# Orchid Island Capital, Inc. (ORC) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Orchid Island Capital, Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1518621/000151862122000023/orc10k20211231.htm
Accession: 0001518621-22-000023
Filing date: 2022-02-25
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ORC/
All MD&A years: /company/ORC/mda/
Next year: /company/ORC/mda/fy2022/ (FY 2022)

ITEM 7. MANAGEMENT’S
 
DISCUSSION
 
AND ANALYSIS OF FINANCIAL
 
CONDITION
 
AND RESULTS OF
 
OPERATIONS

The following discussion of our financial condition and results of operations should
 
be read in conjunction with the financial

statements and notes to those statements included in Item 8 of this Form 10-K.
 
The discussion may contain certain forward-looking

statements that involve risks and uncertainties. Forward-looking statements
 
are those that are not historical in nature. As a result of

many factors, such as those set forth under “Risk Factors” in this Form 10-K,
 
our actual results may differ materially from those

anticipated in such forward-looking statements.

Overview

We are a specialty finance company that invests in residential mortgage-backed securities
 
(“RMBS”) which are issued and

guaranteed by a federally chartered corporation or agency (“Agency RMBS”).
 
Our investment strategy focuses on, and our portfolio

consists of, two categories of Agency RMBS: (i) traditional pass-through Agency RMBS,
 
such as mortgage pass-through certificates

issued by Fannie Mae, Freddie Mac or Ginnie Mae (the “GSEs”) and collateralized
 
mortgage obligations (“CMOs”) issued by the GSEs

(“PT RMBS”) and (ii) structured Agency RMBS, such as interest-only securities (“IOs”),
 
inverse interest-only securities (“IIOs”) and

principal only securities (“POs”), among other types of structured Agency RMBS.
 
We were formed by Bimini in August 2010,

commenced operations on November 24, 2010 and completed our initial public
 
offering (“IPO”) on February 20, 2013.
 
We are

externally managed by Bimini Advisors, an investment adviser registered with the Securities
 
and Exchange Commission (the “SEC”).

Our business objective is to provide attractive risk-adjusted total returns over the
 
long term through a combination of capital

appreciation and the payment of regular monthly distributions. We intend to achieve this objective
 
by investing in and strategically

allocating capital between the two categories of Agency RMBS described above.
 
We seek to generate income from (i) the net interest

margin on our leveraged PT RMBS portfolio and the leveraged portion of our
 
structured Agency RMBS portfolio, and (ii) the interest

income we generate from the unleveraged portion of our structured Agency RMBS
 
portfolio. We intend to fund our PT RMBS and

certain of our structured Agency RMBS through short-term borrowings structured
 
as repurchase agreements. PT RMBS and structured

Agency RMBS typically exhibit materially different sensitivities to movements in interest
 
rates. Declines in the value of one portfolio

may be offset by appreciation in the other. The percentage of capital that we allocate to our two Agency RMBS asset categories will

vary and will be actively managed in an effort to maintain the level of income generated by
 
the combined portfolios, the stability of that

income stream and the stability of the value of the combined portfolios. We believe that this
 
strategy will enhance our liquidity,

earnings, book value stability and asset selection opportunities in various interest
 
rate environments.

We operate so as to qualify to be taxed as a real estate investment trust (“REIT”) under the
 
Internal Revenue Code of 1986, as

amended (the “Code”).
 
We generally will not be subject to U.S. federal income tax to the extent that we
 
currently distribute all of our

REIT taxable income (as defined in the Code) to our stockholders and maintain
 
our REIT qualification.

The Company’s common stock trades on the New York Stock Exchange under the symbol “ORC”.

Capital Raising Activities

On August 2, 2017, we entered
 
into an equity distribution agreement (the “August 2017 Equity Distribution Agreement”)
 
with two

sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate
 
amount of $125,000,000 of shares of our

common stock in transactions that were deemed to be “at the market” offerings and privately
 
negotiated transactions. We issued a total

of 15,123,178 shares under the August 2017 Equity Distribution Agreement for
 
aggregate gross proceeds of $125.0 million, and net

proceeds of approximately $123.1 million, after commissions and fees,
 
prior to its termination in July 2019.

On July 30, 2019, we entered into an underwriting agreement (the “2019 Underwriting
 
Agreement”) with Morgan Stanley & Co.

LLC, Citigroup Global Markets Inc. and J.P. Morgan Securities LLC, as representatives of the underwriters named therein, relating to

the offer and sale of 7,000,000 shares of the Company’s common stock at a price to the public of
 
$6.55 per share. The underwriters

48

purchased the shares pursuant to the 2019 Underwriting Agreement at a price of
 
$6.3535 per share. The closing of the offering of

7,000,000 shares of common stock occurred on August 2, 2019, with net
 
proceeds to us of approximately $44.2 million after deduction

of underwriting discounts and commissions and other estimated offering expenses.

On January 23, 2020, we entered into an equity distribution agreement (the “January
 
2020 Equity Distribution Agreement”) with

three sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount
 
of $200,000,000 of shares

of our common stock in transactions that were deemed to be “at the market”
 
offerings and privately negotiated transactions.
 
We issued

a total of 3,170,727 shares under the January 2020 Equity Distribution Agreement for aggregate
 
gross proceeds of $19.8 million, and

net proceeds of approximately $19.4 million, after commissions and fees, prior to
 
its termination in August 2020.

On August 4, 2020, we entered into an equity distribution agreement (the “August
 
2020 Equity Distribution Agreement”) with four

sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate
 
amount of $150,000,000 of shares of our

common stock in transactions that were deemed to be “at the market” offerings and privately
 
negotiated transactions. We issued a total

of 27,493,650 shares under the August 2020 Equity Distribution Agreement for
 
aggregate gross proceeds of approximately $150.0

million, and net proceeds of approximately $147.4 million, after commissions
 
and fees, prior to its termination in June 2021.

On January 20, 2021, we entered into an underwriting agreement (the “January 2021
 
Underwriting Agreement”) with J.P. Morgan

Securities LLC (“J.P. Morgan”), relating to the offer and sale of 7,600,000 shares of our common stock. J.P.
 
Morgan purchased the

shares of our common stock from the Company pursuant to the January 2021
 
Underwriting Agreement at $5.20 per share. In addition,

we granted J.P.
 
Morgan a 30-day option to purchase up to an additional 1,140,000 shares
 
of our common stock on the same terms and

conditions, which J.P. Morgan exercised in full on January 21, 2021. The closing of the offering of 8,740,000 shares of our common

stock occurred on January 25, 2021, with proceeds to us of approximately $45.2
 
million, net of offering expenses.

On March 2, 2021, we entered into an underwriting agreement (the “March 2021 Underwriting
 
Agreement”) with J.P. Morgan,

relating to the offer and sale of 8,000,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from

the Company pursuant to the March 2021 Underwriting Agreement at $5.45 per share.
 
In addition, we granted J.P. Morgan a 30-day

option to purchase up to an additional 1,200,000 shares of our common stock
 
on the same terms and conditions, which J.P. Morgan

exercised in full on March 3, 2021. The closing of the offering of 9,200,000 shares of our common
 
stock occurred on March 5, 2021,

with proceeds to us of approximately $50.0 million, net of offering expenses.

On June 22, 2021, we entered into an equity distribution agreement (the “June 2021
 
Equity Distribution Agreement”) with four

sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate
 
amount of $250,000,000 of shares of our

common stock in transactions that were deemed to be “at the market” offerings and privately
 
negotiated transactions. We issued a total

of 49,407,336 shares under the June 2021 Equity Distribution Agreement for aggregate
 
gross proceeds of approximately $250.0

million, and net proceeds of approximately $246.2 million, after commissions
 
and fees,
 
prior to its termination in October 2021.

On October 29, 2021, we entered into an equity distribution agreement (the “October
 
2021 Equity Distribution Agreement”) with

four sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate
 
amount of $250,000,000 of shares of

our common stock in transactions that are deemed to be “at the market” offerings and privately negotiated
 
transactions. Through

December 31, 2021, we issued a total of 15,835,700 shares under the October 2021 Equity
 
Distribution Agreement for aggregate gross

proceeds of approximately $78.3 million, and net proceeds of approximately
 
$77.0 million, after commissions and fees.

Stock Repurchase Program

On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to 2,000,000
 
shares of our common stock.

The timing, manner, price and amount of any repurchases is determined by the Company in its discretion and is subject
 
to economic

and market conditions, stock price, applicable legal requirements and other factors.
 
The authorization does not obligate the Company

to acquire any particular amount of common stock and the program may
 
be suspended or discontinued at the Company’s discretion

49

without prior notice.

On February 8, 2018, the Board of Directors approved an increase
 
in the stock repurchase program for up to an

additional 4,522,822 shares of the Company’s common stock.
 
Coupled with the 783,757 shares remaining from the original 2,000,000

share authorization, the increased authorization brought the total authorization
 
to 5,306,579 shares, representing 10% of the then

outstanding share count. On December 9, 2021, the Board of Directors approved an
 
increase in the number of shares of the

Company’s common stock available in the stock repurchase program for up to an additional
 
16,861,994 shares, bringing the remaining

authorization under the stock repurchase program to 17,699,305 shares, representing
 
approximately 10% of the Company’s currently

outstanding shares of common stock. This stock repurchase program has no
 
termination date.

From the inception of the stock repurchase program through December 31, 2021,
 
the Company repurchased a total of 5,685,511

shares at an aggregate cost of approximately $40.4 million, including commissions
 
and fees, for a weighted average price of $7.10 per

share. During the year ended December 31, 2020, the Company repurchased a
 
total of 19,891 shares at an aggregate cost of

approximately
 
$0.1 million, including commissions and fees, for a weighted average
 
price of $3.42 per share. There were no shares

repurchased during the year ended December 31, 2021.

Factors that Affect our Results of Operations and Financial Condition

A variety of industry and economic factors may impact our results of operations and
 
financial condition. These factors include:

●

interest rate trends;

●

increases in our cost of funds resulting from increases in the Federal Funds rate that
 
are controlled by the Fed and are likely

to occur in 2022;

●

the difference between Agency RMBS yields and our funding and hedging costs;

●

competition for, and supply of, investments in Agency RMBS;

●

actions taken by the U.S. government, including the presidential administration, the
 
Fed,

the Federal Housing Financing

Agency (the “FHFA”), the Federal Housing Administration (the “FHA”), the Federal Open Market Committee (the
 
“FOMC”) and

the U.S. Treasury;

●

prepayment rates on mortgages underlying our Agency RMBS and credit
 
trends insofar as they affect prepayment rates; and

●

other market developments.

In addition, a variety of factors relating to our business may also impact our results
 
of operations and financial condition. These

factors include:

●

our degree of leverage;

●

our access to funding and borrowing capacity;

●

our borrowing costs;

●

our hedging activities;

●

the market value of our investments; and

●

the requirements to qualify as a REIT and the requirements to qualify for
 
a registration exemption under the Investment

Company Act.

Results
 
of Operations

Described
 
below are
 
the Company’s
 
results of
 
operations
 
for the
 
years ended
 
December
 
31, 2021,
 
as compared
 
to the Company’s

results of
 
operations
 
for the years
 
ended December
 
31, 2020
 
and 2019.

Net (Loss)
 
Income Summary

Net loss
 
for the year
 
ended December
 
31, 2021
 
was $64.8
 
million, or
 
$0.54 per
 
share. Net
 
income for
 
the year ended
 
December
 
31,

50

2020 was
 
$2.1 million,
 
or $0.03
 
per share.
 
Net income
 
for the year
 
ended December
 
31, 2019
 
was $24.3
 
million, or
 
$0.43 per
 
share. The

components
 
of net (loss)
 
income for
 
the years
 
ended December
 
31, 2021,
 
2020 and
 
2019 are
 
presented
 
in the table
 
below:

(in thousands)

2021

2020

2019

Interest income

$

134,700

$

116,045

$

142,324

Interest expense

(7,090)

(25,056)

(83,666)

Net interest income

127,610

90,989

58,658

Losses on RMBS and derivative contracts

(177,119)

(78,317)

(24,008)

Net portfolio (loss) income

(49,509)

12,672

34,650

Expenses

(15,251)

(10,544)

(10,385)

Net (loss) income

$

(64,760)

$

2,128

$

24,265

GAAP and
 
Non-GAAP
 
Reconciliations

In addition
 
to the results
 
presented
 
in accordance
 
with GAAP, our results
 
of operations
 
discussed
 
below include
 
certain non-GAAP

financial
 
information,
 
including
 
“Net Earnings
 
Excluding
 
Realized
 
and Unrealized
 
Gains and
 
Losses”,
 
“Economic
 
Interest
 
Expense”
 
and

“Economic
 
Net Interest
 
Income.”

Net Earnings
 
Excluding
 
Realized
 
and Unrealized
 
Gains and
 
Losses

We have elected
 
to account
 
for our
 
Agency RMBS
 
under the
 
fair value
 
option. Securities
 
held under
 
the fair
 
value option
 
are

recorded
 
at estimated
 
fair value,
 
with changes
 
in the fair
 
value recorded
 
as unrealized
 
gains or
 
losses through
 
the statements
 
of

operations.

In addition,
 
we have not
 
designated
 
our derivative
 
financial
 
instruments
 
used for
 
hedging purposes
 
as hedges
 
for accounting

purposes,
 
but rather
 
hold them
 
for economic
 
hedging purposes.
 
Changes in
 
fair value
 
of these
 
instruments
 
are presented
 
in a separate

line item
 
in the Company’s
 
statements
 
of operations
 
and are not
 
included in
 
interest
 
expense.
 
As such,
 
for financial
 
reporting
 
purposes,

interest
 
expense and
 
cost of funds
 
are not impacted
 
by the fluctuation
 
in value of
 
the derivative
 
instruments.

Presenting
 
net earnings
 
excluding
 
realized and
 
unrealized
 
gains and
 
losses allows
 
management
 
to: (i) isolate
 
the net interest
 
income

and other
 
expenses of
 
the Company
 
over time,
 
free of all
 
fair value
 
adjustments
 
and (ii)
 
assess the
 
effectiveness
 
of our funding
 
and

hedging strategies
 
on our capital
 
allocation
 
decisions
 
and our
 
asset allocation
 
performance.
 
Our funding
 
and hedging
 
strategies,
 
capital

allocation
 
and asset
 
selection
 
are integral
 
to our risk
 
management
 
strategy, and therefore
 
critical to
 
the management
 
of our portfolio.
 
We

believe that
 
the presentation
 
of our net
 
earnings
 
excluding
 
realized
 
and unrealized
 
gains is useful
 
to investors
 
because it
 
provides a
 
means

of comparing
 
our results
 
of operations
 
to those
 
of our peers
 
who have not
 
elected the
 
same accounting
 
treatment.
 
Our presentation
 
of net

earnings
 
excluding
 
realized and
 
unrealized
 
gains and
 
losses may
 
not be comparable
 
to similarly-titled
 
measures of
 
other companies,
 
who

may use different
 
calculations.
 
As a result,
 
net earnings
 
excluding
 
realized and
 
unrealized
 
gains and
 
losses should
 
not be considered
 
as a

substitute
 
for our GAAP
 
net income
 
(loss) as
 
a measure
 
of our financial
 
performance
 
or any measure
 
of our liquidity
 
under GAAP.
 
The

table below
 
presents
 
a reconciliation
 
of our net
 
income (loss)
 
determined
 
in accordance
 
with GAAP
 
and net earnings
 
excluding realized

and unrealized
 
gains and
 
losses.

51

Net Earnings Excluding Realized and Unrealized Gains and Losses

(in thousands, except per share data)

Per Share

Net Earnings

Net Earnings

Excluding

Excluding

Realized and

Realized and

Realized and

Realized and

Net

Unrealized

Unrealized

Net

Unrealized

Unrealized

Income

Gains and

Gains and

Income

Gains and

Gains and

(GAAP)

Losses

(1)

Losses

(GAAP)

Losses

Losses

Three Months Ended

December 31, 2021

$

(44,564)

$

(82,597)

$

38,033

$

(0.27)

$

(0.49)

$

0.22

September 30, 2021

26,038

(2,887)

28,925

0.20

(0.02)

0.22

June 30, 2021

(16,865)

(40,844)

23,979

(0.17)

(0.41)

0.24

March 31, 2021

(29,369)

(50,791)

21,422

(0.34)

(0.60)

0.26

December 31, 2020

16,479

(4,605)

21,084

0.23

(0.07)

0.30

September 30, 2020

28,076

5,745

22,331

0.42

0.09

0.33

June 30, 2020

48,772

28,749

20,023

0.74

0.43

0.31

March 31, 2020

(91,199)

(108,206)

17,007

(1.41)

(1.68)

0.27

December 31, 2019

18,612

3,840

14,772

0.29

0.06

0.23

September 30, 2019

(8,477)

(19,431)

10,954

(0.14)

(0.32)

0.18

June 30, 2019

3,533

(7,670)

11,203

0.07

(0.15)

0.22

March 31, 2019

10,597

(747)

11,344

0.22

(0.02)

0.24

Years Ended

December 31, 2021

$

(64,760)

$

(177,119)

$

112,359

$

(0.54)

$

(1.46)

$

0.92

December 31, 2020

2,128

(78,317)

80,445

0.03

(1.17)

1.20

December 31, 2019

24,265

(24,008)

48,273

0.43

(0.43)

0.86

(1)
 
Includes realized
 
and unrealized
 
gains (losses)
 
on RMBS and derivative
 
financial instruments,
 
including net
 
interest income
 
or expense on
 
interest

rate swaps.

Economic
 
Interest
 
Expense and
 
Economic
 
Net Interest
 
Income

We use derivative
 
and other
 
hedging instruments,
 
specifically
 
Eurodollar, Fed
 
Funds and
 
T-Note futures
 
contracts,
 
short positions
 
in

U.S. Treasury
 
securities,
 
interest
 
rate swaps
 
and swaptions,
 
to hedge
 
a portion
 
of the interest
 
rate risk
 
on repurchase
 
agreements
 
in a

rising rate
 
environment.

We have not
 
elected to
 
designate
 
our derivative
 
holdings for
 
hedge accounting
 
treatment.
 
Changes in
 
fair value
 
of these
 
instruments

are presented
 
in a separate
 
line item
 
in our statements
 
of operations
 
and not included
 
in interest
 
expense. As
 
such, for
 
financial
 
reporting

purposes,
 
interest
 
expense and
 
cost of funds
 
are not impacted
 
by the fluctuation
 
in value of
 
the derivative
 
instruments.

For the purpose
 
of computing
 
economic net
 
interest
 
income and
 
ratios relating
 
to cost of
 
funds measures,
 
GAAP interest
 
expense

has been
 
adjusted to
 
reflect the
 
realized and
 
unrealized
 
gains or
 
losses on
 
certain derivative
 
instruments
 
the Company
 
uses, specifically

Eurodollar, Fed
 
Funds and
 
U.S. Treasury
 
futures,
 
and interest
 
rate swaps
 
and swaptions,
 
that pertain
 
to each period
 
presented.
 
We

believe that
 
adjusting
 
our interest
 
expense for
 
the periods
 
presented
 
by the gains
 
or losses
 
on these
 
derivative
 
instruments
 
would not

accurately
 
reflect our
 
economic
 
interest
 
expense for
 
these periods.
 
The reason
 
is that these
 
derivative
 
instruments
 
may cover
 
periods that

extend into
 
the future,
 
not just the
 
current period.
 
Any realized
 
or unrealized
 
gains or
 
losses on
 
the instruments
 
reflect the
 
change in

market value
 
of the instrument
 
caused by
 
changes in
 
underlying
 
interest
 
rates applicable
 
to the term
 
covered by
 
the instrument,
 
not just

the current
 
period. For
 
each period
 
presented,
 
we have combined
 
the effects
 
of the derivative
 
financial
 
instruments
 
in place for
 
the

respective
 
period with
 
the actual
 
interest
 
expense incurred
 
on borrowings
 
to reflect
 
total economic
 
interest
 
expense for
 
the applicable

period. Interest
 
expense, including
 
the effect
 
of derivative
 
instruments
 
for the period,
 
is referred
 
to as economic
 
interest expense.
 
Net

interest income,
 
when calculated
 
to include
 
the effect
 
of derivative
 
instruments
 
for the period,
 
is referred
 
to as economic
 
net interest

52

income. This
 
presentation
 
includes
 
gains or
 
losses on
 
all contracts
 
in effect during
 
the reporting
 
period, covering
 
the current
 
period as
 
well

as periods
 
in the future.

The Company
 
may invest
 
in TBAs,
 
which are
 
forward contracts
 
for the purchase
 
or sale of
 
Agency RMBS
 
at a predetermined
 
price,

face amount,
 
issuer, coupon
 
and stated
 
maturity on
 
an agreed-upon
 
future date.
 
The specific
 
Agency RMBS
 
to be delivered
 
into the

contract
 
are not known
 
until shortly
 
before the
 
settlement
 
date. We may
 
choose, prior
 
to settlement,
 
to move the
 
settlement
 
of these

securities
 
out to a
 
later date
 
by entering
 
into a dollar
 
roll transaction.
 
The Agency
 
RMBS purchased
 
or sold for
 
a forward
 
settlement
 
date

are typically
 
priced at
 
a discount
 
to equivalent
 
securities
 
settling
 
in the current
 
month. Consequently,
 
forward
 
purchases
 
of Agency
 
RMBS

and dollar
 
roll transactions
 
represent
 
a form of
 
off-balance
 
sheet financing.
 
These TBAs
 
are accounted
 
for as derivatives
 
and marked
 
to

market through
 
the income
 
statement.
 
Gains or losses
 
on TBAs
 
are included
 
with gains
 
or losses
 
on other
 
derivative
 
contracts
 
and are not

included in
 
interest
 
income for
 
purposes of
 
the discussions
 
below.

We believe
 
that economic
 
interest
 
expense and
 
economic
 
net interest
 
income provide
 
meaningful
 
information
 
to consider, in
 
addition

to the respective
 
amounts prepared
 
in accordance
 
with GAAP. The non-GAAP
 
measures help
 
management
 
to evaluate
 
its financial

position and
 
performance
 
without the
 
effects of
 
certain transactions
 
and GAAP
 
adjustments
 
that are
 
not necessarily
 
indicative
 
of our

current investment
 
portfolio
 
or operations.
 
The unrealized
 
gains or
 
losses on
 
derivative
 
instruments
 
presented
 
in our statements
 
of

operations
 
are not necessarily
 
representative
 
of the total
 
interest
 
rate expense
 
that we will
 
ultimately
 
realize. This
 
is because
 
as interest

rates move
 
up or down
 
in the future,
 
the gains
 
or losses
 
we ultimately
 
realize, and
 
which will
 
affect our
 
total interest
 
rate expense
 
in future

periods,
 
may differ
 
from the
 
unrealized
 
gains or
 
losses recognized
 
as of the
 
reporting
 
date.

Our presentation
 
of the economic
 
value of our
 
hedging strategy
 
has important
 
limitations.
 
First, other
 
market participants
 
may

calculate
 
economic
 
interest
 
expense and
 
economic net
 
interest
 
income differently
 
than the
 
way we calculate
 
them. Second,
 
while we

believe that
 
the calculation
 
of the economic
 
value of our
 
hedging
 
strategy
 
described
 
above helps
 
to present
 
our financial
 
position
 
and

performance,
 
it may be
 
of limited
 
usefulness
 
as an analytical
 
tool. Therefore,
 
the economic
 
value of
 
our investment
 
strategy should
 
not be

viewed in
 
isolation
 
and is not
 
a substitute
 
for interest
 
expense and
 
net interest
 
income computed
 
in accordance
 
with GAAP.

The tables
 
below present
 
a reconciliation
 
of the adjustments
 
to interest
 
expense shown
 
for each
 
period relative
 
to our derivative

instruments,
 
and the income
 
statement
 
line item,
 
gains (losses)
 
on derivative
 
instruments,
 
calculated
 
in accordance
 
with GAAP
 
for the

years ended
 
December
 
31, 2021,
 
2020 and
 
2019 and
 
each quarter
 
during 2021,
 
2020 and
 
2019.

53

Gains (Losses) on Derivative Instruments

(in thousands)

Economic Hedges

Recognized in

Attributed to

Attributed to

Income

U.S. Treasury and TBA

Current

Future

Statement

Securities Gain (Loss)

Period

Periods

(GAAP)

(Short Positions)

(Long Positions)

(Non-GAAP)

(Non-GAAP)

Three Months Ended

December 31, 2021

$

10,945

$

2,568

$

-

$

(7,949)

$

16,326

September 30, 2021

5,375

(2,306)

-

(1,248)

8,929

June 30, 2021

(34,915)

(5,963)

-

(5,104)

(23,848)

March 31, 2021

45,472

9,133

(8,559)

(4,044)

48,942

December 31, 2020

8,538

(436)

5,480

(5,790)

9,284

September 30, 2020

4,079

131

3,336

(6,900)

7,512

June 30, 2020

(8,851)

582

1,133

(5,751)

(4,815)

March 31, 2020

(82,858)

(7,090)

-

(4,900)

(70,868)

December 31, 2019

10,792

(512)

-

3,823

7,481

September 30, 2019

(8,648)

572

1,907

1,244

(12,371)

June 30, 2019

(34,288)

(1,684)

-

1,464

(34,068)

March 31, 2019

(19,032)

(4,641)

-

2,427

(16,818)

Years Ended

December 31, 2021

$

26,877

$

3,432

$

(8,559)

$

(18,345)

$

50,349

December 31, 2020

(79,092)

(6,813)

9,949

(23,341)

(58,887)

December 31, 2019

(51,176)

(6,265)

1,907

8,958

(55,776)

Economic Interest Expense and Economic Net Interest Income

(in thousands)

Interest Expense on Borrowings

Gains

(Losses) on

Derivative

Instruments

Net Interest Income

GAAP

Attributed

Economic

GAAP

Economic

Interest

Interest

to Current

Interest

Net Interest

Net Interest

Income

Expense

Period

(1)

Expense

(2)

Income

Income

(3)

Three Months Ended

December 31, 2021

$

44,421

$

2,023

$

(7,949)

$

9,972

$

42,398

$

34,449

September 30, 2021

34,169

1,570

(1,248)

2,818

32,599

31,351

June 30, 2021

29,254

1,556

(5,104)

6,660

27,698

22,594

March 31, 2021

26,856

1,941

(4,044)

5,985

24,915

20,871

December 31, 2020

25,893

2,011

(5,790)

7,801

23,882

18,092

September 30, 2020

27,223

2,043

(6,900)

8,943

25,180

18,280

June 30, 2020

27,258

4,479

(5,751)

10,230

22,779

17,028

March 31, 2020

35,671

16,523

(4,900)

21,423

19,148

14,248

December 31, 2019

37,529

20,022

3,823

16,199

17,507

21,330

September 30, 2019

35,907

22,321

1,244

21,077

13,586

14,830

June 30, 2019

36,455

22,431

1,464

20,967

14,024

15,488

March 31, 2019

32,433

18,892

2,427

16,465

13,541

15,968

Years Ended

December 31, 2021

$

134,700

$

7,090

$

(18,345)

$

25,435

$

127,610

$

109,265

December 31, 2020

116,045

25,056

(23,341)

48,397

90,989

67,648

December 31, 2019

142,324

83,666

8,958

74,708

58,658

67,616

(1)

Reflects the effect of derivative instrument hedges for only the period
 
presented.

(2)

Calculated by adding the effect of derivative instrument hedges attributed
 
to the period presented to GAAP interest expense.

(3)

Calculated by adding the effect of derivative instrument hedges attributed
 
to the period presented to GAAP net interest income.

54

Net Interest Income

During the
 
year ended
 
December
 
31, 2021,
 
we generated
 
$127.6 million
 
of net interest
 
income, consisting
 
of $134.7
 
million of
 
interest

income from
 
RMBS assets
 
offset by $7.1
 
million of
 
interest
 
expense on
 
borrowings.
 
For the comparable
 
period ended
 
December
 
31,

2020, we
 
generated
 
$91.0 million
 
of net interest
 
income, consisting
 
of $116.0 million
 
of interest
 
income from
 
RMBS assets
 
offset by $25.1

million of
 
interest
 
expense on
 
borrowings.
 
The $18.7
 
million increase
 
in interest
 
income was
 
driven by

a $1,569.3
 
million increase
 
in

average RMBS
 
that was
 
partially offset
 
by a 72 basis
 
point ("bps")
 
decrease
 
in yield on
 
average
 
RMBS. The
 
$18.0 million
 
decrease
 
in

interest
 
expense for
 
the year
 
ended December
 
31, 2021
 
was driven
 
by a 63 bps
 
decrease
 
in the average
 
cost of funds,
 
offset by
 
a

$1,510.5
 
million increase
 
in average
 
borrowings.

For the year
 
ended December
 
31, 2019,
 
we generated
 
$58.7 million
 
of net interest
 
income, consisting
 
of $142.3
 
million of
 
interest

income from
 
RMBS assets
 
offset by $83.7
 
million of
 
interest
 
expense on
 
borrowings.
 
The $26.3
 
million decrease
 
in interest
 
income for
 
the

year ended
 
December
 
31, 2020,
 
compared
 
to the year
 
ended December
 
31, 2019,
 
was due to
 
a 69 bps
 
decrease in
 
yield on
 
average

RMBS,
 
combined with
 
a $71.6 million
 
decrease
 
in average
 
RMBS during
 
the period.
 
The $58.6
 
million decrease
 
in interest
 
expense for
 
the

year ended
 
December
 
31, 2020
 
was due to
 
a $114.7 million
 
decrease
 
in average
 
borrowings,
 
combined with
 
a 175 bps
 
decrease
 
in the

average cost
 
of funds.

On an economic
 
basis, our
 
interest
 
expense on
 
borrowings
 
for the years
 
ended December
 
31, 2021,
 
2020 and
 
2019 was
 
$25.4

million, $48.4
 
million and
 
$74.7 million,
 
respectively, resulting
 
in $109.3
 
million, $67.6
 
million and
 
$67.6 million
 
of economic
 
net interest

income, respectively.

The tables
 
below provide
 
information
 
on our portfolio
 
average balances,
 
interest
 
income, yield
 
on assets,
 
average borrowings,
 
interest

expense, cost
 
of funds,
 
net interest
 
income and
 
net interest
 
spread for
 
each quarter
 
in 2021, 2020
 
and 2019
 
and for the
 
years ended

December
 
31, 2021,
 
2020 and
 
2019 on both
 
a GAAP and
 
economic basis.

($ in thousands)

Average

Yield on

Interest Expense

Average Cost of Funds

RMBS

Interest

Average

Average

GAAP

Economic

GAAP

Economic

Held

(1)

Income

RMBS

Borrowings

(1)

Basis

Basis

(2)

Basis

Basis

(3)

Three Months Ended

December 31, 2021

$

6,056,259

$

44,421

2.93%

$

5,728,988

$

2,023

$

9,972

0.14%

0.70%

September 30, 2021

5,136,331

34,169

2.66%

4,864,287

1,570

2,818

0.13%

0.23%

June 30, 2021

4,504,887

29,254

2.60%

4,348,192

1,556

6,660

0.14%

0.61%

March 31, 2021

4,032,716

26,856

2.66%

3,888,633

1,941

5,985

0.20%

0.62%

December 31, 2020

3,633,631

25,893

2.85%

3,438,444

2,011

7,801

0.23%

0.91%

September 30, 2020

3,422,564

27,223

3.18%

3,228,021

2,043

8,943

0.25%

1.11%

June 30, 2020

3,126,779

27,258

3.49%

2,992,494

4,479

10,230

0.60%

1.37%

March 31, 2020

3,269,859

35,671

4.36%

3,129,178

16,523

21,423

2.11%

2.74%

December 31, 2019

3,705,920

37,529

4.05%

3,631,042

20,022

16,199

2.21%

1.78%

September 30, 2019

3,674,087

35,907

3.91%

3,571,752

22,321

21,077

2.50%

2.36%

June 30, 2019

3,307,885

36,455

4.41%

3,098,133

22,431

20,967

2.90%

2.71%

March 31, 2019

3,051,509

32,433

4.25%

2,945,895

18,892

16,465

2.57%

2.24%

Years Ended

December 31, 2021

$

4,932,548

$

134,700

2.73%

$

4,707,525

$

7,090

$

25,435

0.15%

0.54%

December 31, 2020

3,363,208

116,045

3.45%

3,197,034

25,056

48,397

0.78%

1.51%

December 31, 2019

3,434,850

142,324

4.14%

3,311,705

83,666

74,708

2.53%

2.26%

55

($ in thousands)

Net Interest Income

Net Interest Spread

GAAP

Economic

GAAP

Economic

Basis

Basis

(2)

Basis

Basis

(4)

Three Months Ended

December 31, 2021

$

42,398

$

34,449

2.79%

2.23%

September 30, 2021

32,599

31,351

2.53%

2.43%

June 30, 2021

27,698

22,594

2.46%

1.99%

March 31, 2021

24,915

20,871

2.46%

2.04%

December 31, 2020

23,882

18,093

2.62%

1.94%

September 30, 2020

25,180

18,280

2.93%

2.07%

June 30, 2020

22,779

17,028

2.89%

2.12%

March 31, 2020

19,148

14,248

2.25%

1.62%

December 31, 2019

17,507

21,330

1.84%

2.27%

September 30, 2019

13,586

14,830

1.41%

1.55%

June 30, 2019

14,024

15,488

1.51%

1.70%

March 31, 2019

13,541

15,968

1.68%

2.01%

Years Ended

December 31, 2021

$

127,610

$

109,265

2.58%

2.19%

December 31, 2020

90,989

67,649

2.67%

1.94%

December 31, 2019

58,658

67,616

1.61%

1.88%

(1)

Portfolio yields and costs of borrowings presented in the tables above and the
 
tables on pages 60 and 61 are calculated based on the

average balances of the underlying investment portfolio/borrowings balances
 
and are annualized for the periods presented. Average

balances for quarterly periods are calculated using two data points, the beginning
 
and ending balances.

(2)

Economic interest expense and economic net interest income

presented in the table above and the tables on page 61 includes the effect

of our derivative instrument hedges for only the periods presented.

(3)
 
Represents interest cost of our borrowings and the effect of derivative
 
instrument hedges attributed to the period divided by average

RMBS.

(4)
 
Economic net interest spread is calculated by subtracting average economic
 
cost of funds from realized yield on average RMBS.

Interest Income and Average Asset Yield

Our interest
 
income for
 
the years
 
ended December
 
31, 2021
 
and 2020
 
was $134.7
 
million and
 
$116.0 million,
 
respectively.
 
We had

average RMBS
 
holdings of
 
$4,932.5
 
million and
 
$3,363.2
 
million for
 
the years
 
ended December
 
31, 2021
 
and 2020,
 
respectively.
 
The

yield on our
 
portfolio
 
was 2.73%
 
and 3.45%
 
for the years
 
ended December
 
31, 2021
 
and 2020,
 
respectively. For
 
the year
 
ended

December
 
31, 2021
 
as compared
 
to the year
 
ended December
 
31, 2020,
 
there was
 
a $18.7 million
 
increase in
 
interest
 
income due
 
to a

$1,569.3
 
million increase
 
in average
 
RMBS, offset
 
by a 72 bps
 
decrease
 
in the yield
 
on average
 
RMBS.

For the year
 
ended December
 
31, 2019,
 
we had interest
 
income of
 
$142.3 million
 
and average
 
RMBS holdings
 
of $3,434.9
 
million,

resulting
 
in a yield
 
on our portfolio
 
of 4.14%.
 
For the year
 
ended December
 
31, 2020,
 
as compared
 
to the year
 
ended December
 
31, 2019,

there was
 
a $26.3 million
 
decrease
 
in interest
 
income due
 
to a $71.6
 
million decrease
 
in average
 
RMBS, combined
 
with a 69
 
bps decrease

in the yield
 
on average
 
RMBS.

The table
 
below presents
 
the average
 
portfolio
 
size, income
 
and yields
 
of our respective
 
sub-portfolios,
 
consisting
 
of structured
 
RMBS

and PT RMBS
 
for the years
 
ended December
 
31, 2021,
 
2020 and
 
2019 and
 
for each
 
quarter during
 
2021, 2020
 
and 2019.

56

($ in thousands)

Average RMBS Held

Interest Income

Realized Yield on Average RMBS

PT

Structured

PT

Structured

PT

Structured

RMBS

RMBS

Total

RMBS

RMBS

Total

RMBS

RMBS

Total

Three Months Ended

December 31, 2021

$

5,878,376

$

177,883

$

6,056,259

$

42,673

$

1,748

$

44,421

2.90%

3.93%

2.93%

September 30, 2021

5,016,550

119,781

5,136,331

33,111

1,058

34,169

2.64%

3.53%

2.66%

June 30, 2021

4,436,135

68,752

4,504,887

29,286

(32)

29,254

2.64%

(0.18)%

2.60%

March 31, 2021

3,997,965

34,751

4,032,716

26,869

(13)

26,856

2.69%

(0.15)%

2.66%

December 31, 2020

3,603,885

29,746

3,633,631

25,933

(40)

25,893

2.88%

(0.53)%

2.85%

September 30, 2020

3,389,037

33,527

3,422,564

27,021

202

27,223

3.19%

2.41%

3.18%

June 30, 2020

3,088,603

38,176

3,126,779

27,004

254

27,258

3.50%

2.67%

3.49%

March 31, 2020

3,207,467

62,392

3,269,859

35,286

385

35,671

4.40%

2.47%

4.36%

December 31, 2019

3,611,461

94,459

3,705,920

36,600

929

37,529

4.05%

3.93%

4.05%

September 30, 2019

3,558,075

116,012

3,674,087

36,332

(425)

35,907

4.08%

(1.47)%

3.91%

June 30, 2019

3,181,976

125,909

3,307,885

34,992

1,463

36,455

4.40%

4.65%

4.41%

March 31, 2019

2,919,415

132,094

3,051,509

30,328

2,105

32,433

4.16%

6.37%

4.25%

Years Ended

December 31, 2021

$

4,832,257

$

100,291

$

4,932,548

$

131,939

$

2,761

$

134,700

2.73%

2.75%

2.73%

December 31, 2020

3,322,248

40,960

3,363,208

115,244

801

116,045

3.47%

1.96%

3.45%

December 31, 2019

3,317,732

117,118

3,434,850

138,252

4,072

142,324

4.17%

3.48%

4.14%

Interest Expense and the Cost of Funds

We had average
 
outstanding
 
borrowings
 
of $4,707.5
 
million and
 
$3,197.0 million
 
and total
 
interest
 
expense of
 
$7.1 million
 
and $25.1

million for
 
the years
 
ended December
 
31, 2021
 
and 2020,
 
respectively. Our
 
average cost
 
of funds
 
was 0.15%
 
for the year
 
ended

December
 
31, 2021,
 
compared
 
to 0.78%
 
for the comparable
 
period in
 
2020.
 
There was
 
a $1,510.5
 
million increase
 
in average
 
outstanding

borrowings
 
during the
 
year ended
 
December
 
31, 2021
 
as compared
 
to the year
 
ended December
 
31, 2020.

For the year
 
ended December
 
31, 2019,
 
we had average
 
borrowings
 
of $3,311.7 million
 
and total
 
interest
 
expense of
 
$83.7 million,

resulting
 
in an average
 
cost of funds
 
of 2.53%.
 
There was
 
a 175 bps
 
decrease
 
in the average
 
cost of funds
 
and an $114.7 million

decrease
 
in average
 
outstanding
 
borrowings
 
during the
 
year ended
 
December
 
31, 2020
 
as compared
 
to the year
 
ended December
 
31,

2019.

Our economic
 
interest
 
expense
 
was $25.4
 
million, $48.4
 
million and
 
$74.7 million
 
for the years
 
ended December
 
31, 2021,
 
2020 and

2019, respectively.
 
There was
 
a 97 bps
 
decrease
 
in the average
 
economic cost
 
of funds to
 
0.54% for
 
the year
 
ended December
 
31, 2021

from 1.51%
 
for the year
 
ended December
 
31, 2020.
 
The reason
 
for the decrease
 
in economic
 
cost of funds
 
is primarily
 
due to the
 
lower

cost of our
 
borrowings
 
noted above,
 
offset by the
 
negative performance
 
of our hedging
 
activities
 
during the
 
period. There
 
was a 75 bps

decrease
 
in the average
 
economic
 
cost of funds
 
to 1.51%
 
for the year
 
ended December
 
31, 2020
 
from 2.26%
 
for the year
 
ended

December
 
31, 2019.

Since all
 
of our repurchase
 
agreements
 
are short-term,
 
changes in
 
market rates
 
directly affect
 
our interest
 
expense. Our
 
average
 
cost

of funds
 
calculated
 
on a GAAP
 
basis was
 
5 bps above
 
average
 
one-month
 
LIBOR and
 
9 bps below
 
average six-month
 
LIBOR for
 
the

quarter ended
 
December
 
31, 2021.
 
Our average
 
economic cost
 
of funds
 
was equal
 
to average
 
one-month
 
LIBOR and
 
47 bps above

average six-month
 
LIBOR for
 
the quarter
 
ended December
 
31, 2021.
 
The average
 
term to maturity
 
of the outstanding
 
repurchase

agreements
 
was 27 days
 
and 31 days
 
at December
 
31, 2021 and
 
2020, respectively.

The tables
 
below present
 
the average
 
balance of
 
borrowings
 
outstanding,
 
interest
 
expense and
 
average cost
 
of funds,
 
and average

one-month
 
and six-month
 
LIBOR rates
 
for each
 
quarter in
 
2021, 2020
 
and 2019
 
and for the
 
years ended
 
December
 
31, 2021,
 
2020 and

2019 on both
 
a GAAP and
 
economic basis.

57

($ in thousands)

Average

Interest Expense

Average Cost of Funds

Balance of

GAAP

Economic

GAAP

Economic

Borrowings

Basis

Basis

Basis

Basis

Three Months Ended

December 31, 2021

$

5,728,988

$

2,023

$

9,972

0.14%

0.70%

September 30, 2021

4,864,287

1,570

2,818

0.13%

0.23%

June 30, 2021

4,348,192

1,556

6,660

0.14%

0.61%

March 31, 2021

3,888,633

1,941

5,985

0.20%

0.62%

December 31, 2020

3,438,444

2,011

7,801

0.23%

0.91%

September 30, 2020

3,228,021

2,043

8,943

0.25%

1.11%

June 30, 2020

2,992,494

4,479

10,230

0.60%

1.37%

March 31, 2020

3,129,178

16,523

21,423

2.11%

2.74%

December 31, 2019

3,631,042

20,022

16,199

2.21%

1.78%

September 30, 2019

3,571,752

22,321

21,077

2.50%

2.36%

June 30, 2019

3,098,133

22,431

20,967

2.90%

2.71%

March 31, 2019

2,945,895

18,892

16,465

2.57%

2.24%

Years Ended

December 31, 2021

$

4,707,525

$

7,090

$

25,435

0.15%

0.54%

December 31, 2020

3,197,034

25,056

48,397

0.78%

1.51%

December 31, 2019

3,311,705

83,666

74,708

2.53%

2.26%

Average GAAP Cost of Funds

Average Economic Cost of Funds

Relative to Average

Relative to Average

Average LIBOR

One-Month

Six-Month

One-Month

Six-Month

One-Month

Six-Month

LIBOR

LIBOR

LIBOR

LIBOR

Three Months Ended

December 31, 2021

0.09%

0.23%

0.05%

(0.09)%

0.61%

0.47%

September 30, 2021

0.09%

0.16%

0.04%

(0.03)%

0.14%

0.07%

June 30, 2021

0.10%

0.18%

0.04%

(0.04)%

0.51%

0.43%

March 31, 2021

0.13%

0.23%

0.07%

(0.03)%

0.49%

0.39%

December 31, 2020

0.15%

0.27%

0.08%

(0.04)%

0.76%

0.64%

September 30, 2020

0.17%

0.35%

0.08%

(0.10)%

0.94%

0.76%

June 30, 2020

0.55%

0.70%

0.05%

(0.10)%

0.82%

0.67%

March 31, 2020

1.34%

1.43%

0.77%

0.68%

1.40%

1.31%

December 31, 2019

1.90%

1.98%

0.31%

0.23%

(0.12)%

(0.20)%

September 30, 2019

2.22%

2.18%

0.28%

0.32%

0.14%

0.18%

June 30, 2019

2.45%

2.49%

0.45%

0.41%

0.26%

0.22%

March 31, 2019

2.51%

2.77%

0.06%

(0.20)%

(0.27)%

(0.53)%

Years Ended

December 31, 2021

0.10%

0.20%

0.05%

(0.05)%

0.44%

0.34%

December 31, 2020

0.55%

0.69%

0.23%

0.09%

0.96%

0.82%

December 31, 2019

2.27%

2.35%

0.26%

0.18%

(0.01)%

(0.09)%

58

Gains or Losses

The table
 
below presents
 
our gains
 
or losses
 
for the years
 
ended December
 
31, 2021,
 
2020 and
 
2019.

(in thousands)

2021

2020

2019

Realized losses on sales of RMBS

$

(5,542)

$

(24,986)

$

(10,877)

Unrealized (losses) gains on RMBS

(198,454)

25,761

38,045

Total (losses)
 
gains on RMBS

(203,996)

775

27,168

Losses on interest rate futures

(856)

(13,044)

(18,858)

Gains (losses) on interest rate swaps

23,613

(66,212)

(26,582)

Gains (losses) on payer swaptions (short positions)

9,062

(3,070)

(1,379)

(Losses) gains on payer swaptions (long positions)

(2,580)

98

-

Gains on interest rate floors

2,765

-

-

Gains (losses) on TBA securities (short positions)

3,432

(6,719)

(6,264)

(Losses) gains on TBA securities (long positions)

(8,559)

9,950

1,907

Losses on U.S. Treasury securities

-

(95)

-

Total

$

(177,119)

$

(78,317)

$

(24,008)

We invest in
 
RMBS with
 
the intent
 
to earn net
 
income from
 
the realized
 
yield on those
 
assets over
 
their related
 
funding and
 
hedging

costs, and
 
not for the
 
purpose of
 
making short
 
term gains
 
from sales.
 
However, we
 
have sold,
 
and may continue
 
to sell,
 
existing
 
assets to

acquire new
 
assets, which
 
our management
 
believes might
 
have higher
 
risk-adjusted
 
returns in
 
light of current
 
or anticipated
 
interest
 
rates,

federal government
 
programs
 
or general
 
economic conditions
 
or to manage
 
our balance
 
sheet as part
 
of our asset/liability
 
management

strategy. During
 
the years
 
ended December
 
31, 2021,
 
2020 and
 
2019, the
 
Company received
 
proceeds
 
of $2,851.7
 
million, $4,200.5

million and
 
$3,321.2
 
million,
 
respectively, from
 
the sales
 
of RMBS.
 
Approximately
 
$1.1 billion
 
of the sales
 
during the
 
year ended
 
December

31,
 
2020 occurred
 
during the
 
second half
 
of March
 
2020 as we
 
sold assets
 
in order
 
to maintain
 
sufficient
 
cash and liquidity
 
and reduce
 
risk

associated
 
with the
 
market turmoil
 
brought about
 
by COVID-19.

Realized and
 
unrealized
 
gains and
 
losses on
 
RMBS are
 
driven in
 
part by changes
 
in yields
 
and interest
 
rates, which
 
affect the
 
pricing

of the securities
 
in our portfolio.
 
Gains and
 
losses on
 
interest
 
rate futures
 
contracts
 
are affected
 
by changes
 
in implied
 
forward
 
rates during

the reporting
 
period.

The table
 
below presents
 
historical
 
interest
 
rate data
 
for each
 
quarter end
 
during 2021,
 
2020 and
 
2019.

5 Year

10 Year

15 Year

30 Year

Three

U.S. Treasury

U.S. Treasury

Fixed-Rate

Fixed-Rate

Month

Rate

(1)

Rate

(1)

Mortgage Rate

(2)

Mortgage Rate

(2)

LIBOR

(3)

December 31, 2021

1.26%

1.51%

2.35%

3.10%

0.21%

September 30, 2021

1.00%

1.53%

2.18%

2.90%

0.12%

June 30, 2021

0.87%

1.44%

2.27%

2.98%

0.13%

March 31, 2021

0.94%

1.75%

2.39%

3.08%

0.19%

December 31, 2020

0.36%

0.92%

2.22%

2.68%

0.23%

September 30, 2020

0.27%

0.68%

2.39%

2.89%

0.24%

June 30, 2020

0.29%

0.65%

2.60%

3.16%

0.31%

March 31, 2020

0.38%

0.70%

2.89%

3.45%

1.10%

December 31, 2019

1.69%

1.92%

3.18%

3.72%

1.91%

September 30, 2019

1.55%

1.68%

3.12%

3.61%

2.13%

June 30, 2019

1.76%

2.00%

3.24%

3.80%

2.40%

March 31, 2019

2.24%

2.41%

3.72%

4.27%

2.61%

(1)

Historical 5 and 10 Year
 
U.S. Treasury Rates are obtained from quoted end
 
of day prices on the Chicago Board Options Exchange.

(2)

Historical 30 Year and
 
15 Year Fixed
 
Rate Mortgage Rates are obtained from Freddie Mac’s Primary
 
Mortgage Market Survey.

(3)

Historical LIBOR is obtained from the Intercontinental Exchange Benchmark
 
Administration Ltd.

59

Expenses

Total operating expenses
 
were $15.3
 
million, $10.5
 
million and
 
$10.4 million
 
for the years
 
ended December
 
31, 2021,
 
2020 and 2019,

respectively.
 
The table
 
below provides
 
a breakdown
 
of operating
 
expenses for
 
the years
 
ended December
 
31, 2021,
 
2020 and
 
2019.

(in thousands)

2021

2020

2019

Management fees

$

8,156

$

5,281

$

5,528

Overhead allocation

1,632

1,514

1,380

Accrued incentive compensation

1,132

38

115

Directors fees and liability insurance

1,169

998

998

Audit, legal and other professional fees

1,112

1,045

1,105

Direct REIT operating expenses

1,475

1,057

997

Other administrative

575

611

262

Total expenses

$

15,251

$

10,544

$

10,385

We are externally managed and advised by Bimini Advisors, LLC (the “Manager”) pursuant
 
to the terms of a management

agreement. The management agreement has been renewed through February
 
20, 2023 and provides for automatic one-year extension

options thereafter and is subject to certain termination rights.
 
Under the terms of the management agreement, the Manager is

responsible for administering the business activities and day-to-day operations of
 
the Company.
 
The Manager receives a monthly

management fee in the amount of:

●

One-twelfth of 1.5% of the first $250 million of the Company’s month end equity, as defined in the management agreement,

●

One-twelfth of 1.25% of the Company’s month end equity that is greater than $250
 
million and less than or equal to $500

million, and

●

One-twelfth of 1.00% of the Company’s month end equity that is greater than $500
 
million.

The Company is obligated to reimburse the Manager for any direct expenses
 
incurred on its behalf and to pay the Manager the

Company’s pro rata portion of certain overhead costs set forth in the management
 
agreement.

The Company has contracted with AVM, L.P.
 
(“AVM”) to provide repurchase agreement trading, clearing and administrative

services to the Company. Commencing in 2022, the Manager will begin performing these functions and the contracted relationship
 
with

AVM may be reduced or eliminated. Following the termination of the arrangements with AVM, the Company will pay the Manager

additional fees for its performance of repurchase agreement funding transaction
 
services and related clearing and operational services

as set forth in the management agreement, as amended.

Should the Company terminate the management agreement without cause,
 
it will pay the Manager a termination fee equal to three

times the average annual management fee, as defined in the management
 
agreement, before or on the last day of the term of the

agreement.

The following table summarizes the management fee and overhead allocation
 
expenses for each quarter in 2021, 2020 and 2019

and for the years ended December 31, 2021, 2020 and 2019.

60

($ in thousands)

Average

Average

Advisory Services

Orchid

Orchid

Management

Overhead

Three Months Ended

MBS

Equity

Fee

Allocation

Total

December 31, 2021

$

6,056,259

$

806,382

$

2,587

$

443

$

3,030

September 30, 2021

5,136,331

672,384

2,156

390

2,546

June 30, 2021

4,504,887

542,679

1,792

395

2,187

March 31, 2021

4,032,716

456,687

1,621

404

2,025

December 31, 2020

3,633,631

387,503

1,384

442

1,826

September 30, 2020

3,422,564

368,588

1,252

377

1,629

June 30, 2020

3,126,779

361,093

1,268

348

1,616

March 31, 2020

3,269,859

376,673

1,377

347

1,724

December 31, 2019

3,705,920

414,018

1,477

379

1,856

September 30, 2019

3,674,087

394,788

1,440

351

1,791

June 30, 2019

3,307,885

363,961

1,326

327

1,653

March 31, 2019

3,051,509

363,204

1,285

323

1,608

Years Ended

December 31, 2021

$

4,932,548

$

619,533

$

8,156

$

1,632

$

9,788

December 31, 2020

3,363,208

373,464

5,281

1,514

6,795

December 31, 2019

3,434,850

383,993

5,528

1,380

6,908

Financial
 
Condition:

Mortgage-Backed Securities

As of December
 
31, 2021,
 
our RMBS
 
portfolio
 
consisted
 
of $6,511.1 million
 
of Agency
 
RMBS at
 
fair value
 
and had a
 
weighted

average coupon
 
on assets
 
of 3.03%.
 
During the
 
year ended
 
December
 
31, 2021,
 
we received
 
principal
 
repayments
 
of $591.1
 
million

compared
 
to $523.7
 
million for
 
the year
 
ended December
 
31, 2020.
 
The average
 
three month
 
prepayment
 
speeds for
 
the quarters
 
ended

December
 
31, 2021
 
and 2020
 
were 11.4% and
 
20.1%, respectively.

The following
 
table presents
 
the 3-month
 
constant prepayment
 
rate (“CPR”)
 
experienced
 
on our structured
 
and PT RMBS
 
sub-

portfolios,
 
on an annualized
 
basis, for
 
the quarterly
 
periods presented.
 
CPR is a
 
method of
 
expressing
 
the prepayment
 
rate for
 
a mortgage

pool that
 
assumes that
 
a constant
 
fraction
 
of the remaining
 
principal
 
is prepaid
 
each month
 
or year. Specifically,
 
the CPR
 
in the chart

below represents
 
the three
 
month prepayment
 
rate of the
 
securities
 
in the respective
 
asset
 
category.

Structured

PT RMBS

RMBS

Total

Three Months Ended

Portfolio (%)

Portfolio (%)

Portfolio (%)

December 31, 2021

9.0

24.6

11.4

September 30, 2021

9.8

25.1

12.4

June 30, 2021

10.9

29.9

12.9

March 31, 2021

9.9

40.3

12.0

December 31, 2020

16.7

44.3

20.1

September 30, 2020

14.3

40.4

17.0

June 30, 2020

13.9

35.3

16.3

March 31, 2020

9.8

22.9

11.9

61

The following
 
tables summarize
 
certain characteristics
 
of the Company’s
 
PT RMBS
 
and structured
 
RMBS as of
 
December 31,
 
2021

and 2020:

($ in thousands)

Weighted

Percentage

Average

of

Weighted

Maturity

Fair

Entire

Average

in

Longest

Asset Category

Value

Portfolio

Coupon

Months

Maturity

December 31, 2021

Fixed Rate RMBS

$

6,298,189

96.7%

2.93%

342

1-Dec-51

Total Mortgage-backed Pass-through

6,298,189

96.7%

2.93%

342

1-Dec-51

Interest-Only Securities

210,382

3.2%

3.40%

263

25-Jan-52

Inverse Interest-Only Securities

2,524

0.1%

3.75%

300

15-Jun-42

Total Structured RMBS

212,906

3.3%

3.41%

264

25-Jan-52

Total Mortgage Assets

$

6,511,095

100.0%

3.03%

325

25-Jan-52

December 31, 2020

Fixed Rate RMBS

$

3,560,746

95.5%

3.09%

339

1-Jan-51

Fixed Rate CMOs

137,453

3.7%

4.00%

312

15-Dec-42

Total Mortgage-backed Pass-through

3,698,199

99.2%

3.13%

338

1-Jan-51

Interest-Only Securities

28,696

0.8%

3.98%

268

25-May-50

Total Structured RMBS

28,696

0.8%

3.98%

268

25-May-50

Total Mortgage Assets

$

3,726,895

100.0%

3.19%

333

1-Jan-51

($ in thousands)

December 31, 2021

December 31, 2020

Percentage of

Percentage of

Agency

Fair Value

Entire Portfolio

Fair Value

Entire Portfolio

Fannie Mae

$

4,719,349

72.5%

$

2,733,960

73.4%

Freddie Mac

1,791,746

27.5%

992,935

26.6%

Total Portfolio

$

6,511,095

100.0%

$

3,726,895

100.0%

December 31, 2021

December 31, 2020

Weighted Average Pass-through Purchase Price

$

107.19

$

107.43

Weighted Average Structured Purchase Price

$

15.21

$

20.06

Weighted Average Pass-through Current Price

$

105.31

$

108.94

Weighted Average Structured Current Price

$

14.08

$

10.87

Effective Duration

(1)

3.390

2.360

(1)

Effective duration is the approximate percentage change in price
 
for a 100 bps change in rates.
 
An effective duration of 3.390 indicates that an

interest rate increase of 1.0% would be expected to cause a 3.390% decrease in the value
 
of the RMBS in the Company’s investment portfolio

at December 31, 2021.
 
An effective duration of 2.360 indicates that an interest rate increase
 
of 1.0% would be expected to cause a 2.360%

decrease in the value of the RMBS in the Company’s investment portfolio
 
at December 31, 2020. These figures include the structured securities

in the portfolio, but do not include the effect of the Company’s funding
 
cost hedges.
 
Effective duration quotes for individual investments are

obtained from The Yield Book, Inc.

62

The following
 
table presents
 
a summary
 
of portfolio
 
assets acquired
 
during the
 
years ended
 
December
 
31, 2021
 
and 2020.

($ in thousands)

2021

2020

Total Cost

Average

Price

Weighted

Average

Yield

Total Cost

Average

Price

Weighted

Average

Yield

Pass-through RMBS

$

6,224,819

$

106.68

1.63%

$

4,858,602

$

107.71

1.38%

Structured RMBS

205,906

13.61

3.88%

832

12.96

2.80%

Borrowings

As of December
 
31, 2021,
 
we had established
 
borrowing
 
facilities
 
in the repurchase
 
agreement
 
market with
 
a number
 
of commercial

banks and
 
other financial
 
institutions
 
and had borrowings
 
in place with
 
23 of these
 
counterparties.
 
None of these
 
lenders are
 
affiliated
 
with

the Company. These
 
borrowings
 
are secured
 
by the Company’s
 
RMBS and
 
cash, and
 
bear interest
 
at prevailing
 
market rates.
 
We believe

our established
 
repurchase
 
agreement
 
borrowing
 
facilities
 
provide borrowing
 
capacity in
 
excess of
 
our needs.

As of December
 
31, 2021,
 
we had obligations
 
outstanding
 
under the
 
repurchase
 
agreements
 
of approximately
 
$6,244.1
 
million with
 
a

net weighted
 
average borrowing
 
cost of 0.15%.
 
The remaining
 
maturity of
 
our outstanding
 
repurchase
 
agreement
 
obligations
 
ranged from

5 to 257
 
days, with
 
a weighted
 
average remaining
 
maturity of
 
27 days.
 
Securing
 
the repurchase
 
agreement
 
obligations
 
as of December

31, 2021
 
are RMBS
 
with an estimated
 
fair value,
 
including
 
accrued
 
interest,
 
of approximately
 
$6,525.2
 
million and
 
a weighted
 
average

maturity of
 
345 months,
 
and cash
 
pledged to
 
counterparties
 
of approximately
 
$57.3 million.
 
Through
 
February
 
25, 2022,
 
we have been

able to maintain
 
our repurchase
 
facilities
 
with comparable
 
terms to
 
those that
 
existed at
 
December
 
31, 2021
 
with maturities
 
extending
 
to

various dates
 
through September
 
14, 2022.

The table below presents information about our period end,
 
maximum and average balances of borrowings for each quarter in

2021 and 2020.

($ in thousands)

Difference Between Ending

Ending

Maximum

Average

Borrowings and

Balance of

Balance of

Balance of

Average Borrowings

Three Months Ended

Borrowings

Borrowings

Borrowings

Amount

Percent

December 31, 2021

$

6,244,106

$

6,419,689

$

5,728,988

$

515,118

8.99%

September 30, 2021

5,213,869

5,214,254

4,864,287

349,582

7.19%

June 30, 2021

4,514,704

4,517,953

4,348,192

166,512

3.83%

March 31, 2021

4,181,680

4,204,935

3,888,633

293,047

7.54%

December 31, 2020

3,595,586

3,597,313

3,438,444

157,142

4.57%

September 30, 2020

3,281,303

3,286,454

3,228,021

53,282

1.65%

June 30, 2020

3,174,739

3,235,370

2,992,494

182,245

6.09%

March 31, 2020

2,810,250

4,297,621

3,129,178

(318,928)

(10.19)%

(1)

(1)
 
The lower ending balance relative to the average balance during the quarter
 
ended March 31, 2020 reflects the sale of RMBS pledged as

collateral in order to maintain cash and liquidity in response to the dislocations in the financial
 
and mortgage markets resulting from the

economic impacts of COVID-19.
 
During the quarter ended March 31, 2020, the Company’s investment
 
in RMBS decreased $642.1 million.

Liquidity and Capital Resources

Liquidity
 
is our ability
 
to turn non-cash
 
assets into
 
cash, purchase
 
additional
 
investments,
 
repay principal
 
and interest
 
on borrowings,

fund overhead,
 
fulfill margin
 
calls and
 
pay dividends.
 
We have both
 
internal
 
and external
 
sources of
 
liquidity. However,
 
our material

unused sources
 
of liquidity
 
include cash
 
balances,
 
unencumbered
 
assets and
 
our ability
 
to sell encumbered
 
assets to
 
raise cash.
 
At the

63

onset of
 
the COVID-19
 
pandemic in
 
the spring
 
of 2020,
 
the markets
 
the Company
 
operates
 
in were severely
 
disrupted
 
and the Company

was forced
 
to rely on
 
these sources
 
of liquidity. Our
 
balance sheet
 
also generates
 
liquidity
 
on an on-going
 
basis through
 
payments
 
of

principal
 
and interest
 
we receive
 
on our RMBS
 
portfolio.
 
Management
 
believes that
 
we currently
 
have sufficient
 
liquidity
 
and capital

resources
 
available
 
for (a) the
 
acquisition
 
of additional
 
investments
 
consistent
 
with the
 
size and
 
nature of
 
our existing
 
RMBS portfolio,
 
(b)

the repayments
 
on borrowings
 
and (c) the
 
payment of
 
dividends
 
to the extent
 
required
 
for our continued
 
qualification
 
as a REIT.
 
We may

also generate
 
liquidity
 
from time
 
to time by
 
selling our
 
equity or
 
debt securities
 
in public
 
offerings
 
or private
 
placements.

Internal
 
Sources of
 
Liquidity

Our internal
 
sources of
 
liquidity
 
include our
 
cash balances,
 
unencumbered
 
assets and
 
our ability
 
to liquidate
 
our encumbered
 
security

holdings.
 
Our balance
 
sheet also
 
generates
 
liquidity
 
on an on-going
 
basis through
 
payments
 
of principal
 
and interest
 
we receive
 
on our

RMBS portfolio.
 
Because our
 
PT RMBS portfolio
 
consists entirely
 
of government
 
and agency
 
securities,
 
we do not
 
anticipate
 
having

difficulty converting
 
our assets
 
to cash should
 
our liquidity
 
needs ever
 
exceed our
 
immediately
 
available
 
sources of
 
cash.
 
Our structured

RMBS portfolio
 
also consists
 
entirely of
 
governmental
 
agency securities,
 
although
 
they typically
 
do not trade
 
with comparable
 
bid / ask

spreads as
 
PT RMBS.
 
However, we anticipate
 
that we would
 
be able to
 
liquidate
 
such securities
 
readily, even in
 
distressed
 
markets,

although
 
we would
 
likely do
 
so at prices
 
below where
 
such securities
 
could be sold
 
in a more
 
stable market.
 
To enhance our liquidity
 
even

further, we may
 
pledge a
 
portion of
 
our structured
 
RMBS as
 
part of a
 
repurchase
 
agreement
 
funding,
 
but retain
 
the cash in
 
lieu of acquiring

additional
 
assets.
 
In this way
 
we can, at
 
a modest
 
cost, retain
 
higher levels
 
of cash on
 
hand and
 
decrease
 
the likelihood
 
we will
 
have to

sell assets
 
in a distressed
 
market in
 
order to
 
raise cash.

Our strategy
 
for hedging
 
our funding
 
costs typically
 
involves
 
taking short
 
positions
 
in interest
 
rate futures,
 
treasury
 
futures,
 
interest
 
rate

swaps, interest
 
rate swaptions
 
or other
 
instruments.
 
When the
 
market causes
 
these short
 
positions
 
to decline
 
in value we
 
are required
 
to

meet margin
 
calls with
 
cash.
 
This can
 
reduce our
 
liquidity
 
position
 
to the extent
 
other securities
 
in our portfolio
 
move in price
 
in such a
 
way

that we do
 
not receive
 
enough cash
 
via margin
 
calls to
 
offset the
 
derivative
 
related margin
 
calls. If
 
this were
 
to occur
 
in sufficient

magnitude,
 
the loss of
 
liquidity
 
might force
 
us to reduce
 
the size
 
of the levered
 
portfolio,
 
pledge additional
 
structured
 
securities
 
to raise

funds or
 
risk operating
 
the portfolio
 
with less
 
liquidity.

External
 
Sources of
 
Liquidity

Our primary
 
external
 
sources of
 
liquidity
 
are our ability
 
to (i) borrow
 
under master
 
repurchase
 
agreements,
 
(ii) use
 
the TBA
 
security

market and
 
(iii) sell
 
our equity
 
or debt
 
securities
 
in public
 
offerings
 
or private
 
placements.
 
Our borrowing
 
capacity will
 
vary over
 
time as the

market value
 
of our interest
 
earning assets
 
varies.
 
Our master
 
repurchase
 
agreements
 
have no
 
stated expiration,
 
but can be
 
terminated
 
at

any time at
 
our option
 
or at the
 
option of
 
the counterparty.
 
However, once
 
a definitive
 
repurchase
 
agreement
 
under a master
 
repurchase

agreement
 
has been
 
entered into,
 
it generally
 
may not be
 
terminated
 
by either
 
party.
 
A negotiated
 
termination
 
can occur, but
 
may involve

a fee to
 
be paid by
 
the party
 
seeking to
 
terminate
 
the repurchase
 
agreement
 
transaction.

Under our
 
repurchase
 
agreement
 
funding arrangements,
 
we are required
 
to post margin
 
at the initiation
 
of the borrowing.
 
The margin

posted represents
 
the haircut,
 
which is a
 
percentage
 
of the market
 
value of the
 
collateral
 
pledged.
 
To the extent the
 
market value
 
of the

asset collateralizing
 
the financing
 
transaction
 
declines,
 
the market
 
value of our
 
posted margin
 
will be insufficient
 
and we will
 
be required
 
to

post additional
 
collateral.
 
Conversely, if
 
the market
 
value of the
 
asset pledged
 
increases
 
in value,
 
we would
 
be over collateralized
 
and we

would be
 
entitled to
 
have excess
 
margin returned
 
to us by the
 
counterparty.
 
Our lenders
 
typically
 
value our
 
pledged securities
 
daily to

ensure the
 
adequacy of
 
our margin
 
and make margin
 
calls as
 
needed, as
 
do we.
 
Typically, but not
 
always, the
 
parties agree
 
to a minimum

threshold
 
amount for
 
margin calls
 
so as to avoid
 
the need
 
for nuisance
 
margin calls
 
on a daily
 
basis.

Our master
 
repurchase
 
agreements

do not specify
 
the haircut;
 
rather haircuts
 
are determined
 
on an individual
 
repurchase
 
transaction
 
basis. Throughout
 
the year
 
ended

December
 
31, 2021,
 
haircuts on
 
our pledged
 
collateral
 
remained
 
stable and
 
as of December
 
31, 2021,
 
our weighted
 
average haircut
 
was

approximately
 
4.9% of the
 
value of
 
our collateral.

TBAs
 
represent
 
a form of
 
off-balance
 
sheet financing
 
and are
 
accounted
 
for as derivative
 
instruments.
 
(See Note
 
4 to our
 
Financial

64

Statements
 
in this Form
 
10-K for
 
additional
 
details on
 
of our TBAs).
 
Under certain
 
market conditions,
 
it may be
 
uneconomical
 
for us to
 
roll

our TBAs
 
into future
 
months and
 
we may need
 
to take or
 
make physical
 
delivery
 
of the underlying
 
securities.
 
If we were
 
required
 
to take

physical delivery
 
to settle
 
a long TBA,
 
we would
 
have to fund
 
our total
 
purchase
 
commitment
 
with cash
 
or other
 
financing
 
sources and
 
our

liquidity
 
position could
 
be negatively
 
impacted.

Our TBAs
 
are also
 
subject to
 
margin requirements
 
governed
 
by the Mortgage-Backed
 
Securities
 
Division ("MBSD")
 
of the FICC
 
and

by our master
 
securities
 
forward
 
transaction
 
agreements,
 
which may
 
establish
 
margin levels
 
in excess
 
of the MBSD.
 
Such provisions

require that
 
we establish
 
an initial
 
margin based
 
on the notional
 
value of the
 
TBA, which
 
is subject
 
to increase
 
if the estimated
 
fair value
 
of

our TBAs
 
or the estimated
 
fair value
 
of our pledged
 
collateral
 
declines.
 
The MBSD
 
has the sole
 
discretion
 
to determine
 
the value
 
of our

TBAs
 
and of the
 
pledged collateral
 
securing such
 
contracts.
 
In the event
 
of a margin
 
call, we
 
must generally
 
provide additional
 
collateral
 
on

the same
 
business day.

Settlement
 
of our TBA
 
obligations
 
by taking
 
delivery of
 
the underlying
 
securities
 
as well as
 
satisfying
 
margin requirements
 
could

negatively
 
impact our
 
liquidity
 
position.
 
However, since
 
we do not
 
use TBA dollar
 
roll transactions
 
as our primary
 
source of
 
financing,
 
we

believe that
 
we will have
 
adequate
 
sources of
 
liquidity
 
to meet
 
such obligations.

As discussed
 
earlier, we invest
 
a portion
 
of our capital
 
in structured
 
Agency RMBS.
 
We generally
 
do not apply
 
leverage
 
to this portion

of our portfolio.
 
The leverage
 
inherent
 
in structured
 
securities
 
replaces the
 
leverage
 
obtained
 
by acquiring
 
PT securities
 
and funding
 
them

in the repurchase
 
market.
 
This structured
 
RMBS strategy
 
has been a
 
core element
 
of the Company’s
 
overall investment
 
strategy
 
since

inception.
 
However, we
 
have and may
 
continue to
 
pledge a
 
portion
 
of our structured
 
RMBS in order
 
to raise our
 
cash levels,
 
but generally

will not
 
pledge these
 
securities
 
in order
 
to acquire
 
additional
 
assets.

In future
 
periods,
 
we expect
 
to continue
 
to finance
 
our activities
 
in a manner
 
that is consistent
 
with our
 
current operations
 
through

repurchase
 
agreements.
 
As of December
 
31, 2021,
 
we had cash
 
and cash equivalents
 
of $385.1
 
million.
 
We generated
 
cash flows
 
of

$716.5 million
 
from principal
 
and interest
 
payments on
 
our RMBS
 
and had average
 
repurchase
 
agreements
 
outstanding
 
of $4,707.5
 
million

during the
 
year ended
 
December
 
31, 2021.

As described more fully below, we may also access liquidity by selling our equity or debt securities in public offerings or private

placements.

Stockholders’
 
Equity

On August 2, 2017, we entered into the August 2017 Equity Distribution Agreement
 
with two sales agents pursuant to which we

could offer and sell, from time to time, up to an aggregate amount of $125,000,000 of
 
shares of our common stock in transactions that

were deemed to be “at the market” offerings and privately negotiated transactions. We issued
 
a total of 15,123,178 shares under the

August 2017 Equity Distribution Agreement for aggregate gross proceeds of $125.0
 
million, and net proceeds of approximately $123.1

million, after commissions and fees, prior to its termination in July 2019.

On July 30, 2019, we entered into the 2019 Underwriting Agreement with Morgan
 
Stanley & Co. LLC, Citigroup Global Markets Inc.

and J.P.
 
Morgan Securities LLC, as representatives of the underwriters named
 
therein, relating to the offer and sale of 7,000,000

shares of the Company’s common stock at a price to the public of $6.55 per share. The underwriters
 
purchased the shares pursuant to

the 2019 Underwriting Agreement at a price of $6.3535 per share. The closing
 
of the offering of 7,000,000 shares of common stock

occurred on August 2, 2019, with net proceeds to us of approximately $44.2
 
million after deduction of underwriting discounts and

commissions and other estimated offering expenses.

On January 23, 2020, we entered into the January 2020 Equity Distribution
 
Agreement with three sales agents pursuant to which

we could offer and sell, from time to time, up to an aggregate amount of $200,000,000 of
 
shares of our common stock in transactions

that were deemed to be “at the market” offerings and privately negotiated transactions.
 
We issued a total of 3,170,727 shares under

65

the January 2020 Equity Distribution Agreement for aggregate gross proceeds
 
of $19.8 million, and net proceeds of approximately

$19.4 million, after commissions and fees, prior to its termination in August
 
2020.

On August 4, 2020, we entered into the August 2020 Equity Distribution Agreement
 
with four sales agents pursuant to which we

could offer and sell, from time to time, up to an aggregate amount of $150,000,000
 
of shares of our common stock in transactions that

were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total
 
of 27,493,650 shares under the

August 2020 Equity Distribution Agreement for aggregate gross proceeds
 
of approximately $150.0 million, and net proceeds of

approximately $147.4 million, after commissions and fees,
 
prior to its termination in June 2021.

On January 20, 2021, we entered into the January 2021 Underwriting Agreement
 
with J.P. Morgan Securities LLC (“J.P.
 
Morgan”),

relating to the offer and sale of 7,600,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from

the Company pursuant to the January 2021 Underwriting Agreement at $5.20
 
per share. In addition, we granted J.P. Morgan a 30-day

option to purchase up to an additional 1,140,000 shares of our common stock
 
on the same terms and conditions, which J.P. Morgan

exercised in full on January 21, 2021. The closing of the offering of 8,740,000 shares of our
 
common stock occurred on January 25,

2021, with proceeds to us of approximately $45.2 million, net of offering expenses.

On March 2, 2021, we entered into the March 2021 Underwriting Agreement
 
with J.P. Morgan, relating to the offer and sale of

8,000,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from the Company pursuant to the

March 2021 Underwriting Agreement at $5.45 per share. In addition, we
 
granted J.P. Morgan a 30-day option to purchase up to an

additional 1,200,000 shares of our common stock on the same terms
 
and conditions, which J.P. Morgan exercised in full on March 3,

2021. The closing of the offering of 9,200,000 shares of our common stock occurred on
 
March 5, 2021, with proceeds to us of

approximately $50.0 million, net of offering expenses.

On June 22, 2021, we entered into the June 2021 Equity Distribution Agreement with four
 
sales agents pursuant to which we could

offer and sell, from time to time, up to an aggregate amount of $250,000,000 of shares
 
of our common stock in transactions that were

deemed to be “at the market” offerings and privately negotiated transactions. We issued a
 
total of 49,407,336 shares under the June

2021 Equity Distribution Agreement for aggregate gross proceeds of
 
approximately $250.0 million, and net proceeds of approximately

$246.2 million, after commissions and fees, prior to its termination in October
 
2021.

On October 29, 2021, we entered into the October 2021 Equity Distribution
 
Agreement with four sales agents pursuant to which

we may offer and sell, from time to time, up to an aggregate amount of $250,000,000 of
 
shares of our common stock in transactions

that are deemed to be “at the market” offerings and privately negotiated transactions. Through
 
December 31, 2021, we issued a total of

15,835,700 shares under the October 2021 Equity Distribution Agreement for aggregate
 
gross proceeds of approximately $78.3 million,

and net proceeds of approximately $77.0
 
million, after commissions and fees.

Outlook

Economic Summary

COVID-19 continued to impact the United States and the rest of the world during the fourth
 
quarter of 2021 and into the first

quarter of 2022.
 
The most recent variant, Omicron, spreads much more readily
 
than past variants, but also tends to be much less

severe.
 
Instances of new cases spiked rapidly, starting in December of 2021 and peaked, in the U.S., the week ended January 16,

2022 at 5.58 million.
 
Since then cases have declined fairly rapidly, as have hospitalizations, which have also tended to involve much

shorter stays in the hospital, especially in comparison to the Delta variant.
 
Despite the Omicron wave, the economy added 467,000

jobs in January 2022 and retail sales also rose well above estimates at 3.8%,
 
causing the markets and the Fed to meaningfully revise

expectations for the path of monetary policy in 2022 and beyond.

66

The rationale for the shift in expectations for monetary policy was found in the
 
economic data that was released during the fourth

quarter of 2021.
 
There were several economic indicators that reached milestone
 
levels and made it clear the economy had more than

recovered from the pandemic.
 
The Fed focuses on two areas of economic performance – inflation and the labor
 
market – tied to their

dual mandates of stable prices and maximum employment.
 
With respect to inflation, the year-over-year consumer price index reading

increased from the 4% increase reported in September of 2021
 
to 5.43% in December of 2021. Core personal consumption

expenditures – the Fed’s preferred inflation measure – increased from 3.7% year-over-year
 
to 4.85% between September and

December of 2021.
 
In the latter case, this was the highest reading since the early 1980s.
 
The producer price index was also increasing

rapidly – approaching 7% year over year in December of 2021.
 
This led the Fed to formally declare that their assessment of inflation

as “transitory” was no longer the case.

Labor market indicators
 
also reached new milestones. Initial claims for unemployment insurance
 
breached the 200,000 level

during the fourth quarter of 2021–
 
the first time this happened since the late 1960s.
 
Continuing claims for unemployment insurance

reached levels even lower than the lows reached prior to the pandemic, and the
 
unemployment rate reached 3.9% in December, still

0.4% above the lowest level reached prior to the pandemic but below the Fed’s long-term target
 
level and their proxy for full

employment.
 
The final piece of information was gross domestic product growth of 6.9%
 
for the fourth quarter, released in January of

2022.
 
The Fed’s outlook for monetary policy pivoted materially beginning in November
 
of 2021.

The economic data has strengthened further in early 2022.
 
In particular, measures of inflation have accelerated from the trend of

late 2021 and are very broad based, as prices for essentially every category
 
of goods and services are accelerating.
 
The employment

data has also been very strong, exhibiting little effect from the Omicron variant. The combination
 
of accelerating inflation well above the

Fed’s target level and a very tight labor market have led the market to anticipate the Fed will
 
react aggressively soon. The Fed has

signaled they are about to start an accelerated removal of the extreme monetary accommodation
 
necessitated by the pandemic.
 
In

January of 2022 the FOMC announced they would end their asset purchases
 
in March of 2022 and were likely to start decreasing the

reinvestment of their U.S. Treasury and RMBS assets as they matured or were repaid starting shortly
 
after their first rate hike.
 
The first

rate hike is likely to be in March as well. Current pricing in the futures
 
market indicates
 
the Fed will increase the Fed Funds rate at least

six times by January of 2023 and by approximately 75 basis points more in 2023.

There is a potentially significant geo-political development in the outlook as well.
 
Russia appears to be threatening to take military

action in the Ukraine.
 
They have moved over 100,000 troops and significant other military assets
 
such as tanks, combat aircraft,

missile systems, naval forces and medical personnel into areas on the
 
north, east and south of Ukraine. The situation has been

developing since late 2021 and diplomatic efforts to ease tensions in the area do not appear
 
to be working.
 
The United States and

several NATO allies have sent troops to the region and military supplies to Ukraine.
 
There is also the possibility hostilities may not be

limited to direct military confrontation.
 
This may have begun already as reports of cyber attacks throughout Ukraine
 
and other forms of

non-military intervention have occurred. Should the situation deteriorate further
 
and military action lead to a protracted war, there would

likely be an economic impact on Europe and therefore indirectly in the U.S., potentially
 
slowing economic activity at the margin and

possibly lessening the need for the Fed to remove monetary policy as
 
aggressively as expected otherwise.

Legislative Response and the Federal Reserve

Congress passed the CARES Act (described below) quickly in response to
 
the pandemic’s emergence during the spring of 2020.

As provisions of the CARES Act expired and the effects of the pandemic continued
 
to adversely impact the country, the federal

government passed an additional stimulus package in late December of 2020.
 
Further, on March 11, 2021, President Biden signed into

law an additional $1.9 trillion coronavirus aid package as part of the American
 
Rescue Plan Act of 2021.
 
This law provided for, among

other things, direct payments to most Americans with a gross income of
 
less than $75,000 a year, expansion of the child tax credit,

extension of expanded unemployment benefits through September 6, 2021, funding
 
for procurement of vaccines and health providers,

loans to qualified businesses, funding for rental and mortgage assistance and
 
funding for schools. The expanded federal

unemployment benefits expired on September 6, 2021.
 
In addition, the Fed provided as much support to the markets and the economy

as it could within the constraints of its mandate.

67

During the third quarter of 2020, the Fed unveiled a new monetary policy framework
 
focused on average inflation rate targeting

that allows the Fed Funds rate to remain quite low, even if inflation is expected to temporarily surpass the 2% target
 
level. Further, the

Fed stated they would look past the presence of very tight labor markets,
 
should they be present at the time.
 
This marks a significant

shift from their prior policy framework, which was focused on the unemployment
 
rate as a key indicator of impending inflation.

Adherence to this policy could steepen the U.S. Treasury curve as short-term rates could remain low for a
 
considerable period but

longer-term rates could rise given the Fed’s intention to let inflation potentially run above
 
2% in the future as the economy more fully

recovers.
 
As mentioned above, this policy shift will not likely have an effect on current
 
monetary policy as inflation is now running

considerably higher than the Fed’s 2% target level and the Fed appears likely to move
 
quickly to remove the extreme monetary

accommodation they provided as the pandemic emerged in the U.S. in the
 
spring of 2020.

Interest Rates

At the beginning of 2021,
 
interest rates were still close to the lowest levels ever observed
 
in 2020.
 
As the country and economy

emerged from the effects of the pandemic and the federal government and the Fed took unprecedented
 
actions to buttress the

economy from the effects of the pandemic, interest rates increased over the course of
 
the year.
 
Increases in interest rates were not

uniform over the year as shorter maturity rates, typically more sensitive to anticipated
 
increases in short term rates controlled by the

Fed, increased more than longer term rates.
 
As inflation accelerated in the fourth quarter of 2021, and even more so
 
in early 2022, this

trend intensified and currently the spread between certain intermediate rates
 
– such as 5-year and 7-year maturities – trade at yields

only marginally below longer-term rates such as 10-year U.S. Treasuries.
 
This flattening of the rates curve is typical as the economy

strengthens and the market anticipates increases in short-term rates by the Fed. As
 
economic and/or inflation data strengthen and the

market anticipates progressively more increases in short-term rates, this flattening
 
effect intensifies as well. Eventually the rates curve

could actually invert, whereby the intermediate rates mentioned above actually yield
 
more than longer-term rates.
 
This would occur

when the market anticipates the increases to short-term rates by the Fed will actually
 
slow the economy too much in the future and a

possible recession is on the horizon.
 
Given the unprecedented nature of the monetary and fiscal stimulus
 
needed to combat the

pandemic and the related supercharged effect on the economy, the current recovery and pending rate increase cycle will be difficult to

manage by the Fed and we expect that such an outcome is more likely to occur
 
than in past cycles.

The Agency RMBS Market

As was anticipated,
 
the Fed announced a tapering of their U.S. Treasury and Agency RMBS
 
asset purchases at their November

2021 meeting.
 
As described above, the forthcoming data was likely to necessitate an accelerated
 
pace of accommodation removal

and in December of 2021,
 
and again in January of 2022, the Fed announced revised schedules
 
for tapering.
 
This means a material

source of demand for Agency RMBS is about to leave the market.
 
Given Fed purchases are a source of reserves into the banking

system, this also means banks, which have also been a material source
 
for Agency RMBS, may also be buying fewer securities.

However, the securities that were the focus of the Fed and bank buying, namely production coupon securities, performed
 
relatively well

during the fourth quarter of 2021.

Total
 
returns for Agency RMBS for the fourth quarter and full year of 2021 were -0.4%
 
and -1.2%, respectively.
 
Agency RMBS

returns generally trailed other major domestic fixed income categories.
 
High yield debt returned 0.7% and 5.4% for the fourth quarter

and full year of 2021, respectively.
 
Investment grade returns for the same two periods were 0.2% and -1.0%.
 
Legacy non-Agency

RMBS returns were equal to or exceeded high yield returns.
 
Relative to comparable duration U.S. Treasuries Agency RMBS returns

were -1.0% and -1.6%, respectively for the same two periods.
 
Again, these returns trailed the same other major domestic fixed-income

categories and by comparable amounts.
 
Within the Agency RMBS 30-year coupons, production coupons – 2.0%
 
and 2.5% -

outperformed higher, liquid securities – 3.0% and 3.5%, both on an absolute and relative to comparable duration U.S.
 
Treasury basis

for the fourth quarter of 2021.

Recent Legislative and Regulatory Developments

68

The Fed conducted large scale overnight repo operations from late 2019 until
 
July 2020 to address disruptions in the U.S.

Treasury, Agency debt and Agency MBS financing markets. These operations ceased in July 2020 after the central bank successfully

tamed volatile funding costs that had threatened to cause disruption across the
 
financial system.

The Fed has taken a number of other actions to stabilize markets as a result
 
of the impacts of the COVID-19 pandemic. On

Sunday, March 15, 2020, the Fed announced a $700 billion asset purchase program to provide liquidity to the U.S. Treasury and

Agency MBS markets. Specifically, the Fed announced that it would purchase at least $500 billion of U.S. Treasuries and at least $200

billion of Agency MBS. The Fed also lowered the Fed Funds rate to a range
 
of 0.0% – 0.25%, after having already lowered the Fed

Funds rate by 50 bps on March 3, 2020. On June 30, 2020, Fed Chairman Powell
 
announced expectations to maintain interest rates at

this level until the Fed is confident that the economy has weathered recent events
 
and is on track to achieve maximum employment

and price stability goals. The Federal Open Market Committee (“FOMC”) continued
 
to reaffirm this commitment at all subsequent

meetings through December of 2021, as well as an intention to allow inflation to
 
climb modestly above their 2% target and maintain that

level for a period sufficient for inflation to average 2% long term.

On January 26, 2022, the FOMC reiterated its goals of maximum

employment and a 2% long-run inflation rate and stated that, with a strong labor market
 
and inflation well above 2%, it expected it

would soon be appropriate to raise the target federal funds rate.

In response to the deterioration in the markets for U.S. Treasuries, Agency MBS and other mortgage
 
and fixed income markets as

investors liquidated investments in response to the economic crisis resulting from
 
the actions to contain and minimize the impacts of

the COVID-19 pandemic, on the morning of Monday, March 23, 2020, the Fed announced a program to acquire U.S. Treasuries and

Agency MBS in the amounts needed to support smooth market functioning. With
 
these purchases, market conditions improved

substantially, and in early April, the Fed began to gradually reduce the pace of these purchases. Through November of 2021, the Fed

was committed to purchasing $80 billion of U.S. Treasuries and $40 billion of Agency MBS each month. In November
 
of 2021, it began

tapering its net asset purchases each month, reducing them to $70 billion,
 
$60 billion and $40 billion of U.S. Treasuries and $35 billion,

$30 billion and $20 billion of Agency MBS in November of 2021, December of
 
2021 and January of 2022, respectively.
 
On January 26,

2022, the FOMC announced that it would continue to increase its holdings of U.S. Treasuries by $20 billion per
 
month and its holdings

of Agency RMBS by $10 billion per month for February of 2022 and would end
 
its net asset purchases entirely by early March of 2022.

The CARES Act was passed by Congress and signed into law by President Trump on March 27, 2020.
 
The CARES Act provided

many forms of direct support to individuals and small businesses in order to stem the
 
steep decline in economic activity.
 
This over $2

trillion COVID-19 relief bill, among other things, provided for direct payments to each
 
American making up to $75,000 a year, increased

unemployment benefits for up to four months (on top of state benefits), funding
 
to hospitals and health providers, loans and

investments to businesses, states and municipalities and grants to the airline industry. On April 24, 2020, President Trump signed an

additional funding bill into law that provides an additional $484 billion of funding
 
to individuals, small businesses, hospitals, health care

providers and additional coronavirus testing efforts. Various provisions of the CARES Act began to expire in July 2020, including a

moratorium on evictions (July 25, 2020), expanded unemployment benefits (July
 
31, 2020), and a moratorium on foreclosures (August

31, 2020). On August 8, 2020, President Trump issued Executive Order 13945, directing the
 
Department of Health and Human

Services, the Centers for Disease Control and Prevention (“CDC”),
 
the Department of Housing and Urban Development, and

Department of the Treasury to take measures to temporarily halt residential evictions and foreclosures,
 
including through temporary

financial assistance.

On December 27, 2020, President Trump signed into law an additional $900 billion coronavirus aid package
 
as part of the

Consolidated Appropriations Act, 2021, providing for extensions of many
 
of the CARES Act policies and programs as well as additional

relief. The package provided for, among other things, direct payments to most Americans with a gross income of less
 
than $75,000 a

year, extension of unemployment benefits through March 14, 2021, funding for procurement of vaccines and health
 
providers, loans to

qualified businesses, funding for rental assistance and funding for schools.
 
On January 29, 2021, the CDC issued guidance extending

eviction moratoriums for covered persons through March 31, 2021. The FHFA subsequently extended the foreclosure
 
moratorium

begun under the CARES Act for loans backed by Fannie Mae and Freddie
 
Mac and the eviction moratorium for real estate owned by

69

Fannie Mae and Freddie Mac until July 31, 2021 and September 30, 2021, respectively. The U.S. Housing and Urban Development

Department subsequently extended the FHA foreclosure and eviction moratoria to
 
July 31, 2021 and September 30, 2021, respectively.

Despite the expirations of these foreclosure moratoria, a final rule adopted
 
by the CFPB on June 28, 2021 effectively prohibited

servicers from initiating a foreclosure before January 1, 2022 in most instances.

On March 11, 2021, President Biden signed into law an additional $1.9 trillion coronavirus aid package as part of the
 
American

Rescue Plan Act of 2021.
 
This law provided for, among other things, direct payments to most Americans with a gross income of less

than $75,000 a year, expansion of the child tax credit, extension of expanded unemployment benefits through September
 
6, 2021,

funding for procurement of vaccines and health providers, loans to qualified businesses,
 
funding for rental and mortgage assistance

and funding for schools. The expanded federal unemployment benefits expired on September
 
6, 2021.

In January 2019, the Trump administration made statements of its plans to work with Congress
 
to overhaul Fannie Mae and

Freddie Mac and expectations to announce a framework for the development of
 
a policy for comprehensive housing finance reform

soon. On September 30, 2019, the FHFA announced that Fannie Mae and Freddie Mac were allowed
 
to increase their capital buffers

to $25 billion and $20 billion, respectively, from the prior limit of $3 billion each. This step could ultimately lead to Fannie Mae and

Freddie Mac being privatized and represents the first concrete step on the road to
 
GSE reform.
 
On June 30, 2020, the FHFA released

a proposed rule on a new regulatory framework for the GSEs which seeks to implement
 
both a risk-based capital framework and

minimum leverage capital requirements. The final rule on the new capital framework
 
for the GSEs was published in the federal register

in December 2020.
 
On January 14, 2021, the U.S. Treasury and the FHFA executed letter agreements allowing the GSEs to continue

to retain capital up to their regulatory minimums, including buffers, as prescribed in the December
 
rule.
 
These letter agreements

provide, in part, (i) there will be no exit from conservatorship until all
 
material litigation is settled and the GSE has common equity Tier 1

capital of at least 3% of its assets, (ii) the GSEs will comply with
 
the FHFA’s
 
regulatory capital framework, (iii) higher-risk single-family

mortgage acquisitions will be restricted to current levels, and (iv) the U.S. Treasury and the FHFA will establish a timeline and process

for future GSE reform. However, no definitive proposals or legislation have been released or enacted with respect
 
to ending the

conservatorship, unwinding the GSEs, or materially reducing the roles of the GSEs
 
in the U.S. mortgage market.

On September 14,

2021, the U.S. Treasury and the FHFA suspended certain policy provisions in the January agreement, including limits on loans

acquired for cash consideration, multifamily loans, loans with higher risk
 
characteristics and second homes and investment properties.

On September 15, 2021, the FHFA announced a notice of proposed rulemaking for the purpose of amending the December
 
rule to,

among other things, reduce the Tier 1 capital and risk-weight floor requirements.

In 2017, policymakers announced that LIBOR will be replaced by December
 
31, 2021. The directive was spurred by the fact that

banks are uncomfortable contributing to the LIBOR panel given the shortage of underlying
 
transactions on which to base levels and the

liability associated with submitting an unfounded level. However, the ICE Benchmark Administration, in its
 
capacity as administrator of

USD LIBOR, has announced that it intends to extend publication of USD LIBOR (other
 
than one-week and two-month tenors) by 18

months to June 2023.
 
Notwithstanding this possible extension, a joint statement by key regulatory
 
authorities calls on banks to cease

entering into new contracts that use USD LIBOR as a reference rate by no
 
later than December 31, 2021. The ARRC,
 
a steering

committee comprised of large U.S. financial institutions, has proposed replacing
 
USD-LIBOR with a new SOFR, a rate based on U.S.

repo trading. Many banks believe that it may take four to five years to complete
 
the transition to SOFR, despite the December 31, 2021

deadline. We will monitor the emergence of SOFR carefully as it appears likely to become
 
the new benchmark for hedges and a range

of interest rate investments. At this time, however, no consensus exists as to what rate or rates may become accepted alternatives
 
to

LIBOR.

On December 7, 2021, the CFPB released a final rule that amends Regulation
 
Z, which implemented the Truth in Lending Act,

aimed at addressing cessation of LIBOR for both closed-end (e.g., home mortgage) and
 
open-end (e.g., home equity line of credit)

products. The rule, which mostly becomes effective in April of 2022, establishes requirements
 
for the selection of replacement indices

for existing LIBOR-linked consumer loans. Although the rule does not mandate
 
the use of SOFR as the alternative rate, it identifies

SOFR as a comparable rate for closed-end products and states that for open-end products,
 
the CFPB has determined that ARRC’s

recommended spread-adjusted indices based on SOFR for consumer products
 
to replace the one-month, three-month, or six-month

70

USD LIBOR index “have historical fluctuations that are substantially similar to
 
those of the LIBOR indices that they are intended to

replace.” The CFPB reserved judgment, however, on a SOFR-based spread-adjusted replacement
 
index to replace the one-year USD

LIBOR until it obtained additional information.

On December 8, 2021, the House of Representatives passed the Adjustable Interest
 
Rate (LIBOR) Act of 2021 (H.R. 4616) (the

“LIBOR Act”), which provides for a statutory replacement benchmark rate for contracts
 
that use LIBOR as a benchmark and do not

contain any fallback mechanism independent of LIBOR. Pursuant to the LIBOR
 
Act, SOFR becomes the new benchmark rate by

operation of law for any such contract. The LIBOR Act establishes a safe harbor from
 
litigation for claims arising out of or related to the

use of SOFR as the recommended benchmark replacement. The LIBOR Act
 
makes clear that it should not be construed to disfavor the

use of any benchmark on a prospective basis.

The LIBOR Act also attempts to forestall challenges that it is impairing
 
contracts. It provides that the discontinuance of LIBOR and

the automatic statutory transition to a replacement rate neither impairs or
 
affects the rights of a party to receive payment under such

contracts, nor allows a party to discharge their performance obligations or to declare
 
a breach of contract. It amends the Trust

Indenture Act of 1939 to state that the “the right of any holder of any
 
indenture security to receive payment of the principal of and

interest on such indenture security shall not be deemed to be impaired or
 
affected” by application of the LIBOR Act to any indenture

security.
 
On December 9, 2021, the United States Senate referred the LIBOR Act to
 
the Committee on Banking, Housing and Urban

Affairs.

One-week and two-month U.S. dollar LIBOR rates phased out on December 31,
 
2021, but other U.S. dollar tenors may continue

until June 30, 2023. We will monitor the emergence of SOFR carefully as it appears likely
 
to become the new benchmark for hedges

and a range of interest rate investments. At this time, however, no consensus exists as to what rate or rates may
 
become accepted

alternatives to LIBOR.

Effective January 1, 2021, Fannie Mae, in alignment with Freddie Mac, extended the timeframe for
 
its delinquent loan buyout

policy for Single-Family Uniform Mortgage-Backed Securities (UMBS)
 
and Mortgage-Backed Securities (MBS) from four consecutively

missed monthly payments to twenty-four consecutively missed monthly payments (i.e.,
 
24 months past due). This new timeframe

applied to outstanding single-family pools and newly issued single-family pools and was
 
first reflected when January 2021 factors were

released on the fourth business day in February 2021.

For Agency RMBS investors, when a delinquent loan is bought out of a pool of
 
mortgage loans, the removal of the loan from the

pool is the same as a total prepayment of the loan.
 
The respective GSEs anticipated, however, that delinquent loans will be

repurchased in most cases before the 24-month deadline under one of the following
 
exceptions listed below.

•
 
a loan that is paid in full, or where the related lien is released and/or the
 
note debt is satisfied or forgiven;

•
 
a loan repurchased by a seller/servicer under applicable selling and servicing
 
requirements;

•
 
a loan entering a permanent modification, which generally requires it to
 
be removed from the MBS. During any modification

trial period, the loan will remain in the MBS until the trial period ends;

•
 
a loan subject to a short sale or deed-in-lieu of foreclosure; or

•
 
a loan referred to foreclosure.

Because of these exceptions, the GSEs believe based on prevailing assumptions
 
and market conditions this change will have only

a marginal impact on prepayment speeds, in aggregate. Cohort level impacts
 
may vary. For example, more than half of loans referred

to foreclosure are historically referred within six months of delinquency. The degree to which speeds are affected depends on

delinquency levels, borrower response, and referral to foreclosure timelines.

The scope and nature of the actions the U.S. government or the Fed will
 
ultimately undertake are unknown and will continue to

evolve.

71

Effect on Us

Regulatory developments, movements in interest rates and prepayment rates
 
affect us in many ways, including the following:

Effects on our Assets

A change in or elimination of the guarantee structure of Agency RMBS may increase
 
our costs (if, for example, guarantee fees

increase) or require us to change our investment strategy altogether. For example, the elimination of the guarantee
 
structure of Agency

RMBS may cause us to change our investment strategy to focus on
 
non-Agency RMBS, which in turn would require us to significantly

increase our monitoring of the credit risks of our investments in addition to interest
 
rate and prepayment risks.

Lower long-term interest rates can affect the value of our Agency RMBS in a number of ways.
 
If prepayment rates are relatively

low (due, in part, to the refinancing problems described above), lower long-term interest
 
rates can increase the value of higher-coupon

Agency RMBS. This is because investors typically place a premium on assets
 
with yields that are higher than market yields. Although

lower long-term interest rates may increase asset values in our portfolio, we
 
may not be able to invest new funds in similarly-yielding

assets.

If prepayment levels increase, the value of our Agency RMBS affected by such prepayments may decline.
 
This is because a

principal prepayment accelerates the effective term of an Agency RMBS, which would shorten
 
the period during which an investor

would receive above-market returns (assuming the yield on the prepaid asset
 
is higher than market yields). Also, prepayment proceeds

may not be able to be reinvested in similar-yielding assets. Agency RMBS
 
backed by mortgages with high interest rates are more

susceptible to prepayment risk because holders of those mortgages
 
are most likely to refinance to a lower rate. IOs and IIOs, however,

may be the types of Agency RMBS most sensitive to increased prepayment
 
rates. Because the holder of an IO or IIO receives no

principal payments, the values of IOs and IIOs are entirely dependent
 
on the existence of a principal balance on the underlying

mortgages. If the principal balance is eliminated due to prepayment, IOs
 
and IIOs essentially become worthless. Although increased

prepayment rates can negatively affect the value of our IOs and IIOs, they have the opposite
 
effect on POs. Because POs act like zero-

coupon bonds, meaning they are purchased at a discount to their par value
 
and have an effective interest rate based on the discount

and the term of the underlying loan, an increase in prepayment rates would reduce
 
the effective term of our POs and accelerate the

yields earned on those assets, which would increase our net income.

Higher long-term rates can also affect the value of our Agency RMBS.
 
As long-term rates rise, rates available to borrowers also

rise.
 
This tends to cause prepayment activity to slow and extend the expected
 
average life of mortgage cash flows.
 
As the expected

average life of the mortgage cash flows increases, coupled with higher discount
 
rates, the value of Agency RMBS declines.
 
Some of

the instruments the Company uses to hedge our Agency RMBS assets,
 
such as interest rate futures, swaps and swaptions, are stable

average life instruments.
 
This means that to the extent we use such instruments to hedge
 
our Agency RMBS assets, our hedges may

not adequately protect us from price declines, and therefore may negatively impact our
 
book value.
 
It is for this reason we use interest

only securities in our portfolio. As interest rates rise, the expected average
 
life of these securities increases, causing generally positive

price movements as the number and size of the cash flows increase the
 
longer the underlying mortgages remain outstanding. This

makes interest only securities desirable hedge instruments for pass-through
 
Agency RMBS.

As described above, the Agency RMBS market began to experience severe dislocations
 
in mid-March 2020 as a result of the

economic, health and market turmoil brought about by COVID-19. On March 23, 2020,
 
the Fed announced that it would purchase

Agency RMBS and U.S. Treasuries in the amounts needed to support smooth market functioning, which
 
largely stabilized the Agency

RMBS market, but announced a tapering of these purchases in November 2021.
 
The Fed’s reduction of these purchases could

negatively impact our investment portfolio. Further, the moratoriums on foreclosures and evictions
 
described above will likely delay

potential defaults on loans that would otherwise be bought out of Agency MBS pools
 
as described above.
 
Depending on the ultimate

resolution of the foreclosure or evictions, when and if it occurs, these loans
 
may be removed from the pool into which they were

72

securitized. If this were to occur, it would have the effect of delaying a prepayment on the Company’s securities until such time. As the

majority of the Company’s Agency RMBS assets were acquired at a premium to par, this will tend to increase the realized
 
yield on the

asset in question.

Because we base our investment decisions on risk management principles
 
rather than anticipated movements in interest rates, in

a volatile interest rate environment we may allocate more capital to structured Agency
 
RMBS with shorter durations. We believe these

securities have a lower sensitivity to changes in long-term interest rates than other
 
asset classes. We may attempt to mitigate our

exposure to changes in long-term interest rates by investing in IOs and
 
IIOs, which typically have different sensitivities to changes in

long-term interest rates than PT RMBS, particularly PT RMBS backed by fixed-rate
 
mortgages.

Effects on our borrowing costs

We leverage our PT RMBS portfolio and a portion of our structured Agency RMBS
 
with principal balances through the use of short-

term repurchase agreement transactions. The interest rates on our debt
 
are determined by the short term interest rate markets. An

increase in the Fed Funds rate or LIBOR would increase our borrowing costs,
 
which could affect our interest rate spread if there is no

corresponding increase in the interest we earn on our assets. This would be
 
most prevalent with respect to our Agency RMBS backed

by fixed rate mortgage loans because the interest rate on a fixed-rate mortgage loan
 
does not change even though market rates may

change.

In order to protect our net interest margin against increases in short-term interest rates, we
 
may enter into interest rate swaps,

which economically convert our floating-rate repurchase agreement debt to fixed-rate
 
debt, or utilize other hedging instruments such as

Eurodollar, Fed Funds and T-Note futures contracts or interest rate swaptions.

Summary

The country and economy currently appear to be on the verge of recovering from
 
the COVID-19 pandemic.
 
While the virus

continues to infect people and often results in hospitalizations and deaths,
 
the effect on economic activity has decreased materially.

Coupled with unprecedented monetary and fiscal policy, the most significant combination of the two since the Second World War, the

fading effect of the pandemic is clearly causing the economy to run at unsustainable
 
levels, resulting in very tight labor markets and the

highest levels of inflation in decades. The Fed has begun the rapid transformation
 
from accommodation to constraint and will likely

begin raising short-term rates at their meeting in March of 2022.
 
Currently the market anticipates the Fed will continue to raise rates

throughout the year and into 2023, possibly by as much as 200 basis points.
 
Further, they are rapidly winding down their asset

purchases and will likely stop asset purchases altogether – possibly by the
 
end of the year – as they begin the process of “normalizing”

the size of their balance sheet.
 
Market experts estimate the Fed may have to shrink the size of their balance
 
sheet by up to $4 trillion,

and over a much shorter time frame than the last time they did so over the
 
period from 2017 to 2019.
 
The effect of these developments

on the level of interest rates has been a material flattening of the U.S. Treasury curve, whereby
 
short and intermediate term rates rise

and more so relative to longer maturity U.S. Treasuries.

For the Company,
 
this means our funding costs are likely to rise materially over the course
 
of 2022 and possibly into 2023.
 
While

longer-term maturities have not risen as much as short and intermediate term rates,
 
they have risen and refinancing and purchase

activity in the residential housing market is likely to slow. If this occurs, it would slow premium amortization on the Company’s Agency

RMBS securities. The net effect of higher funding costs and slower premium amortization
 
will depend on the extent and timing of both,

but may reduce the Company’s net interest income, and perhaps meaningfully so, over this period.

To the
 
extent geo-political events unfold, such as the current crisis in
 
Ukraine, the Fed may have to alter their monetary policy

decisions over the course of 2022 and beyond.
 
However, given the level of inflation and strength of the economy at present, such

developments would likely have to be severe in order to meaningfully
 
impact the path of monetary policy over the near-term.

Critical Accounting Estimates

73

Our financial statements are prepared in accordance with GAAP. GAAP requires our management to make some complex and

subjective decisions and assessments. Our most critical accounting policies involve
 
decisions and assessments which could

significantly affect reported assets, liabilities, revenues and expenses. Management has
 
identified its most critical accounting

estimates:

Mortgage-Backed Securities

Our investments in Agency RMBS are accounted for at fair value. We acquire our Agency
 
RMBS for the purpose of generating

long-term returns, and not for the short-term investment of idle capital.

As discussed in Note 12 to the financial statements, our Agency RMBS are valued using
 
Level 2 valuations, and such valuations

currently are determined by our manager based on independent pricing sources and/or
 
third party broker quotes, when available.

Because the price estimates may vary, our Manager must make certain judgments and assumptions about the appropriate
 
price to use

to calculate the fair values. Alternatively, our Manager could opt to have the value of all of our positions in Agency RMBS
 
determined

by either an independent third-party or do so internally.

In managing our portfolio, Bimini Advisors employs the following four-step process at
 
each valuation date to determine the fair

value of our Agency RMBS:

•
 
First, our Manager obtains fair values from subscription-based independent pricing
 
sources. These prices are used by both

our Manager as well as many of our repurchase agreement counterparty on
 
a daily basis to establish margin requirements for our

borrowings.

•
 
Second, our Manager requests non-binding quotes from one to four broker-dealers
 
for certain Agency RMBS in order to

validate the values obtained by the pricing service. Our Manager requests these
 
quotes from broker-dealers that actively trade and

make markets in the respective asset class for which the quote is requested.

•
 
Third, our Manager reviews the values obtained by the pricing source and the broker-dealers
 
for consistency across similar

assets.

•
 
Finally, if the data from the pricing services and broker-dealers is not homogenous or if the data obtained is inconsistent with

our Manager’s market observations, our Manager makes a judgment
 
to determine which price appears the most consistent with

observed prices from similar assets and selects that price. To the extent our Manager believes that none of the prices are consistent

with observed prices for similar assets, which is typically the case for only an
 
immaterial portion of our portfolio each quarter, our

Manager may use a third price that is consistent with observed prices for
 
identical or similar assets. In the case of assets that have

quoted prices such as Agency RMBS backed by fixed-rate mortgages, our Manager
 
generally uses the quoted or observed market

price. For assets such as Agency RMBS backed by ARMs or structured Agency
 
RMBS, our Manager may determine the price based

on the yield or spread that is identical to an observed transaction or a similar
 
asset for which a dealer mark or subscription-based price

has been obtained.

Management believes its pricing methodology to be consistent with the
 
definition of fair value described in Financial Accounting

Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements.

Derivative Financial Instruments

We use derivative instruments to manage interest rate risk, facilitate asset/liability strategies
 
and manage other exposures, and we

may continue to do so in the future. The principal instruments that we have
 
used to date are Fed Funds, T-Note and Eurodollar futures

contracts, interest rate swaps, interest rate swaptions and TBA securities,
 
but we may enter into other derivatives in the future.

74

We account for TBA securities as derivative instruments. Gains and losses associated
 
with TBA securities transactions are

reported in gain (loss) on derivative instruments in the accompanying
 
statements of operations.

We have elected not to treat any of our derivative financial instruments as hedges in
 
order to align the accounting treatment of its

derivative instruments with the treatment of our portfolio assets under the fair
 
value option election. All derivative instruments are

carried at fair value, and changes in fair value are recorded in earnings for
 
each period.

Our futures contracts are Level 1 valuations, as

they are exchange-traded instruments and quoted market prices are readily available.

Our interest rate swaps,
 
interest rate swaptions

and TBA securities are Level 2 valuations. The fair value of interest rate swaps
 
is determined using a discounted cash flow approach

using forward market interest rates and discount rates, which are observable
 
inputs. The fair value of interest rate swaptions is

determined using an option pricing model. The fair value of our TBA
 
securities are determined by the Company based on independent

pricing sources and/or third party broker quotes, similar to how
 
the fair value of our Agency RMBS is derived, as discussed above.

Income Recognition

Since we commenced operations, we have elected to account for all of our Agency
 
RMBS under the fair value option.

All of our Agency RMBS are either pass-through securities or structured Agency
 
RMBS, including CMOs, IOs, IIOs or POs. Income

on pass-through securities, POs and CMOs that contain principal balances is
 
based on the stated interest rate of the security. As a

result of accounting for our RMBS under the fair value option, premium or
 
discount present at the date of purchase is not amortized.

For IOs, IIOs and CMOs that do not contain principal balances, income is accrued
 
based on the carrying value and the effective yield.

The difference between income accrued and the interest received on the security is
 
characterized as a return of investment and serves

to reduce the asset’s carrying value. At each reporting date, the effective yield is adjusted
 
prospectively for future reporting periods

based on the new estimate of prepayments, current interest rates and current
 
asset prices. The new effective yield is calculated based

on the carrying value at the end of the previous reporting period, the new prepayment
 
estimates and the contractual terms of the

security. Changes in fair value of all of our Agency RMBS during the period are recorded in earnings and reported as unrealized
 
gains

(losses) on mortgage-backed securities in the accompanying statements of operations.
 
For IIO securities, effective yield and income

recognition calculations also take into account the index value applicable to
 
the security.

Capital Expenditures

At December 31, 2021,
 
we had no material commitments for capital expenditures.

Dividends

In addition to other requirements that must be satisfied to continue to qualify as a REIT, we must pay annual dividends to our

stockholders of at least 90% of our REIT taxable income, determined without regard
 
to the deductions for dividends paid and excluding

any net capital gains. REIT taxable income (loss) is computed in accordance with
 
the Code, and can be greater than or less than our

financial statement net income (loss) computed in accordance with GAAP. These book to tax differences primarily relate to the

recognition of interest income on RMBS, unrealized gains and losses on
 
RMBS, and the amortization of losses on derivative

instruments that are treated as funding hedges for tax purposes.

We intend to pay regular monthly dividends to our stockholders and have declared the
 
following dividends since the completion of

our IPO.

(in thousands, except per share amounts)

Year

Per Share

Amount

Total

2013

$

1.395

$

4,662

2014

2.160

22,643

75

2015

1.920

38,748

2016

1.680

41,388

2017

1.680

70,717

2018

1.070

55,814

2019

0.960

54,421

2020

0.790

53,570

2021

0.780

97,601

2022 YTD

(1)

0.110

19,502

Totals

$

12.545

$

459,066

(1)

On January 13, 2022, the Company declared a dividend of $0.055 per
 
share to be paid on February 24, 2022. On February 16, 2022, the

Company declared a dividend of $0.055 per share to be paid on March 29,
 
2022. The dollar amount of the dividend declared in February 2022

is estimated based on the number of shares outstanding at February
 
25, 2022. The effects of these dividends are included in the table
 
above

but are not reflected in the Company’s financial statements as of December
 
31, 2021.