only residential mortgage-backed securities	23,322			Market Quotes	Non Binding Third-Party Valuation	2.47			20.17			11.65
Total return swaps	(94		)	Market Quotes	Non Binding Third-Party Valuation ⁽¹⁾	98.25			99.50			98.77
Private label residential mortgage-backed securities	43,059			Discounted Cash Flows	Yield	0.6		%	20.5		%	11.0		%
					Projected Collateral Prepayments	0.0		%	81.0		%	10.0		%
					Projected Collateral Losses	1.4		%	51.2		%	41.4		%
					Projected Collateral Recoveries	0.4		%	53.6		%	41.2		%
					Projected Collateral Scheduled Amortization	0.0		%	90.7		%	7.4		%
												100.0		%
Private label commercial mortgage-backed securities	15,985			Discounted Cash Flows	Yield	8.8		%	57.0		%	23.6		%
					Projected Collateral Losses	0.1		%	5.3		%	2.2		%
					Projected Collateral Recoveries	0.9		%	20.5		%	10.7		%
					Projected Collateral Scheduled Amortization	77.8		%	99.0		%	87.1		%
												100.0		%
Corporate debt and warrants	10,080			Discounted Cash Flows	Yield	19.7		%	19.7		%	19.7		%
Collateralized loan obligations	7,439			Discounted Cash Flows	Yield	11.2		%	50.3		%	20.5		%
					Projected Collateral Prepayments	11.4		%	55.2		%	45.5		%
					Projected Collateral Losses	4.5		%	28.3		%	10.7		%
					Projected Collateral Recoveries	1.5		%	27.2		%	8.6		%
					Projected Collateral Scheduled Amortization	29.8		%	51.5		%	35.2		%
												100.0		%
Consumer loans and asset-backed securities backed by consumer loans⁽²⁾	107,157			Discounted Cash Flows	Yield	9.0		%	25.0		%	11.0		%
					Projected Collateral Prepayments	0.0		%	45.4		%	25.6		%
					Projected Collateral Losses	3.3		%	97.4		%	9.4		%
					Projected Collateral Scheduled Amortization	0.0		%	87.7		%	65.0		%
												100.0		%
Performing commercial mortgage loans	32,557			Discounted Cash Flows	Yield	8.0		%	17.2		%	11.6		%

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(continued)	Fair Value		Valuation Technique	Unobservable Input	Range				Weighted Average
Description	Fair Value		Valuation Technique	Unobservable Input	Min		Max		Weighted Average
	(In thousands)
Non-performing commercial mortgage loans and commercial real estate owned	$	30,222	Discounted Cash Flows	Yield	10.2	%	27.8	%	16.3	%
				Months to Resolution	3.0		39.1		19.5
Performing residential mortgage loans	78,576		Discounted Cash Flows	Yield	5.0	%	13.5	%	6.6	%
Non-performing residential mortgage loans and residential real estate owned	7,413		Discounted Cash Flows	Yield	5.8	%	39.9	%	9.7	%
				Months to Resolution	1.8		162.9		41.9
Credit default swaps on asset-backed securities	5,070		Net Discounted Cash Flows	Projected Collateral Prepayments	19.3	%	29.8	%	22.7	%
				Projected Collateral Losses	15.3	%	27.6	%	22.2	%
				Projected Collateral Recoveries	4.7	%	15.3	%	8.7	%
				Projected Collateral Scheduled Amortization	43.2	%	50.2	%	46.4	%
									100.0	%
Non-exchange traded equity investments in commercial mortgage-related private partnerships	3,090		Discounted Cash Flows	Yield	16.5	%	16.5	%	16.5	%
				Expected Holding Period (Months)	2.9		2.9		2.9
Agency interest only residential mortgage-backed securities	6,300		Option Adjusted Spread ("OAS")	LIBOR OAS⁽³⁾	142		2,831		568
				Projected Collateral Prepayments⁽²⁾	0.0	%	100.0	%	63.6	%
				Projected Collateral Scheduled Amortization	0.0	%	88.1	%	36.4	%
									100.0	%
Non-exchange traded preferred and common equity investment in mortgage-related entity	2,500		Enterprise Value	Equity Price-to-Book⁽⁴⁾	1.3x		1.3x		1.3x
Non-controlling equity interest in limited liability company⁽²⁾	7,315		Net Discounted Cash Flows	Yield	8.5	%	8.5	%	8.5	%
Non-exchange traded preferred equity investment in mortgage-related entity	12,500		Recent Transactions	Transaction Price	N/A		N/A		N/A


(1)	Represents valuations on underlying assets.


(2)	Conformed to current period presentation.


(3)	Shown in basis points.


(4)	Represent an estimation of where market participants might value an enterprise on a price-to-book basis.

For those instruments valued using discounted and net discounted cash flows, collateral prepayments, losses, recoveries, and scheduled amortization are projected over the remaining life of the collateral and expressed as a percentage of the collateral's current principal balance. Averages are weighted based on the fair value of the related instrument. In the case of credit default swaps on asset-backed securities, averages are weighted based on each instrument's bond equivalent value. Bond equivalent value represents the investment amount of a corresponding position in the reference obligation, calculated as the difference between the outstanding principal balance of the underlying reference obligation and the fair value, inclusive of accrued interest, of the derivative contract. For those assets valued using the LIBOR Option Adjusted Spread valuation methodology, cash flows are projected using the Company's models over multiple interest rate scenarios, and these projected cash flows are then discounted using the LIBOR rates implied by each interest rate scenario. The LIBOR OAS of an asset is then computed as the unique constant yield spread that, when added to all LIBOR rates in each interest rate scenario generated by the model, will equate (a) the expected present value of the projected asset cash flows over all model scenarios to (b) the actual current market price of the asset. LIBOR OAS is therefore model-dependent. Generally speaking, LIBOR OAS measures the additional yield spread over LIBOR that an asset provides at its current market price after taking into account any interest rate options embedded in the asset.

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Material changes in any of the inputs above in isolation could result in a significant change to reported fair value measurements. Additionally, fair value measurements are impacted by the interrelationships of these inputs. For example, a higher expectation of collateral prepayments will generally be accompanied by a lower expectation of collateral losses. Conversely, higher losses will generally be accompanied by lower prepayments. Because the Company's credit default swaps on asset-backed security holdings represent credit default swap contracts whereby the Company has purchased credit protection, such default swaps on asset-backed securities generally have the directionally opposite sensitivity to prepayments, losses, and recoveries as compared to the Company's long securities holdings. Prepayments do not represent a significant input for the Company's commercial mortgage-backed securities and commercial mortgage loans. Losses and recoveries do not represent a significant input for the Company's Agency RMBS interest only securities, given the guarantee of the issuing government agency or government-sponsored enterprise.

The tables below include a roll-forward of the Company's financial instruments for the three and nine month periods ended September 30, 2017 and 2016 (including the change in fair value), for financial instruments classified by the Company within Level 3 of the valuation hierarchy.

Level 3—Fair Value Measurement Using Significant Unobservable Inputs:

Three Month Period Ended September 30, 2017



(In thousands)	Ending Balance as of June 30, 2017		Accreted Discounts / (Amortized Premiums)			Net Realized Gain/ (Loss)			Change in Net Unrealized Gain/(Loss)			Purchases/ Payments		Sales/ Issuances			Transfers Into Level 3		Transfers Out of Level 3			Ending Balance as of September 30, 2017
Assets:
Investments, at fair value-
Agency residential mortgage-backed securities	$	4,896	$	(377	)	$	(78	)	$	—		$	1,649	$	(28	)	$	772	$	(1,015	)	$	5,819
Private label residential mortgage-backed securities	79,123		261			1,018			409			3,040		(9,116		)	5,207		(6,294		)	73,648
Private label commercial mortgage-backed securities	13,809		(144		)	(752		)	934			2,100		(5,718		)	1,713		(310		)	11,632
Commercial mortgage loans	65,896		140			—			17			4,342		(2,500		)	—		—			67,895
Residential mortgage loans	136,097		(874		)	388			(1,013		)	37,170		(8,805		)	—		—			162,963
Collateralized loan obligations	42,536		346			61			(839		)	7,108		(13,416		)	—		(8,878		)	26,918
Consumer loans and asset-backed securities backed by consumer loans	108,671		(3,366		)	500			(528		)	33,125		(22,062		)	—		—			116,340
Corporate debt	20,535		(19		)	128			(415		)	409		(7,730		)	—		—			12,908
Real estate owned	24,977		—			—			49			1,137		(401		)	—		—			25,762
Corporate equity investments	35,698		—			329			(806		)	4,641		(2,535		)	—		—			37,327
Total investments, at fair value	532,238		(4,033		)	1,594			(2,192		)	94,721		(72,311		)	7,692		(16,497		)	541,212
Financial derivatives–assets, at fair value-
Credit default swaps on asset-backed securities	5,107		—			603			(577		)	27		(630		)	—		—			4,530
Total return swaps	—		—			21			—			—		(21		)	—		—			—
Total financial derivatives– assets, at fair value	5,107		—			624			(577		)	27		(651		)	—		—			4,530
Total investments and financial derivatives–assets, at fair value	$	537,345	$	(4,033	)	$	2,218		$	(2,769	)	$	94,748	$	(72,962	)	$	7,692	$	(16,497	)	$	545,742

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(In thousands)	Ending Balance as of June 30, 2017			Accreted Discounts / (Amortized Premiums)		Net Realized Gain/ (Loss)			Change in Net Unrealized Gain/(Loss)		Purchases/ Payments			Sales/ Issuances		Transfers Into Level 3		Transfers Out of Level 3		Ending Balance as of September 30, 2017
Liabilities:
Financial derivatives–liabilities, at fair value-
Credit default swaps on asset-backed securities	$	(207	)	$	—	$	(20	)	$	—	$	20		$	—	$	—	$	—	$	(207	)
Total return swaps	—			—		13			—		(13		)	—		—		—		—
Total financial derivatives– liabilities, at fair value	$	(207	)	$	—	$	(7	)	$	—	$	7		$	—	$	—	$	—	$	(207	)

All amounts of net realized and change in net unrealized gain (loss) in the table above are reflected in the accompanying Consolidated Statement of Operations. The table above incorporates changes in net unrealized gain (loss) for both Level 3 financial instruments held by the Company at September 30, 2017, as well as Level 3 financial instruments disposed of by the Company during the three month period ended September 30, 2017. For Level 3 financial instruments held by the Company at September 30, 2017, change in net unrealized gain (loss) of $(2.9) million and $(0.6) million for the three month period ended September 30, 2017 relate to investments and financial derivatives–assets, respectively.

As of June 30, 2017, the Company modified its procedures to determine the level within the hierarchy for certain financial instruments. Under the revised procedure, the Company examines financial instruments individually rather than in cohorts of like instruments as it had previously. As of September 30, 2017, the Company transferred $16.5 million of securities from Level 3 to Level 2 and $7.7 million from Level 2 to Level 3. Transfers between these hierarchy levels were based on the availability of sufficient observable inputs to meet Level 2 versus Level 3 criteria. The leveling of each financial instrument is reassessed at the end of each period, and is based on pricing information received from third-party pricing sources.

Three Month Period Ended September 30, 2016



(In thousands)	Ending Balance as of June 30, 2016		Accreted Discounts / (Amortized Premiums)			Net Realized Gain/ (Loss)			Change in Net Unrealized Gain/(Loss)			Purchases/ Payments		Sales/ Issuances			Transfers Into Level 3		Transfers Out of Level 3			Ending Balance as of September 30, 2016
Assets:
Investments, at fair value-
Agency residential mortgage-backed securities	$	20,506	$	(1,821	)	$	(77	)	$	(169	)	$	1,385	$	—		$	—	$	—		$	19,824
Private label residential mortgage-backed securities	112,511		256			(958		)	6,086			—		(23,652		)	1,517		(13,815		)	81,945
Private label commercial mortgage-backed securities	34,942		429			87			(292		)	5,335		(3,556		)	—		—			36,945
Commercial mortgage loans	49,466		801			72			(1,140		)	13,226		(5,456		)	—		—			56,969
Residential mortgage loans	46,649		67			(78		)	(66		)	24,002		(26,499		)	—		—			44,075
Collateralized loan obligations	33,109		(890		)	(703		)	2,844			4,241		(10,198		)	—		—			28,403
Consumer loans and asset-backed securities backed by consumer loans	154,395		(2,919		)	204			(2,290		)	51,775		(82,066		)	—		—			119,099
Corporate debt	36,974		(52		)	(1,942		)	3,753			83,700		(66,116		)	—		—			56,317
Real estate owned	4,162		—			53			(214		)	1,942		(2,359		)	—		—			3,584
Private corporate equity investments	19,418		—			733			349			5,100		(10,082		)	—		—			15,518
Total investments, at fair value	512,132		(4,129		)	(2,609		)	8,861			190,706		(229,984		)	1,517		(13,815		)	462,679

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(In thousands)	Ending Balance as of June 30, 2016			Accreted Discounts / (Amortized Premiums)			Net Realized Gain/ (Loss)			Change in Net Unrealized Gain/(Loss)			Purchases/ Payments		Sales/ Issuances			Transfers Into Level 3		Transfers Out of Level 3			Ending Balance as of September 30, 2016
Financial derivatives–assets, at fair value-
Credit default swaps on asset-backed securities	$	6,068		$	—		$	604		$	(221	)	$	65	$	(659	)	$	—	$	—		$	5,857
Total return swaps	824			—			3,222			(628		)	954		(4,176		)	—		—			196
Warrants	100			—			—			—			7,486		—			—		—			7,586
Total financial derivatives– assets, at fair value	6,992			—			3,826			(849		)	8,505		(4,835		)	—		—			13,639
Total investments and financial derivatives–assets, at fair value	$	519,124		$	(4,129	)	$	1,217		$	8,012		$	199,211	$	(234,819	)	$	1,517	$	(13,815	)	$	476,318
Liabilities:
Investments sold short, at fair value
Corporate debt	$	(9,947	)	$	—		$	(122	)	$	(7	)	$	20,974	$	(50,085	)	$	—	$	—		$	(39,187	)
Total investments sold short, at fair value	(9,947		)	—			(122		)	(7		)	20,974		(50,085		)	—		—			(39,187		)
Financial derivatives–liabilities, at fair value-
Credit default swaps on asset-backed securities	(234		)	—			18			(67		)	47		(26		)	—		—			(262		)
Total return swaps	(1,016		)	—			(2,143		)	(207		)	1,890		253			—		—			(1,223		)
Total financial derivatives– liabilities, at fair value	(1,250		)	—			(2,125		)	(274		)	1,937		227			—		—			(1,485		)
Guarantees:
Guarantees	(312		)	—			—			162			—		—			—		—			(150		)
Total guarantees	(312		)	—			—			162			—		—			—		—			(150		)
Total investments sold short, financial derivatives– liabilities, and guarantees, at fair value	$	(11,509	)	$	—		$	(2,247	)	$	(119	)	$	22,911	$	(49,858	)	$	—	$	—		$	(40,822	)

All amounts of net realized and change in net unrealized gain (loss) in the table above are reflected in the accompanying Consolidated Statement of Operations. The table above incorporates changes in net unrealized gain (loss) for both Level 3 financial instruments held by the Company at September 30, 2016, as well as Level 3 financial instruments disposed of by the Company during the three month period ended September 30, 2016. For Level 3 financial instruments held by the Company at September 30, 2016, change in net unrealized gain (loss) of $0.6 million, $(0.03) million, $0.4 million, $(1.1) million, and $0.2 million, for the three month period ended September 30, 2016 relate to investments, investments sold short, financial derivatives–assets, financial derivatives–liabilities, and guarantees, respectively.

As of September 30, 2016, the Company transferred $13.8 million of non-Agency RMBS from Level 3 to Level 2. These assets were transferred from Level 3 to Level 2 based on an increased volume of observed trading of these and similar assets. This increase in observed trading activity has led to greater price transparency for these assets, thereby making a Level 2 designation appropriate in the Company's view.

In addition, as of September 30, 2016, the Company transferred $1.5 million of non-Agency RMBS from Level 2 to Level 3. Since June 30, 2016, these securities have exhibited indications of a reduced level of price transparency. Examples of such indications include wider spreads relative to similar securities and a reduction in observable transactions involving these and similar securities.

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Nine Month Period Ended September 30, 2017



(In thousands)	Ending Balance as of December 31, 2016			Accreted Discounts / (Amortized Premiums)			Net Realized Gain/ (Loss)			Change in Net Unrealized Gain/(Loss)			Purchases/ Payments		Sales/ Issuances			Transfers Into Level 3		Transfers Out of Level 3			Ending Balance as of September 30, 2017
Assets:
Investments, at fair value-
Agency residential mortgage-backed securities	$	29,622		$	(7,233	)	$	(515	)	$	(140	)	$	3,962	$	(153	)	$	—	$	(19,724	)	$	5,819
Private label residential mortgage-backed securities	90,083			1,672			1,334			7,319			31,117		(37,278		)	15,043		(35,642		)	73,648
Private label commercial mortgage-backed securities	43,268			574			(3,434		)	7,873			2,120		(31,542		)	—		(7,227		)	11,632
Commercial mortgage loans	61,129			771			416			1,167			31,887		(27,475		)	—		—			67,895
Residential mortgage loans	84,290			(196		)	1,469			(1,090		)	108,356		(29,866		)	—		—			162,963
Collateralized loan obligations	44,956			(5,702		)	1,477			2,135			52,269		(54,305		)	—		(13,912		)	26,918
Consumer loans and asset-backed securities backed by consumer loans⁽¹⁾	107,157			(9,631		)	426			(247		)	83,138		(64,503		)	—		—			116,340
Corporate debt	25,004			236			676			(229		)	83,900		(96,679		)	—		—			12,908
Real estate owned	3,349			—			424			(246		)	25,348		(3,113		)	—		—			25,762
Corporate equity investments⁽¹⁾	29,392			—			1,848			(1,529		)	16,416		(8,800		)	—		—			37,327
Total investments, at fair value	518,250			(19,509		)	4,121			15,013			438,513		(353,714		)	15,043		(76,505		)	541,212
Financial derivatives–assets, at fair value-
Credit default swaps on asset-backed securities	5,326			—			971			(796		)	95		(1,066		)	—		—			4,530
Total return swaps	155			—			243			(155		)	—		(243		)	—		—			—
Warrants	106			—			(100		)	(6		)	—		—			—		—			—
Total financial derivatives– assets, at fair value	5,587			—			1,114			(957		)	95		(1,309		)	—		—			4,530
Total investments and financial derivatives–assets, at fair value	$	523,837		$	(19,509	)	$	5,235		$	14,056		$	438,608	$	(355,023	)	$	15,043	$	(76,505	)	$	545,742
Liabilities:
Financial derivatives–liabilities, at fair value-
Credit default swaps on asset-backed securities	$	(256	)	$	—		$	(485	)	$	477		$	485	$	(428	)	$	—	$	—		$	(207	)
Total return swaps	(249		)	—			(279		)	249			291		(12		)	—		—			—
Total financial derivatives– liabilities, at fair value	$	(505	)	$	—		$	(764	)	$	726		$	776	$	(440	)	$	—	$	—		$	(207	)


(1)	Conformed to current period presentation.

All amounts of net realized and change in net unrealized gain (loss) in the table above are reflected in the accompanying Consolidated Statement of Operations. The table above incorporates changes in net unrealized gain (loss) for both Level 3 financial instruments held by the Company at September 30, 2017, as well as Level 3 financial instruments disposed of by the Company during the nine month period ended September 30, 2017. For Level 3 financial instruments held by the Company at September 30, 2017, change in net unrealized gain (loss) of $2.8 million, $(0.8) million, and $0.05 million for the nine month period ended September 30, 2017 relate to investments, financial derivatives–assets, and financial derivatives–liabilities, respectively.

As of June 30, 2017, the Company modified its procedures to determine the level within the hierarchy for certain financial instruments. Under the revised procedure, the Company examines financial instruments individually rather than in cohorts of like instruments as it had previously. As of September 30, 2017, the Company transferred $76.5 million of securities from Level 3 to Level 2 and $15.0 million from Level 2 to Level 3. Transfers between these hierarchy levels were based on the availability of sufficient observable inputs to meet Level 2 versus Level 3 criteria. The leveling of each financial instrument is reassessed at the end of each period, and is based on pricing information received from third-party pricing sources.

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Nine Month Period Ended September 30, 2016



(In thousands)	Ending Balance as of December 31, 2015			Accreted Discounts / (Amortized Premiums)			Net Realized Gain/ (Loss)			Change in Net Unrealized Gain/(Loss)			Purchases/ Payments		Sales/ Issuances			Transfers Into Level 3		Transfers Out of Level 3			Ending Balance as of September 30, 2016
Assets:
Investments, at fair value-
Agency residential mortgage-backed securities	$	24,918		$	(5,766	)	$	(168	)	$	(849	)	$	1,689	$	—		$	—	$	—		$	19,824
Private label residential mortgage-backed securities	116,435			1,518			(1,305		)	2,995			7,439		(34,904		)	8,360		(18,593		)	81,945
Private label commercial mortgage-backed securities	34,145			1,315			409			(4,132		)	13,179		(7,971		)	—		—			36,945
Commercial mortgage loans	66,399			2,073			254			(917		)	26,650		(37,490		)	—		—			56,969
Residential mortgage loans	22,089			315			787			61			56,068		(35,245		)	—		—			44,075
Collateralized loan obligations	45,974			(3,759		)	98			3,261			5,418		(22,589		)	—		—			28,403
Consumer loans and asset-backed securities backed by consumer loans	115,376			(8,515		)	210			(2,839		)	140,731		(125,864		)	—		—			119,099
Corporate debt	27,028			(99		)	(1,687		)	1,652			136,020		(106,597		)	—		—			56,317
Real estate owned	12,522			—			2,291			(545		)	12,614		(23,298		)	—		—			3,584
Private corporate equity investments	22,088			—			704			(182		)	11,617		(18,709		)	—		—			15,518
Total investments, at fair value	486,974			(12,918		)	1,593			(1,495		)	411,425		(412,667		)	8,360		(18,593		)	462,679
Financial derivatives–assets, at fair value-
Credit default swaps on asset-backed securities	6,332			—			1,068			(476		)	77		(1,144		)	—		—			5,857
Total return swaps	85			—			3,119			111			1,377		(4,496		)	—		—			196
Warrants	150			—			(50		)	—			7,486		—			—		—			7,586
Total financial derivatives– assets, at fair value	6,567			—			4,137			(365		)	8,940		(5,640		)	—		—			13,639
Total investments and financial derivatives–assets, at fair value	$	493,541		$	(12,918	)	$	5,730		$	(1,860	)	$	420,365	$	(418,307	)	$	8,360	$	(18,593	)	$	476,318
Liabilities:
Investments sold short, at fair value
Corporate debt	$	(448	)	$	(8	)	$	409		$	(566	)	$	32,230	$	(70,804	)	$	—	$	—		$	(39,187	)
Total investments sold short, at fair value	(448		)	(8		)	409			(566		)	32,230		(70,804		)	—		—			(39,187		)
Financial derivatives– liabilities, at fair value-
Credit default swaps on asset-backed securities	(221		)	—			(61		)	(42		)	47		15			—		—			(262		)
Total return swaps	(4,662		)	—			(6,508		)	3,438			6,576		(67		)	—		—			(1,223		)
Total financial derivatives– liabilities, at fair value	(4,883		)	—			(6,569		)	3,396			6,623		(52		)	—		—			(1,485		)
Guarantees:
Guarantees	(828		)	—			—			678			—		—			—		—			(150		)
Total guarantees	(828		)	—			—			678			—		—			—		—			(150		)
Total financial derivatives– liabilities and guarantees, at fair value	$	(6,159	)	$	(8	)	$	(6,160	)	$	3,508		$	38,853	$	(70,856	)	$	—	$	—		$	(40,822	)

All amounts of net realized and change in net unrealized gain (loss) in the table above are reflected in the accompanying Consolidated Statement of Operations. The table above incorporates changes in net unrealized gain (loss) for both Level 3 financial instruments held by the Company at September 30, 2016, as well as Level 3 financial instruments disposed of by the Company during the nine month period ended September 30, 2016. For Level 3 financial instruments held by the Company at September 30, 2016, change in net unrealized gain (loss) of $(10.4) million, $(0.3) million, $(0.3) million, $(1.2) million, and

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$0.7 million, for the nine month period ended September 30, 2016 relate to investments, investments sold short, financial derivatives–assets, financial derivatives–liabilities, and guarantees, respectively.

As of September 30, 2016, the Company transferred $18.6 million of non-Agency RMBS from Level 3 to Level 2. These assets were transferred from Level 3 to Level 2 based on an increased volume of observed trading of these and similar assets. This increase in observed trading activity has led to greater price transparency for these assets, thereby making a Level 2 designation appropriate in the Company's view.

In addition, as of September 30, 2016, the Company transferred $8.4 million of non-Agency RMBS from Level 2 to Level 3. Since December 31, 2015, these securities have exhibited indications of a reduced level of price transparency. Examples of such indications include wider spreads relative to similar securities and a reduction in observable transactions involving these and similar securities.

There were no transfers of financial instruments between Level 1 and Level 2 during the three or nine month periods ended September 30, 2017 and 2016.

Not included in the disclosures above are the Company's other financial instruments, which are carried at cost and include, Cash, Due from brokers, Due to brokers, Reverse repurchase agreements, Other secured borrowings, and the Company's unsecured long-term debt, or the "Senior Notes," which is reflected on the Consolidated Statement of Assets, Liabilities, and Equity in Senior notes, net. Cash includes cash held in various accounts including an interest bearing overnight account for which fair value equals the carrying value; such assets are considered Level 1 assets. Due from brokers and Due to brokers include collateral transferred to or received from counterparties, along with receivables and payables for open and/or closed derivative positions. These receivables and payables are short term in nature and any collateral transferred consists primarily of cash; carrying value of these items approximates fair value and such items are considered Level 1 assets and liabilities. The Company's reverse repurchase agreements and other secured borrowings are carried at cost, which approximates fair value due to their short term nature. Reverse repurchase agreements and other secured borrowings are considered Level 2 assets and liabilities based on the adequacy of the associated collateral and their short term nature. The Company estimates the fair value of the Senior Notes at $86.0 million as of September 30, 2017. The Senior Notes are considered Level 3 liabilities given the relative unobservability of the most significant inputs to valuation estimation as well as the lack of trading activity of these instruments.

4. To Be Announced RMBS

In addition to investing in pools of Agency RMBS, the Company transacts in the forward settling TBA market. Pursuant to these TBA transactions, the Company agrees to purchase or sell, for future delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date. TBAs are liquid and have quoted market prices and represent the most actively traded class of MBS. The Company accounts for its TBAs as purchase and sales and uses TBAs primarily for hedging purposes, typically in the form of short positions. However, the Company may also invest in TBAs for speculative purposes, including holding long positions. Overall, the Company typically holds a net short position.

The Company does not generally take delivery of TBAs; rather, it settles the associated receivable and payable with its trading counterparties on a net basis. Transactions with the same counterparty for the same TBA that result in a reduction of the position are treated as extinguished. The fair value of the Company's long positions in TBA contracts are reflected on the Consolidated Condensed Schedule of Investments under TBA–Fixed-Rate Agency Securities and the fair value of the Company's positions in TBA contracts sold short are reflected on the Consolidated Condensed Schedule of Investments under TBA–Fixed-Rate Agency Securities Sold Short. The payables and receivables related to the Company's TBA securities are included on the Consolidated Statement of Assets, Liabilities, and Equity in Payable for securities purchased and Receivable for securities sold, respectively.

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The below table details TBA assets, liabilities, and the respective related payables and receivables as of September 30, 2017 and December 31, 2016:



	As of
	September 30, 2017			December 31, 2016
Assets:	(In thousands)
TBA securities, at fair value (Current principal: $115,303 and $67,720, respectively)	$	121,009		$	70,525
Receivable for securities sold relating to unsettled TBA sales	471,626			406,708
Liabilities:
TBA securities sold short, at fair value (Current principal: -$447,590 and -$384,155, respectively)	$	(470,487	)	$	(404,728	)
Payable for securities purchased relating to unsettled TBA purchases	(121,353		)	(70,347		)
Net short TBA securities, at fair value	(349,478		)	(334,203		)

5. Financial Derivatives

Gains and losses on the Company's derivative contracts for the three and nine month periods ended September 30, 2017 and 2016 are summarized in the tables below:

Three and Nine Month Periods Ended September 30, 2017:



		Three Month Period Ended September 30, 2017						Nine Month Period Ended September 30, 2017
Derivative Type	Primary Risk Exposure	Net Realized Gain/(Loss)⁽¹⁾			Change in Net Unrealized Gain/(Loss)⁽²⁾			Net Realized Gain/(Loss)⁽¹⁾			Change in Net Unrealized Gain/(Loss)⁽²⁾
(In thousands)
Credit default swaps on asset-backed securities	Credit	$	583		$	(577	)	$	486		$	(319	)
Credit default swaps on asset-backed indices	Credit	(58		)	(522		)	(2,514		)	(3,132		)
Credit default swaps on corporate bond indices	Credit	(975		)	(591		)	(2,147		)	(573		)
Credit default swaps on corporate bonds	Credit	(241		)	1,837			218			842
Total return swaps	Equity Market/Credit	(293		)	1			(1,649		)	150
Interest rate swaps	Interest Rates	318			(694		)	(262		)	(1,492		)
Futures	Interest Rates	(152		)	147			(331		)	183
Forwards	Currency	(4,013		)	2,026			(7,357		)	1,162
Warrants	Equity Market	—			—			(100		)	(6		)
Mortgage loan purchase commitments	Interest Rates	—			—			—			31
Options	Credit/Interest Rate/Equity Market	167			26			18			41
Total		$	(4,664	)	$	1,653		$	(13,638	)	$	(3,113	)


(1)	Includes gain/(loss) on foreign currency transactions on derivatives in the amount of $(56) thousand and $(68) thousand, for the three and nine month periods ended September 30, 2017, which is included on the Consolidated Statement of Operations in Realized gain (loss) on foreign currency transactions.


(2)	Includes foreign currency translation on derivatives in the amount of $(59) thousand and $(194) thousand, for the three and nine month periods ended September 30, 2017, which is included on the Consolidated Statement of Operations in Change in net unrealized gain (loss) on foreign currency translation.

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Three and Nine Month Periods Ended September 30, 2016:



		Three Month Period Ended September 30, 2016						Nine Month Period Ended September 30, 2016
Derivative Type	Primary Risk Exposure	Net Realized Gain/(Loss)⁽¹⁾			Change in Net Unrealized Gain/(Loss)⁽²⁾			Net Realized Gain/(Loss)⁽¹⁾			Change in Net Unrealized Gain/(Loss)⁽²⁾
(In thousands)
Credit default swaps on asset-backed securities	Credit	$	622		$	(288	)	$	1,007		$	(518	)
Credit default swaps on asset-backed indices	Credit	983			(2,660		)	3,790			(905		)
Credit default swaps on corporate bond indices	Credit	(21,220		)	12,572			(34,230		)	(5,260		)
Credit default swaps on corporate bonds	Credit	110			(14		)	237			47
Total return swaps	Equity Market/Credit	(4,408		)	(917		)	(11,323		)	3,466
Interest rate swaps	Interest Rates	182			1,087			(1,167		)	(11,129		)
Futures	Interest Rates/Equity Market	(89		)	271			(824		)	417
Forwards	Currency	1,525			(1,855		)	221			(1,402		)
Warrants	Equity Market	—			—			(50		)	—
Mortgage loan purchase commitments	Interest Rates	—			—			—			8
Options	Credit/ Interest Rates	925			(656		)	7,257			(298		)
Total		$	(21,370	)	$	7,540		$	(35,082	)	$	(15,574	)


(1)	Includes gain/(loss) on foreign currency transactions on derivatives in the amount of $0.4 million and $0.3 million, for the three and nine month periods ended September 30, 2016, which is included on the Consolidated Statement of Operations in Realized gain (loss) on foreign currency transactions.


(2)	Includes foreign currency translation on derivatives in the amount of $(0.1) million and $1.0 million, for the three and nine month periods ended September 30, 2016, which is included on the Consolidated Statement of Operations in Change in net unrealized gain (loss) on foreign currency translation.

The tables below detail the average notional values of the Company's financial derivatives, using absolute value of month end notional values, for the nine month period ended September 30, 2017 and the year ended December 31, 2016:



Derivative Type	Nine Month Period Ended September 30, 2017		Year Ended December 31, 2016
	(In thousands)
Interest rate swaps	$	1,270,482	$	1,731,368
Credit default swaps	489,515		1,586,923
Total return swaps	22,536		113,628
Futures	57,240		371,900
Options	88,699		357,260
Forwards	74,623		80,513
Warrants	492		1,640
Mortgage loan purchase commitments	2,060		6,143

From time to time the Company enters into credit derivative contracts for which the Company sells credit protection ("written credit derivatives"). As of September 30, 2017 and December 31, 2016, all of the Company's open written credit derivatives were credit default swaps on either mortgage/asset-backed indices (ABX and CMBX indices) or corporate bond indices (CDX), collectively referred to as credit indices, or on individual corporate bonds, for which the Company receives periodic payments at fixed rates from credit protection buyers, and is obligated to make payments to the credit protection buyer upon the occurrence of a "credit event" with respect to underlying reference assets.

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Written credit derivatives held by the Company at September 30, 2017 and December 31, 2016, are summarized below:



Credit Derivatives	September 30, 2017			December 31, 2016
(In thousands)
Fair Value of Written Credit Derivatives, Net	$	(705	)	$	(1,551	)
Fair Value of Purchased Credit Derivatives Offsetting Written Credit Derivatives with Third Parties ⁽¹⁾	$	756		$	4,552
Notional Value of Written Credit Derivatives ⁽²⁾	$	158,397		$	117,476
Notional Value of Purchased Credit Derivatives Offsetting Written Credit Derivatives with Third Parties ⁽¹⁾	$	90,411		$	68,357


(1)	Offsetting transactions with third parties include purchased credit derivatives which have the same reference obligation.

(2)

The notional value is the maximum amount that a seller of credit protection would be obligated to pay, and a buyer of credit protection would receive upon occurrence of a "credit event." Movements in the value of credit default swap transactions may require the Company or the counterparty to post or receive collateral. Amounts due or owed under credit derivative contracts with an International Swaps and Derivatives Association, or "ISDA," counterparty may be offset against amounts due or owed on other credit derivative contracts with the same ISDA counterparty. As a result, the notional value of written credit derivatives involving a particular underlying reference asset or index has been reduced (but not below zero) by the notional value of any contracts where the Company has purchased credit protection on the same reference asset or index with the same ISDA counterparty.

A credit default swap on a credit index or a corporate bond typically terminates at the stated maturity date in the case of corporate indices or bonds, or, in the case of ABX and CMBX indices, the date that all of the reference assets underlying the index are paid off in full, retired, or otherwise cease to exist. Implied credit spreads may be used to determine the market value of such contracts and are reflective of the cost of buying/selling credit protection. Higher spreads would indicate a greater likelihood that a seller will be obligated to perform (i.e., make payment) under the contract. In situations where the credit quality of the underlying reference assets has deteriorated, the percentage of notional values that would be paid up front to enter into a new such contract ("points up front") is frequently used as an indication of credit risk. Credit protection sellers entering the market in such situations would expect to be paid points up front corresponding to the approximate fair value of the contract. For the Company's written credit derivatives that were outstanding at September 30, 2017, implied credit spreads on such contracts ranged between 5.6 and 1,295.8 basis points. For the Company's written credit derivatives that were outstanding at December 31, 2016, implied credit spreads on such contracts ranged between 68.5 and 636.6 basis points. Excluded from these spread ranges are contracts outstanding for which the individual spread is greater than 2000 basis points. The Company believes that these contracts would be quoted based on estimated points up front. The total fair value of contracts with individual implied credit spreads in excess of 2000 basis points was $(1.3) million and $(2.5) million as of September 30, 2017 and December 31, 2016, respectively. Estimated points up front on these contracts as of September 30, 2017 ranged between 51.5 and 93.5 points, and as of December 31, 2016 ranged between 45.0 and 72.6 points. Total net up-front payments (paid) or received relating to written credit derivatives outstanding at September 30, 2017 and December 31, 2016 were $(3.0) million and $(3.3) million, respectively.

6. Borrowings

Secured Borrowings

The Company's secured borrowings consist of reverse repurchase agreements and other secured borrowings. As of September 30, 2017 and December 31, 2016, the Company's total secured borrowings were $1.119 billion and $1.058 billion, respectively.

Reverse Repurchase Agreements

The Company enters into reverse repurchase agreements. A reverse repurchase agreement involves the sale of an asset to a counterparty together with a simultaneous agreement to repurchase the transferred asset or similar asset from such counterparty at a future date. The Company accounts for its reverse repurchase agreements as collateralized borrowings, with the transferred assets effectively serving as collateral for the related borrowing. The Company's reverse repurchase agreements typically range in term from 30 to 180 days, although the Company also has reverse repurchase agreements that provide for longer or shorter terms. The principal economic terms of each reverse repurchase agreement—such as loan amount, interest rate, and maturity date—are typically negotiated on a transaction-by-transaction basis. Other terms and conditions, such as those relating to events of default, are typically governed under the Company's master repurchase agreements. Absent an event of default, the Company maintains beneficial ownership of the transferred securities during the term of the reverse repurchase agreement and receives the related principal and interest payments. Interest rates on these borrowings are generally fixed based on prevailing rates corresponding to the terms of the borrowings, and for most reverse repurchase agreements, interest is generally paid at the termination of the reverse repurchase agreement, at which time the Company may enter into a new reverse repurchase agreement at prevailing market rates with the same counterparty, repay that counterparty and possibly negotiate financing terms with a different counterparty, or choose to no longer finance the related asset. Some reverse repurchase

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agreements provide for periodic payments of interest, such as monthly payments. In response to a decline in the fair value of the transferred securities, whether as a result of changes in market conditions, security paydowns, or other factors, reverse repurchase agreement counterparties will typically make a margin call, whereby the Company will be required to post additional securities and/or cash as collateral with the counterparty in order to re-establish the agreed-upon collateralization requirements. In the event of increases in fair value of the transferred securities, the Company can generally require the counterparty to post collateral with it in the form of cash or securities. The Company is generally permitted to sell or re-pledge any securities posted by the counterparty as collateral; however, upon termination of the reverse repurchase agreement, or other circumstance in which the counterparty is no longer required to post such margin, the Company must return to the counterparty the same security that had been posted.

At any given time, the Company seeks to have its outstanding borrowings under reverse repurchase agreements with several different counterparties in order to reduce the exposure to any single counterparty. The Company had outstanding borrowings under reverse repurchase agreements with twenty-one counterparties as of both September 30, 2017 and December 31, 2016.

At September 30, 2017, approximately 15% of open reverse repurchase agreements were with one counterparty. As of December 31, 2016, there was no counterparty that held 15% or more of the Company's outstanding reverse repurchase agreements. As of September 30, 2017 remaining days to maturity on the Company's open reverse repurchase agreements ranged from 2 days to 360 days and from 3 days to 320 days as of December 31, 2016. Interest rates on the Company's open reverse repurchase agreements ranged from (1.75)% to 4.57% as of September 30, 2017 and from 0.60% to 3.76% as of December 31, 2016.

The following table details the Company's outstanding borrowings under reverse repurchase agreements for Agency RMBS, Credit assets (which include non-Agency MBS, CLOs, consumer loans, corporate debt, and residential mortgage loans), and U.S. Treasury securities, by remaining maturity as of September 30, 2017 and December 31, 2016:



(In thousands)	September 30, 2017					December 31, 2016
			Weighted Average					Weighted Average
Remaining Maturity	Outstanding Borrowings		Interest Rate		Remaining Days to Maturity	Outstanding Borrowings		Interest Rate		Remaining Days to Maturity
Agency RMBS:
30 Days or Less	$	281,543	1.28	%	15	$	405,725	0.83	%	18
31-60 Days	263,601		1.33	%	44	195,288		0.94	%	45
61-90 Days	184,448		1.39	%	75	149,965		0.97	%	74
91-120 Days	38,826		1.40	%	103	8,240		0.83	%	102
121-150 Days	—		—	%	—	11,798		0.96	%	131
151-180 Days	—		—	%	—	19,296		1.05	%	164
Total Agency RMBS	768,418		1.33	%	43	790,312		0.89	%	41
Credit:
30 Days or Less	64,719		1.79	%	7	94,849		2.55	%	16
31-60 Days	83,826		2.77	%	47	26,974		2.36	%	47
61-90 Days	52,247		2.19	%	72	41,522		2.43	%	77
91-120 Days	34,783		3.82	%	103	10,084		2.91	%	97
121-150 Days	3,338		3.04	%	126	1,239		2.73	%	124
151-180 Days	8,991		3.63	%	164	12,616		3.17	%	165
181-360 Days	7,768		3.72	%	234	50,557		3.46	%	316
Total Credit Assets	255,672		2.61	%	60	237,841		2.75	%	105
U.S. Treasury Securities:
30 Days or Less	5,720		1.30	%	2	5,428		0.91	%	4
Total U.S. Treasury Securities	5,720		1.30	%	2	5,428		0.91	%	4
Total	$	1,029,810	1.65	%	48	$	1,033,581	1.32	%	56

Reverse repurchase agreements involving underlying investments that the Company sold prior to period end, for settlement following period end, are shown using their original maturity dates even though such reverse repurchase agreements may be expected to be terminated early upon settlement of the sale of the underlying investment.

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As of September 30, 2017 and December 31, 2016, the fair value of investments transferred as collateral under outstanding borrowings under reverse repurchase agreements was $1.16 billion and $1.15 billion, respectively. Collateral transferred under outstanding borrowings as of September 30, 2017 include investments in the amount of $13.1 million that were sold prior to period end but for which such sale had not yet settled. In addition the Company posted net cash collateral of $23.3 million and additional securities with a fair value of $1.5 million as of September 30, 2017 to its counterparties. Collateral transferred under outstanding borrowings as of December 31, 2016 include investments in the amount of $33.4 million that were sold prior to year end but for which such sale had not yet settled. In addition, the Company posted net cash collateral of $39.2 million and additional securities with a fair value of $2.7 million as of December 31, 2016 as a result of margin calls from various counterparties.

As of September 30, 2017 and December 31, 2016 there were no counterparties for which the amount at risk relating to our repurchase agreements was greater than 10% of total equity.

Other Secured Borrowings

The Company has entered into securitization transactions to finance certain of its commercial mortgage loans and REO. These securitization transactions are accounted for as collateralized borrowings. As of September 30, 2017 and December 31, 2016, the Company had outstanding borrowings in the amount of $42.7 million and $24.1 million, respectively, in connection with one such securitization which is included under the caption Other secured borrowings on the Company's Consolidated Statement of Assets, Liabilities, and Equity. As of September 30, 2017 and December 31, 2016, the fair value of commercial mortgage loans and REO collateralizing this borrowing was $75.5 million and $42.0 million, respectively. The facility accrues interest on a floating rate basis, and has a maturity in May 2019. The borrowing had an interest rate of 4.58% as of September 30, 2017. See Note 7, Related Party Transactions, for further information on the Company's secured borrowings.

In March 2017, the Company entered a non-recourse secured borrowing facility to finance a portfolio of unsecured loans. The facility includes a reinvestment period ending in November 2017 (or earlier following an early amortization event), whereby the Company can vary its borrowings based on the size of its portfolio, subject to certain maximum limits. Following the reinvestment period, the facility will begin to amortize based on the collections from the underlying unsecured loans. The facility accrues interest on a floating rate basis, and has an expected maturity in November 2018. As of September 30, 2017, the Company had outstanding borrowings under this facility in the amount of $46.9 million which is included under the caption Other secured borrowings, on the Company's Consolidated Statement of Assets, Liabilities, and Equity and the effective interest rate on this facility, inclusive of related deferred financing costs, was 4.84% as of September 30, 2017.

Unsecured Borrowings

Senior Notes

On August 18, 2017, the Company issued $86.0 million in aggregate principal amount of Senior Notes. The total net proceeds to the Company from the issuance of the Senior Notes was approximately $84.7 million, after deducting debt issuance costs. The Senior Notes bear an interest rate of 5.25%, subject to adjustment based on changes in the ratings, if any, of the Senior Notes. Interest on the Senior notes is payable semi-annually in arrears on March 1 and September 1 of each year, with the first interest payment date on March 1, 2018. The Senior Notes mature on September 1, 2022. The Company may redeem the Senior Notes, at its option, in whole or in part, prior to March 1, 2022 at a price equal to 100% of the principal amount thereof, plus the applicable "make-whole" premium as of the applicable date of redemption. At any time on or after March 1, 2022, the Company may redeem the Senior Notes, in whole or in part, at a redemption price equal to 100% of the aggregate principal amount of the Senior Notes to be redeemed, plus accrued and unpaid interest. The Senior Notes are carried at amortized cost. There are a number of covenants, including several financial covenants, associated with the Senior Notes. As of September 30, 2017 the Company was in compliance with all of its covenants.

The Company amortizes debt issuance costs over the life of the associated debt; the amortized portion of debt issuance costs is included in Interest expense on the Consolidated Statement of Operations. The Senior Notes have an effective interest rate of 5.55%, including debt issuance costs.

The Senior Notes are unsecured and are effectively subordinated to secured indebtedness of the Company, to the extent of the value of the collateral securing such indebtedness.

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Schedule of Principal Repayments

The following table details the Company's principal repayment schedule for outstanding borrowings as of September 30, 2017:



Year	Reverse Repurchase Agreements		Other Secured Borrowings		Senior Notes⁽¹⁾		Total
2017	$	936,105	$	—	$	—	$	936,105
2018	93,705		46,899		—		140,604
2019	—		42,747		—		42,747
2020	—		—		—		—
2021	—		—		—		—
2022	—		—		86,000		86,000
Total	$	1,029,810	$	89,646	$	86,000	$	1,205,456


(1)	Represents par value.

7. Related Party Transactions

The Company is party to a Management Agreement (which may be amended from time to time), pursuant to which the Manager manages the assets, operations, and affairs of the Company, in consideration of which the Company pays the Manager management and incentive fees. Effective November 3, 2015, the Board of Directors approved a Sixth Amended and Restated Management Agreement between the Company and the Manager. The descriptions of the Base Management Fees and Incentive Fees are detailed below.

Base Management Fees

The Operating Partnership pays the Manager 1.50% per annum of total equity of the Operating Partnership calculated in accordance with U.S. GAAP as of the end of each fiscal quarter (before deductions for base management fees and incentive fees payable with respect to such fiscal quarter), provided that total equity is adjusted to exclude one-time events pursuant to changes in U.S. GAAP, as well as non-cash charges after discussion between the Manager and the Company's independent directors, and approval by a majority of the Company's independent directors in the case of non-cash charges.

Pursuant to the Company's management agreement, if the Company invests at issuance in the equity of any collateralized debt obligation that is managed, structured, or originated by Ellington or one of its affiliates, or if the Company invests in any other investment fund or other investment for which Ellington or one of its affiliates receives management, origination, or structuring fees, the base management and incentive fees payable by the Company to its Manager will be reduced by an amount equal to the applicable portion (as described in the management agreement) of any such management, origination, or structuring fees.

Summary information—For the three month periods ended September 30, 2017 and 2016, the total base management fee incurred, net of fee rebates, was $2.2 million and $2.5 million, respectively. For the nine month periods ended September 30, 2017 and 2016, the total base management fee incurred, net of fee rebates, was $6.9 million and $7.6 million, respectively.

Incentive Fees

The Manager is entitled to receive a quarterly incentive fee equal to the positive excess, if any, of (i) the product of (A) 25% and (B) the excess of (1) Adjusted Net Income (described below) for the Incentive Calculation Period (which means such fiscal quarter and the immediately preceding three fiscal quarters) over (2) the sum of the Hurdle Amounts (described below) for the Incentive Calculation Period, over (ii) the sum of the incentive fees already paid or payable for each fiscal quarter in the Incentive Calculation Period preceding such fiscal quarter.

For purposes of calculating the incentive fee, "Adjusted Net Income" for the Incentive Calculation Period means the net increase in equity from operations of the Operating Partnership, after all base management fees but before any incentive fees for such period, and excluding any non-cash equity compensation expenses for such period, as reduced by any Loss Carryforward (as described below) as of the end of the fiscal quarter preceding the Incentive Calculation Period.

For purposes of calculating the incentive fee, the "Loss Carryforward" as of the end of any fiscal quarter is calculated by determining the excess, if any, of (1) the Loss Carryforward as of the end of the immediately preceding fiscal quarter over (2) the Company's net increase in equity from operations (expressed as a positive number) or net decrease in equity from

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operations (expressed as a negative number) of the Operating Partnership for such fiscal quarter. As of September 30, 2017, there was no Loss Carryforward.

For purposes of calculating the incentive fee, the "Hurdle Amount" means, with respect to any fiscal quarter, the product of (i) one-fourth of the greater of (A) 9% and (B) 3% plus the 10-year U.S. Treasury rate for such fiscal quarter, (ii) the sum of (A) the weighted average gross proceeds per share of all common share and OP Unit issuances since inception of the Company and up to the end of such fiscal quarter, with each issuance weighted by both the number of shares and OP Units issued in such issuance and the number of days that such issued shares and OP Units were outstanding during such fiscal quarter, using a first-in first-out basis of accounting (i.e. attributing any share and OP Unit repurchases to the earliest issuances first) and (B) the result obtained by dividing (I) retained earnings attributable to common shares and OP Units at the beginning of such fiscal quarter by (II) the average number of common shares and OP Units outstanding for each day during such fiscal quarter, (iii) the sum of the average number of common shares, LTIP Units, and OP Units outstanding for each day during such fiscal quarter. For purposes of determining the Hurdle Amount, issuances of common shares and OP Units (a) as equity incentive awards, (b) to the Manager as part of its base management fee or incentive fee and (c) to the Manager or any of its affiliates in privately negotiated transactions, are excluded from the calculation. The payment of the incentive fee will be in a combination of common shares and cash, provided that at least 10% of any quarterly payment will be made in common shares.

Summary information—The Company did not incur any expense for incentive fees for either of the three or nine month periods ended September 30, 2017 and 2016, since on a rolling four quarter basis, the Company's income did not exceed the prescribed hurdle amount.

Termination Fees

The Management Agreement requires the Company to pay a termination fee to the Manager in the event of (1) the Company's termination or non-renewal of the Management Agreement without cause or (2) the Company's termination of the Management Agreement based on unsatisfactory performance by the Manager that is materially detrimental to the Company or (3) the Manager's termination of the Management Agreement upon a default by the Company in the performance of any material term of the Management Agreement. Such termination fee will be equal to the amount of three times the sum of (i) the average annual Quarterly Base Management Fee Amounts paid or payable with respect to the two 12-month periods ending on the last day of the latest fiscal quarter completed on or prior to the date of the notice of termination or non-renewal and (ii) the average annual Quarterly Incentive Fee Amounts paid or payable with respect to the two 12-month periods ending on the last day of the latest fiscal quarter completed on or prior to the date of the notice of termination or non-renewal.

Expense Reimbursement

Under the terms of the Management Agreement the Company is required to reimburse the Manager for operating expenses related to the Company that are incurred by the Manager, including expenses relating to legal, accounting, due diligence, other services, and all other costs and expenses. The Company's reimbursement obligation is not subject to any dollar limitation. Expenses will be reimbursed in cash within 60 days following delivery of the expense statement by the Manager; provided, however, that such reimbursement may be offset by the Manager against amounts due to the Company from the Manager. The Company will not reimburse the Manager for the salaries and other compensation of the Manager's personnel except that the Company will be responsible for expenses incurred by the Manager in employing certain dedicated or partially dedicated personnel as further described below.

The Company reimburses the Manager for the allocable share of the compensation, including, without limitation, wages, salaries, and employee benefits paid or reimbursed, as approved by the Compensation Committee of the Board of Directors to certain dedicated or partially dedicated personnel who spend all or a portion of their time managing the Company's affairs, based upon the percentage of time devoted by such personnel to the Company's affairs. In their capacities as officers or personnel of the Manager or its affiliates, such personnel will devote such portion of their time to the Company's affairs as is necessary to enable the Company to operate its business.

For the nine month periods ended September 30, 2017 and 2016, the Company reimbursed the Manager $4.1 million and $5.2 million, respectively, for previously incurred operating and compensation expenses.

Equity Investments in Certain Mortgage Originators

As of September 30, 2017, the mortgage originators in which the Company holds equity investments represent related parties. Transactions that have been entered into with these related party mortgage originators are summarized below.

The Company is a party to a flow mortgage loan purchase and sale agreement, with a mortgage originator in which the Company holds an investment in common stock, whereby the Company purchases residential mortgage loans that satisfy

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certain specified criteria. The Company has also provided a $5.0 million line of credit to the mortgage originator. Under the terms of this line of credit, the Company has agreed to make advances to the mortgage originator solely for the purpose of funding specifically identified residential mortgage loans designated for sale to the Company. To the extent the advances are drawn by the mortgage originator, it must pay interest, at a rate of 15.00% per annum, on the outstanding balance of each advance from the date the advance is made until such advance is repaid in full. The mortgage originator is required to repay advances in full no later than two business days following the date the Company purchases the related residential mortgage loans from the mortgage originator. As of September 30, 2017, there were no advances outstanding. The Company has also entered into two agreements whereby it guarantees the performance of such mortgage originator under third-party master repurchase agreements. See Note 15, Commitments and Contingencies, for further information on the Company's guarantees of the third-party borrowing arrangements.

In connection with another mortgage originator in which the Company holds an equity interest, the Company has entered into agreements whereby it guarantees the performance of such mortgage originator under a third-party master repurchase agreement. See Note 15, Commitments and Contingencies, for further information on the Company's guarantee of the third-party borrowing arrangement, as well as other obligations of the Company with respect to this mortgage originator.

Consumer, Residential, and Commercial Loan Transactions with Affiliates

The Company has investments in participation certificates related to consumer loans titled in the name of a related party of Ellington. Through its participation certificates, the Company has beneficial interests in the loan cash flows, net of servicing-related fees and expenses. The total fair value of the Company's beneficial interests in the net cash flows, was $9.7 million and $7.6 million as of September 30, 2017 and December 31, 2016, respectively, and is included on the Company's Consolidated Condensed Schedule of Investments in Consumer Loans and Asset-backed Securities backed by Consumer Loans.

The Company purchases certain of its consumer loans through an affiliate, or the "Purchasing Entity." The Purchasing Entity has entered into purchase agreements, open-ended in duration, with third party consumer loan originators whereby it has agreed to purchase eligible consumer loans. The amount of loans purchased under these purchase agreements is dependent on, among other factors, the amount of loans originated in any given period by the selling originators. The Company and other affiliates of Ellington have entered into agreements with the Purchasing Entity whereby the Company and each of the affiliates have agreed to purchase their allocated portion (subject to monthly determination based on available capital and other factors) of the eligible loans acquired by the Purchasing Entity under each purchase agreement. The Company and other affiliates acquire beneficial interests in the loans from the Purchasing Entity immediately upon purchase by the Purchasing Entity at the price paid by the Purchasing Entity. During the nine month period ended September 30, 2017, the Company purchased loans under these agreements with an aggregate principal balance of $68.4 million. As of September 30, 2017, the estimated remaining contingent purchase obligations of the Company under these purchase agreements was approximately $173.5 million in principal balance.

The Company's beneficial interests in the consumer loans purchased through the Purchasing Entity are evidenced by participation certificates issued by trusts that hold legal title to the loans. These trusts are owned by a related party of Ellington and were established to hold such loans. Through its participation certificates, the Company participates in the cash flows of the underlying loans held by each trust. The total amount of consumer loans held in the related party trusts, for which the Company has participating interests in the net cash flows, was $96.1 million and $43.2 million as of September 30, 2017 and December 31, 2016, respectively, and is included on the Company's Consolidated Condensed Schedule of Investments in Consumer Loans and Asset-backed Securities backed by Consumer Loans.

The Company has investments in participation certificates related to residential mortgage loans and REO held in a trust owned by another related party of Ellington. Through its participation certificates, the Company participates in the cash flows of the underlying loans held by such trust. The total amount of residential mortgage loans and REO held in the related party trust, for which the Company has participating interests in the net cash flows, was $163.6 million and $86.0 million as of September 30, 2017 and December 31, 2016, respectively, and is included on the Company's Consolidated Condensed Schedule of Investments in Mortgage Loans as well as Real Estate Owned.

The Company is a co-investor in certain small balance commercial loans with two other investors, including an unrelated third party and an affiliate of Ellington. These loans are held in a consolidated subsidiary of the Company. As of September 30, 2017, the aggregate fair value of these loans was $27.9 million and the non-controlling interests held by the unrelated third party and the Ellington affiliate were $1.8 million and $5.2 million, respectively.

Participation in Multi-Borrower Financing Facility

The Company is a co-participant in an agreement with certain other entities managed by Ellington, or the "Affiliated Entities," in order to facilitate the financing of certain small balance commercial mortgage loans and REO owned by the

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Company and the Affiliated Entities, respectively (the "SBC Assets"). In connection with this financing, each of the Company and the Affiliated Entities transferred their respective SBC Assets to a jointly owned entity, which in turn transferred these assets to a securitization trust. As of September 30, 2017, the trust has outstanding debt to a large financial institution in the amount of $89.6 million, which amortizes over a period ending in May 2019. While the Company's SBC Assets were transferred to the securitization trust, the Company's SBC Assets and the related debt have not been derecognized for financial reporting purposes, in accordance with ASC 860-10, because the Company continues to retain the risks and rewards of ownership of its SBC Assets. The Company's portion of the total debt outstanding as of September 30, 2017 and December 31, 2016 was $42.7 million and $24.1 million, respectively, and is included under the caption Other secured borrowings on the Company's Consolidated Statement of Assets, Liabilities, and Equity. To the extent there is a default under the financing arrangement, the assets of a non-defaulting participant could be used to satisfy outstanding obligations under the financing arrangement. As of September 30, 2017, each of the Affiliated Entities was performing under the agreement.

Participation in Multi-Seller Consumer Loan Securitization

The Company participated in an August 2016 securitization transaction whereby the Company, together with another entity managed by Ellington (the "co-participant"), sold consumer loans with an aggregate unpaid principal balance of approximately $124 million to a newly formed special purpose entity ("the Issuer"). Of the $124 million in loans sold to the Issuer, the Company's share was 51% while the co-participant's share was 49%. The transfer was accounted for as a sale in accordance with ASC 860-10. Pursuant to the securitization, the Issuer issued senior and subordinated notes in the principal amount of $87 million and $18.7 million, respectively. Trust certificates representing beneficial ownership of the Issuer were also issued. In connection with the transaction, and through a jointly owned newly formed entity (the "Acquiror"), the Company and the co-participant acquired all of the subordinated notes as well as the trust certificates in the Issuer. The Company and the co-participant acquired 51% and 49%, respectively, of the interest in the Acquiror. The Company's interest in the Acquiror is accounted for as a beneficial interest.

The notes and trust certificates issued by the Issuer are backed by the cash flows from the underlying consumer loans. The Company has no obligation to repurchase or replace securitized loans that subsequently become delinquent or are otherwise in default. However, if there are breaches of representations and warranties, the Company could, under certain circumstances be required to purchase or replace securitized loans. Cash flows collected on the underlying consumer loans are distributed to service providers, noteholders and trust certificate holders in accordance with the contractual priority of payments. Before the senior notes have been fully repaid, most of these cash inflows are applied first to service the loans, administer the Issuer, and repay the senior notes. After the senior notes have been fully repaid, most of these cash inflows are applied first to service the loans, administer the Issuer, and then to repay the subordinated notes. In any given period, and subject to the level of available cash flow, the trust certificates may receive payments. In addition, another affiliate of Ellington (the "Administrator"), acts as the administrator for the securitization and is paid a monthly fee for its services.

The Issuer is deemed to be a variable interest entity, or "VIE." A VIE is an entity having either total at-risk equity that is insufficient to finance its activities without additional subordinated financial support, or whose at-risk equity holders lack the ability to control the entity's activities. Variable interests are investments or other interests in a VIE that will absorb portions of such VIE's expected losses or receive portions of the VIE's expected residual returns. Expected residual returns represent the expected positive variability in the fair value of a VIE's net assets. Because the Company holds a variable interest in the Issuer, and as the Issuer is deemed to be a VIE, the Company is required to evaluate its interest in the Issuer under ASC 810, Consolidation, or "ASC 810." Under the VIE model, the party that is deemed to be the primary beneficiary is required to consolidate the VIE. The primary beneficiary is defined as the party that has the power to direct the entity's most significant economic activities and the ability to participate in the entity's economics. While the Company retains credit risk in the securitization because the Company's beneficial interests include the most subordinated interests in the securitized assets, which are the first to absorb credit losses on those assets, the Company does not retain the power to direct the activities of the Issuer that most significantly impact the Issuer's economic performance. As a result, the Company determined that neither the Company nor the Acquiror is the primary beneficiary of the Issuer, and therefore the Company has not consolidated the Issuer.

In December 2016, in order to facilitate the financing of the Company's share of the subordinated note held by the Acquiror, the Company entered into a repurchase agreement with the Acquiror (the "Acquiror Repurchase Agreement") whereby the Company's share of the subordinated note held by the Acquiror was transferred to the Company as collateral under the Acquiror Repurchase Agreement. The Company then re-hypothecated this collateral to a third-party lending institution pursuant to a reverse repurchase agreement (the "Reverse Agreement"). The Acquiror Repurchase Agreement is included on the Company's Consolidated Statement of Assets, Liabilities and Equity under the caption, Repurchase Agreements, at fair value and on its Consolidated Condensed Schedule of Investments. The Company's obligation under the Reverse Agreement is included on its Consolidated Statement of Assets, Liabilities and Equity under the caption, Reverse repurchase agreements. As of September 30, 2017 the outstanding amounts under the Acquiror Repurchase Agreement and the Reverse Agreement were each $5.7 million and the fair value of the related collateral was $9.4 million.

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Participation in CLO Transaction

In June 2017, the Company and several other affiliates of Ellington (the "CLO Co-Participants") participated in a CLO securitization transaction (the "CLO Securitization"), collateralized by corporate loans and sponsored and managed by an affiliate of Ellington (the "CLO Manager"). Pursuant to the CLO Securitization, a newly formed special purpose entity (the "CLO Issuer") issued notes totaling $373.6 million in face amount, consisting of $187.5 million of secured senior notes, $97.3 million of secured subordinated notes, and $88.8 million of unsecured subordinated notes. The secured senior notes were sold to third parties, as were a portion of the secured subordinated notes. The notes issued by the CLO Issuer are backed by the cash flows from the underlying corporate loans, including loans that will be purchased during the reinvestment period, which is expected to end in July 2019.

The Company and one CLO Co-Participant transferred corporate loans with a fair value of approximately $62.0 million and $141.7 million, respectively, to the CLO Issuer in exchange for cash. The Company has no obligation to repurchase or replace securitized corporate loans that subsequently become delinquent or are otherwise in default, and the transfer by the Company was accounted for as a sale in accordance with ASC 860-10.

The Company and each of the CLO Co-Participants purchased various classes of subordinated notes issued by the CLO Issuer. In addition, the Company and the CLO Co-Participants also funded a newly formed entity (the "Risk Retention Vehicle") to purchase approximately 25% of the unsecured subordinated notes issued by the CLO Issuer, in order to comply with risk retention rules (the "Risk Retention Rules") under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as described below.

The Company purchased a total of $36.6 million face amount of secured and unsecured subordinated notes for an aggregate purchase price of $35.9 million. The Company subsequently sold some of these notes, and as of September 30, 2017 the Company's remaining investment in these notes had an aggregate fair value of $29.8 million, and is included on the Company's Consolidated Condensed Schedule of Investments in Collateralized Loan Obligations. In addition to these investments, the Company's holds an approximate 25% ownership interest in the Risk Retention Vehicle, with a fair value of $5.6 million, as of September 30, 2017, and is included on the Company's Consolidated Condensed Schedule of Investments in Corporate Equity Investments.

Pursuant to the CLO Securitization, the cash flows from the underlying loans are applied first to pay administrative and other expenses of the CLO Issuer and management fee to the CLO Manager, and any remaining available cash flows are then applied to pay interest and principal of the secured senior and secured subordinated notes, and to make distributions to the unsecured subordinated note holders, according to the contractual priorities set forth in the securitization cash flow waterfall. Furthermore, once the unsecured subordinated note holders have realized an annualized internal rate of return of 12% and as long as certain other criteria have been met, the CLO Manager receives, as an incentive fee, a specified percentage of any further distributions that would otherwise be made solely to the unsecured subordinated note holders.

The CLO Manager is entitled to receive management and incentive fees in accordance with the management agreement between the CLO Manager and the CLO Issuer. In accordance with the Company's Management Agreement, the Manager rebates to the Company the portion of the management fees payable by the CLO Issuer to the CLO Manager that is allocable to the Company's participating interest in the unsecured subordinated notes issued by the CLO Issuer. For the three and nine month periods ended September 30, 2017 the amount of such fee rebates was $0.2 million.

Under the Risk Retention Rules, securitization sponsors are generally required to retain at least 5% of the economic interest in the credit risk of the securitized assets. The unsecured subordinated notes purchased by the Risk Retention Vehicle represent approximately 6% of the economic interest in the credit risk of the underlying corporate loans. While the Risk Retention Vehicle is generally required under the Risk Retention Rules to hold its investment in the CLO Issuer for a specified minimum amount of time, the Company is not required to hold its investment in the Risk Retention Vehicle for such minimum period. The CLO Manager has full and exclusive management and control of the business of the Risk Retention Vehicle and is required to hold its investment in the Risk Retention Vehicle for the specified minimum amount of time under the Risk Retention Rules.

The CLO Issuer and the Risk Retention Vehicle are each deemed to be VIEs. Because the Company holds a variable interest in the CLO Issuer and the Risk Retention Vehicle, and as the CLO Issuer and the Risk Retention Vehicle are deemed to be VIEs, the Company is required to evaluate its interests under ASC 810. The Company does not have the power to direct the activities of either the CLO Issuer or the Risk Retention Vehicle that most significantly impact each entity's economic performance. As a result, the Company determined that it is not the primary beneficiary of either the CLO Issuer or the Risk Retention Vehicle, and therefore the Company has not consolidated the CLO Issuer or the Risk Retention Vehicle.

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8. Long-Term Incentive Plan Units

LTIP Units held pursuant to the Company's incentive plans are generally exercisable by the holder at any time after vesting. Each unit is convertible into one common share. Costs associated with the LTIP Units issued under the Company's incentive plans are measured as of the grant date and expensed ratably over the vesting period. Total expense associated with LTIP Units issued under the Company's incentive plans for each of the three month periods ended September 30, 2017 and 2016 was $0.1 million. Total expense associated with LTIP Units issued under the Company's incentive plans for each of the nine month periods ended September 30, 2017 and 2016 was $0.3 million.

On September 12, 2017, the Company's Board of Directors authorized the issuance of 10,002 LTIP Units to its independent directors pursuant to the Company's 2017 Equity Incentive Plan. These LTIP Units will vest and become non-forfeitable on September 11, 2018.

The below table details on the Company's unvested LTIP Units as of September 30, 2017:



Grant Recipient	Number of LTIP Units Granted	Grant Date	Vesting Date⁽¹⁾
Independent directors:
	10,002	September 12, 2017	September 11, 2018
Partially dedicated employees:
	8,090	December 13, 2016	December 13, 2017
	5,583	December 13, 2016	December 13, 2018
	5,949	December 15, 2015	December 15, 2017
	686	December 15, 2015	December 31, 2017
Total unvested LTIP Units at September 30, 2017	30,310


(1)	Date at which such LTIP Units will vest and become non-forfeitable.

The following table summarizes issuance and exercise activity of the Company's LTIP Units for the three month periods ended September 30, 2017 and 2016:



	Three Month Period Ended September 30, 2017					Three Month Period Ended September 30, 2016
	Manager	Director/ Employee		Total		Manager	Director/ Employee		Total
LTIP Units Outstanding (6/30/2017 and 6/30/2016, respectively)	375,000	94,539		469,539		375,000	74,938		449,938
Granted	—	10,002		10,002		—	8,403		8,403
Exercised	—	(2,801	)	(2,801	)	—	(2,475	)	(2,475	)
LTIP Units Outstanding (9/30/2017 and 9/30/2016, respectively)	375,000	101,740		476,740		375,000	80,866		455,866
LTIP Units Vested and Outstanding (9/30/2017 and 9/30/2016, respectively)	375,000	71,430		446,430		375,000	51,070		426,070

The following table summarizes issuance and exercise activity of the Company's LTIP Units for the nine month periods ended September 30, 2017 and 2016:



	Nine Month Period Ended September 30, 2017					Nine Month Period Ended September 30, 2016
	Manager	Director/ Employee		Total		Manager	Director/ Employee		Total
LTIP Units Outstanding (12/31/2016 and 12/31/2015, respectively)	375,000	94,539		469,539		375,000	74,938		449,938
Granted	—	10,002		10,002		—	8,403		8,403
Exercised	—	(2,801	)	(2,801	)	—	(2,475	)	(2,475	)
LTIP Units Outstanding (9/30/2017 and 9/30/2016, respectively)	375,000	101,740		476,740		375,000	80,866		455,866
LTIP Units Vested and Outstanding (9/30/2017 and 9/30/2016, respectively)	375,000	71,430		446,430		375,000	51,070		426,070

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As of September 30, 2017, there were an aggregate of 1,922,188 common shares underlying awards, including LTIP Units, available for future issuance under the Company's 2017 Equity Incentive Plan.

9. Non-controlling Interests

Operating Partnership

Non-controlling interests include the interest in the Operating Partnership owned by an affiliate of the Manager and certain related parties. On January 1, 2013, 212,000 OP Units were purchased by the initial non-controlling interest member. Income allocated to the non-controlling interest is based on the non-controlling interest owners' ownership percentage of the Operating Partnership during the quarter, calculated using a daily weighted average of all common shares and convertible units outstanding during the quarter. Holders of OP Units are entitled to receive the same distributions that holders of common shares receive, and OP Units are convertible into common shares on a one-for-one basis, subject to specified limitations. OP Units are non-voting with respect to matters as to which common shareholders are entitled to vote. As of September 30, 2017, non-controlling interest related to the outstanding 212,000 OP Units represented an interest of approximately 0.6% in the Operating Partnership. As of September 30, 2017 and December 31, 2016 non-controlling interest related to the outstanding 212,000 OP Units was $4.0 million and $4.1 million, respectively.

Joint Venture Interests

Non-controlling interests also include the interests of joint venture partners in various consolidated subsidiaries of the Company. These subsidiaries hold the Company's investments in certain commercial mortgage loans and REO. These joint venture partners participate in these subsidiaries on a pari passu basis with the Company at a predetermined percentage, and therefore participate in all income, expense, gains and losses of such subsidiaries. These joint venture partners make capital contributions to the subsidiaries as new approved investments are purchased by the subsidiaries, and are generally entitled to distributions when investments are sold or otherwise disposed of. As of September 30, 2017 and December 31, 2016 these joint venture partners' interests in subsidiaries of the Company were $9.9 million and $3.0 million, respectively.

These joint venture partners' interests are not convertible into common shares of the Company or OP Units, nor are these joint venture partners entitled to receive distributions that holders of common shares of the Company receive.

10. Common Share Capitalization

During the three month periods ended September 30, 2017 and 2016, the Board of Directors authorized dividends totaling $0.45 per share and $0.50 per share, respectively. Total dividends paid during the three month periods ended September 30, 2017 and 2016 were $14.8 million and $16.6 million, respectively. During the nine month periods ended September 30, 2017 and 2016, the Board of Directors authorized dividends totaling $1.35 per share and $1.50 per share, respectively. Total dividends paid during the nine month periods ended September 30, 2017 and 2016 were $44.3 million and $50.3 million, respectively.

The following table summarizes issuance, repurchase, and other activity with respect to the Company's common shares for the three and nine month periods ended September 30, 2017 and 2016:



	Three Month Period Ended				Nine Month Period Ended
	September 30, 2017		September 30, 2016		September 30, 2017		September 30, 2016
Common Shares Outstanding (6/30/2017, 6/30/2016, 12/31/2016, and 12/31/2015, respectively)	32,112,697		32,743,356		32,294,703		33,126,012
Share Activity:
Shares repurchased	(123,321	)	(126,771	)	(305,327	)	(509,427	)
Director LTIP Units exercised	2,801		2,475		2,801		2,475
Common Shares Outstanding (9/30/2017, 9/30/2016, 9/30/2017, and 9/30/2016, respectively)	31,992,177		32,619,060		31,992,177		32,619,060

If all LTIP and OP Units that have been previously issued were to become fully vested and exchanged for common shares as of September 30, 2017 and 2016, the Company's issued and outstanding common shares would increase to 32,680,917 and 33,286,926 shares, respectively.

On March 6, 2017, the Company's Board of Directors approved the adoption of a share repurchase program under which the Company is authorized to repurchase up to 1.7 million common shares. The program, which is open-ended in duration,

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allows the Company to make repurchases from time to time on the open market or in negotiated transactions, including under Rule 10b5-1 plans. Repurchases are at the Company's discretion, subject to applicable law, share availability, price and its financial performance, among other considerations. This program supersedes the program that was previously adopted on August 3, 2015. During the three month period ended September 30, 2017, the Company repurchased 123,321 shares at an average price per share of $15.60 and a total cost of $1.9 million. During the nine month period ended September 30, 2017, the Company repurchased 305,327 shares at an average price per share of $15.69 and a total cost of $4.8 million.

11. Earnings Per Share

The components of the computation of basic and diluted EPS were as follows:



	Three Month Period Ended September 30,						Nine Month Period Ended September 30,
	2017			2016			2017			2016
(In thousands except share amounts)
Net increase (decrease) in shareholders' equity resulting from operations	$	6,195		$	516		$	26,537		$	(17,699	)
Add: Net increase (decrease) in equity resulting from operations attributable to the participating non-controlling interest⁽¹⁾	41			3			172			(112		)
Net increase (decrease) in equity resulting from operations related to common shares, LTIP Unit holders, and participating non-controlling interest	6,236			519			26,709			(17,811		)
Net increase (decrease) in shareholders' equity resulting from operations available to common share and LTIP Unit holders:
Net increase (decrease) in shareholders' equity resulting from operations– common shares	6,106			509			26,155			(17,460		)
Net increase (decrease) in shareholders' equity resulting from operations– LTIP Units	89			7			382			(239		)
Dividends Paid⁽²⁾:
Common shareholders	(14,451		)	(16,309		)	(43,416		)	(49,263		)
LTIP Unit holders	(211		)	(225		)	(634		)	(675		)
Non-controlling interest	(96		)	(106		)	(286		)	(318		)
Total dividends paid to common shareholders, LTIP Unit holders, and non-controlling interest	(14,758		)	(16,640		)	(44,336		)	(50,256		)
Undistributed (Distributed in excess of) earnings:
Common shareholders	(8,345		)	(15,800		)	(17,261		)	(66,723		)
LTIP Unit holders	(122		)	(218		)	(252		)	(914		)
Non-controlling interest	(55		)	(103		)	(114		)	(430		)
Total undistributed (distributed in excess of) earnings attributable to common shareholders, LTIP Unit holders, and non-controlling interest	$	(8,522	)	$	(16,121	)	$	(17,627	)	$	(68,067	)
Weighted average shares outstanding (basic and diluted):
Weighted average common shares outstanding	32,095,675			32,643,154			32,153,366			32,854,979
Weighted average participating LTIP Units	471,057			451,125			470,050			450,336
Weighted average non-controlling interest units	212,000			212,000			212,000			212,000
Basic earnings per common share:
Distributed	$	0.45		$	0.50		$	1.35		$	1.50
Undistributed (Distributed in excess of)	(0.26		)	(0.48		)	(0.54		)	(2.03		)
	$	0.19		$	0.02		$	0.81		$	(0.53	)
Diluted earnings per common share:
Distributed	$	0.45		$	0.50		$	1.35		$	1.50
Undistributed (Distributed in excess of)	(0.26		)	(0.48		)	(0.54		)	(2.03		)
	$	0.19		$	0.02		$	0.81		$	(0.53	)


(1)	For the three month periods ended September 30, 2017 and 2016, excludes net increase in equity resulting from operations of $0.4 million and $31 thousand, respectively, attributable to joint venture partners, which have non-participating interests as described in Note 9. For the nine month periods

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ended September 30, 2017 and 2016, excludes net increase in equity resulting from operations of $1.1 million and $0.2 million, respectively attributable to joint venture partners, which have non-participating interests as described in Note 9.


(2)	The Company pays quarterly dividends in arrears, so a portion of the dividends paid in each calendar year relate to the prior year's earnings.

12. Counterparty Risk

As of September 30, 2017, investments with an aggregate value of approximately $1.16 billion were held with dealers as collateral for various reverse repurchase agreements. The investments held as collateral include securities in the amount of $13.1 million that were sold prior to period end but for which such sale had not yet settled as of September 30, 2017. At September 30, 2017 no single counterparty held more than 15% of the total amount held with dealers as collateral for various reverse repurchase agreements. In addition to the below, unencumbered investments, on a settlement date basis, of approximately $79.0 million were held in custody at the Bank of New York Mellon Corporation.

The following table details the percentage of collateral amounts held by dealers who hold greater than 15% of the Company's Due from Brokers, included as of September 30, 2017:



Dealer		% of Total Due from Brokers
J. P. Morgan Securities LLC		23%
Morgan Stanley		20%
BNP Paribas Securities Corp.		19%

The following table details the percentage of amounts held by dealers who hold greater than 15% of the Company's Receivable for securities sold as of September 30, 2017:



Dealer		% of Total Receivable for Securities Sold
Bank of America Securities		29%
Morgan Stanley		23%

In addition, the Company held cash and cash equivalents of $111.4 million and $123.3 million as of September 30, 2017 and December 31, 2016, respectively. The below table details the concentration of cash and cash equivalents held by each counterparty:



	As of
Counterparty	September 30, 2017	December 31, 2016
Bank of New York Mellon Corporation	45%	27%
Goldman Sachs Financial Square Funds—Government Fund	36%	16%
BlackRock Liquidity Funds FedFund Portfolio	18%	41%
US Bank N.A.	1%	—%
Morgan Stanley Institutional Liquidity Fund—Government Portfolio	—%	16%

13. Restricted Cash

The Company is required to maintain certain cash balances with counterparties and/or unrelated third parties for various activities and transactions.

In connection with a letter of credit with a mortgage originator in which the Company holds an equity interest, funds were deposited into an account for the benefit of the mortgage originator. This letter of credit was terminated in April 2017.

The Company is required to maintain a specific cash balance in a segregated account pursuant to a flow consumer loan purchase and sale agreement.

The Company is also required to maintain specific minimum cash balances in connection with certain regulated subsidiaries, including its subsidiary that holds various state mortgage origination licenses.

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The below table details the Company's restricted cash balances included in Restricted cash on the Consolidated Statement of Assets, Liabilities, and Equity as of September 30, 2017 and December 31, 2016.



	September 30, 2017		December 31, 2016
	(In thousands)
Restricted cash balance related to:
Minimum account balance required for regulatory purposes	$	250	$	250
Letter of credit	—		230
Flow consumer loan purchase and sale agreement	175		175
Total	$	425	$	655

14. Offsetting of Assets and Liabilities

The Company records financial instruments at fair value as described in Note 2. All financial instruments are recorded on a gross basis on the Consolidated Statement of Assets, Liabilities, and Equity. In connection with the vast majority of its derivative, repurchase and reverse repurchase agreements, and the related trading agreements, the Company and its counterparties are required to pledge collateral. Cash or other collateral is exchanged as required with each of the Company's counterparties in connection with open derivative positions, and repurchase and reverse repurchase agreements.

The following tables present information about certain assets and liabilities representing financial instruments as of September 30, 2017 and December 31, 2016. The Company has not entered into master netting agreements with any of its counterparties. Certain of the Company's repurchase and reverse repurchase agreements and financial derivative transactions are governed by underlying agreements that generally provide a right of offset in the event of default or in the event of a bankruptcy of either party to the transaction.

September 30, 2017:



Description	Amount of Assets (Liabilities) Presented in the Consolidated Statements of Assets, Liabilities, and Equity⁽¹⁾			Financial Instruments Available for Offset			Financial Instruments Transferred or Pledged as Collateral⁽²⁾⁽³⁾		Cash Collateral (Received) Pledged⁽²⁾⁽³⁾			Net Amount
(In thousands)
Assets
Financial derivatives–assets	$	29,896		$	(19,093	)	$	—	$	(3,600	)	$	7,203
Repurchase agreements	193,070			(193,070		)	—		—			—
Liabilities
Financial derivatives–liabilities	(32,278		)	19,093			—		13,112			(73		)
Reverse repurchase agreements	(1,029,810		)	193,070			813,458		23,282			—

December 31, 2016:



Description	Amount of Assets (Liabilities) Presented in the Consolidated Statements of Assets, Liabilities, and Equity⁽¹⁾			Financial Instruments Available for Offset			Financial Instruments Transferred or Pledged as Collateral⁽²⁾⁽³⁾		Cash Collateral (Received) Pledged⁽²⁾⁽³⁾			Net Amount
(In thousands)
Assets
Financial derivatives–assets	$	35,595		$	(15,082	)	$	—	$	(7,933	)	$	12,580
Repurchase agreements	184,819			(184,819		)	—		—			—
Liabilities
Financial derivatives–liabilities	(18,687		)	15,082			—		3,574			(31		)
Reverse repurchase agreements	(1,033,581		)	184,819			809,573		39,189			—


(1)	In the Company's Consolidated Statement of Assets, Liabilities, and Equity, all balances associated with repurchase agreements, reverse repurchase agreements, and financial derivatives are presented on a gross basis.

(2)

For the purpose of this presentation, for each row the total amount of financial instruments transferred or pledged and cash collateral (received) or pledged may not exceed the applicable gross amount of assets or (liabilities) as presented here. Therefore, the Company has reduced the amount of financial instruments transferred or pledged as collateral related to the Company's reverse repurchase agreements and cash collateral pledged on the

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Company's financial derivative liabilities. Total financial instruments transferred or pledged as collateral on the Company's reverse repurchase agreements as of September 30, 2017 and December 31, 2016 were $1.16 billion and $1.16 billion, respectively. As of September 30, 2017 and December 31, 2016, total cash collateral on financial derivative assets excludes excess net cash collateral pledged of $10.3 million and $14.9 million, respectively. As of September 30, 2017 and December 31, 2016, total cash collateral on financial derivative liabilities excludes excess cash collateral pledged of $18.9 million and $14.8 million, respectively.

(3)

When collateral is pledged to or pledged by a counterparty, it is often pledged or posted with respect to all positions with such counterparty, and in such cases such collateral cannot be specifically identified as relating to a specific asset or liability. As a result, in preparing the above tables, the Company has made assumptions in allocating pledged or posted collateral among the various rows.

15. Commitments and Contingencies

The Company provides current directors and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Company.

In the normal course of business the Company may also enter into contracts that contain a variety of representations, warranties, and general indemnifications. The Company's maximum exposure under these arrangements, including future claims that may be made against the Company that have not yet occurred, is unknown. The Company has not incurred any costs to defend lawsuits or settle claims related to these indemnification agreements. The Company has no liabilities recorded for these agreements as of September 30, 2017 and December 31, 2016.

Commitments and Contingencies Related to Investments in Mortgage Originators

In connection with certain of its investments in mortgage originators, the Company has outstanding commitments and contingencies as described below.

In connection with its equity interest in a mortgage originator, as described in Note 7, Related Party Transactions, the Company has entered into agreements whereby it guarantees the performance of the mortgage originator under a master repurchase agreement. The Company's maximum aggregate guarantee under the agreement is capped at $125.0 million. As of September 30, 2017 the mortgage originator had borrowings, for which the Company has provided a guarantee under the agreement, in the amount of $0.7 million. The Company's obligation under this arrangement is deemed to be a guarantee under ASC 460-10, Guarantees, or"ASC 460," and is carried at fair value and included in Other Liabilities on the Consolidated Statement of Assets, Liabilities, and Equity. As of both September 30, 2017 and December 31, 2016 the estimated fair value of such guarantee was zero. As of September 30, 2017, the Company and its co-investor each had a commitment to invest an additional $2.5 million in this mortgage originator.

As described in Note 7, Related Party Transactions, the Company is party to a flow mortgage loan purchase and sale agreement with another mortgage originator. The Company has entered into two agreements whereby it guarantees the performance of this mortgage originator under master repurchase agreements. The Company's maximum guarantees are capped at $30.0 million. As of September 30, 2017 the mortgage originator had $8.1 million outstanding borrowings under these agreements guaranteed by the Company. The Company's obligation under these arrangements are deemed to be guarantees under ASC 460-10 and are carried at fair value and included in Other Liabilities on the Consolidated Statement of Assets, Liabilities, and Equity. As of September 30, 2017 the estimated fair value of such guarantees was zero.

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16. Financial Highlights

Results of Operations for a Share Outstanding Throughout the Periods:



	Three Month Period Ended						Nine Month Period Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
Beginning Shareholders' Equity Per Share (6/30/2017, 6/30/2016, 12/31/2016, and 12/31/2015, respectively)	$	19.49		$	20.58		$	19.75		$	22.10
Net Investment Income	0.25			0.20			0.87			0.81
Net Realized/Unrealized Gains (Losses)	(0.05		)	(0.18		)	—			(1.35		)
Results of Operations Attributable to Equity	0.20			0.02			0.87			(0.54		)
Less: Results of Operations Attributable to Non-controlling Interests	(0.01		)	—			(0.04		)	—
Results of Operations Attributable to Shareholders' Equity⁽¹⁾	0.19			0.02			0.83			(0.54		)
Dividends Paid to Common Shareholders	(0.45		)	(0.50		)	(1.35		)	(1.50		)
Weighted Average Share Impact on Dividends Paid⁽²⁾	(0.01		)	(0.01		)	(0.03		)	(0.03		)
Accretive (Dilutive) Effect of Share Issuances (Net of Offering Costs), Share Repurchases, and Adjustments to Non-controlling Interest	0.02			0.02			0.04			0.08
Ending Shareholders' Equity Per Share (9/30/2017, 9/30/2016, 9/30/2017, and 9/30/2016, respectively)⁽³⁾	$	19.24		$	20.11		$	19.24		$	20.11
Shares Outstanding, end of period	31,992,177			32,619,060			31,992,177			32,619,060


(1)	Calculated based on average common shares outstanding and can differ from the calculation for EPS (See Note 11).


(2)	Per share impact on dividends paid relating to share issuances/repurchases during the period as well as dividends paid to LTIP and OP Unit holders.


(3)	If all LTIP Units and OP Units previously issued were vested and exchanged for common shares as of September 30, 2017 and 2016, shareholders' equity per share would be $18.96 and $19.83, respectively.

Total Return:

The Company calculates its total return two ways, one based on its reported net asset value and the other based on its publicly traded share price.

The following table illustrates the Company's total return for the periods presented based on net asset value:

Net Asset Value Based Total Return for a Shareholder:⁽¹⁾



	Three Month Period Ended		Nine Month Period Ended
	September 30, 2017	September 30, 2016	September 30, 2017	September 30, 2016
Total Return	1.05%	0.13%	4.40%	(2.25)%


(1)	Total return is calculated assuming reinvestment of distributions at shareholders' equity per share during the period.

Market Based Total Return for a Shareholder:

For the three month periods ended September 30, 2017 and 2016, the Company's market based total return based on the closing price as reported by the New York Stock Exchange was 0.21% and 0.13%, respectively. For the nine month periods ended September 30, 2017 and 2016, the Company's market based total return based on the closing price as reported by the New York Stock Exchange was 10.52% and 8.14%, respectively. Calculation of market based total return assumes the reinvestment of dividends at the closing price as reported by the New York Stock Exchange as of the ex-date.

Net Investment Income Ratio to Average Equity:⁽¹⁾⁽²⁾



	Three Month Period Ended		Nine Month Period Ended
	September 30, 2017	September 30, 2016	September 30, 2017	September 30, 2016
Net Investment Income	4.95%	3.80%	5.86%	5.14%


(1)	Average equity is calculated using month end values.


(2)	Includes all items of income and expense on an annualized basis.

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Expense Ratios to Average Equity:⁽¹⁾⁽²⁾



	Three Month Period Ended		Nine Month Period Ended
	September 30, 2017	September 30, 2016	September 30, 2017	September 30, 2016
Operating expenses, before interest expense and other investment related expenses	(2.76)%	(2.89)%	(2.80)%	(2.88)%
Interest expense and other investment related expenses	(6.32)%	(3.69)%	(5.69)%	(3.43)%
Total Expenses	(9.08)%	(6.58)%	(8.49)%	(6.31)%


(1)	Average equity is calculated using month end values.


(2)	Includes all items of income and expense on an annualized basis.

17. Subsequent Events

On November 1, 2017, the Company's Board of Directors approved a dividend for the third quarter of 2017 in the amount of $0.41 per share payable on December 15, 2017 to shareholders of record as of December 1, 2017.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

In this Quarterly Report on Form 10-Q, except where the context suggests otherwise, "EFC," "we," "us," and "our" refer to Ellington Financial LLC and its subsidiaries, our "Manager" refers to Ellington Financial Management LLC, our external manager, and "Ellington" refers to Ellington Management Group, L.L.C. and its affiliated investment advisory firms.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

When used in this Quarterly Report on Form 10-Q, in future filings with the Securities and Exchange Commission ("SEC") or in press releases or other written or oral communications issued or made by us, statements which are not historical in nature, including those containing words such as "believe," "expect," "anticipate," "estimate," "project," "plan," "continue," "intend," "should," "would," "could," "goal," "objective," "will," "may," "seek," or similar expressions, are intended to identify "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and, as such, may involve known and unknown risks, uncertainties, and assumptions.

Forward-looking statements are based on our beliefs, assumptions, and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions, and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity, and results of operations may vary materially from those expressed or implied in our forward-looking statements. The following factors are examples of those that could cause actual results to vary from our forward-looking statements: changes in interest rates and the market value of our securities; market volatility; changes in the prepayment rates on the mortgage loans underlying our agency securities; increased rates of default and/or decreased recovery rates on our assets; the availability and costs of financing to fund our assets; changes in government regulations affecting our business; our ability to maintain our exclusion from registration under the Investment Company Act of 1940, as amended (the "Investment Company Act"); and risks associated with investing in real estate assets, including changes in business conditions and the general economy. These and other risks, uncertainties and factors, including the risk factors described under Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 as filed with the SEC, could cause our actual results to differ materially from those projected or implied in any forward-looking statements we make. All forward-looking statements speak only as of the date on which they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Executive Summary

We are a specialty finance company that primarily acquires and manages mortgage-related and consumer-related assets, including residential mortgage-backed securities, or "RMBS," residential and commercial mortgage loans, consumer loans and asset-backed securities, or "ABS," backed by consumer loans, commercial mortgage-backed securities, or "CMBS," real property, and mortgage-related derivatives. We also invest in corporate debt and equity, including distressed debt, collateralized loan obligations, or "CLOs," non-mortgage-related derivatives, and other financial assets, including private debt and equity investments in mortgage-related entities. We are externally managed and advised by our Manager, an affiliate of Ellington. Ellington is a registered investment adviser with a 22-year history of investing in a broad spectrum of mortgage-backed securities, or "MBS," and related derivatives.

We conduct all of our operations and business activities through Ellington Financial Operating Partnership LLC, or the "Operating Partnership." As of September 30, 2017, we have an ownership interest of approximately 99.4% in the Operating Partnership. The interest of approximately 0.6% not owned by us represents the interest in the Operating Partnership that is owned by an affiliate of our Manager and certain related parties, and is reflected in our financial statements as a non-controlling interest.

Our primary objective is to generate attractive, risk-adjusted total returns for our shareholders. We seek to attain this objective by utilizing an opportunistic strategy to make investments, without restriction as to ratings, structure, or position in the capital structure, that we believe compensate us appropriately for the risks associated with them rather than targeting a specific yield. Our evaluation of the potential risk-adjusted return of any potential investment typically involves weighing the potential returns of such investment under a variety of economic scenarios against the perceived likelihood of the various scenarios. Potential investments subject to greater risk (such as those with lower credit ratings and/or those with a lower position in the capital structure) will generally require a higher potential return to be attractive in comparison to investment alternatives with lower potential return and a lower degree of risk. However, at any particular point in time, depending on how we perceive the market's pricing of risk both generally and across sectors, we may favor higher-risk assets or we may favor lower-risk assets, or a combination of the two in the interests of portfolio diversification or other considerations.

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Through September 30, 2017, our Credit strategy has been the primary driver of our risk and return, and we expect that this will continue in the near- to medium-term. Our Credit strategy includes non-Agency RMBS; residential and commercial mortgage loans, which can be performing or non-performing; real estate owned properties, or "REO" consumer loans and ABS backed by consumer loans; CLOs; European non-dollar denominated investments; other mortgage-related structured investments; private debt and/or equity investments in mortgage originators and other mortgage-related entities; and corporate debt and equity. We believe that Ellington's capabilities allow our Manager to identify attractive assets in these classes, value these assets, monitor and forecast the performance of these assets, and opportunistically hedge our risk with respect to these assets.

We continue to maintain a highly leveraged portfolio of Agency RMBS to take advantage of opportunities in that market sector and to maintain our exclusion from registration as an investment company under the Investment Company Act. Unless we acquire very substantial amounts of whole mortgage loans or there are changes to the rules and regulations applicable to us under the Investment Company Act, we expect that we will always maintain some core amount of Agency RMBS.

We also use leverage in our Credit strategy, albeit significantly less leverage than that used in our Agency RMBS strategy. Through September 30, 2017, we financed our asset purchases primarily through reverse repurchase agreements, or "reverse repos," which we account for as collateralized borrowings and we expect to continue to obtain the vast majority of our financing through the use of reverse repos. In addition to financing our assets through reverse repos, we sometimes also enter into other secured borrowing transactions, which are accounted for as collateralized borrowings, to finance certain of our commercial mortgage loans and REO and certain of our consumer loans. We have also obtained term financing for our consumer loans and leveraged corporate loans through the securitization markets. In each of these cases, we accounted for the securitization transaction as a sale.

The strategies that we employ are intended to capitalize on opportunities in the current market environment. We intend to adjust our strategies to changing market conditions by shifting our asset allocations across various asset classes as credit and liquidity trends evolve over time. We believe that this flexibility, combined with Ellington's experience, will help us generate more consistent returns on our capital throughout changing market cycles.

As of September 30, 2017, outstanding borrowings under reverse repos and other secured borrowings were $1.1 billion. Of our total borrowings outstanding under reverse repos and other secured borrowings, approximately 69%, or $768.4 million, relates to our Agency RMBS holdings, as of September 30, 2017. The remaining outstanding borrowings relate to our Credit portfolio and U.S. Treasury securities.

In August 2017, we issued $86.0 million of unsecured long-term debt, or the "Senior Notes," at par that mature in September of 2022. The Senior Notes bear interest at a rate of 5.25%, subject to adjustment based on changes, if any, in the ratings of the Senior Notes. Inclusive of debt issuance costs, the effective interest rate on the Senior Notes is 5.55%. See Note 6 of the notes to our consolidated financial statements for further detail on the Senior Notes.

Our debt-to-equity ratio was 1.91 to 1 as of September 30, 2017. Our debt-to-equity ratio does not account for liabilities other than debt financings and does not include debt associated with securitization transactions accounted for as sales.

We opportunistically hedge our credit risk, interest rate risk, and foreign currency risk; however, at any point in time we may choose not to hedge all or a portion of these risks, and we will generally not hedge those risks that we believe are appropriate for us to take at such time, or that we believe would be impractical or prohibitively expensive to hedge.

We believe that we have been organized and have operated so that we have qualified, and will continue to qualify, to be treated for U.S. federal income tax purposes as a partnership and not as an association or a publicly traded partnership taxable as a corporation.

We also measure our book value per share and our total return on a diluted basis, assuming all convertible units were converted into common shares at their respective issuance dates. As of September 30, 2017, our diluted book value per share was $18.96 as compared to $19.21 as of June 30, 2017 and $19.46 as of December 31, 2016. On a diluted basis, the Company's total return for the three and nine month periods ended September 30, 2017 was 1.06% and 4.47%, respectively. Additionally our diluted net-asset-value-based total return was 168.86% from our inception (August 17, 2007) through September 30, 2017, and our annualized inception-to-date diluted net-asset-value-based total return was 10.26% as of September 30, 2017.

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Our Targeted Asset Classes

Our targeted asset classes currently include investments in the U.S. and Europe (as applicable) in the following categories:



Asset Class		Principal Assets
Agency RMBS	.	Whole pool pass-through certificates;
	.	Partial pool pass-through certificates;
	.	Agency collateralized mortgage obligations, or "CMOs," including interest only securities, or "IOs," principal only securities, or "POs," inverse interest only securities, or "IIOs; and
	.	To-Be-Announced mortgage pass-through certificates, or "TBAs."

CLOs	.	Equity and mezzanine tranches of CLOs; and
CLOs	.	Retained tranches from securitizations to which we have contributed assets.

CMBS and Commercial Mortgage Loans	.	CMBS; and
CMBS and Commercial Mortgage Loans	.	Commercial mortgages and other commercial real estate debt.

Consumer Loans and ABS	.	Consumer loans;
	.	ABS backed by consumer loans; and
	.	Retained tranches from securitizations to which we have contributed assets.

Corporate Debt and Equity and Derivatives	.	Corporate debt or equity, including distressed debt and equity;
	.	Credit default swaps, or "CDS," on corporations or on corporate indices, or "CDX"
	.	Options or total return swaps on corporate equity or debt or on corporate equity indices; and
	.	Corporate credit relative value strategies.

Mortgage-Related Derivatives	.	CDS on individual RMBS, on the ABX, CMBX and PrimeX indices and on other mortgage-related indices; and
Mortgage-Related Derivatives	.	Other mortgage-related derivatives.

Non-Agency RMBS	.	RMBS backed by prime jumbo, Alt-A, manufactured housing, and subprime mortgages;
	.	RMBS backed by fixed rate mortgages, Adjustable rate mortgages, or "ARMs," Option-ARMs, and Hybrid ARMs;
	.	RMBS backed by first lien and second lien mortgages;
	.	Investment grade and non-investment grade securities;
	.	Senior and subordinated securities;
	.	IOs, POs, IIOs, and inverse floaters; and
	.	Collateralized debt obligations, or "CDOs."

Residential Mortgage Loans	.	Residential non-performing loans, or "NPLs"
	.	Non-qualified mortgage , or "non-QM," loans; and
	.	Retained tranches from securitizations to which we have contributed assets.

Other	.	Real estate, including commercial and residential real property;
	.	Strategic debt and/or equity investments in mortgage originators and other mortgage -related entities;
	.	Mortgage servicing rights, or "MSRs"
	.	Credit risk transfer securities, or "CRTs" and
	.	Other non-mortgage-related derivatives.

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Agency RMBS

Our Agency RMBS assets consist primarily of whole pool (and to a lesser extent, partial pool) pass-through certificates, the principal and interest of which are guaranteed by a federally chartered corporation, such as the Federal National Mortgage Association, or "Fannie Mae," the Federal Home Loan Mortgage Corporation, or "Freddie Mac," or the Government National Mortgage Association, within the U.S. Department of Housing and Urban Development, or "Ginnie Mae," and which are backed by ARMs, Hybrid ARMs, or fixed-rate mortgages. In addition to investing in pass-through certificates which are backed by traditional mortgages, we have also invested in Agency RMBS backed by reverse mortgages. Reverse mortgages are mortgage loans for which neither principal nor interest is due until the borrower dies, the home is sold, or other trigger events occur. Mortgage pass-through certificates are securities representing undivided interests in pools of mortgage loans secured by real property where payments of both interest and principal, plus prepaid principal, on the securities are made monthly to holders of the security, in effect "passing through" monthly payments made by the individual borrowers on the mortgage loans that underlie the securities, net of fees paid to the issuer/guarantor and servicers of the securities. Whole pool pass-through certificates are mortgage pass-through certificates that represent the entire ownership of (as opposed to merely a partial undivided interest in) a pool of mortgage loans.

Our Agency RMBS assets are typically concentrated in specified pools. Specified pools are fixed-rate Agency pools consisting of mortgages with special characteristics, such as mortgages with low loan balances, mortgages backed by investor properties, mortgages originated through the government-sponsored "Making Homes Affordable" refinancing programs, and mortgages with various other characteristics. Our Agency strategy also includes RMBS that are backed by ARMs or Hybrid ARMs and reverse mortgages, and CMOs, including IOs, POs, and IIOs.

TBAs

In addition to investing in specific pools of Agency RMBS, we utilize forward-settling purchases and sales of Agency RMBS where the underlying pools of mortgage loans are TBAs. Pursuant to these TBA transactions, we agree to purchase or sell, for future delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date. TBAs are liquid and have quoted market prices and represent the most actively traded class of MBS. We use TBAs primarily for hedging purposes. TBA trading is based on the assumption that mortgage pools that are eligible to be delivered at TBA settlement are fungible and thus the specific mortgage pools to be delivered do not need to be explicitly identified at the time a trade is initiated.

We primarily engage in TBA transactions for purposes of managing certain risks associated with our investment strategies. The principal risks that we use TBAs to mitigate are interest rate and yield spread risks. For example, we may hedge the interest rate and/or yield spread risk inherent in our long Agency RMBS by taking short positions in TBAs that are similar in character. Alternatively, we may engage in TBA transactions because we find them attractive in their own right, from a relative value perspective or otherwise.

CLOs

We acquire CLOs, a form of asset-backed security collateralized by syndicated corporate loans. Our current CLO holdings include mezzanine and equity interests, and are concentrated in securitizations that have exited the reinvestment period. We also contribute assets to new securitizations in order to retain certain tranches from such securitizations. Securitizations can effectively provide us with long-term, locked-in financing on the related collateral pool, with an effective cost of funds well below the expected yield on the collateral pool.

CMBS

We acquire CMBS, which are securities collateralized by mortgage loans on commercial properties. The majority of CMBS issued are fixed rate securities backed by fixed rate loans made to multiple borrowers on a variety of property types, though single-borrower CMBS and floating rate CMBS have also been issued.

The majority of CMBS utilize senior/subordinate structures, similar to those found in non-Agency RMBS. Subordination levels vary so as to provide for one or more AAA credit ratings on the most senior classes, with less senior securities rated investment grade and non-investment grade, including a first loss component which is typically unrated. This first loss component is commonly referred to as the "B-piece," which is the most subordinated (and therefore highest yielding and riskiest) tranche of a CMBS securitization. Much of our focus within the CMBS sector has been in B-pieces.

Commercial Mortgage Loans and Other Commercial Real Estate Debt

We acquire commercial mortgage loans, which are loans secured by liens on commercial properties, including retail, office, industrial, hotel, and multi-family properties. Loans may be fixed or floating rate and will generally range from two to

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ten years. We may acquire both first lien loans and subordinated loans. Commercial real estate debt typically limits the borrower's right to freely prepay for a period of time through provisions such as prepayment fees, lockout, yield maintenance, or defeasance provisions.

We acquire commercial mortgage loans that may be non-performing, underperforming, or otherwise distressed; these are typically acquired at a discount both to their unpaid principal balances and to the value of the underlying real estate. In addition, we also opportunistically participate in the origination of "bridge" loans, which have shorter terms and higher interest rates than more traditional commercial mortgage loans. Bridge loans are typically secured by properties in transition, where the borrower is in the process of either re-developing or stabilizing operations at the property. Within both our distressed and bridge loan strategies, we focus on smaller balance loans and loan packages that are less-competitively-bid. These loans typically have balances that are less than $20 million, and are secured by real estate and, in some cases, a personal guarantee from the borrower. Properties securing these loans may include multi-family, retail, office, industrial, and other commercial property types.

Consumer Loans and ABS

We acquire U.S. consumer whole loans and ABS backed by U.S. consumer loans. Our U.S. consumer loan portfolio primarily consists of unsecured loans, but also includes secured auto loans. We are currently purchasing newly originated consumer loans under flow agreements with originators, and we continue to evaluate new opportunities. We seek to purchase newly originated consumer loans from originators that have demonstrated disciplined underwriting with a significant focus on regulatory compliance and sound lending practices. Our ABS backed by U.S. consumer loans consist of retained tranches of our consumer loan securitization. Through securitization of our consumer loans, we are essentially able to achieve long-term financing for the securitized pool.

We also acquire non-dollar denominated ABS backed by European non-performing consumer loans.

Corporate Debt and Equity and Derivatives

We acquire corporate debt and equity, both distressed and non-distressed, and both secured and unsecured. Distressed corporate debt instruments are typically obligations of companies that are experiencing distress or dislocation resulting from over-leveraged capital structures or other financial or operational issues. These companies may default on their obligations, or be involved in bankruptcy or restructuring proceedings. In addition to making outright purchases of distressed corporate loans, we may also acquire exposure to distressed corporate loans synthetically through total return swaps. In connection with our investments in distressed corporate debt, we may also acquire the equity of reorganized corporations that have exited bankruptcy.

We take long and short positions in corporate debt and equity (including indices on corporate debt and equity) either outright in the "cash" markets, or synthetically by entering into derivative contracts such as credit default swaps, total return swaps, and options. A credit event relating to a credit default swap on an individual corporation or an index of corporate credits would typically be triggered by a corporation's bankruptcy or its failure to make a scheduled payment on a debt obligation. We take positions in the corporate debt and equity markets both for investment purposes and for hedging purposes. When used for hedging purposes, they do not necessarily serve to hedge against risks that are directly related to specific corporate entities or indices, but rather they may reflect our belief that the performance of certain entities or indices may have a reasonable degree of correlation with the performance of certain other parts of our portfolio.

A total return swap is a derivative whereby one party makes payments to the other representing the total return on a reference debt or equity security (or index of debt or equity securities) in exchange for an agreed upon ongoing periodic premium. An equity option is a derivative that gives the holder the option to buy or sell an equity security or index of securities at a predetermined price within a certain time period. The option may reference the equity of a publicly traded company or an equity index. In addition to general market risk, our derivatives on corporate debt and equity are subject to risks related to the underlying corporate entities.

Mortgage-Related Derivatives

We take long and short positions in various mortgage-related derivative instruments, including credit default swaps. A credit default swap is a credit derivative contract in which one party (the protection buyer) pays an ongoing periodic premium (and often an upfront payment as well) to another party (the protection seller) in return for compensation for default (or similar credit event) by a reference entity. In this case, the reference entity can be an individual MBS or an index of several MBS, such as an ABX, PrimeX, or CMBX index. Payments from the protection seller to the protection buyer typically occur if a credit event takes place. A credit event can be triggered by, among other things, the reference entity's failure to pay its principal obligations or a severe ratings downgrade of the reference entity.

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Non-Agency RMBS

We acquire non-Agency RMBS backed by prime jumbo, Alt-A, manufactured housing, and subprime residential mortgage loans. Our non-Agency RMBS holdings can include investment-grade and non-investment grade classes, including non-rated classes.

Non-Agency RMBS are generally debt obligations issued by private originators of, or investors in, residential mortgage loans. Non-Agency RMBS generally are issued as CMOs and are backed by pools of whole mortgage loans or by mortgage pass-through certificates. Non-Agency RMBS generally are securitized in senior/subordinated structures, or in excess spread/over-collateralization structures. In senior/subordinated structures, the subordinated tranches generally absorb all losses on the underlying mortgage loans before any losses are borne by the senior tranches. In excess spread/over-collateralization structures, losses are first absorbed by any existing over-collateralization, then borne by subordinated tranches and excess spread, which represents the difference between the interest payments received on the mortgage loans backing the RMBS and the interest due on the RMBS debt tranches, and finally by senior tranches and any remaining excess spread.

Residential Mortgage Loans

Our residential mortgage loans include non-QM loans and residential NPLs. A non-QM loan is not necessarily high-risk, nor subprime, but is instead a loan that does not conform to the complex Qualified Mortgage, or "QM," rules of the Consumer Financial Protection Bureau. For example, many non-QM loans are made to creditworthy borrowers who cannot provide traditional documentation for income, such as borrowers who are self-employed. There is also demand from certain creditworthy borrowers for loans above a 43% debt-to-income ratio limit that still meet all ability-to-repay standards. We hold an equity investment in a non-QM originator, and we have purchased all of our non-QM loans from this originator.

We remain active in the market for residential NPLs. The market for large residential NPL pools has remained highly concentrated, with the great majority having traded to only a handful of large players who typically securitize the residential NPLs that they purchase. As a result, we have continued to focus our acquisitions on smaller, less-competitively-bid, and more attractively-priced mixed legacy pools sourced from motivated sellers.

Other Investment Assets

Our other assets include real estate, including residential and commercial real property, strategic debt and/or equity investments in mortgage originators, and other non-mortgage related derivatives. We do not typically purchase real property directly; rather, our real estate ownership usually results from foreclosure activity with respect to our acquired residential and commercial loans. We have made investments in mortgage originators and other mortgage-related entities in the form of debt and/or equity and, to date, our investments represent non-controlling interests. We have also entered into flow agreements with certain of the mortgage originators in which we have invested. We have not yet acquired mortgage servicing rights or credit risk transfer securities, but we may do so in the future.

Hedging Instruments

Credit Risk Hedging

We enter into credit-hedging positions in order to protect against adverse credit events with respect to our Credit investments. Our credit hedging portfolio can vary significantly from period to period, and can encompass a wide variety of financial instruments, including corporate debt or equity-related instruments, RMBS- or CMBS-related instruments, or instruments involving other markets. Our hedging instruments can include both “single-name” instruments (i.e., instruments referencing one underlying entity or security) and hedging instruments referencing indices. We also opportunistically overlay our credit hedges with certain relative value long/short positions involving the same or similar instruments.

Interest Rate Hedging

We opportunistically hedge our interest rate risk by using various hedging strategies to mitigate such risks. The interest rate hedging instruments that we use and may use in the future include, without limitation:


•	TBAs;


•	interest rate swaps (including floating-to-fixed, fixed-to-floating, or more complex swaps such as floating-to-inverse floating, callable or non-callable);

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•	CMOs;


•	U.S. Treasury securities;


•	swaptions, caps, floors, and other derivatives on interest rates;


•	futures and forward contracts; and


•	options on any of the foregoing.

In particular, from time to time we enter into short positions in interest rate swaps to offset the potential adverse effects that changes in interest rates will have on the value of certain of our assets and our financing costs. An interest rate swap is an agreement to exchange interest rate cash flows, calculated on a notional principal amount, at specified payment dates during the life of the agreement. Typically, one party pays a fixed interest rate and receives a floating interest rate and the other party pays a floating interest rate and receives a fixed interest rate. Each party's payment obligation is computed using a different interest rate. In an interest rate swap, the notional principal is generally not exchanged. We may also use interest rate-related instruments to hedge certain non-interest-related risks that we believe are correlated to interest rates. For example, to the extent that we believe that swap spreads (i.e., the difference between interest rate swap yields and U.S. Treasury yields) are correlated to credit spreads, we may take a position in swap spreads to hedge our credit spread risk. We may also opportunistically enter into swap spreads trades, or other interest rate-related trades, for speculative purposes.

Foreign Currency Hedging

To the extent we hold instruments denominated in currencies other than U.S. dollars, we may enter into transactions to offset the potential adverse effects of changes in currency exchange rates. In particular, we may use currency forward contracts and other currency-related derivatives to mitigate this risk.

Trends and Recent Market Developments


•	In October, the Federal Reserve initiated its balance sheet normalization program, and began tapering asset purchases of both U.S. Treasury securities and Agency RMBS. At the November Federal Open Market Committee, or "FOMC," meeting, the Federal Reserve maintained the target range for the federal funds rate at 1.00%–1.25%.


•	For the third consecutive quarter, the yield curve flattened. The 2-year U.S. Treasury yield rose 10 basis points to end the quarter at 1.48%, while the 10-year U.S. Treasury yield increased only 3 basis points to 2.33%.


•	Despite the rise in U.S. Treasury yields, mortgage rates declined over the course of the third quarter, with the Freddie Mac survey 30-year mortgage rate falling 5 basis points to end the quarter at 3.83%.


•	Overall Agency RMBS prepayment rates declined slightly during the quarter. The Mortgage Bankers Association's Refinance Index, which measures refinancing application volumes, increased 2.0% quarter over quarter but remains well below the multi-year high reached in mid-2016.


•	Data released by S&P Dow Jones Indices for its S&P CoreLogic Case-Shiller Indices for August showed, on average, a continuation of mid-single-digit home price appreciation nationally, with home prices posting a 5.9% year-over-year increase for its 20-City Composite and a 5.3% year-over-year increase for its 10-City Composite, after seasonal adjustments.

•

Data from the Federal Reserve Bank of New York's Quarterly Report on Household Debt and Credit indicated that aggregate household debt balances increased 0.9% to $12.84 trillion in the second quarter of 2017, and are now $164 billion higher than the previous peak of $12.68 trillion reached in the third quarter of 2008. Additionally, in October the University of Michigan's Index of Consumer Sentiment increased 5.9% from the prior month and 15.5% year-over-year, representing its highest monthly level since January 2004.

Volatility remained at historic lows during the third quarter. The Merrill Lynch Option Volatility Estimate Index, or MOVE Index, declined to an all-time low, while the Chicago Board Options Exchange Volatility Index, known as the VIX, dropped to its lowest level in 23 years. U.S. Treasury yields were again range-bound, with the 10-year U.S. Treasury trading within a 35-basis point range during the quarter.

During the quarter, yield spreads across most credit products, including non-Agency RMBS, remained at the tightest points of their trailing two-year ranges. Corporate credit spreads fluctuated intra-quarter but finished the quarter tighter. As in prior quarters, demand remained strong for floating-rate debt instruments, including CLOs and leveraged loans. Finally, damage from recent hurricanes and ongoing negative headlines in retail led to heightened volatility in the CMBS market during the quarter.

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Also during the third quarter, Agency RMBS finally participated in the spread tightening that other fixed-income asset classes had already benefited from this year. After the Federal Reserve announced at its September meeting the initiation of its tapering program, the Agency mortgage basis tightened significantly, suggesting that many investors had been waiting for policy clarity before adding Agency RMBS exposure. As measured by the Bloomberg Barclays U.S. MBS Agency Fixed Rate Index, Agency RMBS generated an excess return over the Bloomberg Barclays U.S. Treasury Index of 48 basis points for the quarter.

Mortgage REIT buying of Agency RMBS was also widespread following a number of equity raises, suggesting that private capital has been willing and able, at least so far, to replace the Federal Reserve's footprint in this market. Year-to-date through October 31, 2017, residential mortgage REITs have raised approximately $8.1 billion of capital, representing over $40 billion of Agency RMBS buying power. At the same time, low interest rate volatility and a muted prepayment environment have provided a significant tailwind to the sector.

Portfolio Overview and Outlook

As of September 30, 2017, our long Credit portfolio (excluding corporate credit relative value trading positions, hedges, and other derivatives) increased 8.3% to $741.3 million, from $684.7 million as of June 30, 2017; and our long Agency RMBS portfolio decreased 2.1% to $816.2 million, from $834.0 million as of June 30, 2017.

Credit Summary



	As of September 30, 2017				As of June 30, 2017
($ in thousands)	Fair Value⁽¹⁾		% of Total Credit Portfolio		Fair Value⁽¹⁾		% of Total Credit Portfolio
Residential Mortgage Loans and REO	$	163,649	22.1	%	$	136,729	20.0	%
Consumer Loans and ABS ⁽²⁾	119,366		16.1	%	111,783		16.7	%
CMBS and Commercial Loans and REO	115,182		15.5	%	117,957		17.2	%
Non-Dollar Denominated MBS, CLOs, and Other ⁽³⁾	116,792		15.8	%	97,235		13.8	%
CLOs⁽²⁾	110,890		15.0	%	101,599		14.8	%
RMBS	75,933		10.2	%	72,572		10.6	%
Debt and Equity Investment in Mortgage-Related Entities	27,590		3.7	%	31,170		4.6	%
Corporate Debt and Equity	11,900		1.6	%	15,659		2.3	%
Total Long Credit	$	741,302	100.0	%	$	684,704	100.0	%


(1)	This information does not include U.S. Treasury securities, interest rate swaps, TBA positions, positions related to our corporate credit relative value strategy, or other hedge positions.


(2)	Includes equity investment in limited liability company related to securitizations.


(3)	Other includes asset-backed securities backed by non-performing consumer loans and corporate debt.

During the third quarter, our Credit strategy was profitable even after taking into account modest losses on our credit hedges. We benefited from particularly strong performance in the following strategies: CMBS, distressed corporate investments, non-performing and re-performing U.S. residential mortgage loans, and corporate credit relative value. Most of the return in the credit strategies during the quarter came from net interest income as opposed to trading gains, as our selling activity was limited as we sought to deploy the proceeds of our debt offering. A notable exception to this was our corporate credit relative value strategy, which generated trading gains across a number of smaller positions, as some of the basis relationships, which as we noted last quarter had moved against us, started to normalize. With its strong performance during the third quarter, this strategy more than recovered from its underperformance last quarter, and we continue to hold many of the same basis positions as we expect those relationships to continue to normalize. Finally, we note that our credit portfolio was not materially impacted by the recent hurricanes.

While our long assets generally performed well during the third quarter, our pace of capital deployment for our Credit strategy has been slower than anticipated. However, our Credit portfolio has grown during each of the last few quarters, and during the third quarter we grew the Credit portfolio by 8.3%, or $56.6 million, to $741.3 million. Similar to the previous quarter, we added U.K. non-conforming RMBS investments, which we believe currently offer superior value to their U.S. counterparts. We also net added to our CLO, consumer loan and non-QM mortgage loan portfolios, while we net sold assets in our CMBS and performing leveraged loan strategies.

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Currently, our credit hedges consist primarily of financial instruments tied to high-yield corporate credit, such as CDS on high-yield corporate bond indices, as well as tranches and options on these indices; short positions in and CDS on corporate bonds; and positions involving ETFs of high-yield corporate bonds. Our credit hedges also currently include CDS tied to individual MBS or an index of several MBS, such as CMBX. We also opportunistically overlay our high-yield corporate credit hedges and mortgage-related derivatives with certain relative value long/short positions involving the same or similar instruments. In the third quarter, credit hedges reduced profitability in most of our credit strategies, as spreads in most credit sectors continued to tighten, including the high-yield corporate and CMBS sectors in which most of our credit hedges continue to be concentrated.

In addition to using credit hedges, we also use interest rate hedges in our Credit strategy in order to protect our portfolio against the risk of rising interest rates. The interest rate hedges in our Credit strategy, which currently consist primarily of interest rate swaps, had no material impact on our results for the quarter. We also use foreign currency hedges in our Credit strategy, in order to protect our assets denominated in euros and British pounds against the risk of declines in those currencies against the U.S. dollar. We had net losses on our foreign currency hedges for the quarter, but these were more than offset by net gains on foreign currency-related transactions and translation.

We believe that our publicly traded partnership structure affords us valuable flexibility, especially with respect to our ability to adjust our exposures nimbly by hedging many forms of risk, such as credit risk, interest rate risk, and foreign currency risk.

Agency RMBS Summary



	As of September 30, 2017				As of June 30, 2017
($ in thousands)	Fair Value⁽¹⁾		% of Agency Portfolio		Fair Value⁽¹⁾		% of Agency Portfolio
Fixed Rate	$	721,709	88.4	%	$	739,908	88.7	%
Floating Rate	8,598		1.1	%	9,991		1.2	%
Reverse Mortgages	55,172		6.7	%	55,315		6.6	%
IOs	30,722		3.8	%	28,783		3.5	%
Total Long Agency RMBS	$	816,201	100.0	%	$	833,997	100.0	%


(1)	Does not include long TBA positions with a fair value of $121.0 million or $179.9 million, as of September 30, 2017 and June 30, 2017 respectively.

Our Agency RMBS portfolio performed well in the third quarter as Agency RMBS yield spreads tightened. Most of this tightening occurred toward the end of the quarter, after the Federal Reserve announced at its September FOMC meeting that it would begin tapering purchases in October—an announcement that removed uncertainty in the sector and triggered buying. The sector also benefited from a confined interest rate range, declining implied volatility, and a muted prepayment environment. The strong performance of Agency RMBS in the third quarter represented a reversal of the sector's underperformance versus other spread products during the first half of 2017.

During the third quarter, our portfolio also benefited from the outperformance of specified pools versus TBAs, as we continued to concentrate our long investments in specified pools, and to hold net short positions in TBAs as a significant component of our interest rate hedging strategy. Slightly lower roll costs in higher coupon TBAs and increased investor demand for specified pools were key drivers of the outperformance. Average pay-ups on our specified pools increased to 0.81% as of September 30, 2017, from 0.77% as of June 30, 2017. Pay-ups are price premiums for specified pools relative to their TBA counterparts. As of September 30, 2017, the weighted average coupon on our fixed-rate specified pools was 4.0%.

During the quarter we continued to hedge interest rate risk in our Agency strategy, primarily through the use of interest rate swaps and short positions in TBAs, and to a lesser extent, short positions in U.S. Treasury securities. For the quarter, we had total net losses of $(2.0) million, or $(0.06) per share, on our interest rate hedging portfolio. In our hedging portfolio, the relative proportion (based on 10-year equivalents¹) of TBA short positions decreased slightly quarter over quarter relative to interest rate swaps. We believe that it is important to be able to hedge our Agency RMBS portfolio using a variety of instruments, including TBAs.

¹"10-year equivalents" for a group of positions represent the amount of 10-year U.S. Treasury securities that would experience a similar change in market value under a standard parallel move in interest rates.

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Portfolio turnover for our Agency strategy was approximately 9% for the quarter (as measured by sales and excluding paydowns), and we had net realized losses of $(0.2) million, excluding interest rate hedges. Our portfolio selection continues to be informed by mortgage industry trends—including significant enhancements in technology that are helping streamline the origination process—and we note that refinancing capacity remains high, with employment in the mortgage industry near a post-financial crisis high.

We expect to continue to target specified pools that, taking into account their particular composition and based on our prepayment projections, should: (1) generate attractive yields relative to other Agency RMBS and U.S. Treasury securities, (2) have less prepayment sensitivity to government policy shocks, and/or (3) create opportunities for trading gains once the market recognizes their value, which for newer pools may come only after several months, when actual prepayment experience can be observed. We believe that our research team, proprietary prepayment models, and extensive databases remain essential tools in our implementation of this strategy.

The following table summarizes prepayment rates for our portfolio of fixed-rate specified pools (excluding those backed by reverse mortgages) for the three month periods ended September 30, 2017, June 30, 2017, March 31, 2017, December 31, 2016, and September 30, 2016.



	Three Month Period Ended
	September 30, 2017		June 30, 2017		March 31, 2017		December 31, 2016		September 30, 2016
Three Month Constant Prepayment Rates⁽¹⁾	13.4	%	11.9	%	10.5	%	15.1	%	12.2	%


(1)	Excludes Agency fixed-rate RMBS without any prepayment history.

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The following table provides details about the composition of our portfolio of fixed-rate specified pools (excluding those backed by reverse mortgages) as of September 30, 2017 and June 30, 2017:



		September 30, 2017					June 30, 2017
	Coupon	Current Principal		Fair Value		Weighted Average Loan Age (Months)	Current Principal		Fair Value		Weighted Average Loan Age (Months)
		(In thousands)					(In thousands)
Fixed-rate Agency RMBS:
15-year fixed-rate mortgages:
	3.00	$	26,924	$	27,730	20	$	25,345	$	26,072	19
	3.50	64,417		67,526		28	68,333		71,574		25
	4.00	9,973		10,572		49	10,546		11,136		47
	4.50	3,012		3,235		78	3,282		3,528		75
Total 15-year fixed-rate mortgages		104,326		109,063		29	107,506		112,310		27
20-year fixed-rate mortgages:
	4.00	1,745		1,860		78	1,851		1,972		44
	4.50	1,120		1,214		47	1,132		1,227		43
Total 20-year fixed-rate mortgages		2,865		3,074		66	2,983		3,199		44
30-year fixed-rate mortgages:
	2.50	—		—		—	2,179		2,132		8
	3.00	5,653		5,663		36	5,778		5,817		32
	3.28	112		113		63	—		—		—
	3.50	117,239		121,583		19	107,250		110,798		18
	3.75	2,918		3,049		2	—		—		—
	4.00	266,079		282,497		24	290,146		307,530		22
	4.50	130,870		141,577		31	129,010		139,382		30
	5.00	44,983		49,424		58	47,967		52,596		56
	5.50	2,881		3,194		107	2,818		3,132		104
	6.00	2,189		2,472		91	2,662		3,012		89
Total 30-year fixed-rate mortgages		572,924		609,572		28	587,810		624,399		27
Total fixed-rate Agency RMBS		$	680,115	$	721,709	28	$	698,299	$	739,908	27

Our net Agency premium as a percentage of the fair value of our specified pool holdings is one metric that we use to measure the overall prepayment risk of our specified pool portfolio. Net Agency premium represents the total premium (excess of market value over outstanding principal balance) on our specified pool holdings less the total premium on related net short TBA positions. The lower our net Agency premium, the less we believe that our specified pool portfolio is exposed to market-wide increases in Agency RMBS prepayments. Our net Agency premium as a percentage of fair value of our specified pool holdings was approximately 3.1% as of September 30, 2017, as compared to 3.0% as of June 30, 2017. These figures take into account the net short TBA positions that we use to hedge our specified pool holdings, which had a notional value of $418.7 million and a fair value of $440.8 million as of September 30, 2017, as compared to a notional value of $410.5 million and a fair value of $432.5 million as of June 30, 2017. Excluding these TBA hedging positions, our Agency premium as a percentage of fair value was approximately 5.9% and 5.8% as of September 30, 2017 and June 30, 2017, respectively. Our Agency premium percentage and net Agency premium percentage may fluctuate from period to period based on a variety of factors, including market factors such as interest rates and mortgage rates, and, in the case of our net Agency premium percentage, based on the degree to which we hedge prepayment risk with short TBA positions. We believe that our focus on purchasing pools with specific prepayment characteristics provides a measure of protection against prepayments.

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Financing

Our financing costs include interest expense related to our reverse repo borrowings, other secured borrowings, and Senior Notes. For the three month period ended September 30, 2017 the weighted average cost of funds of our reverse repo borrowings and other secured borrowings increased 21 basis points to 1.97%, from 1.76% for the three month period ended June 30, 2017. The interest rates on our reverse repo borrowings and other secured borrowings are based on or correlated with LIBOR, and as a result our associated borrowing costs have increased as LIBOR has increased over the last several quarters. Our average cost of funds has also increased as a result of the increase in size of our Credit portfolio, which carries higher funding costs relative to our Agency RMBS portfolio.

On August 18, 2017, we issued $86.0 million in aggregate principal amount of unsecured Senior Notes, at par and maturing on September 1, 2022. The total net proceeds from the issuance of the Senior Notes was approximately $84.7 million, after deducting debt issuance costs. The Senior Notes bear an interest rate of 5.25%, and interest is payable semi-annually in arrears on March 1 and September 1 of each year, with the first interest payment date on March 1, 2018. Inclusive of debt issuance costs, the effective interest rate on the Senior Notes is 5.55%.

Under the Dodd-Frank Act, bank capital treatment of reverse repo transactions has become more onerous, thereby making it less attractive for banks to provide certain forms of reverse repo financing. While large banks still dominate the reverse repo market, non-bank firms, not subject to the same regulations as large banks, are becoming more active in providing reverse repo financing. The vast majority of our outstanding reverse repo financing is still provided by larger banks and dealers; however, in limited amounts, we have also entered into reverse repos with smaller non-bank dealers. In general, we continue to see strong appetite and competitive terms from both types of lenders.

Our debt-to-equity ratio including reverse repo, other secured borrowings, and our Senior Notes, increased to 1.91:1, excluding U.S. Treasury securities, as of September 30, 2017, as compared to 1.85:1 as of June 30, 2017. Our debt-to-equity ratio may fluctuate period over period based on portfolio management decisions, market conditions, and the timing of security purchase and sale transactions.

Critical Accounting Policies

Our unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, or "U.S. GAAP," for investment companies. In June 2007, the AICPA issued Amendments to ASC 946-10 ("ASC 946-10"), Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies. ASC 946-10 was effective for fiscal years beginning on or after December 15, 2007 with earlier application encouraged. After we adopted ASC 946-10, the FASB issued guidance which effectively delayed indefinitely the effective date of ASC 946-10. However, this additional guidance explicitly permitted entities that early adopted ASC 946-10 before December 31, 2007 to continue to apply the provisions of ASC 946-10. We have elected to continue to apply the provisions of ASC 946-10. ASC 946-10 provides guidance for determining whether an entity is within the scope of the AICPA Audit and Accounting Guide for Investment Companies, or the "Guide." The Guide provides guidance for determining whether the specialized industry accounting principles of the Guide should be retained in the financial statements of a parent company, of an investment company or of an equity method investor in an investment company. Effective August 17, 2007, we adopted ASC 946-10 and follow its provisions which, among other things, requires that investments be reported at fair value in the financial statements. Although we conduct our operations so that we are not required to register as an investment company under the Investment Company Act, for financial reporting purposes, we have elected to continue to apply the provisions of ASC 946-10.

In June 2013, the FASB issued ASU 2013-08, Financial Services-Investment Companies ("ASC 946"). This update modified the guidance for ASC 946 for determining whether an entity is an investment company for U.S. GAAP purposes. It requires entities that adopted Statement of Position 07-1 prior to its deferral to reassess whether they continue to meet the definition of an investment company for U.S. GAAP purposes. The guidance was effective for interim and annual reporting periods in fiscal years that began after December 15, 2013, with retrospective application; earlier application was prohibited. We have determined that we still meet the definition of an investment company under ASC 946 and, as a result, the presentation of our financial statements has not changed since the effective date of this ASU.

Certain of our critical accounting policies require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We believe that all of the decisions and assessments upon which our consolidated financial statements are based were reasonable at the time made based upon information available to us at that time. We rely on the experience of our Manager and Ellington and analysis of historical and current market data in order to arrive at what we believe to be reasonable estimates. See Note 2 of the notes to the consolidated

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financial statements for a complete discussion of our significant accounting policies. We have identified our most critical accounting policies to be the following:

Valuation: For financial instruments that are traded in an "active market," the best measure of fair value is the quoted market price. However, many of our financial instruments are not traded in an active market. Therefore, management generally uses third-party valuations when available. If third-party valuations are not available, management uses other valuation techniques, such as the discounted cash flow methodology. Summary descriptions, for various categories of financial instruments, of the valuation methodologies management uses in determining fair value of our financial instruments are detailed in Note 2 of the notes to our consolidated financial statements. Management utilizes such methodologies to assign a good faith fair value (the estimated price that, in an orderly transaction at the valuation date, would be received to sell an asset, or paid to transfer a liability, as the case may be) to each such financial instrument.

See the notes to our consolidated financial statements for more information on valuation techniques used by management in the valuation of our assets and liabilities.

Purchases and Sales of Investments and Investment Income: Purchase and sales transactions are generally recorded on trade date. Realized and unrealized gains and losses are calculated based on identified cost. We generally amortize premiums and accrete discounts on our fixed-income investments using the effective interest method.

See the notes to our consolidated financial statements for more information on the assumptions and methods that we use to amortize purchase premiums and accrete purchase discounts.

Recent Accounting Pronouncements

Refer to the notes to our consolidated financial statements for a description of relevant recent accounting pronouncements.

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Financial Condition

The following table summarizes our investment portfolio⁽¹⁾ as of September 30, 2017 and December 31, 2016.



	September 30, 2017													December 31, 2016
(In thousands)	Current Principal			Fair Value			Average Price ⁽²⁾		Cost			Average Cost ⁽²⁾		Current Principal			Fair Value			Average Price ⁽²⁾		Cost			Average Cost ⁽²⁾
Non-Agency RMBS and Residential Mortgage Loans	$	367,389		$	304,721		$	82.94	$	294,569		$	80.18	$	354,219		$	226,543		$	63.96	$	220,321		$	62.20
Non-Agency CMBS and Commercial Mortgage Loans	164,857			94,038			57.04		96,823			58.73		200,017			100,143			50.07		111,995			55.99
ABS and Consumer Loans	247,007			243,292			98.50		247,248			100.10		140,569			138,011			98.18		143,936			102.40
Total Non-Agency MBS, Mortgage loans, and ABS and Consumer Loans⁽³⁾	779,253			642,051			82.39		638,640			81.96		694,805			464,697			66.88		476,252			68.54
Agency RMBS:
Floating	8,272			8,598			103.94		8,684			104.97		10,998			11,457			104.18		11,468			104.27
Fixed	680,115			721,709			106.12		722,572			106.24		685,334			726,142			105.95		727,068			106.09
Reverse Mortgages	50,784			55,172			108.64		55,539			109.36		55,910			60,221			107.71		61,174			109.41
Total Agency RMBS⁽⁴⁾	739,171			785,479			106.26		786,795			106.44		752,242			797,820			106.06		799,710			106.31
Total Non-Agency and Agency MBS, Mortgage loans, and ABS and Consumer Loans⁽³⁾⁽⁴⁾	1,518,424			1,427,530			94.01		1,425,435			93.88		1,447,047			1,262,517			87.25		1,275,962			88.18
Agency Interest Only RMBS	n/a			30,722			n/a		31,373			n/a		n/a			29,622			n/a		30,096			n/a
Non-Agency Interest Only and Principal Only MBS and Other⁽⁵⁾⁽⁶⁾	n/a			22,465			n/a		19,264			n/a		n/a			19,711			n/a		21,748			n/a
TBAs:
Long	115,303			121,009			104.95		121,217			105.13		67,720			70,525			104.14		70,334			103.86
Short	(447,590		)	(470,487		)	105.12		(471,204		)	105.28		(384,155		)	(404,728		)	105.36		(404,967		)	105.42
Net Short TBAs	(332,287		)	(349,478		)	105.17		(349,987		)	105.33		(316,435		)	(334,203		)	105.62		(334,633		)	105.75
Long U.S. Treasury Securities	1,510			1,519			100.62		1,510			99.99		5,620			5,419			96.43		5,635			100.27
Short U.S. Treasury Securities	(50,909		)	(50,467		)	99.13		(50,523		)	99.24		(72,871		)	(69,762		)	95.73		(69,946		)	95.99
Short European Sovereign Bonds	(68,389		)	(69,940		)	102.27		(66,592		)	97.37		(61,016		)	(62,680		)	102.73		(66,800		)	109.48
Repurchase Agreements	193,071			193,070			100.00		194,265			100.62		184,819			184,819			100.00		185,205			100.21
Long Corporate Debt	106,485			89,308			83.87		90,324			84.82		95,664			80,095			83.73		81,036			84.71
Short Corporate Debt	(70,580		)	(70,567		)	99.98		(70,082		)	99.29		(40,807		)	(39,572		)	96.97		(39,664		)	97.20
Non-Exchange Traded Preferred and Common Equity Investment in Mortgage-Related Entities	n/a			21,814			n/a		22,814			n/a		n/a			18,090			n/a		17,243			n/a
Non-controlling equity interest in limited liability companies⁽⁶⁾	n/a			11,445			n/a		15,937			n/a		n/a			7,315			n/a		11,423			n/a
Non-Exchange Traded Corporate Equity	n/a			4,068			n/a		3,690			n/a		n/a			3,987			n/a		4,313			n/a
Long Common Stock	n/a			790			n/a		1,092			n/a		n/a			4,396			n/a		4,381			n/a
Short Common Stock	n/a			(14,189		)	n/a		(14,105		)	n/a		n/a			(8,154		)	n/a		(8,052		)	n/a
Real Estate Owned	n/a			25,762			n/a		26,198			n/a		n/a			3,349			n/a		3,539			n/a
Total				$	1,273,852				$	1,280,613							$	1,104,949				$	1,121,486


(1)	For more detailed information about the investments in our portfolio, please refer to the Consolidated Condensed Schedule of Investments as of these dates contained in our consolidated financial statements.


(2)	Represents the dollar amount (not shown in thousands) per $100 of current principal of the price or cost for the security.


(3)	Excludes non-Agency Interest Only and Principal Only MBS and Other (see footnote 5 below).


(4)	Excludes Agency Interest Only RMBS.


(5)	Other includes equity tranches of CLOs, Other private label securities, and residual-like non-Agency RMBS and ABS backed by consumer loans.

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(6)	Conformed to current period presentation.

The following table summarizes our financial derivatives portfolio⁽¹⁾ as of September 30, 2017 and December 31, 2016.



	September 30, 2017						December 31, 2016
(In thousands)	Notional Value			Fair Value			Notional Value			Fair Value
Mortgage-Related Derivatives:
Long CDS on RMBS and CMBS Indices	$	9,456		$	(1,485	)	$	17,228		$	(2,887	)
Short CDS on RMBS and CMBS Indices	(37,495		)	6,977			(112,999		)	16,701
Short CDS on Individual RMBS	(9,011		)	4,323			(10,134		)	5,070
Net Mortgage-Related Derivatives	(37,050		)	9,815			(105,905		)	18,884
Credit Derivatives:
Long CDS referencing Corporate Bond Indices	12,888			631			40,611			2,744
Short CDS referencing Corporate Bond Indices	(261,060		)	(11,646		)	(49,306		)	(2,840		)
Long CDS on Corporate Bonds	136,053			149			59,637			(1,408		)
Short CDS on Corporate Bonds	(199,642		)	(3,651		)	(83,108		)	(2,886		)
Purchased Put Options on CDS on Corporate Bond Indices⁽²⁾	—			—			10,000			—
Long Total Return Swaps on Corporate Equities ⁽³⁾	63			—			—			—
Short Total Return Swaps on Corporate Equities ⁽³⁾	(10,486		)	—			(42,093		)	(55		)
Long Total Return Swaps on Corporate Debt ⁽⁴⁾	—			—			5,438			(94		)
Interest Rate Derivatives:
Long Interest Rate Swaps	515,443			(1,064		)	376,074			(2,122		)
Short Interest Rate Swaps	(955,216		)	2,482			(862,535		)	5,062
Long Eurodollar Futures ⁽⁶⁾	—			—			11,000			(8		)
Short U.S. Treasury Note Futures ⁽⁵⁾	(6,800		)	143			(7,000		)	19
Short Eurodollar Futures ⁽⁶⁾	—			—			(62,000		)	(51		)
Interest Rate Caps	113,453			2			61,908			2
Total Net Interest Rate Derivatives				1,563						2,902
Other Derivatives:
Short Foreign Currency Forwards⁽⁸⁾	(66,971		)	707			(54,787		)	(456		)
Purchased Call Equity Options⁽⁷⁾	28			50			16			42
Warrants⁽⁹⁾	—			—			1,639			106
Mortgage Loan Purchase Commitments⁽¹⁰⁾	—			—			20,601			(31		)
Total Net Derivatives				$	(2,382	)				$	16,908


(1)	For more detailed information about the financial derivatives in our portfolio, please refer to the Consolidated Condensed Schedule of Investments as of these dates contained in our consolidated financial statements.


(2)	Represents the option on our part to enter into a CDS on a corporate bond index whereby we would pay a fixed rate and receive credit protection payments.


(3)	Notional value represents number of underlying shares times the closing price of the underlying security.


(4)	Notional value represents outstanding principal on underlying corporate debt.


(5)	Notional value represents the total face amount of U.S. Treasury securities underlying all contracts held. As of September 30, 2017 and December 31, 2016 a total of 68 and 70 short U.S. Treasury note futures contracts were held, respectively.


(6)	Every $1,000,000 in notional value represents one Eurodollar future contract.


(7)	Notional value represents the number of common shares we have the option to purchase multiplied by the strike price.


(8)	Notional value represents U.S. Dollars to be received by us at the maturity of the forward contract.


(9)	Notional value represents number of shares that warrants are convertible into.


(10)	Notional value represents principal balance of mortgage loan purchase commitments. Actual loan purchases are contingent upon successful loan closings in accordance with agreed-upon parameters.

As of September 30, 2017, our Consolidated Statement of Assets, Liabilities, and Equity reflects total assets of $2.7 billion as compared to $2.4 billion as of December 31, 2016. Total liabilities as of September 30, 2017 and December 31, 2016 were $2.1 billion and $1.8 billion, respectively. Our portfolios of investments, financial derivatives, and repurchase agreements included in total assets were $2.0 billion and $1.7 billion as of September 30, 2017 and December 31, 2016, respectively, while our investments sold short and financial derivatives included in total liabilities were $707.9 million and $603.6 million as of September 30, 2017 and December 31, 2016, respectively. Investments sold short consist principally of short positions in

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TBAs, which we primarily use to hedge the risk of rising interest rates on our investment portfolio. Typically, we hold a net short position in TBAs. The amounts of net short TBAs, as well as other hedging instruments, may fluctuate according to the size of our investment portfolio as well as according to how we view market dynamics as favoring the use of one hedging instrument or another. As of September 30, 2017 and December 31, 2016, we had a net short TBA position of $349.5 million and $334.2 million, respectively.

TBA-related assets include TBAs and receivables for TBAs sold short, and TBA-related liabilities include TBAs sold short and payables for TBAs purchased. As of September 30, 2017, total assets included $121.0 million of TBAs as well as $471.6 million of receivables for securities sold relating to unsettled TBA sales. As of December 31, 2016, total assets included $70.5 million of TBAs as well as $406.7 million of receivables for securities sold relating to unsettled TBA sales. As of September 30, 2017, total liabilities included $470.5 million of TBAs sold short as well as $121.4 million of payables for securities purchased relating to unsettled TBA purchases. As of December 31, 2016, total liabilities included $404.7 million of TBAs sold short as well as $70.3 million of payables for securities purchased relating to unsettled TBA purchases. Open TBA purchases and sales involving the same counterparty, the same underlying deliverable Agency pass-throughs, and the same settlement date are reflected in our consolidated financial statements on a net basis.

For a more detailed discussion of our investment portfolio, see "—Trends and Recent Market Developments—Portfolio Overview and Outlook" above.

We use mortgage-related credit derivatives primarily to hedge credit risk in our non-Agency MBS portfolio, although we also take net long positions in certain CDS on RMBS and CMBS indices. Our CDS on individual RMBS represent "single-name" positions whereby we have synthetically purchased credit protection on specific non-Agency RMBS bonds. As there is no longer an active market for CDS on individual RMBS, our portfolio continues to run off. We also use CDS on corporate bond indices, options thereon, and various other instruments as a means to hedge credit risk, or for relative value trading purposes. As market conditions change, especially as the pricing of various credit hedging instruments changes in relation to our outlook on future credit performance, we continuously re-evaluate both the extent to which we hedge credit risk and the particular mix of instruments that we use to hedge credit risk.

We often hold long and/or short positions in corporate bonds/equities. Our long and short positions in corporate bonds/equities can serve as outright investments, portfolio hedges, or components of relative value trading opportunities and/or strategies. We have also implemented an interest rate derivatives trading strategy. Within this strategy, we can take long and/or short positions in various interest rate-related instruments, such as U.S. Treasury securities, interest rate swaps, futures, and options. While some of the trading positions in this strategy are intended as hedges for various exposures in our overall portfolio, we also may take speculative positions to capitalize on what we view as market inefficiencies or anomalies.

We use a variety of instruments to hedge interest rate risk in our portfolio, including non-derivative instruments such as TBAs, U.S. Treasury securities and sovereign debt instruments, and derivative instruments such as interest rate swaps, Eurodollar and U.S. Treasury futures, and options on the foregoing. The mix of instruments that we use to hedge interest rate risk may change materially from one period to the next.

We have also entered into foreign currency forward contracts in order to hedge risks associated with foreign currency fluctuations.

We have entered into reverse repos to finance some of our assets. As of both September 30, 2017 and December 31, 2016, indebtedness outstanding on our reverse repos was approximately $1.0 billion. As of September 30, 2017, we had total Agency RMBS financed with reverse repos of $797.4 million as compared to $809.2 million as of December 31, 2016. As of September 30, 2017, we had total Credit assets financed with reverse repos of $356.8 million as compared to $338.2 million as of December 31, 2016. As of September 30, 2017 and December 31, 2016 we also had total U.S. Treasury securities financed with reverse repos of $5.7 million and $5.4 million, respectively. Outstanding indebtedness under reverse repos for Agency RMBS as of September 30, 2017 and December 31, 2016 was $768.4 million and $790.3 million, respectively, while outstanding indebtedness under reverse repos for our Credit portfolio as of September 30, 2017 and December 31, 2016 was $255.7 million and $237.8 million, respectively. Outstanding indebtedness under reverse repos for U.S. Treasury securities as of September 30, 2017 and December 31, 2016 was $5.7 million and $5.4 million, respectively. Our reverse repos bear interest at rates that have historically moved in close relationship to LIBOR. We account for our reverse repos as collateralized borrowings. In addition to our reverse repos, as of September 30, 2017 and December 31, 2016 we had other secured borrowings in the amount of $89.6 million and $24.1 million, respectively, used to finance $146.8 million and $42.0 million, respectively, of commercial mortgage loans and REO, and consumer loans. In addition to our secured borrowings, in August 2017 we issued $86.0 million of unsecured Senior Notes, and these were all outstanding as of September 30, 2017.

As of September 30, 2017 and December 31, 2016 our debt-to-equity ratio was 1.91 to one and 1.64 to one, respectively. Excluding U.S. Treasury securities our debt-to-equity ratio as of September 30, 2017 and December 31, 2016 was 1.91 to one

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and 1.63 to one, respectively. See the discussion in "—Liquidity and Capital Resources" below for further information on our reverse repos.

In connection with our derivative and TBA transactions, in certain circumstances we may require that counterparties post collateral with us. When we exit a derivative or TBA transaction for which a counterparty has posted collateral, we may be required to return some or all of the related collateral to the respective counterparty. As of September 30, 2017 and December 31, 2016, our derivative and TBA counterparties posted an aggregate value of approximately $3.6 million and $12.8 million of collateral with us, respectively. This collateral posted with us is included in Due to brokers on our Consolidated Statement of Assets, Liabilities, and Equity.

TBA Market

We generally do not settle our purchases and sales of TBAs. If, for example, we wish to maintain a short position in a particular TBA as a hedge, we may "roll" the short TBA transaction. In a hypothetical roll transaction, we might have previously entered into a contract to sell a specified amount of 30-year FNMA 4.5% TBA pass-throughs to a particular counterparty on a specified settlement date. As this settlement date approaches, because we generally do not intend to settle the sale transaction, but we wish to maintain the short position, we enter into a roll transaction whereby we purchase the same amount of 30-year FNMA 4.5% TBA pass-throughs (but not necessarily from the same counterparty) for the same specified settlement date, and we sell the same amount of 30-year FNMA 4.5% TBA pass-throughs (potentially to yet another counterparty) for a later settlement date. In this way, we have essentially "flattened out" our 30-year FNMA 4.5% TBA pass-through position for the earlier settlement date (i.e., offset the original sale with a corresponding purchase), and established a new short position for the later settlement date, hence maintaining our short position. By rolling our transaction, we maintain our desired short position in 30-year FNMA 4.5% securities without settling the original sale transaction.

In the case where the counterparty from whom we purchase (or to whom we sell) for the earlier settlement date is the same as the counterparty to whom we sell (or from whom we purchase) for the later settlement date, and when the purchase and sale are transacted simultaneously, the pair of simultaneous purchase and sale transactions is often referred to as a "TBA roll" transaction.

In some instances, to avoid taking or making delivery of TBA securities, we will "pair off" an open purchase or sale transaction with an offsetting sale or purchase with the same counterparty. Alternatively, we will "assign" open transactions from counterparties from whom we have purchased to other counterparties to whom we have sold. In either case, no securities are actually delivered, but instead the net difference in trade proceeds of the offsetting transactions is calculated and a money wire representing such difference is sent to the appropriate party.

For each of the nine month periods ended September 30, 2017 and 2016, as disclosed on our Consolidated Statement of Cash Flows, the aggregate TBA activity, or volume of closed transactions based on the sum of the absolute value of buy and sell transactions, was $17.2 billion. Our TBA activity has principally consisted of: (a) sales (respectively purchases) of TBAs as hedges in connection with purchases (respectively sales) of certain other assets (especially fixed-rate Agency whole pools); (b) TBA roll transactions (as described above) effected to maintain existing TBA short positions; and (c) TBA "sector rotation" transactions whereby a short position in one TBA security is replaced with a short position in a different TBA security. Since we have actively turned over our portfolio of fixed-rate Agency whole pools, the volume of TBA hedging transactions has also been correspondingly high. Moreover, our fixed-rate Agency whole pool portfolio is typically larger in gross size than our equity capital base, and so we tend to hold large short TBA positions relative to our equity capital base at any time. Finally, the entire amount of short TBA positions held at each monthly TBA settlement date is typically rolled to the following month, and since the amount of short TBA positions tends to be large relative to our equity capital base, TBA roll transaction volume over multi-month periods can represent a multiple of our equity capital base.

Equity

As of September 30, 2017, our equity decreased by approximately $15.1 million to $629.7 million from $644.8 million as of December 31, 2016. This decrease principally consisted of dividends paid of $44.3 million, distributions to joint venture partners of approximately $8.2 million, and payments to repurchase common shares of $4.8 million. This was partially offset by a net increase in equity resulting from operations for the nine month period ended September 30, 2017 of $27.8 million and an increase related to contributions from our non-controlling interests of approximately $14.2 million. Shareholders' equity, which excludes the non-controlling interests related to the minority interest in the Operating Partnership as well the minority interests of our joint venture partners, was $615.6 million as of September 30, 2017.

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Results of Operations for the Three and Nine Month Periods Ended September 30, 2017 and 2016

The table below represents the net increase (decrease) in equity resulting from operations for the three and nine month periods ended September 30, 2017 and 2016.



	Three Month Period Ended September 30,						Nine Month Period Ended September 30,
(In thousands except per share amounts)	2017			2016			2017			2016
Interest income	$	21,145		$	16,662		$	65,819		$	56,078
Other income	1,232			807			3,043			3,500
Total investment income	22,377			17,469			68,862			59,578
Expenses:
Base management fee to affiliate (Net of fee rebates of $172, $0, $172, and $0, respectively)	2,161			2,485			6,942			7,649
Interest expense	8,166			4,143			21,794			11,845
Other investment related expenses	1,908			2,068			5,487			6,007
Other operating expenses	2,240			2,379			6,530			7,339
Total expenses	14,475			11,075			40,753			32,840
Net investment income	7,902			6,394			28,109			26,738
Net realized and change in net unrealized gain (loss) on investments	(663		)	7,728			9,209			5,965
Net realized and change in net unrealized gain (loss) on financial derivatives, excluding currency forwards	(900		)	(13,868		)	(10,303		)	(50,764		)
Net realized and change in net unrealized gain (loss) on financial derivatives—currency forwards	(1,987		)	(330		)	(6,195		)	(1,181		)
Net foreign currency gain (loss)	2,243			626			6,946			1,609
Net increase (decrease) in equity resulting from operations	6,595			550			27,766			(17,633		)
Less: Net increase in equity resulting from operations attributable to non-controlling interests	400			34			1,229			66
Net increase (decrease) in shareholders' equity resulting from operations	$	6,195		$	516		$	26,537		$	(17,699	)
Net increase (decrease) in shareholders' equity resulting from operations per share	$	0.19		$	0.02		$	0.81		$	(0.53	)

Results of Operations for the Three Month Periods Ended September 30, 2017 and 2016

Summary of Net Increase (Decrease) in Shareholders' Equity from Operations

For the three month period ended September 30, 2017 we had a net increase in shareholders' equity resulting from operations of $6.2 million, as compared to $0.5 million for the three month period ended September 30, 2016. The increase in shareholders' equity resulting from operations period over period was primarily due to a decrease in our net realized and unrealized losses on our investments and financial derivatives as well as an increase in total investment income. Total return based on changes in "net asset value" or "book value" for our common shares was 1.05% and 0.13% for the three month periods ended September 30, 2017 and 2016, respectively. Total return on our common shares is calculated based on changes in net asset value per share or book value per share and assumes reinvestment of dividends.

Net Investment Income

Net investment income was $7.9 million and $6.4 million for the three month periods ended September 30, 2017 and 2016, respectively. Net investment income consists of interest and other income less total expenses. The period-over-period increase in net investment income was primarily due to an increase in total investment income, partially offset by an increase in total expenses, mainly interest expense, for the three month period ended September 30, 2017 as compared to the three month period ended September 30, 2016. The increase in our period-over-period total investment income was primarily driven by an increase in interest income, which resulted from the increase in both the average size and weighted average yield of both our Credit and Agency portfolios. Our interest expense increased on our reverse repo borrowings given the increase in LIBOR, and in addition we issued Senior Notes during the current period, which also increased our overall financing costs.

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Interest Income

Interest income was $21.1 million for the three month period ended September 30, 2017 as compared to $16.7 million for the three month period ended September 30, 2016. Interest income includes coupon payments received and accrued on our holdings, the net accretion and amortization of purchase discounts and premiums on those holdings and interest on our cash balances, including those balances held by our counterparties as collateral. The period-over-period increase in interest income was primarily due to an increase in the size of our Credit and Agency portfolios, a higher weighted average yield on our portfolio of yield-bearing assets, and a smaller negative "Catch-up Premium Amortization Adjustment," as described below.

For the three month period ended September 30, 2017, interest income from our Credit portfolio was $13.3 million, as compared to $11.8 million for the three month period ended September 30, 2016. The period-over-period increase in interest income in this portfolio was primarily due to an increase in the average size of the portfolio, along with a slightly higher weighted average yield on the portfolio. For the three month period ended September 30, 2017, interest income from our Agency RMBS was $5.9 million, while for the three month period ended September 30, 2016, interest income was $4.7 million. The period-over-period increase in interest income in our Agency portfolio was primarily due to an increase in the weighted average yield of the portfolio, along with a smaller negative "Catch-up Premium Amortization Adjustment" and a slight increase in the average size of that portfolio.

Some of the variability in our interest income and portfolio yields is due to quarterly adjustments to premium amortization triggered by changes in actual and projected prepayments on our Agency RMBS (accompanied by a corresponding offsetting adjustment to realized and unrealized gains and losses). We refer to this quarterly adjustment as a "Catch-up Premium Amortization Adjustment." The adjustment is calculated as of the beginning of each quarter based on our then assumptions about cashflows and prepayments, and can vary significantly from quarter to quarter. For the third quarter of 2017, we had a negative Catch-up Premium Amortization Adjustment of approximately $(0.4) million, which decreased our interest income. Excluding the Catch-up Premium Amortization Adjustment, the weighted average yield of our overall portfolio was 5.32% for the third quarter of 2017. By comparison, for the third quarter of 2016 the Catch-up Premium Amortization Adjustment decreased interest income by approximately $(1.4) million. Excluding this Catch-up Premium Amortization Adjustment, the weighted average yield on our overall portfolio for the third quarter of 2016 would have been 5.14%.

The following table details our interest income, average holdings of yield-bearing assets, and weighted average yield based on amortized cost for the three month periods ended September 30, 2017 and 2016:



	Credit⁽¹⁾						Agency⁽¹⁾						Total⁽¹⁾
(In thousands)	Interest Income		Average Holdings		Yield		Interest Income		Average Holdings		Yield		Interest Income		Average Holdings		Yield
Three month period ended September 30, 2017	$	13,329	$	641,402	8.31	%	$	5,917	$	834,363	2.84	%	$	19,246	$	1,475,765	5.22	%
Three month period ended September 30, 2016	$	11,830	$	573,420	8.25	%	$	4,659	$	817,632	2.28	%	$	16,489	$	1,391,053	4.74	%


(1)	Amounts exclude interest income on cash and cash equivalents (including when posted as margin), long positions in U.S. Treasury securities, and repurchase agreements. Also excludes interest income on long holdings of corporate securities that represent components of certain relative value trading strategies.

Base Management Fees

For the three month periods ended September 30, 2017 and 2016, base management fee incurred, which is based on total equity at the end of each quarter, was $2.2 million and $2.5 million, respectively. The decrease in the base management fee was due to our smaller capital base period over period.

Interest Expense

Interest expense primarily includes interest on funds borrowed under reverse repos and other secured borrowings, interest on our Senior Notes, coupon interest on securities sold short, the related net accretion and amortization of purchase discounts and premiums on those short holdings, and interest on our counterparties' cash collateral held by us. Our total interest expense, increased to $8.2 million for the three month period ended September 30, 2017, as compared to $4.1 million for the three month period ended September 30, 2016. This increase in our interest expense was primarily due to an increase in the cost of our reverse repo borrowings, which increased as LIBOR increased period over period, an increase in interest expense related to a larger position in corporate bonds sold short, and interest expense on our $86 million of Senior Notes, which have an

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effective interest rate of 5.55%. The increase in our interest expense was also the result of a shift in the mix of our borrowings, as more of our borrowings now relate to our Credit portfolio, given that portfolio's increase in size.

The table below summarizes the components of interest expense for the three month periods ended September 30, 2017 and 2016.



	For the Three Month Period Ended
	September 30, 2017		September 30, 2016
Reverse repos and other secured borrowings	$	5,798	$	3,303
Unsecured senior notes ⁽¹⁾	570		—
Securities sold short ⁽²⁾	1,531		514
Other ⁽³⁾	267		326
Total	$	8,166	$	4,143


(1)	Amount includes the related amortization of debt issuance costs.


(2)	Amount includes the related net accretion and amortization of purchase discounts and premiums.


(3)	Primarily includes repurchase agreements with negative interest rates, which can occur when we borrow certain bonds that we have sold short.

The following table summarizes our aggregate secured borrowings, which carry interest rate that are based on or correlated with LIBOR, including reverse repos and other secured borrowings for the three month periods ended September 30, 2017 and 2016.



	For the Three Month Period Ended
	September 30, 2017						September 30, 2016
Collateral for Borrowing	Average Borrowings		Interest Expense		Average Cost of Funds		Average Borrowings		Interest Expense		Average Cost of Funds
(In thousands)
Credit⁽¹⁾	$	315,731	$	2,962	3.72	%	$	231,505	$	1,839	3.16	%
Agency RMBS	783,521		2,571		1.30	%	781,539		1,413		0.72	%
Subtotal⁽¹⁾	1,099,252		5,533		2.00	%	1,013,044		3,252		1.28	%
Corporate Credit Relative Value Trading Strategy	59,347		239		1.60	%	15,603		36		0.92	%
U.S. Treasury Securities	9,014		26		1.14	%	15,974		15		0.38	%
Total	$	1,167,613	$	5,798	1.97	%	$	1,044,621	$	3,303	1.26	%
Average One-Month LIBOR					1.23	%					0.51	%
Average Six-Month LIBOR					1.46	%					1.15	%


(1)	Excludes U.S. Treasury Securities and investments in our corporate credit relative value trading strategy.

Among other instruments, we use interest rate swaps to hedge our portfolios against the risk of rising interest rates. If we were to include as a component of our cost of funds the actual and accrued periodic payments on our interest rate swaps used to hedge our yield-bearing targeted assets, our total average cost of funds would increase to 2.01% and 1.48% for the three month periods ended September 30, 2017 and 2016, respectively. Our net interest margin, defined as the yield on our portfolio of yield-bearing targeted assets (See—Interest Income above), less our cost of funds (including actual and accrued periodic payments on interest rate swaps as described above) was 3.21% and 3.26% for the three month periods ended September 30, 2017 and 2016, respectively. These metrics do not include amortization of upfront payments associated with certain of our interest rate swaps or the costs associated with other instruments that we use to hedge interest rate risk, such as TBAs and futures.

Incentive Fees

In addition to the base management fee, our Manager is also entitled to a quarterly incentive fee if our performance (as measured by adjusted net income, as defined in the management agreement) over the relevant rolling four quarter calculation period exceeds a defined return hurdle for the period. No incentive fee was incurred for either of the three month periods ended September 30, 2017 and 2016, since on a rolling four quarter basis, our income did not exceed the prescribed hurdle amount. Because our operating results can vary materially from one period to another, incentive fee expense can also be highly variable.

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Other Investment Related Expenses

Other investment related expenses consist of servicing fees on our mortgage and consumer loans, as well as various other expenses and fees directly related to our financial assets. For the three month periods ended September 30, 2017 and 2016 other investment related expenses were $1.9 million and $2.1 million, respectively. The decrease in other investment related expenses was primarily due to a decrease in dividend expense on short common stock and other expenses directly associated with our investment transactions.

Other Operating Expenses

Other operating expenses consist of professional fees, compensation expense related to our dedicated or partially dedicated personnel, administration fees, share-based LTIP expense, insurance expense, and various other operating expenses necessary to run our business. Other operating expenses exclude management and incentive fees, interest expense, and other investment related expenses. Other operating expenses for the three month period ended September 30, 2017 were $2.2 million as compared to $2.4 million for the three month period ended September 30, 2016. The decrease in our other operating expenses was primarily related to decreased professional fees and administration fees.

Net Realized and Unrealized Gains (Losses) on Investments

During the three month period ended September 30, 2017, we had net realized and unrealized losses on investments of $(0.7) million as compared to net realized and unrealized gains of $7.7 million for the three month period ended September 30, 2016. Net realized and unrealized losses on investments of $(0.7) million for the three month period ended September 30, 2017 resulted principally from net realized and unrealized losses on CLOs, non-QM mortgage loans, TBAs, consumer loans, and short common stock, partially offset by net realized and unrealized gains on Agency RMBS, U.S. CMBS, European structured products (RMBS and CLOs) as well as European consumer loans, corporate debt, and U.S. Treasury securities. Our net short positions in TBAs, U.S. Treasury securities, and sovereign debt are used primarily to hedge interest rate and/or prepayment risk with respect to our investment holdings.

Net realized and unrealized gains on investments of $7.7 million for the three month period ended September 30, 2016 resulted principally from net realized and unrealized gains from U.S. and European non-Agency RMBS and CLOs, Agency RMBS pass-throughs, and distressed corporate loans, partially offset by net realized and unrealized losses on small balance commercial mortgage loans, consumer loans and ABS, sovereign debt, TBAs, and U.S. Treasury securities.

Net Realized and Unrealized Gains and (Losses) on Financial Derivatives

During the three month period ended September 30, 2017, we had net realized and unrealized losses on our financial derivatives of $(2.9) million as compared to net realized and unrealized losses of $(14.2) million for the three month period ended September 30, 2016. Our financial derivatives consist of interest rate derivatives, which we use primarily to hedge interest rate risk, and of credit derivatives and total return swaps, both of which we use primarily to hedge credit risk, but also for non-hedging purposes. Non-hedging credit derivatives and total return swaps include both long and short positions. Our derivatives also include foreign currency forwards, which we use to hedge foreign currency risk. Our interest rate derivatives are primarily in the form of net short positions in interest rate swaps, Eurodollar futures, and U.S. Treasury Note futures. We also use certain non-derivative instruments, such as TBAs, corporate debt, U.S. Treasury securities and sovereign debt instruments, to hedge interest rate risk. During both the current and prior periods, our derivative credit hedges were primarily in the form of short positions in instruments tied to high-yield corporate credit, credit default swaps on asset-backed indices and individual MBS, and total return swaps. Net realized and unrealized losses of $(2.9) million on our financial derivatives for the three month period ended September 30, 2017 resulted primarily from net losses on our foreign exchange currency hedges, CDS on asset-backed and corporate bond indices, and interest rate swaps. These net losses were partially offset by net gains on CDS on corporate bonds. Our CDS on corporate bonds include credit hedging positions as well as positions related to our corporate credit relative value trading strategy. Net foreign exchange transaction and translation gains more than offset the net realized and unrealized losses on our foreign currency forwards. Translation and transaction net gains were incurred in connection with our non-dollar denominated European assets.

Net realized and unrealized losses on our financial derivatives of $(14.2) million for the three month period ended September 30, 2016 resulted primarily from net losses related to our CDS on high-yield corporate bond indices, CDS on asset-backed indices, and total return swaps, partially offset by net gains on our interest rate swaps. Net foreign exchange transaction and translation gains more than offset the net realized and unrealized losses on our foreign currency forwards. Translation and transaction gains were incurred in connection with our non-dollar denominated European assets.

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Results of Operations for the Nine Month Periods Ended September 30, 2017 and 2016

Summary of Net Increase (Decrease) in Shareholders' Equity from Operations

For the nine month period ended September 30, 2017 we had a net increase in shareholders' equity resulting from operations of $26.5 million, and for the nine month period ended September 30, 2016 we had a net decrease in shareholders' equity resulting from operations of $(17.7) million. The period-over-period reversal in our results of operations was primarily due to a significant decrease in our net realized and unrealized losses on our financial derivatives. Because our credit hedges during the nine month period ended September 30, 2016 were primarily in the form of short positions in financial instruments tied to high-yield corporate credit, we incurred significant losses in the nine month period ended September 30, 2016 as high-yield corporate credit rallied meaningfully during the period. For the nine month period ended September 30, 2017, high-yield corporate credit also rallied, but we had significantly less exposure to these credit hedges during the period, and as a result we had much lower credit hedging losses as compared to the prior period. Total return based on changes in "net asset value" or "book value" for our common shares was 4.40% for the nine month period ended September 30, 2017 as compared to (2.25)% for the nine month period ended September 30, 2016. Total return on our common shares is calculated based on changes in net asset value per share or book value per share and assumes reinvestment of dividends.

Net Investment Income

Net investment income was $28.1 million and $26.7 million for the nine month periods ended September 30, 2017 and 2016, respectively. Net investment income consists of interest and other income less total expenses. The period-over-period increase in net investment income was primarily due to an increase in total investment income, principally from interest income, partially offset by an increase in total expenses, mainly interest expense, for the nine month period ended September 30, 2017 as compared to the nine month period ended September 30, 2016. Our interest expense increased on our reverse repo borrowings given the increase in LIBOR, and in addition we issued Senior Notes during the current period, which also increased our overall financing costs.

Interest Income

Interest income was $65.8 million for the nine month period ended September 30, 2017 as compared to $56.1 million for the nine month period ended September 30, 2016. Interest income includes coupon payments received and accrued on our holdings, the net accretion and amortization of purchase discounts and premiums on those holdings and interest on our cash balances, including those balances held by our counterparties as collateral. The period-over-period increase in interest income was primarily due to an increase in the size of our Credit portfolio as well as a large positive Catch-up Premium Amortization Adjustment for the nine month period ended September 30, 2017 as compared to a large negative Catch-up Premium Amortization Adjustment for the nine month period ended September 30, 2016.

For the nine month period ended September 30, 2017, interest income from our Credit portfolio was $39.0 million, as compared to $37.5 million for the nine month period ended September 30, 2016. The slight period-over-period increase in interest income in this portfolio was primarily due to the larger size of the portfolio for the nine month period ended September 30, 2017. For the nine month period ended September 30, 2017, interest income from our Agency RMBS was $20.9 million, while for the nine month period ended September 30, 2016, interest income was $17.5 million. The period-over-period increase in interest income in this portfolio was primarily due to a positive Catch-up Premium Amortization Adjustment for the nine month period ended September 30, 2017 as compared to a negative Catch-up Premium Amortization Adjustment for the nine month period ended September 30, 2016.

For the nine month period ended September 30, 2017, we had a positive Catch-up Premium Amortization Adjustment of approximately $1.5 million, which increased our interest income. Excluding the Catch-up Premium Amortization Adjustment, the weighted average yield of our overall portfolio was 5.39% for the nine month period ended September 30, 2017. By comparison, for the nine month period ended September 30, 2016 the Catch-up Premium Amortization Adjustment decreased interest income by approximately $2.4 million. Excluding this Catch-up Premium Amortization Adjustment, the weighted average yield on our overall portfolio for the nine month period ended September 30, 2016 would have been 5.24%.

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The following table details our interest income, average holdings of yield-bearing assets, and weighted average yield based on amortized cost for the nine month periods ended September 30, 2017 and 2016:



	Credit⁽¹⁾						Agency⁽¹⁾						Total⁽¹⁾
(In thousands)	Interest Income		Average Holdings		Yield		Interest Income		Average Holdings		Yield		Interest Income		Average Holdings		Yield
Nine month period ended September 30, 2017	$	38,950	$	596,599	8.70	%	$	20,943	$	848,145	3.29	%	$	59,893	$	1,444,744	5.53	%
Nine month period ended September 30, 2016	$	37,517	$	575,504	8.69	%	$	17,537	$	887,485	2.63	%	$	55,054	$	1,462,990	5.02	%


(1)	Amounts exclude interest income on cash and cash equivalents (including when posted as margin) and long positions in U.S. Treasury securities. Also excludes long holdings of corporate securities that represent components of certain relative value trading strategies.

Base Management Fees

For the nine month periods ended September 30, 2017 and 2016, base management fee incurred, which is based on total equity at the end of each quarter, was $6.9 million and $7.6 million, respectively. The decrease in the base management fee was due to our smaller capital base period over period.

Interest Expense

Interest expense primarily includes interest on funds borrowed under reverse repos and other secured borrowings, interest on our Senior Notes, coupon interest on securities sold short, the related net accretion and amortization of purchase discounts and premiums on those short holdings, and interest on our counterparties' cash collateral held by us. Our total interest expense increased to $21.8 million for the nine month period ended September 30, 2017, as compared to $11.8 million for the nine month period ended September 30, 2016. This increase in our interest expense was primarily due to an increase in the cost of our reverse repo borrowings, which increased as LIBOR increased period over period, an increase in interest expense related to a larger position in corporate bonds sold short, and interest expense on our $86 million of Senior Notes, which have an effective interest rate of 5.55%. The increase in our interest expense was also the result of a shift in the mix of our borrowings, as more of our borrowings now relate to our Credit portfolio, given that portfolio's increase in size.

The table below summarizes the components of interest expense for the nine month periods ended September 30, 2017 and 2016.



	For the Nine Month Period Ended
	September 30, 2017	September 30, 2016
Reverse repos and other secured borrowings	15,079	$	10,075
Unsecured senior notes ⁽¹⁾	570	—
Securities sold short ⁽²⁾	4,759	1,213
Other ⁽³⁾	1,386	557
Total	21,794	$	11,845


(1)	Amount includes the related amortization of debt issuance costs.


(2)	Amount includes the related net accretion and amortization of purchase discounts and premiums.


(3)	Primarily includes repurchase agreements with negative interest rates, which can occur when we borrow certain bonds that we have sold short.

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The following table summarizes our aggregate secured borrowings, which carry interest rates that are based on or correlated with LIBOR, including reverse repos and other secured borrowings, for the nine month period ended September 30, 2017 and 2016.



	For the Nine Month Period Ended
	September 30, 2017						September 30, 2016
Collateral for Borrowing	Average Borrowings		Interest Expense		Average Cost of Funds		Average Borrowings		Interest Expense		Average Cost of Funds
(In thousands)
Credit⁽¹⁾	$	275,624	$	7,557	3.67	%	$	258,791	$	5,659	2.92	%
Agency RMBS	794,547		6,653		1.12	%	842,784		4,338		0.69	%
Subtotal⁽¹⁾	1,070,171		14,210		1.78	%	1,101,575		9,997		1.21	%
Corporate Credit Relative Value Trading Strategy	60,219		677		1.50	%	6,334		44		0.94	%
U.S. Treasury Securities	31,823		192		0.81	%	15,922		34		0.28	%
Total	$	1,162,213	$	15,079	1.73	%	$	1,123,831	$	10,075	1.20	%
Average One-Month LIBOR					1.04	%					0.46	%
Average Six-Month LIBOR					1.42	%					0.99	%


(1)	Excludes U.S. Treasury Securities and investments in our corporate credit relative value trading strategy.

Among other instruments, we use interest rate swaps to hedge our portfolios against the risk of rising interest rates. If we were to include as a component of our cost of funds the actual and accrued periodic payments on our interest rate swaps used to hedge our yield-bearing targeted assets, our total average cost of funds would increase to 1.83% and 1.43% for the nine month periods ended September 30, 2017 and 2016, respectively. Our net interest margin, defined as the yield on our portfolio of yield-bearing targeted assets (See—Interest Income above), less our cost of funds (including actual and accrued periodic payments on interest rate swaps as described above) was 3.70% and 3.59% for the nine month periods ended September 30, 2017 and 2016, respectively. These metrics do not include amortization of upfront payments associated with certain of our interest rate swaps or the costs associated with other instruments that we use to hedge interest rate risk, such as TBAs and futures.

Incentive Fees

In addition to the base management fee, our Manager is also entitled to a quarterly incentive fee if our performance (as measured by adjusted net income, as defined in the management agreement) over the relevant rolling four quarter calculation period exceeds a defined return hurdle for the period. No incentive fee was incurred for the nine month periods ended September 30, 2017 and 2016, since on a rolling four quarter basis, our income did not exceed the prescribed hurdle amount. Because our operating results can vary materially from one period to another, incentive fee expense can also be highly variable.

Other Investment Related Expenses

Other investment related expenses consist of servicing fees on our mortgage and consumer loans, as well as various other expenses and fees directly related to our financial assets. For the nine month periods ended September 30, 2017 and 2016 other investment related expenses were $5.5 million and $6.0 million, respectively. The decrease in other investment related expenses was primarily due to a decrease in dividend expense on short common stock and other expenses directly associated with our investment transactions.

Other Operating Expenses

Other operating expenses consist of professional fees, compensation expense related to our dedicated or partially dedicated personnel, administration fees, share-based LTIP expense, insurance expense, and various other operating expenses necessary to run our business. Other operating expenses exclude management and incentive fees, interest expense, and other investment related expenses. Other operating expenses for the nine month period ended September 30, 2017 were $6.5 million as compared to $7.3 million for the nine month period ended September 30, 2016. The decrease in our other operating expenses was primarily related to decreased professional fees and administration fees.

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Net Realized and Unrealized Gains (Losses) on Investments

During the nine month period ended September 30, 2017, we had net realized and unrealized gains on investments of $9.2 million as compared to net realized and unrealized gains of $6.0 million for the nine month period ended September 30, 2016. Net realized and unrealized gains on investments of $9.2 million for the nine month period ended September 30, 2017 resulted principally from net realized and unrealized gains on European structured products (RMBS, CMBS, and CLOs), U.S. CLOs, non-Agency MBS, small balance commercial and residential mortgage loans, and corporate debt, partially offset by net realized and unrealized losses on Agency RMBS, TBAs, non-QM loans, U.S. consumer loans, and short common stock. Our net short positions in TBAs, U.S. Treasury securities, and sovereign securities are used primarily to hedge interest rate and/or prepayment risk with respect to our investment holdings.

Net realized and unrealized gains on investments of $6.0 million for the nine month period ended September 30, 2016 resulted principally from net realized and unrealized gains on Agency RMBS, U.S. non-Agency RMBS, U.S. and European CLOs, commercial and residential REO, partially offset by net realized and unrealized losses on TBAs, U.S. Treasury securities, U.S. and European CMBS, consumer loans, and distressed corporate debt.

Net Realized and Unrealized Gains and (Losses) on Financial Derivatives

During the nine month period ended September 30, 2017, we had net realized and unrealized losses on our financial derivatives of $(16.5) million as compared to net realized and unrealized losses of $(51.9) million for the nine month period ended September 30, 2016. Our financial derivatives consist of interest rate derivatives, which we use primarily to hedge interest rate risk, and of credit derivatives and total return swaps, both of which we use primarily to hedge credit risk, but also for non-hedging purposes. Non-hedging credit derivatives and total return swaps include both long and short positions. Our derivatives also include foreign currency forwards, which we use to hedge foreign currency risk. Our interest rate derivatives are primarily in the form of net short positions in interest rate swaps, Eurodollar futures, and U.S. Treasury Note futures. We also use certain non-derivative instruments, such as TBAs, corporate debt, U.S. Treasury securities and sovereign debt instruments, to hedge interest rate risk. During both the current and prior periods, our derivative credit hedges were primarily in the form of short positions in instruments tied to high-yield corporate credit, credit default swaps on asset-backed indices and individual MBS and total return swaps. Net realized and unrealized losses of $(16.5) million on our financial derivatives for the nine month period ended September 30, 2017 resulted primarily from net losses on our foreign exchange currency hedges, CDS on asset-backed and corporate bond indices, total return swaps, and interest rate swaps. Net foreign exchange transaction and translation gains more than offset the net realized and unrealized losses on our foreign currency forwards. Translation and transaction net gains were incurred in connection with our non-dollar denominated European assets.

Net realized and unrealized losses on our financial derivatives of $(51.9) million for the nine month period ended September 30, 2016 resulted primarily from net losses related to our CDS on high yield corporate bond indices, interest rate swaps, and total return swaps, partially offset by net gains on our options on CDS on high-yield corporate bond indices and our CDS on asset-backed indices. Net foreign exchange transaction and translation gains more than offset the net realized and unrealized losses on our foreign currency forwards. Translation and transaction gains were incurred in connection with our non-dollar denominated European assets.

Liquidity and Capital Resources

Liquidity refers to our ability to meet our cash needs, including repaying our borrowings, funding and maintaining positions in MBS and other assets, making distributions in the form of dividends, and other general business needs. Our short-term (one year or less) and long-term liquidity requirements include acquisition costs for assets we acquire, payment of our base management fee and incentive fee, compliance with margin requirements under our repurchase agreements, or "repos," reverse repos, TBAs, and financial derivative contracts, repayment of reverse repo borrowings and other secured borrowings to the extent we are unable or unwilling to extend such borrowings, payment of our general operating expenses, payment of interest payments on our Senior Notes, and payment of our quarterly dividend. Our capital resources primarily include cash on hand, cash flow from our investments (including principal and interest payments received on our investments and proceeds from the sale of investments), borrowings under reverse repos, and proceeds from equity and debt offerings. We expect that these sources of funds will be sufficient to meet our short-term and long-term liquidity needs.

The following summarizes our reverse repos:



	Reverse Repurchase Agreements
(In thousands)	Average Borrowed Funds During the Period		Borrowed Funds Outstanding at End of the Period
Nine Month Period Ended September 30, 2017	$	1,093,474	$	1,029,810
Nine Month Period Ended September 30, 2016	$	1,044,621	$	983,814

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The following summarizes our borrowings under reverse repos by remaining maturity:



(In thousands)	September 30, 2017
Remaining Days to Maturity	Outstanding Borrowings		%
30 Days or Less	$	351,982	34.2	%
31 - 60 Days	347,427		33.7	%
61 - 90 Days	236,695		23.0	%
91 - 120 Days	73,609		7.1	%
121 - 150 Days	3,338		0.3	%
151 - 180 Days	8,991		0.9	%
181 - 360 Days	7,768		0.8	%
	$	1,029,810	100.0	%

Reverse repos involving underlying investments that we sold prior to September 30, 2017, for settlement following September 30, 2017, are shown using their original maturity dates even though such reverse repos may be expected to be terminated early upon settlement of the sale of the underlying investment.

The amounts borrowed under our reverse repo agreements are generally subject to the application of "haircuts." A haircut is the percentage discount that a reverse repo lender applies to the market value of an asset serving as collateral for a reverse repo borrowing, for the purpose of determining whether such reverse repo borrowing is adequately collateralized. As of September 30, 2017, the weighted average contractual haircut applicable to the assets that serve as collateral for our outstanding reverse repo borrowings (excluding reverse repo borrowings related to U.S. Treasury securities) was 27.5% with respect to Credit assets, 5.3% with respect to Agency RMBS assets, and 12.2% overall. As of December 31, 2016 these respective weighted average contractual haircuts were 29.6%, 5.3%, and 12.5%.

We expect to continue to borrow funds in the form of reverse repos as well as other similar types of financings. The terms of our reverse repo borrowings are predominantly governed by master repurchase agreements, which generally conform to the terms in the standard master repurchase agreement as published by the Securities Industry and Financial Markets Association as to repayment and margin requirements. In addition, each lender may require that we include supplemental terms and conditions to the standard master repurchase agreement. Typical supplemental terms and conditions include the addition of or changes to provisions relating to margin calls, net asset value requirements, cross default provisions, certain key person events, changes in corporate structure, and requirements that all controversies related to the repurchase agreement be litigated in a particular jurisdiction. These provisions may differ for each of our lenders.

As of both September 30, 2017 and December 31, 2016, we had $1.0 billion of borrowings outstanding under our reverse repos. As of September 30, 2017, the remaining terms on our reverse repos ranged from 2 days to 360 days, with a weighted average remaining term of 48 days. As of December 31, 2016, the remaining terms on our reverse repos ranged from 3 days to 320 days, with a weighted average remaining term of 56 days. Our reverse repo borrowings were with a total of twenty-one counterparties as of both September 30, 2017 and December 31, 2016. As of September 30, 2017 and December 31, 2016, our reverse repos, excluding those on U.S. Treasury securities, had a weighted average borrowing rate of 1.65% and 1.32%, respectively. As of September 30, 2017, our reverse repos had interest rates ranging from (1.75)% to 4.57%. As of December 31, 2016, our reverse repos had interest rates ranging from 0.60% to 3.76%. Investments transferred as collateral under reverse repos had an aggregate estimated fair value of $1.2 billion as of both September 30, 2017 and December 31, 2016. The interest rates of our reverse repos have historically moved in close relationship to short-term LIBOR rates, and in some cases are explicitly indexed to short-term LIBOR rates and reset accordingly. It is expected that amounts due upon maturity of our reverse repos will be funded primarily through the roll/re-initiation of reverse repos and, if we are unable or unwilling to roll/re-initiate our reverse repos, through free cash and proceeds from the sale of securities.

In addition to our borrowings under reverse repurchase agreements, we have entered into various transactions to finance certain of our commercial mortgage loans and REO and certain of our consumer loans; these transactions are accounted for as collateralized borrowings. As of September 30, 2017 and December 31, 2016 we had outstanding borrowings related to these transactions in the amount of $89.6 million and $24.1 million, respectively, which is reflected under the caption "Other secured borrowings" on the Consolidated Statement of Assets, Liabilities, and Equity. As of September 30, 2017 and December 31, 2016, the fair value of commercial mortgage loans and REO, and consumer loans collateralizing our other secured borrowings was $146.8 million and $42.0 million, respectively. See Note 6 in the notes to our consolidated financial statements for further information on the Company's other secured borrowings.

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In August 2017, we issued $86.0 million of unsecured Senior Notes, at par, that mature in September 2022. The Senior Notes bear an interest rate of 5.25%, subject to adjustment based on changes, if any, in the ratings of the Senior Notes. The Senior Notes have an effective interest rate, including debt issuance costs, of 5.55%. The Company may redeem the Senior Notes, at its option, in whole or in part, prior to March 1, 2022 at a price equal to 100% of the principal amount thereof, plus the applicable "make-whole" premium as of the applicable date of redemption. At any time on or after March 1, 2022, the Company may redeem the Senior Notes in whole or in part at a redemption price equal to 100% of the aggregate principal amount of the Senior Notes to be redeemed, plus accrued and unpaid interest. See Note 6 of the notes to our consolidated financial statements for further detail on the Senior Notes.

The following table details total outstanding borrowings, average outstanding borrowings, and the maximum outstanding borrowings at any month end for each quarter under reverse repurchase agreements for the past twelve quarters:



Quarter Ended	Borrowings Outstanding at Quarter End		Average Borrowings Outstanding		Maximum Borrowings Outstanding at Any Month End
	(In thousands)
September 30, 2017	$	1,029,810	$	1,093,474	$	1,133,586
June 30, 2017	1,119,238		1,121,884		1,213,525
March 31, 2017	1,086,271		1,083,251		1,157,648
December 31, 2016	1,033,581		989,453		1,033,581
September 30, 2016	983,814		1,044,621		1,081,484
June 30, 2016	1,070,105		1,124,885		1,160,096
March 31, 2016	1,149,064		1,178,552		1,205,385
December 31, 2015⁽¹⁾	1,174,189		1,335,360		1,401,378
September 30, 2015	1,372,794		1,378,821		1,386,610
June 30, 2015	1,360,408		1,427,369		1,497,281
March 31, 2015	1,396,112		1,505,226		1,554,589
December 31, 2014	1,669,433		1,882,629		1,889,410

(1)

Our outstanding borrowings as of December 31, 2015 declined relative to our average borrowings outstanding for the quarter ended December 31, 2015. In light of continued and anticipated significant market volatility, during the quarter ended December 31, 2015, we net sold Agency RMBS, thereby reducing our outstanding borrowings and increasing our cash holdings in order to be more defensively positioned.

Amount at risk represents the excess, if any, for each counterparty of the fair value of collateral held by such counterparty over the amounts outstanding under repurchase agreements. As of both September 30, 2017 and December 31, 2016 there were no counterparties with an amount at risk greater than 5% of shareholders' equity.

Although we typically finance most of our holdings of Agency RMBS, as of September 30, 2017 and December 31, 2016, we held unencumbered Agency pools, on a settlement date basis, in the amount of $4.9 million and $40.0 million, respectively.

We held cash and cash equivalents of approximately $111.4 million and $123.3 million as of September 30, 2017 and December 31, 2016, respectively.

On March 6, 2017, our Board of Directors approved the adoption of a share repurchase program under which we are authorized to repurchase up to 1.7 million common shares. The program, which is open-ended in duration, allows us to make repurchases from time to time on the open market or in negotiated transactions. Repurchases are at our discretion, subject to applicable law, share availability, price and our financial performance, among other considerations. This program superseded the similar share repurchase program that had previously been adopted on August 3, 2015, which had also authorized the repurchase of 1.7 million common shares.

During the three month period ended September 30, 2017 we repurchased 123,321 common shares at an average price per share of $15.60 and a total cost of $1.9 million. During the nine month period ended September 30, 2017 we repurchased 305,327 common shares at an average price per share of $15.69 and a total cost of $4.8 million. In addition to making discretionary repurchases, we from time to time use 10b5-1 plans to increase the number of trading days available to implement these repurchases. Through November 3, 2017, we have repurchased 337,925 shares under the current share repurchase program for an aggregate cost of $5.3 million.

We may declare dividends based on, among other things, our earnings, our financial condition, our working capital needs, and new opportunities. Dividends are declared and paid on a quarterly basis in arrears. The declaration of dividends to our

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shareholders and the amount of such dividends are at the discretion of our Board of Directors. During the nine month period ended September 30, 2017, we paid total dividends in the amount of $44.3 million related to the three month periods ended December 31, 2016, March 31, 2017, and June 30, 2017. In November 2017, our Board of Directors approved a dividend related to the third quarter of 2017 in the amount of $0.41 per share, or approximately $13.3 million, payable on December 15, 2017 to shareholders of record as of December 1, 2017. During the nine month period ended September 30, 2016, we paid total dividends in the amount of $50.3 million related to the three month periods ended December 31, 2015, March 31, 2016, and June 30, 2016.

The following tables set forth the dividend distributions authorized by the Board of Directors payable to shareholders and LTIP holders for the periods indicated below:

Nine Month Period Ended September 30, 2017



(In thousands except per share amounts)	Dividend Per Share	Dividend Amount			Record Date	Payment Date
First Quarter	$0.45	$	14,757		June 1, 2017	June 15, 2017
Second Quarter	$0.45	$	14,757		September 1, 2017	September 15, 2017
Third Quarter	$0.41	$	13,348	*	December 1, 2017	December 15, 2017

* Estimated

Nine Month Period Ended September 30, 2016



(In thousands except per share amounts)	Dividend Per Share	Dividend Amount		Record Date	Payment Date
First Quarter	$0.50	$	16,744	June 1, 2016	June 15, 2016
Second Quarter	$0.50	$	16,640	September 1, 2016	September 15, 2016
Third Quarter	$0.45	$	14,892	December 1, 2016	December 15, 2016

For the nine month period ended September 30, 2017, our operating activities used net cash in the amount of $123.9 million, and our reverse repo activity used to finance many of our investments (including repayments, in conjunction with the sales of investments, of amounts borrowed under our reverse repo agreements) used net cash of $3.8 million. We received proceeds from the issuance of other secured borrowings of $94.9 million and used $21.0 million to pay down principal on other secured borrowings. We also received $85.1 million in proceeds from the issuance of Senior Notes, net of debt issuance costs paid. Thus our operating activities, when combined with our reverse repo financings, other secured borrowings, and the net borrowings related to our Senior Notes, provided net cash of $31.3 million for the nine month period ended September 30, 2017. In addition, contributions from non-controlling interests provided cash of $14.2 million. We used $44.3 million to pay dividends, $8.2 million for distributions to non-controlling interests (our joint venture partners), and $4.8 million to repurchase common shares. As a result there was an decrease in our cash holdings of $11.9 million from $123.3 million as of December 31, 2016 to $111.4 million as of September 30, 2017.

For the nine month period ended September 30, 2016, our operating activities provided net cash in the amount of $163.7 million, and our reverse repo activity used to finance many of our investments (including repayments, in conjunction with the sales of investments, of amounts borrowed under our reverse repo agreements) used net cash of $141.8 million. In addition we received proceeds from the issuance of other secured borrowings of $40.9 million less repayments of $10.2 million. Thus our operating activities, when combined with our reverse repo and other secured borrowings, used net cash of $52.6 million for the nine month period ended September 30, 2016. We also used $50.3 million to pay dividends, $2.6 million for distributions to a non-controlling interest (our joint venture partners), and $8.8 million to repurchase common shares. In addition, contributions from a non-controlling interest member provided cash of $4.7 million. As a result there was a decrease in our cash holdings of $4.3 million from $183.9 million as of December 31, 2015 to $179.6 million as of September 30, 2016.

Based on our current portfolio, amount of free cash on hand, debt-to-equity ratio, and current and anticipated availability of credit, we believe that our capital resources will be sufficient to enable us to meet anticipated short-term and long-term liquidity requirements. However, the unexpected inability to finance our Agency RMBS portfolio would create a serious short-term strain on our liquidity and would require us to liquidate much of that portfolio, which in turn would require us to restructure our portfolio to maintain our exclusion from registration as an investment company under the Investment Company Act. Steep declines in the values of our Credit assets financed using reverse repos, or in the values of our derivative contracts, would result in margin calls that would significantly reduce our free cash position. Furthermore, a substantial increase in prepayment rates on our assets financed by reverse repos could cause a temporary liquidity shortfall, because we are generally required to post margin on such assets in proportion to the amount of the announced principal paydowns before the actual receipt of the cash from such principal paydowns. If our cash resources are at any time insufficient to satisfy our liquidity

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requirements, we may have to sell assets or issue debt or additional equity securities.

We are not required by our investment guidelines to maintain any specific debt-to-equity ratio, and we believe that the appropriate leverage for the particular assets we hold depends on the credit quality and risk of those assets, as well as the general availability and terms of stable and reliable financing for those assets.

Contractual Obligations and Commitments

We are a party to a management agreement with our Manager. Pursuant to that agreement, our Manager is entitled to receive a base management fee, an incentive fee, reimbursement of certain expenses and, in certain circumstances, a termination fee. Such fees and expenses do not have fixed and determinable payments. For a description of the management agreement provisions, see Note 7 of the notes to our consolidated financial statements.

We enter into reverse repos with third-party broker-dealers whereby we sell securities to such broker-dealers at agreed-upon purchase prices at the initiation of the reverse repos and agree to repurchase such securities at predetermined repurchase prices and termination dates, thus providing the broker-dealers with an implied interest rate on the funds initially transferred to us by the broker-dealers. We enter into repos with third-party broker-dealers whereby we purchase securities under agreements to resell at an agreed-upon price and date. In general, we most often enter into repo transactions in order to effectively borrow securities that we can then deliver to counterparties to whom we have made short sales of the same securities. The implied interest rates on the repos and reverse repos we enter into are based upon competitive market rates at the time of initiation. Repos and reverse repos that are conducted with the same counterparty may be reported on a net basis if they meet the requirements of ASC 210-20, Balance Sheet, Offsetting. See "—Liquidity and Capital Resources" for a summary of our borrowings on reverse repos. As of September 30, 2017 and December 31, 2016 there were no repos or reverse repos reported on a net basis on the Consolidated Statement of Assets, Liabilities, and Equity.

As of September 30, 2017, we had an aggregate amount at risk under our reverse repos with twenty-one counterparties of approximately $154.8 million, and as of December 31, 2016, we had an aggregate amount at risk under our reverse repos with twenty-one counterparties of approximately $161.1 million. Amounts at risk represent the excess, if any, for each counterparty of the fair value of collateral held by such counterparty over the amounts outstanding under reverse repos. If the amounts outstanding under repos and reverse repos with a particular counterparty are greater than the collateral held by the counterparty, there is no amount at risk for the particular counterparty. Amount at risk as of both September 30, 2017 and December 31, 2016 does not include approximately $3.1 million, of net accrued interest receivable, which is defined as accrued interest on securities held as collateral less interest payable on cash borrowed.

Our derivatives are predominantly subject to bilateral collateral arrangements or clearing in accordance with the Dodd-Frank Act. We may be required to deliver or receive cash or securities as collateral upon entering into derivative transactions. Changes in the relative value of derivative transactions may require us or the counterparty to post or receive additional collateral. Entering into derivative contracts involves market risk in excess of amounts recorded on our balance sheet. In the case of cleared derivatives, the clearinghouse becomes our counterparty and the Future Commission Merchant acts as an intermediary between us and the clearinghouse with respect to all facets of the related transaction, including the posting and receipt of required collateral.

As of September 30, 2017, we had an aggregate amount at risk under our derivative contracts with seventeen counterparties of approximately $36.9 million. We also had $9.3 million of initial margin for cleared OTC derivatives posted to central clearinghouses as of that date. As of December 31, 2016, we had an aggregate amount at risk under our derivatives contracts with eighteen counterparties of approximately $42.5 million. We also had $7.6 million of initial margin for cleared OTC derivatives posted to central clearinghouses as of that date. Amounts at risk under our derivatives contracts represent the excess, if any, for each counterparty of the fair value of our derivative contracts plus our collateral held directly by the counterparty less the counterparty's collateral held by us. If a particular counterparty's collateral held by us is greater than the aggregate fair value of the financial derivatives plus our collateral held directly by the counterparty, there is no amount at risk for the particular counterparty.

We purchase and sell TBAs and Agency pass-through certificates on a when-issued or delayed delivery basis. The delayed delivery for these securities means that these transactions are more prone to market fluctuations between the trade date and the ultimate settlement date, and thereby are more vulnerable, especially in the absence of margining arrangements with respect to these transactions, to increasing amounts at risk with the applicable counterparties. As of September 30, 2017, in connection with our forward settling TBA and Agency pass-through certificates, we had an aggregate amount at risk with twelve counterparties of approximately $5.6 million. As of December 31, 2016, in connection with our forward settling TBA and Agency pass-through certificates, we had an aggregate amount at risk with five counterparties of approximately $1.7 million. Amounts at risk in connection with our forward settling TBA and Agency pass-through certificates represent the excess, if any, for each counterparty of the net fair value of the forward settling securities plus our collateral held directly by the

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counterparty less the counterparty's collateral held by us. If a particular counterparty's collateral held by us is greater than the aggregate fair value of the forward settling securities plus our collateral held directly by the counterparty, there is no amount at risk for the particular counterparty.

See Note 15 in the notes to our consolidated financial statements for further detail on our other contractual obligations and commitments.

Off-Balance Sheet Arrangements

As of September 30, 2017, we did not have any material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitment to provide funding to any such entities that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or resources that would be material to an investor in our securities. As such, we are not materially exposed to any market, credit, liquidity, or financing risk that could arise if we had engaged in such relationships. See Note 7 of the notes to our consolidated financial statements for further detail about a multi-seller consumer loan securitization transaction we entered into in August 2016.

At September 30, 2017 the Company had not entered into any reverse repurchase agreements for which delivery of the borrowed funds is not scheduled until after period end.

Inflation

Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The primary components of our market risk at September 30, 2017 are related to credit risk, prepayment risk, and interest rate risk. We seek to actively manage these and other risks and to acquire and hold assets that we believe justify bearing those risks, and to maintain capital levels consistent with those risks.

Credit Risk

We are subject to credit risk in connection with many of our assets, especially non-Agency MBS, mortgage loans, and consumer loans. Credit losses on real estate loans can occur for many reasons, including, but not limited to, poor origination practices, fraud, faulty appraisals, documentation errors, poor underwriting, legal errors, poor servicing practices, weak economic conditions, decline in the value of homes, businesses or commercial properties, special hazards, earthquakes and other natural events, over-leveraging of the borrower on a property, reduction in market rents and occupancies and poor property management services, changes in legal protections for lenders, reduction in personal income, job loss, and personal events such as divorce or health problems. Property values are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional, and local economic conditions (which may be adversely affected by industry slowdowns and other factors), local real estate conditions (such as an oversupply of housing), changes or continued weakness in specific industry segments, construction quality, age and design, demographic factors, and retroactive changes to building or similar codes. The ability of borrowers to repay consumer loans may be adversely affected by numerous borrower-specific factors, including unemployment, divorce, major medical expenses or personal bankruptcy. General factors, including an economic downturn, high energy costs or acts of God or terrorism, may also affect the financial stability of borrowers and impair their ability or willingness to repay their loans. Whenever any of our consumer loans defaults, we are at risk of loss to the extent of any deficiency between the liquidation value of the collateral, if any, securing the loan, and the principal and accrued interest of the loan. Many of our consumer loans are unsecured, or are secured by collateral (such as an automobile) that depreciates rapidly; as a result, these loans may be at greater risk of loss than residential real estate loans.

Similarly, we are exposed to the risk of potential credit losses on other credit-related assets in our portfolio, including distressed corporate debt, CLOs, and investments in mortgage-related entities.

For many of our investments, the two primary components of credit risk are default risk and severity risk.

Default Risk

Default risk is the risk that borrowers will fail to make principal and interest payments on mortgage loans or other debt

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obligations. We may attempt to mitigate our default risk by, among other things, opportunistically entering into credit default swaps and total return swaps. These instruments can reference various MBS indices, corporate bond indices, or corporate entities, such as publicly traded REITs. We often rely on third-party servicers to mitigate our default risk, but such third-party servicers may have little or no economic incentive to mitigate loan default rates.

Severity Risk

Severity risk is the risk of loss upon a borrower default on a mortgage loan or other secured or unsecured debt obligation. Severity risk includes the risk of loss of value of the property or other asset, if any, securing the mortgage loan or debt obligation, as well as the risk of loss associated with taking over the property or other asset, if any, including foreclosure costs. We often rely on third-party servicers to mitigate our severity risk, but such third-party servicers may have little or no economic incentive to mitigate loan loss severities. In the case of mortgage loans, such mitigation efforts may include loan modification programs and prompt foreclosure and property liquidation following a default.

Prepayment Risk

Prepayment risk is the risk of change, whether an increase or a decrease, in the rate at which principal is returned in respect of fixed-income assets in our portfolio, including both through voluntary prepayments and through liquidations due to defaults and foreclosures. Most significantly, our portfolio is exposed to the risk of changes in prepayment rates of mortgage loans underlying our RMBS, and changes in prepayment rates of certain of our consumer loan holdings. This rate of prepayment is affected by a variety of factors, including the prevailing level of interest rates as well as economic, demographic, tax, social, legal, and other factors. Changes in prepayment rates will have varying effects on the different types of securities in our portfolio, and we attempt to take these effects into account in making asset management decisions. Additionally, increases in prepayment rates may cause us to experience losses on our interest only securities and inverse interest only securities, as those securities are extremely sensitive to prepayment rates. Prepayment rates, besides being subject to interest rates and borrower behavior, are also substantially affected by government policy and regulation. For example, the government sponsored HARP program, which was designed to encourage mortgage refinancings, continues to be a factor in prepayment risk, and could become a bigger factor if eligibility requirements are expanded or qualification processes are streamlined. Mortgage rates remain very low by historical standards, and as a result, prepayments continue to represent a meaningful risk, especially with respect to our Agency RMBS.

Interest Rate Risk

Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control. We are subject to interest rate risk in connection with most of our assets and liabilities. For some securities in our portfolio, the coupon interest rates on, and therefore also the values of, such securities are highly sensitive to interest rate movements, such as inverse floating rate RMBS, which benefit from falling interest rates. We selectively hedge our interest rate risk by entering into interest rate swaps, TBAs, U.S. Treasury securities, Eurodollar futures, U.S. Treasury futures, and other instruments. In general, such hedging instruments are used to offset the large majority of the interest rate risk we estimate to arise from our Agency RMBS positions. Hedging instruments may also be used to offset a portion of the interest rate risk arising from certain non-Agency MBS positions.

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The following sensitivity analysis table shows the estimated impact on the value of our portfolio segregated by certain identified categories as of September 30, 2017, assuming a static portfolio and immediate and parallel shifts in interest rates from current levels as indicated below.



(In thousands)	Estimated Change for a Decrease in Interest Rates by										Estimated Change for an Increase in Interest Rates by
	50 Basis Points					100 Basis Points					50 Basis Points					100 Basis Points
Category of Instruments	Market Value			% of Total Equity		Market Value			% of Total Equity		Market Value			% of Total Equity		Market Value			% of Total Equity
Agency RMBS	$	6,663		1.06	%	$	11,232		1.78	%	$	(8,757	)	(1.39	)%	$	(19,610	)	(3.11	)%
Non-Agency RMBS, CMBS, Other ABS, and Mortgage Loans	3,324			0.53	%	6,261			0.99	%	(3,711		)	(0.59	)%	(7,809		)	(1.24	)%
U.S. Treasury Securities, and Interest Rate Swaps, Options, and Futures	(7,371		)	(1.17	)%	(15,067		)	(2.39	)%	7,045			1.12	%	13,765			2.19	%
Mortgage-Related Derivatives	50			0.01	%	99			0.02	%	(51		)	(0.01	)%	(102		)	(0.02	)%
Corporate Securities and Derivatives on Corporate Securities	(34		)	(0.01	)%	(22		)	(0.01	)%	80			0.01	%	207			0.03	%
Repurchase Agreements and Reverse Repurchase Agreements	(2,389		)	(0.38	)%	(4,809		)	(0.76	)%	2,350			0.38	%	4,668			0.74	%
Total	$	243		0.04	%	$	(2,306	)	(0.37	)%	$	(3,044	)	(0.48	)%	$	(8,881	)	(1.41	)%

The preceding analysis does not show sensitivity to changes in interest rates for instruments for which we believe that the effect of a change in interest rates is not material to the value of the overall portfolio and/or cannot be accurately estimated. In particular, this analysis excludes certain of our holdings of corporate securities and derivatives on corporate securities, and reflects only sensitivity to U.S. interest rates.

Our analysis of interest rate risk is derived from Ellington's proprietary models as well as third-party information and analytics. Many assumptions have been made in connection with the calculations set forth in the table above and, as such, there can be no assurance that assumed events will occur or that other events will not occur that would affect the outcomes. For example, for each hypothetical immediate shift in interest rates, assumptions have been made as to the response of mortgage prepayment rates, the shape of the yield curve, and market volatilities of interest rates; each of the foregoing factors can significantly and adversely affect the fair value of our interest rate-sensitive instruments.

The above analysis utilizes assumptions and estimates based on management's judgment and experience, and relies on financial models, which are inherently imperfect; in fact, different models can produce different results for the same securities. While the table above reflects the estimated impacts of immediate parallel interest rate increases and decreases on specific categories of instruments in our portfolio, we actively trade many of the instruments in our portfolio, and therefore our current or future portfolios may have risks that differ significantly from those of our September 30, 2017 portfolio estimated above. Moreover, the impact of changing interest rates on fair value can change significantly when interest rates change by a greater amount than the hypothetical shifts assumed above. Furthermore, our portfolio is subject to many risks other than interest rate risks, and these additional risks may or may not be correlated with changes in interest rates. For all of the foregoing reasons and others, the table above is for illustrative purposes only and actual changes in interest rates would likely cause changes in the actual fair value of our portfolio that would differ from those presented above, and such differences might be significant and adverse. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Special Note Regarding Forward-Looking Statements."

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosures. An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and

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15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2017. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2017.

Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the three month period ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings

Neither we nor Ellington nor its affiliates (including our Manager) are currently subject to any legal proceedings that we or our Manager consider material. Nevertheless, we and Ellington and its affiliates operate in highly regulated markets that currently are under intense regulatory scrutiny, and we and Ellington and its affiliates have received, and we expect in the future that we and they may receive, inquiries and requests for documents and information from various federal, state and foreign regulators. For example, in January 2017, we received a subpoena from the SEC requesting documents, communications, and other information relating primarily to a loan originator and the loans originated by such originator, our analyses of such loans, the purchases and securitizations of such loans by us and by certain third parties, and the servicing of such loans. We have responded to the subpoena and intend to continue to cooperate with any further requests. Ellington has advised us that, at the present time, it is not aware that any material legal proceeding against us or Ellington or its affiliates is contemplated in connection with any such inquiries or requests. We and Ellington cannot provide any assurance that these or any future such inquiries and requests will not result in further investigation of or the initiation of a proceeding against us or Ellington or its affiliates or that, if any such investigation or proceeding were to arise, it would not materially adversely affect us. For a discussion of certain risks to which we or Ellington or its affiliates could be exposed as a result of inquiries or requests for documents and information received by us or Ellington or its affiliates, see "Risk Factors—We or Ellington or its affiliates may be subject to regulatory inquiries or proceedings" included in Part 1A of this Annual Report on Form 10-K for the year ended December 31, 2016.

Item 1A. Risk Factors

For information regarding factors that could affect our results of operations, financial condition, and liquidity, see the risk factors discussed under "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016. There have been no material changes from these previously disclosed risk factors. See also "Special Note Regarding Forward-Looking Statements," included in Part I, Item 2 of this Quarterly Report on Form 10-Q.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

On September 12, 2017, we granted 3,334 LTIP units to Thomas Robards, 3,334 LTIP units to Ronald I. Simon, Ph.D., and 3,334 LTIP units to Edward Resendez as compensation for serving as directors. These grants were made pursuant to our 2007 Individual Incentive Plan and such grants were exempt from the registration requirements of the Securities Act based on the exemption provided in Rule 701 promulgated under the Securities Act.

Purchases of Equity Securities



	Total Number of Shares Purchased	Average Price Paid		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Number of Shares that May Yet be Purchased Under the Plans or Programs
					(In thousands)
July 1, 2017 – July 31, 2017	—	$	—	—	1,571,733
August 1, 2017 – August 31, 2017	—	—		—	1,571,733
September 1, 2017 – September 30, 2017	123,321	15.60		123,321	1,448,412
Total	123,321	$	15.60	123,321	1,448,412

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Item 6. Exhibits



Exhibit		Description
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002

32.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002

32.2*		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002

101		The following financial information from Ellington Financial LLC's Quarterly Report on Form 10-Q for the nine month period ended September 30, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statement of Assets, Liabilities, and Equity, (ii) Consolidated Statement of Operations, (iii) Consolidated Statements of Changes in Equity, (iv) Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements.


*	Furnished herewith. These certifications are not deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		ELLINGTON FINANCIAL LLC.
Date:	November 9, 2017	By:	/s/ LAURENCE PENN
			Laurence Penn Chief Executive Officer (Principal Executive Officer)

		ELLINGTON FINANCIAL LLC.
Date:	November 9, 2017	By:	/s/ LISA MUMFORD
			Lisa Mumford Chief Financial Officer (Principal Financial and Accounting Officer)

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EXHIBIT INDEX



Exhibit		Description
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002

32.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002

32.2*		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002

101		The following financial information from Ellington Financial LLC's Quarterly Report on Form 10-Q for the nine month period ended September 30, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statement of Assets, Liabilities, and Equity, (ii) Consolidated Statement of Operations, (iii) Consolidated Statements of Changes in Equity, (iv) Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements.


*	Furnished herewith. These certifications are not deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

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