What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2020-03-12 compared with 2019-03-08 · 105 added, 111 removed, 907 unchanged (19% of the section changed)

11 unchanged sentences

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheet of Ellington Residential Mortgage REIT and its subsidiaries (the "Company") as of December 31, 2018 and 2017, and the related consolidated statements of operations, shareholders’ equity and cash flows for the years then ended, including the related notes (collectively referred to as the "consolidated financial statements").

We have audited the accompanying consolidated balance sheets of Ellington Residential Mortgage REIT and its subsidiaries (the "Company") as of December 31, 2019 and 2018, and the related consolidated statements of operations, of shareholders' equity and of cash flows for the years then ended, including the related notes (collectively referred to as the "consolidated financial statements").

We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

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A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the the company;

and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

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BALANCE, December 31, 2017

Shares issued (1)

Offering costs

Issuance of restricted shares

Forfeiture of common shares to satisfy tax withholding obligations

Share based compensation

Repurchase of common shares

Dividends declared (1)

Net income (loss)

BALANCE, December 31, 2018

3 unchanged sentences

Dividends declared (1)

Net income (loss)

BALANCE, December 31, 2019

For the year ended December 31, 2017 proceeds from the issuance of shares is net of an underwriters' discount of $1.9 million and third-party agent commissions and fees of $0.2 million.

For the years ended December 31, 2019 and 2018, dividends totaling $ 1.18 and $ 1.45 , respectively, per common share outstanding, were declared.

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Cash flows provided by (used in) financing activities:

Net proceeds from the issuance of common shares

Offering costs paid

Repurchase of common shares

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Dividends payable

Conformed to current period presentation.

See Notes to Consolidated Financial Statements

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Agency RMBS include both Agency pools and Agency collateralized mortgage obligations, or "CMOs," and non-Agency RMBS primarily consist of non-Agency CMOs, both investment grade and non-investment grade.

The Company may also acquire and manage mortgage servicing rights, credit risk transfer securities, residential mortgage loans, and other mortgage- and real estate-related assets.

The Company may also acquire and manage CMBS, mortgage servicing rights, credit risk transfer securities, residential mortgage loans, and other mortgage- and real estate-related assets.

The Company may also invest in other instruments including, but not limited to, forward-settling To-Be-Announced Agency pass-through certificates, or "TBAs," interest rate swaps and swaptions, U.S.

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The Company's targeted investments may range from unrated first loss securities to AAA senior securities.

The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, or "the Code," and intends to conduct its operations to be qualified and taxed as a REIT.

The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, or "the Code," and conducts its operations to qualify and be taxed as a REIT.

As a REIT, the Company is required to distribute annually at least 90 % of its taxable income.

As long as the Company continues to qualify as a REIT, it will not be subject to U.S.

federal corporate taxes on its taxable income to the extent that it distributes all of its annual taxable income to its shareholders.

federal corporate taxes on its taxable income to the extent that it distributes all of its annual taxable income to its shareholders within the time limits prescribed by the Code.

It is the intention of the Company to distribute at least 100 % of its taxable income, after application of available tax attributes, within the time limits prescribed by the Code, which may extend into the subsequent taxable year.

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The Company's consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, or "U.S.

GAAP." Entities in which the Company has a controlling financial interest, through ownership of the majority of the entities' voting equity interests, or through other contractual rights that give the Company control, are consolidated by the Company.

GAAP," and Regulation S-X.

Entities in which the Company has a controlling financial interest, through ownership of the majority of the entities' voting equity interests, or through other contractual rights that give the Company control, are consolidated by the Company.

All inter-company balances and transactions have been eliminated.

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Level 3—inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Currently, this category includes certain RMBS, such as certain non-Agency RMBS and certain Agency IOs, where there is less price transparency.

For certain financial instruments, the various inputs that management uses to measure fair value for such financial instrument may fall into different levels of the fair value hierarchy.

In such cases, the determination of which category within the fair value hierarchy is appropriate for such financial instrument is based on the lowest level of input that is significant to the fair value measurement.

ASC 820 prioritizes the various inputs that management uses to measure fair value with the highest priority to inputs that are observable and reflect quoted prices (unadjusted) for identical assets or liabilities in active markets (Level 1) and the lowest priority to inputs that are unobservable and significant to the fair value measurement (Level 3).

Currently, this category includes certain RMBS, such as certain non-Agency RMBS and certain Agency interest only securities, or "IOs," where there is less price transparency.

For certain financial instruments, the various inputs that management uses to measure fair value may fall into different levels of the fair value hierarchy.

For each such financial instrument, the determination of which category within the fair value hierarchy is appropriate is based on the lowest level of input that is significant to the fair value measurement.

ASC 820 prioritizes the various inputs that management uses to measure fair value, with the highest priority given to inputs that are observable and reflect quoted prices (unadjusted) for identical assets or liabilities in active markets (Level 1), and the lowest priority given to inputs that are unobservable and significant to the fair value measurement (Level 3).

The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.

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The following are summary descriptions, for the various categories of financial instruments, of the valuation methodologies management uses in determining fair value of the Company's financial instruments in such categories.

Management utilizes such methodologies to assign a good faith fair value (the estimated price that, in an orderly transaction at the valuation date, would be received to sell an asset, or paid to transfer a liability, as the case may be) to each such financial instrument.

Valuations for fixed-rate RMBS pass-throughs issued by a U.S government agency or government-sponsored enterprise, or "GSE," are typically based on observable pay-up data (pay-ups are price premiums for specified categories of fixed-rate pools relative to their TBA counterparts) or models that use observable market data, such as interest rates and historical prepayment speeds, and are validated against third-party valuations.

With respect to the Company's other RMBS investments and TBAs, management seeks to obtain at least one third-party valuation, and often obtains multiple valuations when available.

Management utilizes such methodologies to assign a fair value (the estimated price that, in an orderly transaction at the valuation date, would be received to sell an asset, or paid to transfer a liability, as the case may be) to each such financial instrument.

For the Company's RMBS investments and TBAs, management seeks to obtain at least one third-party valuation, and often obtains multiple valuations when available.

Management has been able to obtain third-party valuations on the vast majority of these instruments and expects to continue to solicit third-party valuations in the future.

Management generally values each financial instrument at the average of third-party valuations received and not rejected as described below.

Third-party valuations are not binding, and while management generally does not adjust the valuations it receives, management may challenge or reject a valuation when, based on its validation criteria, management determines that such valuation is unreasonable or erroneous.

Third-party valuations are not binding, management may adjust the valuations it receives (e.g., downward adjustments for odd lots), and management may challenge or reject a valuation when, based on its validation criteria, management determines that such valuation is unreasonable or erroneous.

Furthermore, based on its validation criteria, management may determine that the average of the third-party valuations received for a given instrument does not result in what management believes to be the fair value of such instrument, and in such circumstances management may override this average with its own good faith valuation.

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Purchases and sales of investments are recorded on trade date and realized and unrealized gains and losses are calculated based on identified cost.

Purchases and sales of securities are recorded on trade date and realized and unrealized gains and losses are calculated based on identified cost.

The Company has chosen to make a fair value election pursuant to ASC 825-10, Financial Instruments , for its securities portfolio.

Electing the fair value option allows the Company to record changes in fair value in the Consolidated Statement of Operations, which, in management's view, more appropriately reflects the results of operations for a particular reporting period as all securities activities will be recorded in a similar manner.

Electing the fair value option, or "FVO," allows the Company to record changes in fair value in the Consolidated Statement of Operations, which, in management's view, more appropriately reflects the results of operations for a particular reporting period as all securities activities will be recorded in a similar manner.

As such, securities are recorded at fair value on the Consolidated Balance Sheet and the period change in fair value is recorded in current period earnings on the Consolidated Statement of Operations as a component of Change in net unrealized gains (losses) on securities.

The Company evaluates the cost basis of its Agency IOs and non-Agency RMBS for other-than-temporary impairment, or "OTTI," on at least a quarterly basis.

When the fair value of a security is less than its amortized cost basis as of the balance sheet date, the security is considered impaired, and the impairment is designated as either temporary or other-than-temporary.

When a security's cost basis is impaired, an OTTI is considered to have occurred if (i) the Company intends to sell the security (i.e., a decision has been made as of the reporting date), (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, or (iii) the Company does not expect to recover the security's amortized cost basis, even if the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security.

If any of these conditions exist as of the financial reporting date, the entire amount of the impairment loss, if any, is recognized in earnings as a realized loss and the cost basis of the security is adjusted.

Any resulting OTTI adjustments made to the amortized cost basis of the security are reflected in Net realized gains (losses) on securities, on the Consolidated Statement of Operations.

(D) Interest Income:

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For RMBS that are deemed to be of high credit quality at the time of purchase, premiums and discounts are generally amortized/accreted into interest income over the life of such securities using the effective interest method.

An effective yield retroactive to the time of purchase is periodically recomputed based on actual prepayments and changes in projected prepayment activity, and a catch-up adjustment, or "Catch-up Premium Amortization Adjustment," is made to amortization to reflect the cumulative impact of the change in effective yield.

For such RMBS whose cash flows vary depending on prepayments, an effective yield retroactive to the time of purchase is periodically recomputed based on actual prepayments and changes in projected prepayment activity, and a catch-up adjustment, or "Catch-up Premium Amortization Adjustment," is made to amortization to reflect the cumulative impact of the change in effective yield.

For RMBS that are deemed not to be of high credit quality at the time of purchase, interest income is recognized based on the effective interest method.

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The Company enters into various types of financial derivatives subject to its investment guidelines, which include restrictions associated with maintaining its qualification as a REIT.

The Company's financial derivatives are predominantly subject to bilateral collateral arrangements or clearing in accordance with the Dodd-Frank Wall

Street Reform and Consumer Protection Act of 2010.

The Company's financial derivatives are predominantly subject to bilateral collateral arrangements or clearing in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The Company may be required to deliver or may receive cash or securities as collateral upon entering into derivative transactions.

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Collateral received by the Company is reflected on the Consolidated Balance Sheet as "Due to Brokers." Conversely, collateral posted by the Company is reflected as "Due from Brokers" on the Consolidated Balance Sheet.

The types of financial derivatives that have been utilized by the Company to date are interest rate swaps, TBAs, swaptions, and futures.

The types of financial derivatives that have been utilized by the Company to date include interest rate swaps, TBAs, swaptions, and futures.

The Company enters into interest rate swaps.

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The Company typically does not take delivery of TBAs, but rather enters into offsetting transactions and settles the associated receivable and payable balances with its counterparties.

The Company uses TBAs to mitigate interest rate risk, but from time to time it also holds net long positions in certain TBA securities as a means of acquiring exposure to Agency RMBS.

The Company uses TBAs to mitigate interest rate risk, usually by taking short positions.

The Company also invests in TBAs as a means of acquiring additional exposure to Agency RMBS, or for speculative purposes, including holding long positions.

TBAs are accounted for by the Company as financial derivatives.

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instead, the agreed-upon premium is paid by the buyer upon expiration of the options contract, regardless of whether or not the options contract is exercised.

Unrealized gains or (losses) resulting from the options contract being marked-to-market are included in Change in net unrealized gains (losses) on financial derivatives in the Consolidated Statement of Operations.

Realized gains or (losses) are included in Realized gains (losses) on financial derivatives in the Consolidated Statement of Operations.

Unrealized gains or (losses) resulting from the options contract being marked-to-market are

included in Change in net unrealized gains (losses) on financial derivatives in the Consolidated Statement of Operations.

Realized gains or (losses) are included in Net realized gains (losses) on financial derivatives on the Consolidated Statement of Operations.

Futures Contracts :

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Initial margin deposits are made upon entering into futures contracts and can be either in the form of cash or securities.

During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by marking-to-market to reflect the

current market value of the contract.

During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by marking-to-market to reflect the current market value of the contract.

Unrealized gains or (losses) are included in Change in net unrealized gains (losses) on financial derivatives in the Consolidated Statement of Operations.

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When the contract is closed, the Company records a realized gain or loss equal to the difference between the proceeds of the closing transaction and the Company's basis in the contract.

Realized gains or (losses) are included in Realized gains (losses) on financial derivatives in the Consolidated Statement of Operations.

Realized gains or (losses) are included in Net realized gains (losses) on financial derivatives on the Consolidated Statement of Operations.

Financial derivative assets are included in Financial derivatives–assets, at fair value on the Consolidated Balance Sheet while financial derivative liabilities are included in Financial derivatives–liabilities, at fair value on the Consolidated Balance Sheet.

The Company has chosen to elect the FVO for its financial derivatives.

Electing the FVO allows the Company to record changes in fair value in the Consolidated Statement of Operations, which, in management's view, more appropriately reflects the results of operations for a particular reporting period as all securities activities will be recorded in a similar manner.

Changes in unrealized gains and losses on financial derivatives are included in Change in net unrealized gains (losses) on financial derivatives, on the Consolidated Statement of Operations.

Realized gains and losses on financial derivatives are included in Net realized gains (losses) on financial derivatives on the Consolidated Statement of Operations.

(H) Repurchase Agreements:

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Treasury securities to mitigate the potential impact of changes in interest rates on the performance of its portfolio.

When the Company sells securities short, it typically satisfies its security delivery settlement obligation by obtaining the security sold short from the same or a different counterparty.

The Company generally is required to deliver cash or securities as collateral to the counterparty for the Company's obligation to return the borrowed security.

The Company has chosen to make a fair value election pursuant to ASC 825-10, Financial Instruments , for its securities sold short.

When the Company sells securities short, it typically satisfies its security delivery settlement obligation by borrowing or purchasing the security sold short from the same or a different counterparty.

When borrowing a security sold short from a counterparty, the Company generally is required to deliver cash or securities to such counterparty as collateral for the Company's obligation to return the borrowed security.

The Company has chosen to make the fair value election pursuant to ASC 825-10, Financial Instruments , for its securities sold short.

As such, securities sold short are recorded at fair value on the Consolidated Balance Sheet and the period change in fair value is recorded in current period earnings on the Consolidated Statement of Operations as a component of Change in net unrealized gains (losses) on securities.

A realized gain or loss will be recognized upon the termination of a short sale if the market price is less or greater than the proceeds originally received.

A realized gain or loss will be recognized upon the termination of a short sale if the market price is less or greater than the original sale price.

Such realized gain or loss is recorded on the Company's Consolidated Statement of Operations in Net realized gains (losses) on securities.

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The cost is measured based on the fair value, at the grant date, of the equity or liability instruments issued and is amortized over the vesting period.

Restricted shares issued to the Company's independent directors and partially dedicated personnel are participating securities and receive dividends prior to vesting.

Restricted shares issued to the Company's independent trustees and partially dedicated personnel are participating securities and receive dividends prior to vesting.

Fair value for such awards is based on the closing stock price on the New York Stock Exchange at the grant date.

The vesting period for restricted share awards is

typically one to two years .

Shares issued to the Company's independent directors and partially dedicated personnel are subject to tax withholding upon vesting.

The Company's independent directors and partially dedicated personnel are permitted to forfeit a portion of their vested shares to pay such withholding tax.

The vesting period for restricted share awards is typically one to two years .

Shares issued to the Company's independent trustees and partially dedicated personnel are subject to tax withholding upon vesting.

The Company's independent trustees and partially dedicated personnel are permitted to forfeit a portion of their vested shares to pay such withholding tax.

Forfeited shares decrease the total number of shares issued and outstanding and are immediately retired upon settlement.

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(Q) Income Taxes:

The Company has elected to be taxed as a REIT under Sections 856 to 860 of the Code.

As a REIT, the Company is generally not subject to corporate-level federal and state income tax on net income it distributes to its shareholders.

To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including the distribution of at least 90% of its annual taxable income to shareholders.

The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Code.

As a REIT, the Company is generally not subject to corporate-level federal and state income tax on net income it distributes to its shareholders within the prescribed timeframes.

To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including distributing at least 90 % of its annual taxable income to shareholders.

Even if the Company qualifies as a REIT, it may be subject to certain federal, state, local and foreign taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income.

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For uncertain tax positions, the tax benefit to be recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

The Company did not have any unrecognized tax benefits resulting from tax positions related to the current period or to 2017, 2016, or 2015 (its open tax years).

The Company did not have any unrecognized tax benefits resulting from tax positions related to the current period or its open tax years.

In the normal course of business, the Company may be subject to examination by federal, state, local, and foreign jurisdictions, where applicable, for the current period and its open tax years.

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ASU 2018-13 is effective for annual periods beginning after December 15, 2019 and interim periods within those years, with early adoption permitted.

Entities are permitted to early adopt any removed or modified disclosures and delay adoption of the additional disclosures until their effective date.

Entities are permitted to early adopt any removed or modified

disclosures and delay adoption of the additional disclosures until their effective date.

The Company has elected to early adopt the removal and modification of various disclosure requirements in accordance with ASU 2018-13;

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The Company has elected not to early adopt the additional disclosure requirements.

The adoption of additional disclosures, as required under ASU 2018-13, is not expected to have a material impact on the Company's consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation—Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07").

This amends ASC 718, Compensation—Stock Compensation , to simplify several aspects of accounting for nonemployee share-based payment transactions.

ASU 2018-07 is effective for annual periods beginning after December 15, 2019 and interim periods beginning after December 15, 2020 with early adoption permitted.

The adoption of ASU 2018-07 is not expected to have a material impact on the Company's consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows—Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15").

This amends ASC 230, Statement of Cash Flows , to clarify how certain cash receipts and payments should be classified on the statement of cash flows.

The updates that most affect the Company relate to classifying each separately identifiable source or use within the cash receipts and cash payments on the basis of the nature of the underlying cash flows and identifying such receipts and payments as operating, investing, or financing activities.

ASU 2016-15 is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019, with early adoption permitted.

The Company has elected to early adopt ASU 2016-15.

The adoption of ASU 2016-15 did not have a material impact on the Company's consolidated financial statements.

The adoption of the additional disclosure requirements, as required under ASU 2018-13, is not expected to have a material impact on the Company's consolidated financial statements.

Mortgage-Backed Securities

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The Company's Agency RMBS include mortgage pass-through certificates and CMOs representing interests in or obligations backed by pools of residential mortgage loans issued or guaranteed by a U.S.

government agency or GSE.

The non-Agency RMBS portfolio is not issued or guaranteed by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or any agency of the U.S.

government agency or government-sponsored enterprise, or "GSE." The non-Agency RMBS portfolio is not issued or guaranteed by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or any agency of the U.S.

Government and is therefore subject to greater credit risk.

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Unamortized Premium (Discount)

Amortized Cost

15-year fixed-rate mortgages

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Non-Agency RMBS

Weighted average coupon represents the weighted average pass-through rates of the securities rather than the weighted average gross mortgage rates of the underlying collateral.

Average lives of RMBS are generally shorter than stated contractual maturities.

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Unamortized Premium (Discount)

Amortized Cost

15-year fixed-rate mortgages

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Non-Agency RMBS

Weighted average coupon represents the weighted average pass-through rates of the securities rather than the weighted average gross mortgage rates of the underlying collateral.

Average lives of RMBS are generally shorter than stated contractual maturities.

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Average lives of RMBS are generally shorter than stated contractual maturities.

Weighted average coupon represents the weighted average pass-through rates of the securities rather than the weighted average gross mortgage rates of the underlying collateral.

As of December 31, 2018:

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Average lives of RMBS are generally shorter than stated contractual maturities.

The following table reflects the components of interest income on the Company's RMBS for the years ended December 31, 2018 and 2017:

Year Ended December 31, 2018

Year Ended December 31, 2017

Weighted average coupon represents the weighted average pass-through rates of the securities rather than the weighted average gross mortgage rates of the underlying collateral.

The following tables reflect the components of interest income on the Company's RMBS for the years ended December 31, 2019 and 2018:

December 31, 2019

December 31, 2018

($ in thousands)

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Non-Agency RMBS

For years ended December 31, 2018 and 2017 the Catch-up Premium Amortization Adjustment was $(37) thousand and $1.2 million , respectively.

For the years ended December 31, 2019 and 2018, the Catch-up Premium Amortization Adjustment was $( 5.9 ) million and $( 38 ) thousand , respectively.

For the year ended December 31, 2019 , the Company recognized an impairment charge of $ 4.3 million relating to its Agency IOs, which is included in Net realized gains (losses) on securities, on the Consolidated Statement of Operations.

This charge recorded was due to an adverse change in cash flows resulting from an increase in prepayments.

The following tables present the Company's financial instruments measured at fair value on:

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All amounts of net realized and changes in net unrealized gains (losses) in the table above are reflected in the accompanying Consolidated Statement of Operations.

The table above incorporates changes in net unrealized gains (losses) for

both Level 3 financial instruments held by the Company at December 31, 2018 , as well as Level 3 financial instruments disposed of by the Company during the year ended December 31, 2018 .

The table above incorporates changes in net unrealized gains (losses) for both Level 3 financial instruments held by the Company at December 31, 2019 , as well as Level 3 financial instruments

disposed of by the Company during the year ended December 31, 2019 .

For Level 3 financial instruments held by the Company as of December 31, 2019 , change in net unrealized gains (losses) of $( 25 ) thousand and $ 0.5 million , for the year ended December 31, 2019 relate to non-Agency RMBS and Agency RMBS, respectively.

At December 31, 2019 , the Company transferred $ 1.3 million of RMBS from Level 3 to Level 2 and $ 5.2 million of RMBS from Level 2 to Level 3.

Transfers between these hierarchy levels were based on the availability of sufficient observable inputs to meet Level 2 versus Level 3 criteria.

Transfers between hierarchy levels are based on the availability of sufficient observable inputs to meet Level 2 versus Level 3 criteria.

The level designation of each financial instrument is reassessed at the end of each period, and is based on pricing information received from third party pricing sources.

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The table above incorporates changes in net unrealized gains (losses) for both Level 3 financial instruments held by the Company as of December 31, 2018 , as well as Level 3 financial instruments disposed of by the Company during the year ended December 31, 2018 .

For Level 3 financial instruments held by the Company as of December 31, 2017 , change in net unrealized gains (losses) of $1.3 million and $(0.3) million , for the year ended December 31, 2017 relate to non-Agency RMBS and Agency RMBS, respectively.

For Level 3 financial instruments held by the Company as of December 31, 2018 , change in net unrealized gains (losses) of $ 16 thousand and $ 0.3 million , for the year ended December 31, 2018 relate to non-Agency RMBS and Agency RMBS, respectively.

At December 31, 2018 , the Company transferred $ 2.7 million of RMBS from Level 3 to Level 2 and $ 3.3 million of RMBS from Level 2 to Level 3.

Transfers between these hierarchy levels were based on the availability of sufficient observable inputs to meet Level 2 versus Level 3 criteria.

Transfers between these hierarchy levels are based on the availability of sufficient observable inputs to meet Level 2 versus Level 3 criteria.

The level designation of each financial instrument is reassessed at the end of each period, and is based on pricing information received from third party pricing sources.

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Non-Binding Third-Party Valuation

Agency RMBS–Interest Only Securities

Market quotes

Non-Binding Third-Party Valuation

Non-Agency RMBS

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Shown in basis points.

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

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

For those instruments valued using discounted cash flows, collateral prepayments, losses, recoveries, and scheduled amortization are projected over the remaining life of the collateral and expressed as a percentage of the collateral's current principal balance.

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Due to brokers

Cash and cash equivalents includes cash held in an interest bearing overnight account for which fair value equals the carrying value and cash held in money market accounts which are liquid in nature and for which fair value equals the carrying value;

Cash and cash equivalents includes cash held in interest bearing overnight accounts, for which fair value equals the carrying value, and cash held in money market accounts, which are liquid in nature and for which fair value equals the carrying value;

such assets are considered Level 1 assets.

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(In thousands)

The following table provides information about the Company's fixed receiver interest rate swaps as of December 31, 2018 and 2017.

The following tables provide information about the Company's fixed receiver interest rate swaps as of December 31, 2019 and 2018.

December 31, 2019 :

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(In thousands)

Interest Rate Swaptions

The following tables provide information about the Company's swaptions as of December 31, 2017.

The Company did not hold any swaptions as of December 31, 2018.

December 31, 2017:

Underlying Swap

Months to Expiration

($ in thousands)

The following tables provide information about the Company's short positions in futures as of December 31, 2018 and 2017.

The following tables provide information about the Company's futures as of December 31, 2019 and 2018.

December 31, 2019 :

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($ in thousands)

Long Contracts:

Treasury Futures

Short Contracts:

Treasury Futures

December 31, 2018:

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($ in thousands)

Short Contracts:

Treasury Futures

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TBAs are generally liquid, have quoted market prices, and represent the most actively traded class of MBS.

The Company uses TBAs to mitigate interest rate risk, typically in the form of short positions.

However, from time to time, the Company also invests in TBAs as a means of acquiring additional exposure to Agency RMBS, or for speculative purposes, including holding long positions.

Overall, the Company typically holds a net short position.

The Company uses TBAs to mitigate interest rate risk, usually by taking short positions.

The Company also invests in TBAs as a means of acquiring additional exposure to Agency RMBS, or for speculative purposes, including holding long positions.

The Company does not generally take delivery of TBAs;

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Net Realized Gains (Losses) on Periodic Settlements of Interest Rate Swaps

Net Realized Gains (Losses) Other Than Periodic Settlements of Interest Rate Swaps

Net Realized Gains (Losses) on Financial Derivatives Other Than Periodic Settlements of Interest Rate Swaps

Net Realized Gains (Losses) on Financial Derivatives

Change in Net Unrealized Gains (Losses) on Accrued Periodic Settlements of Interest Rate Swaps

Change in Net Unrealized Gains (Losses) Other Than on Accrued Periodic Settlements of Interest Rate Swaps

Change in Net Unrealized Gains (Losses) on Financial Derivatives Other Than on Accrued Periodic Settlements of Interest Rate Swaps

Change in Net Unrealized Gains (Losses) on Financial Derivatives

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Net Realized Gains (Losses) on Periodic Settlements of Interest Rate Swaps

Net Realized Gains (Losses) Other Than Periodic Settlements of Interest Rate Swaps

Net Realized Gains (Losses) on Financial Derivatives Other Than Periodic Settlements of Interest Rate Swaps

Net Realized Gains (Losses) on Financial Derivatives

Change in Net Unrealized Gains (Losses) on Accrued Periodic Settlements of Interest Rate Swaps

Change in Net Unrealized Gains (Losses) Other Than on Accrued Periodic Settlements of Interest Rate Swaps

Change in Net Unrealized Gains (Losses) on Financial Derivatives Other Than on Accrued Periodic Settlements of Interest Rate Swaps

Change in Net Unrealized Gains (Losses) on Financial Derivatives

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Collateral transferred under outstanding borrowings as of December 31, 2018 includes RMBS in the amount of $ 74.4 million that were sold prior to year end but for which such sale had not yet settled.

In addition as of December 31, 2018 , the Company was posting to repo counterparties net cash collateral of $3.8 million and was holding from repo counterparties securities with a fair value of $1.1 million , as a result of margin calls with various repo counterparties.

As of December 31, 2017, the Company was posting to repo counterparties net cash collateral of $18.7 million and additional securities with a fair value of $2.5 million as a result of margin calls with various repo counterparties.

In addition as of December 31, 2019 , the Company was posting to repurchase agreement counterparties net cash collateral of $ 24.9 million as a result of margin calls with various repurchase agreement counterparties.

As of December 31, 2018, the Company was posting to repurchase agreement counterparties net cash collateral of $ 3.8 million and additional securities with a fair value of $ 1.1 million as a result of margin calls with various repurchase agreement counterparties.

Amount at risk represents the excess, if any, for each counterparty of the fair value of collateral held by such counterparty over the amounts outstanding under repurchase agreements.

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Total financial instruments transferred or pledged as collateral on the Company's repurchase agreements as of December 31, 2019 were $ 1.33 billion .

As of December 31, 2018 total cash collateral on financial derivative assets and liabilities excludes $5.1 million and $4.6 million respectively of net excess cash collateral.

When collateral is pledged to or pledged by a counterparty, it is often pledged or posted with respect to all positions with such counterparty, and in such cases such collateral cannot be specifically identified as relating to a specific asset or liability.

As of December 31, 2019 total cash collateral (received) pledged on financial derivative assets and liabilities excludes $ 8.3 million and $ 1.1 million respectively of net excess cash collateral.

As a result, in preparing the above table, the Company has made assumptions in allocating pledged or posted collateral among the various rows.

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As of December 31, 2018 total cash collateral on financial derivative assets and liabilities excludes $ 5.1 million and $ 4.6 million , respectively of net excess cash collateral.

As a result, in preparing the above table, the Company has made assumptions in allocating pledged or posted collateral among the various rows.

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Management Agreement

The Company is party to the Management Agreement, which has a current term that expires on September 24, 2019, and has been, and will continue to be, renewed automatically each year thereafter for an additional one -year period, subject to certain termination rights.

The Company is party to the Management Agreement, which has a current term that expires on September 24, 2020, and has been, and is expected to be, renewed automatically each year thereafter for an additional one-year period, subject to certain termination rights.

The Company is externally managed and advised by the Manager.

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The Company reimburses the Manager for the allocable share of the compensation, including, without limitation, wages, salaries, and employee benefits paid or reimbursed, as approved by the Compensation Committee of the Board of Trustees, to certain dedicated or partially dedicated personnel who spend all or a portion of their time managing the Company's affairs, based upon the percentage of time devoted by such personnel to the Company's affairs.

In their capacities as officers or

personnel of the Manager or its affiliates, such personnel will devote such portion of their time to the Company's affairs as is necessary to enable the Company to operate its business.

In their capacities as officers or personnel of the Manager or its affiliates, such personnel will devote such portion of their time to the Company's affairs as is necessary to enable the Company to operate its business.

For the years ended December 31, 2019 and 2018, the Company reimbursed the Manager $ 2.1 million and $ 2.0 million , respectively, for previously incurred operating and compensation expenses.

As of December 31, 2019 and 2018, the outstanding payable to the Manager for operating and compensation expenses was $ 0.2 million and $ 0.3 million , respectively, which are included in Accrued expenses on the Consolidated Balance Sheet.

Termination Fee

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No preferred shares have been issued.

During the years ended December 31, 2018 and 2017, the Board of Directors authorized dividends totaling $1.45 per share and $1.57 per share, respectively.

Total dividends declared during the years ended December 31, 2018 and 2017 were $18.4 million and $18.9 million , respectively.

On September 12, 2018, the Company's Board of Trustees authorized the issuance of 13,144 shares to its independent trustees pursuant to director share award agreements.

Such shares will vest and become non-forfeitable on September 11, 2019.

On September 11, 2019, the Company's Board of Trustees authorized the issuance of 15,024 shares to its independent trustees pursuant to trustee share award agreements.

On December 13, 2019, the Company's Board of Trustees authorized the issuance of 7,337 restricted common shares to certain of its partially dedicated employees pursuant to employee share award agreements.

Such restricted common shares are subject to forfeiture restrictions that will lapse on December 11, 2019 with respect to 3,117 common shares and December 11, 2020 with respect to 3,115 common shares.

Detailed below is a roll forward of the Company's common shares outstanding for the years ended December 31, 2019 and 2018:

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Share Activity:

Shares issued

Restricted shares issued

Shares repurchased

Forfeiture of common shares to satisfy tax withholding obligations

Common Shares Outstanding (12/31/2019 and 12/31/2018, respectively)

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Repurchases are at the Company's discretion, subject to applicable law, share availability, price and its financial performance, among other considerations.

This program superseded the program that was previously adopted on February 6, 2018.

During the year ended December 31, 2018 , the Company purchased 852,380 of its common shares at an aggregate cost of $9.4 million , and an average price per share of $11.01 .

From inception of the current share repurchase program adopted on June 13, 2018 through December 31, 2018 , the Company purchased 224,213 of its common shares at an aggregate cost of $2.4 million , and an average price per share of $10.57 .

During the year ended December 31, 2019 , the Company repurchased 73,816 of its common shares at an aggregate cost of $ 0.7 million , and an average price per share of $ 10.12 .

From inception of the current share repurchase program adopted on June 13, 2018 through December 31, 2019 , the Company repurchased 298,029 of its common shares at an aggregate cost of $ 3.1 million , and an average price per share of $ 10.46 .

Distribution Policy

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From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of business.

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

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

In the normal course of business the Company may also enter into contracts that contain a variety of representations, warranties, and general indemnifications.

The Company's maximum exposure under these arrangements, including future claims that may be made against the Company that have not yet occurred, is unknown.

The Company has not incurred any costs to defend lawsuits or settle claims related to these indemnification agreements.

The Company has not incurred any costs

to defend lawsuits or settle claims related to these indemnification agreements.

The Company has no liabilities recorded for these agreements as of December 31, 2019 and 2018 and management is not aware of any significant contingencies at December 31, 2019 .

Condensed Quarterly Financial Data (Unaudited)

Detailed below is unaudited quarterly information for the years ended December 31, 2018 and 2017.

D etailed below is unaudited quarterly information for the years ended December 31, 2019 and 2018.

(In thousands except for per share amounts)

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Dividends declared

For the year ended December 31, 2018 the sum of EPS for the four quarters of the year does not equal EPS as calculated for the entire year (see Note 8) as a result of changes in shares during the year due to repurchases of common shares, as EPS is calculated using average shares outstanding during the period.

(In thousands except for per share amounts)

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Dividends declared

For the year ended December 31, 2017 the sum of EPS for the four quarters of the year does not equal EPS as calculated for the entire year (see Note 8) as a result of changes in shares during the year due to issuances of common shares, as EPS is calculated using average shares outstanding during the period.

Subsequent Events

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data