# Orchid Island Capital, Inc. (ORC) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Orchid Island Capital, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1518621/000143774923005355/orc20221231_10k.htm
Accession: 0001437749-23-005355
Filing date: 2023-03-03
Report date: 2022-12-31
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/
Previous year: /company/ORC/mda/fy2021/ (FY 2021)
Next year: /company/ORC/mda/fy2023/ (FY 2023)

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.

Common Stock Reverse Split

On August 30, 2022, the Company effected a 1-for-5 reverse stock split of its common stock and proportionately decreased the number of authorized shares of common stock.  All share and per share information has been retroactively adjusted to reflect the reverse split.

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 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 REIT under 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 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 634,145 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 5,498,730 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.

42

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 1,520,000 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 $26.00 per share. In addition, we granted J.P. Morgan a 30-day option to purchase up to an additional 228,000 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 1,748,000 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 1,600,000 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 $27.25 per share. In addition, we granted J.P. Morgan a 30-day option to purchase up to an additional 240,000 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 1,840,000 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 9,881,467 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, 2022, we issued a total of 7,052,188 shares under the October 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately $119.6 million, and net proceeds of approximately $117.6 million, after commissions and fees. Subsequent to December 31, 2022 and through March 3, 2023, we issued a total of 2,690,000 shares under the October 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately $32.2 million, and net proceeds of approximately $31.7 million, after commissions and fees.

Stock Repurchase Program

On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to 400,000 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 without prior notice. On February 8, 2018, the Board of Directors approved an increase in the stock repurchase program for up to an additional 904,564 shares of the Company’s common stock. Coupled with the 156,751 shares remaining from the original 400,000 share authorization, the increased authorization brought the total authorization to 1,061,316 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 3,372,399 shares, bringing the remaining authorization under the stock repurchase program to 3,539,861 shares, representing approximately 10% of the Company’s then outstanding shares of common stock.

On October 12, 2022, 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 4,300,000 shares, bringing the remaining authorization under the stock repurchase program to 6,183,601 shares, representing approximately 18% of the Company’s then outstanding shares of common stock. This stock repurchase program has no termination date.

From the inception of the stock repurchase program through December 31, 2022, the Company repurchased a total of 3,675,572 shares at an aggregate cost of approximately $64.8 million, including commissions and fees, for a weighted average price of $17.63 per share. During the year ended December 31, 2022, the Company repurchased a total of 2,538,470 shares of its common stock at an aggregate cost of approximately $24.5 million, including commissions and fees, for a weighted average price of $9.63 per share. Subsequent to December 31, 2022, and through March 3, 2023, the Company repurchased a total of 373,041 shares at an aggregate cost of approximately $4.0 million, including commissions and fees, for a weighted average price of $10.62 per share.

43

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:

[[GREPCENT_TABLE]]
[["","\u25cf","interest rate trends;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","increases in our cost of funds resulting from increases in the Federal Funds rate that are controlled by the Fed that occurred in 2022 and are likely to occur in 2023;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","the difference between Agency RMBS yields and our funding and hedging costs;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","competition for, and supply of, investments in Agency RMBS;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","actions taken by the U.S. government, including the presidential administration, the Fed, the FHFA, the FHA, the FOMC and the U.S. Treasury;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","prepayment rates on mortgages underlying our Agency RMBS and credit trends insofar as they affect prepayment rates; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","other market developments."]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","\u25cf","our degree of leverage;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","our access to funding and borrowing capacity;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","our borrowing costs;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","our hedging activities;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","the market value of our investments;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","increases in our cost of funds resulting from increases in the Fed Funds rate that are controlled by the Fed which have occurred in 2022, and are likely to continue to occur in 2023; and"],["","\u25cf","the requirements to qualify as a REIT and the requirements to qualify for a registration exemption under the Investment Company Act."]]
[[/GREPCENT_TABLE]]

Results of Operations

Described below are the Company’s results of operations for the years ended December 31, 2022, as compared to the Company’s results of operations for the years ended December 31, 2021 and 2020.

Net (Loss) Income Summary

Net loss for the year ended December 31, 2022 was $258.5 million, or $6.90 per share. Net loss for the year ended December 31, 2021 was $64.8 million, or $2.67 per share. Net income for the year ended December 31, 2020 was $2.1 million, or $0.16 per share. The components of net (loss) income for the years ended December 31, 2022, 2021 and 2020 are presented in the table below:

[[GREPCENT_TABLE]]
[["(in thousands)"],["","","2022","","","2021","","","2020"],["Interest income","","$","144,633","","","$","134,700","","","$","116,045"],["Interest expense","","","(61,708",")","","","(7,090",")","","","(25,056",")"],["Net interest income","","","82,925","","","","127,610","","","","90,989"],["Losses on RMBS and derivative contracts","","","(320,669",")","","","(177,119",")","","","(78,317",")"],["Net portfolio (loss) income","","","(237,744",")","","","(49,509",")","","","12,672"],["Expenses","","","(20,709",")","","","(15,251",")","","","(10,544",")"],["Net (loss) income","","$","(258,453",")","","$","(64,760",")","","$","2,128"]]
[[/GREPCENT_TABLE]]

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.”

44

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.

Described below are the Company's results of operations for the years ended December 31, 2022, 2021 and 2020.

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Includes realized and unrealized gains (losses) on RMBS and derivative financial instruments, including net interest income or expense on interest rate swaps."]]
[[/GREPCENT_TABLE]]

45

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 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 from time to time invests 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, 2022, 2021 and 2020 and each quarter during 2022, 2021 and 2020.

46

[[GREPCENT_TABLE]]
[["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, 2022","","$","(10,657",")","","$","(9,700",")","","$","-","","","$","11,076","","","$","(12,033",")"],["September 30, 2022","","","184,819","","","","10,642","","","","106","","","","5,043","","","","169,028"],["June 30, 2022","","","103,758","","","","1,013","","","","1,067","","","","1,996","","","","99,682"],["March 31, 2022","","","177,816","","","","2,539","","","","27","","","","(1,287",")","","","176,537"],["December 31, 2021","","","10,945","","","","2,568","","","","-","","","","(7,949",")","","","16,326"],["September 30, 2021","","","5,375","","","","(2,306",")","","","-","","","","(1,248",")","","","8,929"],["June 30, 2021","","","(34,915",")","","","(5,963",")","","","-","","","","(5,104",")","","","(23,848",")"],["March 31, 2021","","","45,472","","","","9,133","","","","(8,559",")","","","(4,044",")","","","48,942"],["December 31, 2020","","","8,538","","","","(436",")","","","5,480","","","","(5,790",")","","","9,284"],["September 30, 2020","","","4,079","","","","131","","","","3,336","","","","(6,900",")","","","7,512"],["June 30, 2020","","","(8,851",")","","","582","","","","1,133","","","","(5,751",")","","","(4,815",")"],["March 31, 2020","","","(82,858",")","","","(7,090",")","","","-","","","","(4,900",")","","","(70,868",")"],["Years Ended"],["December 31, 2022","","$","455,736","","","$","4,494","","","$","1,200","","","$","16,828","","","$","433,214"],["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",")"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["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, 2022","","$","31,897","","","$","29,512","","","$","11,076","","","$","18,436","","","$","2,385","","","$","13,461"],["September 30, 2022","","","35,611","","","","21,361","","","","5,043","","","","16,318","","","","14,250","","","","19,293"],["June 30, 2022","","","35,268","","","","8,180","","","","1,996","","","","6,184","","","","27,088","","","","29,084"],["March 31, 2022","","","41,857","","","","2,655","","","","(1,287",")","","","3,942","","","","39,202","","","","37,915"],["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"],["Years Ended"],["December 31, 2022","","$","144,633","","","$","61,708","","","$","16,828","","","$","44,880","","","$","82,925","","","$","99,753"],["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"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Reflects the effect of derivative instrument hedges for only the period presented."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP interest expense."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(3)","Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP net interest income."]]
[[/GREPCENT_TABLE]]

47

Net Interest Income

During the year ended December 31, 2022, we generated $82.9 million of net interest income, consisting of $144.6 million of interest income from RMBS assets offset by $61.7 million of interest expense on borrowings. For the comparable period 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. The $9.9 million increase in interest income was driven by a 72 basis points ("bps") increase in yield on average RMBS that was partially offset by a $745.5 million decrease in average RMBS. The $54.6 million increase in interest expense for the year ended December 31, 2022 was driven by a 138 bps increase in the average cost of funds, offset by a $665.5 million decrease in average borrowings.

For the year ended December 31, 2020, we generated $91.0 million of net interest income, consisting of $116.1 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 for the year ended December 31, 2021, compared to the year ended December 31, 2020, was due to a $1,569.3 million increase in average RMBS, that was partially offset by a 72 bps decrease in yield on average RMBS. The $18.0 million decrease in interest expense for the year ended December 31, 2021 was due to a 63 bps decrease in the average cost of funds, partially offset by a $1,510.5 million increase in average borrowings.

On an economic basis, our interest expense on borrowings for the years ended December 31, 2022, 2021 and 2020 was $44.9 million, $25.4 million and $48.4 million, respectively, resulting in $99.8 million, $109.3 million and $67.7 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 2022, 2021 and 2020 and for the years ended December 31, 2022, 2021 and 2020 on both a GAAP and economic basis.

[[GREPCENT_TABLE]]
[["($ 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, 2022","","$","3,370,608","","","$","31,897","","","","3.79","%","","$","3,256,153","","","$","29,512","","","$","18,436","","","","3.63","%","","","2.26","%"],["September 30, 2022","","","3,571,037","","","","35,611","","","","3.99","%","","","3,446,420","","","","21,361","","","","16,318","","","","2.48","%","","","1.89","%"],["June 30, 2022","","","4,260,727","","","","35,268","","","","3.31","%","","","4,111,544","","","","8,180","","","","6,184","","","","0.80","%","","","0.60","%"],["March 31, 2022","","","5,545,844","","","","41,857","","","","3.02","%","","","5,354,107","","","","2,655","","","","3,942","","","","0.20","%","","","0.29","%"],["December 31, 2021","","","6,056,259","","","","44,421","","","","2.93","%","","","5,728,988","","","","2,023","","","","9,972","","","","0.14","%","","","0.70","%"],["September 30, 2021","","","5,136,331","","","","34,169","","","","2.66","%","","","4,864,287","","","","1,570","","","","2,818","","","","0.13","%","","","0.23","%"],["June 30, 2021","","","4,504,887","","","","29,254","","","","2.60","%","","","4,348,192","","","","1,556","","","","6,660","","","","0.14","%","","","0.61","%"],["March 31, 2021","","","4,032,716","","","","26,856","","","","2.66","%","","","3,888,633","","","","1,941","","","","5,985","","","","0.20","%","","","0.62","%"],["December 31, 2020","","","3,633,631","","","","25,893","","","","2.85","%","","","3,438,444","","","","2,011","","","","7,801","","","","0.23","%","","","0.91","%"],["September 30, 2020","","","3,422,564","","","","27,223","","","","3.18","%","","","3,228,021","","","","2,043","","","","8,943","","","","0.25","%","","","1.11","%"],["June 30, 2020","","","3,126,779","","","","27,258","","","","3.49","%","","","2,992,494","","","","4,479","","","","10,230","","","","0.60","%","","","1.37","%"],["March 31, 2020","","","3,269,859","","","","35,671","","","","4.36","%","","","3,129,178","","","","16,523","","","","21,423","","","","2.11","%","","","2.74","%"],["Years Ended"],["December 31, 2022","","$","4,187,054","","","$","144,633","","","","3.45","%","","$","4,042,056","","","$","61,708","","","$","44,880","","","","1.53","%","","","1.11","%"],["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","%"]]
[[/GREPCENT_TABLE]]

48

[[GREPCENT_TABLE]]
[["($ in thousands)"],["","","Net Interest Income","","","Net Interest Spread"],["","","GAAP","","","Economic","","","GAAP","","","Economic"],["","","Basis","","","Basis(2)","","","Basis","","","Basis(4)"],["Three Months Ended"],["December 31, 2022","","$","2,385","","","$","13,461","","","","0.16","%","","","1.53","%"],["September 30, 2022","","","14,250","","","","19,293","","","","1.51","%","","","2.10","%"],["June 30, 2022","","","27,088","","","","29,084","","","","2.51","%","","","2.71","%"],["March 31, 2022","","","39,202","","","","37,915","","","","2.82","%","","","2.73","%"],["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","","","","18,092","","","","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","%"],["Years Ended"],["December 31, 2022","","$","82,925","","","$","99,753","","","","1.92","%","","","2.34","%"],["December 31, 2021","","","127,610","","","","109,265","","","","2.58","%","","","2.19","%"],["December 31, 2020","","","90,989","","","","67,648","","","","2.67","%","","","1.94","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Portfolio yields and costs of borrowings presented in the tables above and the tables on pages 50 and 51 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."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","Economic interest expense and economic net interest income presented in the table above and the tables on page 51 includes the effect of our derivative instrument hedges for only the periods presented."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(3)","Represents interest cost of our borrowings and the effect of derivative instrument hedges attributed to the period divided by average RMBS."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(4)","Economic net interest spread is calculated by subtracting average economic cost of funds from realized yield on average RMBS."]]
[[/GREPCENT_TABLE]]

Interest Income and Average Asset Yield

Our interest income for the years ended December 31, 2022 and 2021 was $144.6 million and $134.7 million, respectively. We had average RMBS holdings of  $4,187.1 million and $4,932.6 million for the years ended December 31, 2022 and 2021, respectively. The yield on our portfolio was 3.45% and 2.73% for the years ended December 31, 2022 and 2021, respectively. For the year ended December 31, 2022 as compared to the year ended December 31, 2021, there was a $9.9 million increase in interest income due to a 72 bps increase in the yield on average RMBS, offset by a $745.5 million decrease in average RMBS.

For the year ended December 31, 2020, we had interest income of $116.0 million and average RMBS holdings of $3,363.2 million, resulting in a yield on our portfolio of 3.45%. For the year ended December 31, 2021, as compared to the year ended December 31, 2020, there was a $18.6 million increase in interest income due to a $1,569.3 million increase in average RMBS, partially offset by a 72 bps decrease in the yield on average RMBS.

49

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, 2022, 2021 and 2020 and for each quarter during 2022, 2021 and 2020.

[[GREPCENT_TABLE]]
[["($ 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, 2022","","$","3,335,154","","","$","35,454","","","$","3,370,608","","","$","31,204","","","$","693","","","$","31,897","","","","3.74","%","","","7.83","%","","","3.79","%"],["September 30, 2022","","","3,458,277","","","","112,760","","","","3,571,037","","","","32,298","","","","3,313","","","","35,611","","","","3.74","%","","","11.75","%","","","3.99","%"],["June 30, 2022","","","4,069,334","","","","191,393","","","","4,260,727","","","","31,894","","","","3,374","","","","35,268","","","","3.14","%","","","7.05","%","","","3.31","%"],["March 31, 2022","","","5,335,353","","","","210,491","","","","5,545,844","","","","40,066","","","","1,791","","","","41,857","","","","3.00","%","","","3.40","%","","","3.02","%"],["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","%"],["Years Ended"],["December 31, 2022","","$","4,049,530","","","$","137,524","","","$","4,187,054","","","$","135,462","","","$","9,171","","","$","144,633","","","","3.35","%","","","6.67","%","","","3.45","%"],["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","%"]]
[[/GREPCENT_TABLE]]

Interest Expense and the Cost of Funds

We had average outstanding borrowings of $4,042.1 million and $4,707.5 million and total interest expense of $61.7 million and $7.1 million for the years ended December 31, 2022 and 2021, respectively. Our average cost of funds was 1.53% for the year ended December 31, 2022, compared to 0.15% for the comparable period in 2021.  There was a $665.5 million decrease in average outstanding borrowings during the year ended December 31, 2022 as compared to the year ended December 31, 2021.

For the year ended December 31, 2020, we had average borrowings of $3,197.0 million and total interest expense of $25.1 million, resulting in an average cost of funds of 0.78%.  There was a 63 bps decrease in the average cost of funds and an $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.

Our economic interest expense was $44.9 million, $25.4 million and $48.4 million for the years ended December 31, 2022, 2021 and 2020, respectively. There was a 57 bps increase in the average economic cost of funds to 1.11% for the year ended December 31, 2022 from 0.54% for the year ended December 31, 2021. The reason for the increase in economic cost of funds is primarily due to the higher cost of our borrowings noted above, offset by the positive performance of our hedging activities during the period. 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.

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 41 bps below one-month average SOFR and 33 bps above six-month average SOFR for the year ended December 31, 2022. Our average economic cost of funds was 83 bps below one-month average SOFR and 9 bps below six-month average SOFR for the year ended December 31, 2022. The average term to maturity of the outstanding repurchase agreements was 27 days and 27 days at December 31, 2022 and 2021, respectively. 

50

The tables below present the average balance of borrowings outstanding, interest expense and average cost of funds, and one-month average and six-month average SOFR rates for each quarter in 2022, 2021 and 2020 and for the years ended December 31, 2022, 2021 and 2020 on both a GAAP and economic basis.

[[GREPCENT_TABLE]]
[["($ 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, 2022","","$","3,256,153","","","$","29,512","","","$","18,436","","","","3.63","%","","","2.26","%"],["September 30, 2022","","","3,446,420","","","","21,361","","","","16,318","","","","2.48","%","","","1.89","%"],["June 30, 2022","","","4,111,544","","","","8,180","","","","6,184","","","","0.80","%","","","0.60","%"],["March 31, 2022","","","5,354,107","","","","2,655","","","","3,942","","","","0.20","%","","","0.29","%"],["December 31, 2021","","","5,728,988","","","","2,023","","","","9,972","","","","0.14","%","","","0.70","%"],["September 30, 2021","","","4,864,287","","","","1,570","","","","2,818","","","","0.13","%","","","0.23","%"],["June 30, 2021","","","4,348,192","","","","1,556","","","","6,660","","","","0.14","%","","","0.61","%"],["March 31, 2021","","","3,888,633","","","","1,941","","","","5,985","","","","0.20","%","","","0.62","%"],["December 31, 2020","","","3,438,444","","","","2,011","","","","7,801","","","","0.23","%","","","0.91","%"],["September 30, 2020","","","3,228,021","","","","2,043","","","","8,943","","","","0.25","%","","","1.11","%"],["June 30, 2020","","","2,992,494","","","","4,479","","","","10,230","","","","0.60","%","","","1.37","%"],["March 31, 2020","","","3,129,178","","","","16,523","","","","21,423","","","","2.11","%","","","2.74","%"],["Years Ended"],["December 31, 2022","","$","4,042,056","","","$","61,708","","","$","44,880","","","","1.53","%","","","1.11","%"],["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","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","","","","","","","","","Average GAAP Cost of Funds","","","Average Economic Cost of Funds"],["","","","","","","","","","","Relative to Average","","","Relative to Average"],["","","Average SOFR","","","One-Month","","","Six-Month","","","One-Month","","","Six-Month"],["","","One-Month","","","Six-Month","","","SOFR","","","SOFR","","","SOFR","","","SOFR"],["Three Months Ended"],["December 31, 2022","","","4.06","%","","","2.89","%","","","(0.43",")%","","","0.74","%","","","(1.80",")%","","","(0.63",")%"],["September 30, 2022","","","2.47","%","","","1.43","%","","","0.01","%","","","1.05","%","","","(0.58",")%","","","0.46","%"],["June 30, 2022","","","1.09","%","","","0.39","%","","","(0.29",")%","","","0.41","%","","","(0.49",")%","","","0.21","%"],["March 31, 2022","","","0.16","%","","","0.07","%","","","0.04","%","","","0.13","%","","","0.13","%","","","0.22","%"],["December 31, 2021","","","0.05","%","","","0.05","%","","","0.09","%","","","0.09","%","","","0.65","%","","","0.65","%"],["September 30, 2021","","","0.05","%","","","0.03","%","","","0.08","%","","","0.10","%","","","0.18","%","","","0.20","%"],["June 30, 2021","","","0.03","%","","","0.03","%","","","0.11","%","","","0.11","%","","","0.58","%","","","0.58","%"],["March 31, 2021","","","0.01","%","","","0.06","%","","","0.19","%","","","0.14","%","","","0.61","%","","","0.56","%"],["December 31, 2020","","","0.08","%","","","0.09","%","","","0.15","%","","","0.14","%","","","0.83","%","","","0.82","%"],["September 30, 2020","","","0.09","%","","","0.07","%","","","0.16","%","","","0.18","%","","","1.02","%","","","1.04","%"],["June 30, 2020","","","0.08","%","","","0.65","%","","","0.52","%","","","(0.05",")%","","","1.29","%","","","0.72","%"],["March 31, 2020","","","0.65","%","","","1.46","%","","","1.46","%","","","0.65","%","","","2.09","%","","","1.28","%"],["Years Ended"],["December 31, 2022","","","1.94","%","","","1.20","%","","","(0.41",")%","","","0.33","%","","","(0.83",")%","","","(0.09",")%"],["December 31, 2021","","","0.04","%","","","0.04","%","","","0.11","%","","","0.11","%","","","0.50","%","","","0.50","%"],["December 31, 2020","","","0.22","%","","","0.57","%","","","0.56","%","","","0.21","%","","","1.29","%","","","0.94","%"]]
[[/GREPCENT_TABLE]]

51

Gains or Losses

The table below presents our gains or losses for the years ended December 31, 2022, 2021 and 2020.

[[GREPCENT_TABLE]]
[["(in thousands)"],["","","2022","","","2021","","","2020"],["Realized losses on sales of RMBS","","$","(133,695",")","","$","(5,542",")","","$","(24,986",")"],["Unrealized (losses) gains on RMBS and U.S. Treasury Notes","","","(642,710",")","","","(198,454",")","","","25,761"],["Total (losses) gains on RMBS and U.S. Treasury Notes","","","(776,405",")","","","(203,996",")","","","775"],["Gains (losses) on interest rate futures","","","207,511","","","","(856",")","","","(13,044",")"],["Gains (losses) on interest rate swaps","","","170,297","","","","23,613","","","","(66,212",")"],["(Losses) gains on payer swaptions (short positions)","","","(81,050",")","","","9,062","","","","(3,070",")"],["Gains (losses) on payer swaptions (long positions)","","","152,365","","","","(2,580",")","","","98"],["Gains on interest rate caps","","","919","","","","-","","","","-"],["Gains on interest rate floors","","","-","","","","2,765","","","","-"],["Gains (losses) on TBA securities (short positions)","","","4,494","","","","3,432","","","","(6,719",")"],["Gains (losses) on TBA securities (long positions)","","","1,200","","","","(8,559",")","","","9,950"],["Losses on U.S. Treasury securities (short positions)","","","-","","","","-","","","","(95",")"],["Total","","$","(320,669",")","","$","(177,119",")","","$","(78,317",")"]]
[[/GREPCENT_TABLE]]

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, 2022, 2021 and 2020, the Company received proceeds of $2,759.9 million $2,851.7 million, and $4,200.5 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, the spreads that Agency RMBS trade relative to comparable duration U.S. Treasuries or swaps, as well as varying levels of demand for RMBS, which affect the pricing of the securities in our portfolio. The unrealized gains and losses on RMBS may also include the premium lost as a result of prepayments on the underlying mortgages, decreasing unrealized gains or increasing unrealized losses as prepayment speeds or premiums increase. To the extent RMBS are carried at a discount to par, unrealized gains or losses on RMBS would also include discount accreted as a result of prepayments on the underlying mortgages, increasing unrealized gains or decreasing unrealized losses as speeds on discounts increase. 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 2022, 2021 and 2020.

[[GREPCENT_TABLE]]
[["","","5 Year","","","10 Year","","","15 Year","","","30 Year","","","90 Day"],["","","U.S. Treasury","","","U.S. Treasury","","","Fixed-Rate","","","Fixed-Rate","","","Average"],["","","Rate(1)","","","Rate(1)","","","Mortgage Rate(2)","","","Mortgage Rate(2)","","","SOFR(3)"],["December 31, 2022","","","4.00","%","","","3.88","%","","","5.68","%","","","6.42","%","","","3.62","%"],["September 30, 2022","","","4.04","%","","","3.80","%","","","5.96","%","","","6.70","%","","","2.13","%"],["June 30, 2022","","","3.00","%","","","2.97","%","","","4.83","%","","","5.70","%","","","0.70","%"],["March 31, 2022","","","2.42","%","","","2.33","%","","","3.83","%","","","4.67","%","","","0.09","%"],["December 31, 2021","","","1.26","%","","","1.51","%","","","2.33","%","","","3.11","%","","","0.05","%"],["September 30, 2021","","","1.00","%","","","1.53","%","","","2.28","%","","","3.01","%","","","0.05","%"],["June 30, 2021","","","0.87","%","","","1.44","%","","","2.34","%","","","3.02","%","","","0.02","%"],["March 31, 2021","","","0.94","%","","","1.75","%","","","2.45","%","","","3.17","%","","","0.04","%"],["December 31, 2020","","","0.36","%","","","0.92","%","","","2.17","%","","","2.67","%","","","0.09","%"],["September 30, 2020","","","0.27","%","","","0.68","%","","","2.40","%","","","2.90","%","","","0.09","%"],["June 30, 2020","","","0.29","%","","","0.65","%","","","2.59","%","","","3.13","%","","","0.05","%"],["March 31, 2020","","","0.38","%","","","0.70","%","","","2.92","%","","","3.50","%","","","1.26","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Historical 5 and 10 Year U.S. Treasury Rates are obtained from quoted end of day prices on the Chicago Board Options Exchange."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","Historical 30 Year and 15 Year Fixed Rate Mortgage Rates are obtained from Freddie Mac\u2019s Primary Mortgage Market Survey."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(3)","Historical SOFR is obtained from the Federal Reserve Bank of New York."]]
[[/GREPCENT_TABLE]]

52

Expenses

Total operating expenses were $20.7 million, $15.3 million and $10.5 million for the years ended December 31, 2022, 2021 and 2020, respectively. The table below provides a breakdown of operating expenses for the years ended December 31, 2022, 2021 and 2020.

[[GREPCENT_TABLE]]
[["(in thousands)"],["","","2022","","","2021","","","2020"],["Management fees","","$","10,447","","","$","8,156","","","$","5,281"],["Overhead allocation","","","2,042","","","","1,632","","","","1,514"],["Incentive compensation","","","957","","","","1,132","","","","38"],["Directors fees and liability insurance","","","1,251","","","","1,169","","","","998"],["Audit, legal and other professional fees","","","1,143","","","","1,112","","","","1,045"],["Direct REIT operating expenses","","","4,091","","","","1,475","","","","1,057"],["Other administrative","","","778","","","","575","","","","611"],["Total expenses","","$","20,709","","","$","15,251","","","$","10,544"]]
[[/GREPCENT_TABLE]]

Direct REIT operating expenses were higher in the year ended December 31, 2022, as compared to the year ended December 31, 2021 primarily due to increased commissions and fees related to the Company’s interest rate derivative positions.

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, 2024 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:

[[GREPCENT_TABLE]]
[["","\u25cf","One-twelfth of 1.5% of the first $250 million of the Company\u2019s month end equity, as defined in the management agreement,"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","One-twelfth of 1.25% of the Company\u2019s month end equity that is greater than $250 million and less than or equal to $500 million, and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","One-twelfth of 1.00% of the Company\u2019s month end equity that is greater than $500 million."]]
[[/GREPCENT_TABLE]]

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.

On April 1, 2022, pursuant to the third amendment to the management agreement entered into on November 16, 2021, the Manager began providing certain repurchase agreement trading, clearing and administrative services to the Company that had been previously provided by AVM, L.P. under an agreement terminated on March 31, 2022.  In consideration for such services, the Company will pay the following fees to the Manager:

[[GREPCENT_TABLE]]
[["","\u25cf","A daily fee equal to the outstanding principal balance of repurchase agreement funding in place as of the end of such day multiplied by 1.5 basis points for the amount of aggregate outstanding principal balance less than or equal to $5 billion, and multiplied by 1.0 basis point for any amount of aggregate outstanding principal balance in excess of $5 billion, and"],["","\u25cf","A fee for the clearing and operational services provided by personnel of the Manager equal to $10,000 per month."]]
[[/GREPCENT_TABLE]]

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.

53

The following table summarizes the management fee and overhead allocation expenses for each quarter in 2022, 2021 and 2020 and for the years ended December 31, 2022, 2021 and 2020.

[[GREPCENT_TABLE]]
[["($ in thousands)"],["","","Average","","","Average","","","Advisory Services"],["","","Orchid","","","Orchid","","","Management","","","Overhead"],["Three Months Ended","","MBS","","","Equity","","","Fee","","","Allocation","","","Total"],["December 31, 2022","","$","3,370,608","","","$","823,516","","","$","2,566","","","$","560","","","$","3,126"],["September 30, 2022","","","3,571,037","","","","839,935","","","","2,616","","","","522","","","","3,138"],["June 30, 2022","","","4,260,727","","","","866,539","","","","2,631","","","","519","","","","3,150"],["March 31, 2022","","","5,545,844","","","","853,577","","","","2,634","","","","441","","","","3,075"],["December 31, 2021","","","6,056,259","","","","806,382","","","","2,587","","","","443","","","","3,030"],["September 30, 2021","","","5,136,331","","","","672,384","","","","2,156","","","","390","","","","2,546"],["June 30, 2021","","","4,504,887","","","","542,679","","","","1,792","","","","395","","","","2,187"],["March 31, 2021","","","4,032,716","","","","456,687","","","","1,621","","","","404","","","","2,025"],["December 31, 2020","","","3,633,631","","","","387,503","","","","1,384","","","","442","","","","1,826"],["September 30, 2020","","","3,422,564","","","","368,588","","","","1,252","","","","377","","","","1,629"],["June 30, 2020","","","3,126,779","","","","361,093","","","","1,268","","","","348","","","","1,616"],["March 31, 2020","","","3,269,859","","","","376,673","","","","1,377","","","","347","","","","1,724"],["Years Ended"],["December 31, 2022","","$","4,187,054","","","$","845,892","","","$","10,447","","","$","2,042","","","$","12,489"],["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"]]
[[/GREPCENT_TABLE]]

Financial Condition:

Mortgage-Backed Securities

As of December 31, 2022, our RMBS portfolio consisted of $3,540.0 million of Agency RMBS at fair value and had a weighted average coupon on assets of 3.46%. During the year ended December 31, 2022, we received principal repayments of $440.1 million compared to $591.1 million for the year ended December 31, 2021. The average three month prepayment speeds for the quarters ended December 31, 2022 and 2021 were 5.0% and 11.4%, 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.

[[GREPCENT_TABLE]]
[["","","","","Structured"],["","","PT RMBS","","RMBS","","Total"],["Three Months Ended","","Portfolio (%)","","Portfolio (%)","","Portfolio (%)"],["December 31, 2022","","4.9","","6.0","","5.0"],["September 30, 2022","","6.1","","10.4","","6.5"],["June 30, 2022","","8.3","","13.7","","9.4"],["March 31, 2022","","8.1","","19.5","","10.7"],["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"]]
[[/GREPCENT_TABLE]]

54

The following tables summarize certain characteristics of the Company’s PT RMBS and structured RMBS as of December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["($ in thousands)"],["","","","","","","","","","","","","","","Weighted"],["","","","","","","Percentage","","","","","","","Average"],["","","","","","","of","","","Weighted","","","Maturity"],["","","Fair","","","Entire","","","Average","","","in","","Longest"],["Asset Category","","Value","","","Portfolio","","","Coupon","","","Months","","Maturity"],["December 31, 2022"],["Fixed Rate RMBS","","$","3,519,906","","","","99.4","%","","","3.47","%","","","339","","1-Nov-52"],["Interest-Only Securities","","","19,669","","","","0.6","%","","","4.01","%","","","234","","25-Jul-48"],["Inverse Interest-Only Securities","","","427","","","","0.0","%","","","0.00","%","","","286","","15-Jun-42"],["Total Mortgage Assets","","$","3,540,002","","","","100.0","%","","","3.46","%","","","336","","1-Nov-52"],["December 31, 2021"],["Fixed Rate RMBS","","$","6,298,189","","","","96.7","%","","","2.93","%","","","342","","1-Dec-51"],["Interest-Only Securities","","","210,382","","","","3.2","%","","","3.40","%","","","263","","25-Jan-52"],["Inverse Interest-Only Securities","","","2,524","","","","0.1","%","","","3.75","%","","","300","","15-Jun-42"],["Total Mortgage Assets","","$","6,511,095","","","","100.0","%","","","3.03","%","","","325","","25-Jan-52"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["($ in thousands)"],["","","December 31, 2022","","","December 31, 2021"],["","","","","","","Percentage of","","","","","","","Percentage of"],["Agency","","Fair Value","","","Entire Portfolio","","","Fair Value","","","Entire Portfolio"],["Fannie Mae","","$","2,320,960","","","","65.6","%","","$","4,719,349","","","","72.5","%"],["Freddie Mac","","","1,219,042","","","","34.4","%","","","1,791,746","","","","27.5","%"],["Total Portfolio","","$","3,540,002","","","","100.0","%","","$","6,511,095","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","December 31, 2022","","","December 31, 2021"],["Weighted Average Pass-through Purchase Price","","$","106.41","","","$","107.19"],["Weighted Average Structured Purchase Price","","$","18.74","","","$","15.21"],["Weighted Average Pass-through Current Price","","$","91.46","","","$","105.31"],["Weighted Average Structured Current Price","","$","14.05","","","$","14.08"],["Effective Duration (1)","","","5.58","","","","3.39"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Effective duration is the approximate percentage change in price for a 100 bps change in rates. An effective duration of 5.58 indicates that an interest rate increase of 1.0% would be expected to cause a 5.58% decrease in the value of the RMBS in the Company\u2019s investment portfolio at December 31, 2022. An effective duration of 3.39 indicates that an interest rate increase of 1.0% would be expected to cause a 3.39% decrease in the value of the RMBS in the Company\u2019s investment portfolio at December 31, 2021. These figures include the structured securities in the portfolio, but do not include the effect of the Company\u2019s funding cost hedges. Effective duration quotes for individual investments are obtained from The Yield Book, Inc."]]
[[/GREPCENT_TABLE]]

The following table presents a summary of portfolio assets acquired during the years ended December 31, 2022 and 2021.

[[GREPCENT_TABLE]]
[["($ in thousands)"],["","","2022","","","2021"],["","","Total Cost","","","Average Price","","","Weighted Average Yield","","","Total Cost","","","Average Price","","","Weighted Average Yield"],["Pass-through RMBS","","$","1,004,526","","","$","100.03","","","","4.59","%","","$","6,224,819","","","$","106.68","","","","1.63","%"],["Structured RMBS","","","-","","","","-","","","","0.00","%","","","205,906","","","","13.61","","","","3.88","%"]]
[[/GREPCENT_TABLE]]

55

Borrowings

As of December 31, 2022, 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 20 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, 2022, we had obligations outstanding under the repurchase agreements of approximately $3,378.4 million with a net weighted average borrowing cost of 4.44%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 3 to 173 days, with a weighted average remaining maturity of 27 days. Securing the repurchase agreement obligations as of December 31, 2022 are RMBS with an estimated fair value, including accrued interest, of approximately $3,524.1 million and a weighted average maturity of 344 months, and cash pledged to counterparties of approximately $13.3 million. Through March 3, 2023, we have been able to maintain our repurchase facilities with comparable terms to those that existed at December 31, 2022 with maturities extending to various dates through June 22, 2023.

The table below presents information about our period end, maximum and average balances of borrowings for each quarter in 2022 and 2021.

[[GREPCENT_TABLE]]
[["($ 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, 2022","","$","3,378,445","","","$","3,414,950","","","$","3,256,153","","","$","122,292","","","","3.76","%"],["September 30, 2022","","","3,133,861","","","","4,047,606","","","","3,446,420","","","","(312,559",")","","","(9.07",")%"],["June 30, 2022","","","3,758,980","","","","4,464,544","","","","4,111,544","","","","(352,564",")","","","(8.57",")%"],["March 31, 2022","","","4,464,109","","","","6,244,106","","","","5,354,107","","","","(889,998",")","","","(16.62",")%","(1)"],["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","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(1)","The lower ending balance relative to the average balance during the quarter ended March 31, 2022 reflects the disposal of RMBS pledged as collateral. During the quarter ended March 31, 2022, the Company\u2019s investment in RMBS decreased $510.4 million."]]
[[/GREPCENT_TABLE]]

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. 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.

56

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 repo transaction basis. Throughout the year ended December 31, 2022, haircuts on our pledged collateral remained stable and as of December 31, 2022, our weighted average haircut was approximately 4.5% 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 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 ("MSFTAs"), 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.

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 repo 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, 2022, we had cash and cash equivalents of $205.7 million. We generated cash flows of $589.9 million from principal and interest payments on our RMBS and had average repurchase agreements outstanding of $4,042.1 million during the year ended December 31, 2022.

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

57

Stockholders’ Equity

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 634,145 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 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 5,498,730 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 1,520,000 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 $26.00 per share. In addition, we granted J.P. Morgan a 30-day option to purchase up to an additional 228,000 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 1,748,000 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 1,600,000 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 $27.25 per share. In addition, we granted J.P. Morgan a 30-day option to purchase up to an additional 240,000 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 1,840.000 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 9,881,467 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, 2022, we issued a total of 7,052,188 shares under the October 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately $119.6 million, and net proceeds of approximately $117.6 million, after commissions and fees. Subsequent to December 31, 2022 and through March 3, 2023, we issued a total of 2,690,000 shares under the October 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately $32.2 million, and net proceeds of approximately $31.7 million, after commissions and fees.

Outlook 

Economic Summary

As 2022 ended, the markets' and the Fed's outlook for the economy, inflation and the path of monetary policy began to diverge.  The seeds for the divergence were planted as the third quarter of 2022 came to an end and the Fed had finally succeeded in convincing the market that they had much work to do in removing accommodation and that the process would take longer than the market had expected.  Public comments by Fed officials became uniformly hawkish – pointing to substantially more rate increases – and the incoming inflation data for July, August and September of 2022 was quite strong.  The combined effect of the data and the clear intentions of the Fed to aggressively fight to prevent inflation from spiraling out of control and becoming entrenched in consumer behavior dispelled any notion that the Fed would not succeed in their pursuit of their dual mandate – price stability and full employment.  In fact, the Fed was so successful at convincing the market it would aggressively remove accommodation and slow inflation that the market began to look beyond this step in the process and instead focus on the ramifications of such policy removal – namely a slowing of the economy.

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The change of focus – or “pivot” – on the part of the market occurred in late October and early November of 2022, largely in response to inflation data.  The consumer price index ("CPI") for October and November of 2022, released in November and December of 2022, were much lower than previous months.  While such figures were revised higher in early February of 2023, at the time the market interpreted this development as evidence that inflation had peaked and was coming down quickly.  The market reaction reflected an assumption that the Fed would succeed in taming inflation quicker than the Fed was expecting and that the rate hikes envisioned by the Fed and reflected in their summary of economic projections would instead cause the economy to slow too much and that the Fed would have to lower rates beginning in late 2023. 

The divergence in expectations emanated from service sector inflation expectation.  As the first quarter of 2023 began, it became clear goods inflation was dropping quickly.  This was a result of Covid-19 induced supply constraints abating and consumer demand shifting from goods to services.  The market expected that the real estate sector, always very sensitive to interest rates, was in decline and would no longer be a source of inflation outside of the lagged effects of rents, which was anticipated to ebb soon.  What remained was non-shelter related services inflation.  The Fed recognizes wage pressures are the primary source of inflation in this case.  Accordingly, measures of labor market tightness and wage inflation have become the Fed’s focus.  To the extent such measures remain elevated, Fed actions will likely continue to reflect their tightening bias.

Interest Rates

The Fed raised the Fed Funds target range twice during the fourth quarter of 2022 and the high end of the range was 4.50% at the end of the year – an increase of 125 basis points during the quarter.  The Fed raised the target by another 25 basis points in February 2023. Moreover, the market expects the Fed will continue to raise the target further in 2023, perhaps as much as 100 basis points including the February 2023 increase.  Importantly, the Fed, as evidenced by their own “dot plot”, a summary of committee members' expectations of the Fed Funds rate over their forecast period, anticipates the Fed Funds rate will peak at approximately 5.125% by mid-2023 and remain above 5% throughout the balance of 2023.  As the fourth quarter of 2022 ended, the market generally expected the target range would peak just under 5.00% and be under 4.5% by the end of 2023.  This is consistent with the discussion above. Yields on U.S. Treasury securities with maturities of one year or less increased substantially during the fourth quarter of 2022, with the shortest maturities increasing the most – reflective of the actual and anticipated increases in overnight funding levels driven by the Fed.  Such increases were as much as 134 basis points in the case of the one-month U.S. Treasury bill.

As the fourth quarter unfolded, with the market expecting the Fed to succeed in containing inflation and ultimately slowing the economy in the process, longer maturity interest rates were essentially unchanged during the fourth quarter.  During the month of October 2022, the hawkish rhetoric from the Fed and strong inflation data initially caused long-term rates to increase substantially from August 2022 levels near 2.6% to approximately 4.25% in late October 2022 in the case of the 10-year U.S. Treasury. However, longer-term rates slowly declined for much of the balance of the fourth quarter before a 40-basis point increase over the last two weeks of the year. The late December 2022 increase was triggered by additional hawkish comments by the Fed at their December meeting reinforced by similar language by the European Central Bank and illiquid holiday trading conditions.  For the fourth quarter of 2022, U.S. Treasury maturities beyond the 2-year point were largely unchanged.

The combination of the extreme upward movement in short maturity yields described above and the essentially unchanged yields for longer maturity U.S. Treasuries resulted in an extreme flattening of the yield curve to the point the curve became inverted.  This continued the trend that began in early July of 2022.  Over the course of the fourth quarter of 2022, the extent of the inversion increased substantially.  In the case of the spread between the 2-year and 10-year U.S. Treasuries the inversion reached 84 basis points in early December and 88 basis points in the case of the spread between the 10-year U.S. Treasury and the Fed Funds rate.  Historically such inversions signaled market expectations of a recession on the horizon, as was the case in late 2022.

The Agency RMBS Market

The Agency RMBS market returns for 2022 were negative – down 11.9%.  However, the sector posted positive returns for the fourth quarter of 2.1%, which was 110 bps higher than comparable duration swaps.  As described above, expectations for the economy and rates diverged between those of the Fed and the markets during the last two months of the fourth quarter of 2022.  During the fourth quarter, the markets' appetite for riskier assets improved in anticipation that the Fed was nearing the end of its tightening cycle and would be easing monetary conditions by the end of 2023. This led the higher risk sectors of the fixed income markets to outperform, as investment and non-investment grade corporates outperformed U.S. Treasuries, Agency RMBS and Agency debt by a considerable margin. 

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The performance of the Agency RMBS sector was not uniformly positive for the fourth quarter.  As described above, early in the quarter U.S. Treasury yields achieved their highest levels in many years in late October of 2022.  Agency RMBS spreads to comparable duration spreads also reached their widest levels since the great financial crisis, easily surpassing the levels observed in March of 2020.  As market sentiment turned mid-quarter and risk appetite improved the attractive levels of Agency RMBS, like most other asset classes, were viewed as very attractive.  The sector’s performance was driven to a large extent by the extremes reached in late October and has continued into early 2023.  However, the spreads available in the sector remain wider than those observed prior to the onset of the pandemic in early 2020.  The absence of the largest of the traditional buyers of the asset class – banks, and since March of 2020, the Fed, may result in the sector recovering slowly towards pre-pandemic levels, if it can do so at all.

Within the Agency RMBS sector, 30-year fixed rate coupons slightly outperformed 15-year and Ginnie Mae fixed rate securities, both in absolute and relative terms.  Within the 30-year fixed rate sector lower/discount coupon securities generated the best relative/excess returns to comparable duration U.S. Treasuries and swaps.

Recent Legislative and Regulatory Developments

In response to the deterioration in the markets for U.S. Treasuries, Agency RMBS and other mortgage and fixed income markets resulting from the impacts of the COVID-19 pandemic, the Fed implemented a program of quantitative easing. Through November of 2021, the Fed was committed to purchasing $80 billion of U.S. Treasuries and $40 billion of Agency RMBS each month. In November of 2021, it began tapering its net asset purchases each month, ended net asset purchases by early March of 2022, and ended asset purchases entirely in September of 2022. On May 4, 2022, the FOMC announced a plan for reducing the Fed’s balance sheet. In June of 2022, in accordance with this plan, the Fed began reducing its balance sheet by a maximum of $30 billion of U.S. Treasuries and $17.5 billion of Agency RMBS each month. On September 21, 2022, the FOMC announced the Fed’s decision to continue reducing the balance sheet by a maximum of $60 billion of U.S Treasuries and $35 billion of Agency RMBS per month.

On January 29, 2021, the Center for Disease Control and Prevention issued guidance extending eviction moratoriums for covered persons put in place by the CARES Act through March 31, 2021. The FHFA subsequently extended the foreclosure moratorium for loans backed by the Enterprises and the eviction moratorium for real estate owned by the Enterprises 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. Foreclosure activity has risen since the end of the moratorium, with foreclosure starts in 2022 up 169% from 2021, but remaining 26% lower than pre-pandemic levels in 2019 and 88% lower than the peak in 2009. 

On September 30, 2019, the FHFA announced that the Enterprises 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 the Enterprises being privatized and represents the first concrete step on the road to Enterprise reform.  In December 2020, the FHFA released a final rule on a new regulatory framework for the Enterprises which seeks to implement both a risk-based capital framework and minimum leverage capital requirements. On January 14, 2021, the U.S. Treasury and the FHFA executed letter agreements allowing the Enterprises 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 Enterprise has common equity Tier 1 capital of at least 3% of its assets, (ii) the Enterprises 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 Enterprise reform. However, no definitive proposals or legislation have been released or enacted with respect to ending the conservatorship, unwinding the Enterprises, or materially reducing the roles of the Enterprises 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 February 25, 2022, the FHFA published a final rule, effective as of April 26, 2022, amending the Enterprise capital framework established in December 2020 by, among other things, replacing the fixed leverage buffer equal to 1.5% of an Enterprise’s adjusted total assets with a dynamic leverage buffer equal to 50% of an Enterprise’s stability capital buffer, reducing the risk weight floor from 10% to 5%, and removing the requirement that the Enterprises must apply an overall effectiveness adjustment to their credit risk transfer exposures. On June 14, 2022, the Enterprises announced that they would each charge a 50 bps fee for commingled securities issued on or after July 1, 2022 to cover the additional capital required for such securities under the Enterprise capital framework, which was subsequently reduced on January 19, 2023 to 9.375 bps for commingled securities issued on or after April 1, 2023 to address industry concern that the fee posed a risk to the fungibility of the Uniform Mortgage-Backed Security (“UMBS”) and negatively impacted liquidity and pricing in the market for TBA securities.

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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 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.

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 became 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 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 March 15, 2022, the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”) was signed into law as part of the Consolidated Appropriations Act, 2022 (H.R. 2471). The LIBOR Act 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.

On July 28, 2022, the Fed published a proposed rule to implement the LIBOR Act, which was adopted on December 16, 2022.  The final rule, which went into effect on February 27, 2023, sets benchmark SOFR rates to replace overnight, one-month, three-month, six-month and 12-month LIBOR contracts and provides mechanisms for converting most existing LIBOR contracts, including Agency RMBS, to SOFR no later than June 30, 2023.

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.

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

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.

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 our Agency RMBS. This is because investors typically place a premium on assets with coupon/yields that are higher than coupon/yields available in the market. To the extent such securities pre-pay slower than would otherwise be the case, we benefit from an above market coupon/yield for longer, enhancing the return from the security. 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.

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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 we use 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 ended these purchases in March 2022 and announced plans to reduce its balance sheet. The Fed’s planned reduction of its balance sheet 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 RMBS 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 securitized. If this were to occur, it would have the effect of delaying a prepayment on our securities until such time. To the extent our Agency RMBS assets were acquired at a premium to par, this will tend to increase the realized yield on the asset in question. To the extent they were acquired at a discount, this will tend to decrease 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. Increases in the Fed Funds rate, SOFR or LIBOR typically 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.

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Summary

During the fourth quarter of 2022 the trends in incoming economic data began to change, indicating the actions of the Fed to remove accommodation and slow demand were starting to take hold.  The most interest rate sensitive sectors of the economy, mainly housing and housing related, were slowing precipitously.  Demand and consumption for goods – reflected in sales and production data – were clearly slowing.  Even inflation data, as evidenced by the CPI and Personal Consumption Expenditures data, slowed during the quarter as well - although such data was subsequently revised higher in early February of 2023. The one big exception was the labor market and wages, which were still tight in the case of the labor market and increasing in the case of wages.  To central bankers, and in particular the Fed, this was problematic.  As consumers migrated their consumption from goods to services as the effects of the pandemic wore off, service inflation remained elevated due to persistent worker shortages and the resulting wage pressures as employers struggled to fill positions. The Fed identified non-shelter related services inflation as the focus of their efforts to contain inflation and inflation expectations.  In their efforts to rein in service-related inflation, the Fed has continued to raise the Fed Funds rate and plans to continue doing so into 2023.  In fact, the Fed raised the Fed Funds rate at their February 2023 meeting and indicated additional hikes were likely while simultaneously stating their intention to hold rates at what they deem to be restrictive territory into 2024.

The financial markets were reluctant to accept that the Fed would be so aggressive in their tightening until late in the third quarter of 2022 when the Fed appeared to finally convince the markets of the extent and timing of the tightening plans.  The market reacted swiftly as interest rates increased rapidly from August through late October 2022. Short maturity rates increased the most, in anticipation of the Fed raising Fed Funds as high as 5.0% in 2023.  However, the market view, as expressed in interest rates, futures and the shape of the U.S. Treasury yield curve, differed from the view of the Fed during the last two months of 2022 and early 2023.  Market pricing at the end of 2022 indicated a belief that the Fed would succeed in reining in inflation sooner than the Fed did, and that in so doing it would ultimately slow the economy so much that the Fed would have to pivot and move to lower rates by the end of 2023. The result of this view was a deeply inverted U.S. Treasury yield curve, with short term rates of maturities of two-years or less far in excess of longer maturity U.S. Treasuries.  

The Agency RMBS market returns for 2022 were -11.9%.  However, the sector returned 2.1% for the fourth quarter of 2022.  The turning point coincided with the markets pivot towards believing the Fed tightening cycle was nearing its end and that the economy would slow in 2023.  In late October 2022, spreads on Agency RMBS reached levels not seen since the 2007 financial crisis.  However, as market sentiment turned in November and December of 2022 these spread levels appeared quite attractive.  This was also true of most risk assets.  As a result, the sector performed very well over the balance of the fourth quarter of 2022, and this has continued into early 2023, which has resulted in an increase in the valuation of our assets. In the case of even riskier asset classes the performance has been even better. As the first quarter of 2023 unfolds, the Agency RMBS sector is still trading at spread levels well above levels observed prior to the COVID-19 pandemic.  However, the absence of two of the largest buyers of the sector, banks and, since the onset of the pandemic, the Fed may result in the sector recovering more slowly towards pre-pandemic levels, if such levels are even obtained at all.  The risk to the sector would be a re-acceleration of inflation and the need for the Fed to tighten monetary policy even further.  Data released in February of 2023 heightens this concern. Absent such a development, we expect the sector to perform well from a price perspective while net interest spreads are expected to remain depressed unless the Fed reduces funding levels.

Critical Accounting Estimates

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.

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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.

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.

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Capital Expenditures

At December 31, 2022, 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.

[[GREPCENT_TABLE]]
[["(in thousands, except per share amounts)"],["Year","","Per Share Amount","","","Total"],["2013","","$","6.975","","","$","4,662"],["2014","","","10.800","","","","22,643"],["2015","","","9.600","","","","38,748"],["2016","","","8.400","","","","41,388"],["2017","","","8.400","","","","70,717"],["2018","","","5.350","","","","55,814"],["2019","","","4.800","","","","54,421"],["2020","","","3.950","","","","53,570"],["2021","","","3.900","","","","97,601"],["2022","","","2.475","","","","87,906"],["2023 YTD(1)","","","0.320","","","","12,540"],["Totals","","$","64.970","","","$","540,010"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","On January 11, 2023, the Company declared a dividend of $0.16 per share that was paid on February 24, 2023. On February 15, 2023, the Company declared a dividend of $0.16 per share to be paid on March 29, 2023. The effects of these dividends are included in the table above but are not reflected in the Company\u2019s financial statements as of December 31, 2022."]]
[[/GREPCENT_TABLE]]

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