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Item 7. Management’s Discussion and Analysis

2021-03-16 compared with 2020-03-12 · 274 added, 271 removed, 346 unchanged (61% of the section changed)

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We are a Maryland real estate investment trust, or "REIT," formed in August 2012 that specializes in acquiring, investing in, and managing residential mortgage- and real estate-related assets.

Our primary objective is to generate attractive current yields and risk-adjusted total returns for our shareholders by making investments that we believe compensate us appropriately

for the risks associated with them.

Our primary objective is to generate attractive current yields and risk-adjusted total returns for our shareholders by making investments that we believe compensate us appropriately for the risks associated with them.

We seek to attain this objective by constructing and actively managing a portfolio consisting primarily of residential mortgage-backed securities, or "RMBS," for which the principal and interest payments are guaranteed by a U.S.

government agency or a U.S.

government-sponsored entity, or "Agency RMBS," and, to a lesser extent, RMBS that do not carry such guarantees, or "non-Agency RMBS," such as RMBS backed by prime jumbo, Alternative A-paper, mortgage loans that are not deemed "qualified mortgage," or "QM," loans under the rules of the Consumer Financial Protection Bureau, or "non-QM loans," mortgages on single-family-rental properties, manufactured housing, and subprime residential mortgage loans.

We also may opportunistically acquire other types of mortgage- and real estate-related asset classes, such as commercial mortgage-backed securities, or "CMBS," residential mortgage loans, mortgage servicing rights, or "MSRs," and credit risk transfer securities, or "CRTs." We believe that being able to combine Agency RMBS with non-Agency RMBS and other mortgage- and real estate-related asset classes enables us to balance a range of mortgage-related risks.

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Market Overview

After raising the target range for the federal funds rate four times in 2018, the U.S.

Federal Reserve, or "Federal Reserve," elected to maintain the range of 2.25%–2.50% during the first half of 2019, before lowering the range by 25 basis points at each of its July, September, and October meetings, to the current range of 1.50%–1.75%.

These were the first reductions since 2008 and were in response to uncertainties around global growth and trade negotiations.

At its final meeting of the year, in December 2019, the Federal Reserve elected to leave the target range unchanged.

In March 2019, the Federal Reserve announced that over the following six months it would gradually end the tapering of its U.S.

Treasury security reinvestments.

According to the plan, beginning in May, the monthly tapering of U.S.

Treasury security reinvestments would decrease to $15 billion, from $30 billion, and the tapering would end altogether at the end of September.

Additionally, the tapering of Agency RMBS would continue at $20 billion per month, but beginning in October, monthly paydowns from Agency RMBS up to the $20 billion monthly cap would be reinvested in U.S.

Treasury securities.

Then, in July, the Federal Reserve announced that it would end the tapering of its U.S.

Treasury security reinvestments on August 1, 2019, two months earlier than previously planned.

It also announced that it would reinvest principal payments from Agency RMBS into U.S.

Treasury securities, up to $20 billion per month, and that it would reinvest principal payments in excess of $20 billion into Agency RMBS.

The Federal Reserve confirmed this plan at its December meeting.

During the week of September 16, 2019, interest rates on overnight repo spiked to unusually high levels.

In response, the Federal Reserve conducted overnight and term repo operations to provide liquidity to the repo market, and repo rates normalized as a result.

To help prevent future spikes in overnight repo rates, the Federal Reserve began buying short-term U.S.

Treasury bills in October, and committed to continue purchasing them at least into the second quarter of 2020.

The Federal Reserve also committed to continue these repo operations through January 2020 to address any year-end liquidity issues.

Repo markets remained relatively stable in the fourth quarter of 2019, allaying fears of year-end volatility.

LIBOR rates, which drive many of our financing costs, steadily declined during 2019 before increasing modestly in December.

For the year, one-month LIBOR decreased 74 basis points to 1.76% at year end, and three-month LIBOR fell 90 basis points to 1.91%, a 15 basis point positive spread, as compared to a 30 basis point positive spread at the

However, at several points during 2019, in anticipation of near-term interest rate cuts by the Federal Reserve, the spread between one- and three-month LIBOR inverted.

Over the course of 2019, interest rates declined across the U.S.

Treasury yield curve, with the two-year U.S.

Treasury yield decreasing 92 basis points to finish the year at 1.57%, and the ten-year U.S.

Treasury yield declining 76 basis points to 1.92%.

During one week in the third quarter, the spread between the two-year U.S.

Treasury yield and ten-year U.S.

Treasury yield inverted, which had not happened since June 2007.

As of the end of the third quarter, the entire two-month through five-year segment of the U.S.

Treasury yield curve was inverted.

During the fourth quarter, the yield curve normalized, and the spread between the two-year and ten-year U.S.

Treasury yields was 35 basis points at year end, its steepest level in more than 18 months.

Mortgage rates declined sharply during the first eight months of the year, before increasing moderately going into year end.

The Freddie Mac survey 30-year mortgage rate declined 106 basis points between December 31, 2018 and September 5, 2019, before increasing 25 basis points to end the year at 3.74%.

With falling mortgage rates, Agency RMBS prepayment rates surged, increasing from 6.6% in January to 21.2% in October, before retracing to 17.0% in December.

real GDP increased at an estimated annualized rate of 3.1% in the first quarter, 2.0% in the second quarter, 2.1% in the third quarter, and 2.1% in the fourth quarter.

Total unemployment declined throughout the year, falling to 3.5% as of year-end 2019, as compared to 3.9% as of year-end 2018.

Each of the Bloomberg Barclays US MBS Index ("BB MBS Index"), Bloomberg Barclays US Corporate Bond Index ("BB IG Index"), and Bloomberg Barclays US Corporate High Yield Bond Index ("BB HY Index") generated positive returns for each quarter of 2019;

and for the full year, each generated excess returns (on a duration-adjusted basis) over the Bloomberg Barclays US Treasury Index ("BB UST Index").

During 2019, the BB MBS Index generated a positive return of 6.35% and an excess return of 0.61%;

the BB IG Index generated a positive return of 14.5% and an excess return of 6.76%;

and the BB HY Index generated a positive return of 14.3% and an excess return of 9.3%.

Changing market sentiment around central bank policies, trade negotiations, global growth prospects, and geopolitical tensions drove market fluctuations during 2019, but over the course of the year most asset classes performed well, as interest rates ratcheted tighter and the yield curve remained flat, and at times, inverted.

During the first quarter of the year, the market weakness of December 2018 reversed course, and most fixed income and equity assets performed well.

Dovish messaging from the Federal Reserve soothed the stock and bond markets and sparked a market rally;

domestic equity indexes rose, yield spreads on most credit assets and many Agency assets tightened, and market volatility declined.

Interest rates were range-bound for the first two months of the year before dropping considerably in March.

At March 31, 2019 the yield on the ten-year U.S.

Treasury note had declined to 2.41%, down 83 basis points from early November 2018.

Meanwhile, the yield curve continued to flatten, with a portion of the curve even inverting for a week in March, again stoking fears of a full yield curve inversion, and whether that might signal a looming recession.

The Federal Reserve appeared to end its rate hiking cycle and also announced a slowdown of its balance sheet runoff in March;

in Europe, the European Central Bank ("ECB") introduced new stimulus measures in response to slowing growth, including a recession in Italy.

Moving into the second quarter, volatility remained low, and equities and many credit assets continued to perform well in April.

Meanwhile, declining interest rates continued to drive increases in actual and projected prepayments, which in turn led to modest widening of Agency RMBS yield spreads and increases in pay-ups on specified pools, trends that would continue through most of 2019.

Volatility returned to the markets in May, however, as global trade tensions escalated.

By the end of May, the Merrill Lynch Option Volatility Estimate Index, or "MOVE Index," which had just reached an all-time low in March, spiked to its highest level in more than two years.

Meanwhile, domestic equities sold off, yield spreads on most fixed income assets widened, and interest rates plummeted.

Over the course of the month, the S&P 500 declined 6% while the yield on the ten-year U.S.

Treasury fell 38 basis points.

Both the BB IG Index and BB HY Index underperformed relative to the BB UST Index, while the BB MBS Index had its worst performance relative to U.S.

Treasuries since November 2016.

In June, interest rate futures markets implied a near-certain probability of a rate cut in July, which spurred a broad rally across most asset classes.

Long-term U.S.

Treasury yields continued their precipitous decline, with the ten-year yield dropping below 2% for the first time since November 2016.

In Europe, the ECB signaled that it was ready to launch another round of stimulus, and the total amount of negative-yielding sovereign bonds reached $13 trillion globally.

In July, the market was optimistic about U.S./China trade negotiations, and anticipating an interest rate cut by the Federal Reserve, domestic equities hit record highs.

On July 31, the Federal Reserve indeed cut short term rates by 25 basis points, and announced an end to its U.S.

Treasury security portfolio runoff two months early.

Sentiment flipped in August, however, and significant market volatility returned, as messaging from the Federal Reserve shifted hawkish, concerns over global growth intensified, and U.S.

trade negotiations with China grew tense following China's devaluation of its currency.

During the month,

the MOVE Index hit a 3.5-year high, and the VIX volatility index spiked to its highest level since the beginning of the year.

Meanwhile, domestic equities fell, interest rates plummeted, various parts of the yield curve inverted, and yield spreads on many fixed income assets fluctuated.

Over the course of the month, the S&P 500 declined by 1.8% while the yield on the ten-year U.S.

Treasury fell by 52 basis points, finishing the month below the yield on the two-year U.S.

The Federal Reserve responded to the increased volatility by pledging more monetary stimulus should the global slowdown damage the U.S.

economy, while several central banks around the globe also responded by cutting interest rates.

Moving into September, volatility subsided;

the VIX and MOVE indexes declined, domestic equities recovered, and U.S.

Treasury yields rose.

The ECB cut its short-term rate in September, its first cut since 2016, and announced a quantitative easing program.

Later in the month, the Federal Reserve cut its short term rate again, though the decision was not unanimous, clouding the outlook for future reductions.

Domestic equity indexes posted positive returns for the month, and medium-term and long-term U.S.

Treasury yields rose.

Markets remained steady in the fourth quarter.

Trade concerns eased with the announcement that the U.S.

and China had reached agreement on "Phase One" of a trade deal in principle, and with the signing of the U.S.–Mexico–Canada Agreement.

Meanwhile, accommodative monetary policy continued globally with a third rate cut from the Federal Reserve, the ECB restarting asset purchases, and additional policy support in China.

Domestic equity indexes set new record highs and volatility was low as the VIX hit its low point for the year in November, and the ten-year traded in a 41-basis point range for the quarter, as compared to a range of 133 basis points during the year's first three quarters.

Interest rates drifted up modestly, slowing prepayments in November and December and supporting agency yield spreads, and the yield curve steepened moderately going into year end.

Over the course of 2019, market optimism over global stimulus, including three interest rate cuts by the Federal Reserve, and progress on trade negotiations seemed to prevail over various macroeconomic concerns including slowing global growth, the Federal Reserve signaling an end to interest rate cuts, geopolitical tensions, and an upcoming U.S.

presidential election.

Coming off of a weak December in 2018, virtually all investment classes performed well over 2019.

Domestic equities had one of the best years of the decade, with the NASDAQ up 35%, the S&P up 29%, and the Dow Jones Industrial Average up 22%.

The BB IG Index and BB HY Index each generated returns over 14% and significant excess returns to the BB UST Index.

Safer assets rallied as well, with the BB MBS Index generating positive absolute and excess returns to the BB UST Index, despite falling mortgage rates and significant increases in prepayments;

gold prices appreciating 18%;

and the yield on the ten-year U.S.

Treasury note reaching a 3-year low in September, before finishing the year below 2%.

• After lowering the target range for the federal funds rate three times in 2019, the U.S.

Federal Reserve, or "Federal Reserve," elected to maintain its target range of 1.50%–1.75% at its January 2020 meeting, but noted concerns about the spread of the novel coronavirus disease ("COVID-19") in its minutes.

As the first quarter of 2020 progressed and COVID-19 spread, economic activity declined as countries around the world implemented social-distancing restrictions;

unemployment claims surged and GDP growth forecasts were revised downward as the market began to price in a global recession.

In March, macroeconomic conditions worsened, and financial markets experienced extreme volatility and dislocations.

In response, the Federal Reserve implemented two emergency interest rate cuts totaling 150 basis points, resumed its asset purchases at an unprecedented pace, added additional liquidity to repo markets, and formed several credit facilities to stabilize markets.

The White House and U.S.

Congress passed three rounds of stimulus packages, culminating in the $2 trillion CARES Act on March 27th, the largest emergency spending bill in history.

In April, the Federal Reserve expanded many of its stimulus programs to provide up to $2.3 trillion in additional capital.

Similarly, central banks and governments around the globe responded swiftly and aggressively with interest rate cuts, quantitative easing programs, and stimulus packages.

While these efforts were successful in stabilizing markets, the negative economic impact of COVID-19 persisted, and the Federal Reserve continued its accommodative monetary policy throughout the rest of 2020, including maintaining its target range of 0.00%–0.25% for the federal funds rate;

purchasing significant amounts of U.S.

Treasury securities, Agency RMBS, and other eligible collateral pursuant to the asset purchase programs it outlined earlier in the year;

and extending or expanding several of its liquidity support programs.

At its final meeting of 2020, in December, the Federal Reserve noted that "the COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world.

Economic activity and employment have continued to recover but remain well below their levels at the beginning of the year." The Federal Reserve reiterated that it "is committed to using its full range of tools to support the U.S.

economy in this challenging time, thereby promoting its maximum employment and price stability goals." The Federal Reserve also directed the Open Market Desk to increase its holdings of Treasury securities by $80 billion per month, and of Agency RMBS by $40 billion per month.

Finally, just prior to year end 2020, Congress and the administration approved an additional $900 billion of COVID-related stimulus and economic aid.

• Interest rates dropped dramatically during the first quarter of 2020, as the spread of COVID-19 prompted a flight to safety.

Between February 12th and March 9th, the 10-year U.S.

Treasury yield plummeted 109 basis points to a record low of 0.54%, before rebounding to 1.19% less than two weeks later, and then declining to 0.67% as of March 31st.

Treasury yields fell across the yield curve over the course of the quarter, with yields on 3-month Treasury bills down 148 basis points, yields on the 2-year U.S.

Treasury down 132 basis points, and yields on the 10-year U.S.

Treasury down 125 basis points.

On March 9th, the MOVE index, which measures U.S.

interest rate volatility, reached its highest point since the 2008-2009 financial crisis.

During the second and third quarters, interest rate volatility subsided considerably and U.S.

Treasury yields continued to hover near all-time lows.

During this six-month period, the 10-year U.S.

Treasury yield traded in a remarkably tight 39-basis-point rage, compared to a 134-basis-point range in the first quarter.

At September 30th, the 10-year U.S.

Treasury yield was 0.68%, virtually unchanged from March 31st and only 14 basis points above the record low reached in March.

After reaching its highest point since the 2008–2009 financial crisis in March, the MOVE index had reverted to pre-COVID-19 levels by mid-April and continued to decline through the third quarter, hitting an all-time low at the end of September.

During the fourth quarter, long-term interest rates rose modestly and the U.S.

Treasury yield curve steepened, with the 10-year U.S.

Treasury yield increasing 23 basis points to finish the year at 0.91%, and the 2-year U.S.

Treasury yield up just 1 basis point to 0.12%.

The yield spread between the 2-year and 10-year U.S.

Treasury increased to 79 basis

points from 56 basis points at the end of the third quarter.

The MOVE index increased modestly in October, before reverting to lower levels in November and December.

• Mortgage rates declined during each quarter of 2020, setting new all-time lows at several points during the year.

Over the course of the year, the Freddie Mac survey 30-year mortgage declined 107 basis points to 2.67% at December 31, 2020.

Refinancing applications surged with the declining mortgage rates.

On March 6th, the Mortgage Bankers Association's Refinance Index, which measures refinancing application volumes, increased 79% to its highest level since April 2009.

Although refinancing applications declined after March, they remained elevated throughout the year, at levels not seen since 2013.

Overall Fannie Mae 30-year MBS prepayments increased steadily during the year, from a CPR of 17.0 in December 2019 to an 8-year high of 37.2 CPR in October 2020, before finishing the year at 35.6 CPR.

• In connection with the Federal Reserve actions, LIBOR rates, which drive many of our financing costs, declined sharply during the first half of 2020.

Between December 31, 2019, and June 30, 2020, one-month LIBOR declined 160 basis points to 0.16%, and three-month LIBOR fell 161 basis points to 0.30%.

LIBOR rates remained low during the second half of the year, with one-month LIBOR finishing the year at 0.14% and three-month LIBOR at 0.24%.

real GDP declined at an annualized rate of 5.0% in the first quarter and then 31.4% in the second quarter, reflecting the negative impact of the COVID-19 pandemic and associated measures to contain it.

The GDP growth rate bounced back in the third quarter, increasing at estimated annualized rates of 33.4%, before slowing in the fourth quarter to an estimated annualized rate of 4.1%.

• The sudden and significant decline in economic activity and implementation of social-distancing restrictions caused unemployment claims to rise significantly in 2020.

employers reported a reduction of 701,000 jobs in March, and unemployment claims surged to 38.5 million in the second quarter.

The unemployment rate spiked to 11.1% at June 30th, from 4.4% at March 31st.

Unemployment claims totaled 14.1 million in the third quarter and 10.3 million in the fourth quarter, both down significantly from the second quarter but still well above historical averages.

The unemployment rate dropped to 6.7% at December 31st, down from 7.8% at September 30th, 11.1% at June 30th and 14.8% at the April 30th peak.

However, the U.S.

lost 140,000 jobs in December, the first month of net job losses since the spring, which muddled the outlook going forward.

• With the economic slowdown and spike in unemployment, forbearance rates on residential mortgages rose during the first half of 2020.

According to the Mortgage Bankers Association, the total forbearance rate increased most significantly during the month of April, from 2.7% as of March 29th to 7.5% as of April 26th, before rising further to 8.5% as of May 31st, plateauing during June, and then finishing the second quarter at 8.4%.

Forbearance rates on residential mortgages declined steadily during the third and fourth quarters, driven by the economic recovery and an improving employment picture, even as many stimulus measures expired.

According to the Mortgage Bankers Association, the total forbearance rate decreased from 8.4% at the end of June, to 6.9% at the end of September, and to 5.5% as of January 3, 2021.

• Yield spreads on most fixed income assets widened sharply in the first half of March.

For Agency RMBS, the heightened levels of interest rate volatility, together with concerns of a liquidity crunch in the private sector, exacerbated fundamental concerns about a surge in prepayments from the decline in mortgage rates;

while for credit assets, the negative macroeconomic developments raised concerns about a potential surge in future credit losses within many sectors.

Across virtually all credit-sensitive fixed income asset classes, repo financing stresses and sharp declines in asset prices severely reduced liquidity, and prompted forced selling from many market participants experiencing liquidity problems, which further contributed to price declines and yield spread widening.

This selling was particularly acute in structured credit assets, but even Agency RMBS, despite their creditworthiness, experienced significant yield spread widening in sympathy.

As described above, central banks and governments around the globe responded swiftly and aggressively with interest rate cuts, quantitative easing programs, and stimulus packages;

these actions succeeded in stabilizing markets for the balance of 2020.

• The Bloomberg Barclays US MBS Index ("BB MBS Index") generated a positive return for each quarter of 2020, finishing the year with a 3.87% return, but a slight negative excess return (on a duration-adjusted basis) of (0.17)% relative to the Bloomberg Barclays U.S.

Treasury Index.

Notably, during the extreme market volatility experienced in March, the intra-month negative excess return reached an extreme of (2.22)% as of March 19th, before actions by the Federal Reserve caused yield spreads on Agency RMBS to retighten.

Additionally, after underperforming in the first quarter, pay-ups on Agency specified pools performed exceptionally well during the rest of 2020.

• For the first quarter, the Bloomberg Barclays US Corporate Bond Index ("BB IG Index") generated a loss of 3.63% and a negative excess return of (13.50)%, while the Bloomberg Barclays U.S.

Corporate High Yield Bond Index ("BB HY Index") generated a loss of (12.68)% and a negative excess return of (17.03)%.

Each index generated both positive returns and positive excess returns during each of the subsequent three quarters, however.

For the full year, the BB IG

Index generated a 9.89% return, and a positive excess return of 0.49%;

while the BB HY Index generated a 7.11% return and positive excess return of 2.25%.

• During the first quarter, U.S.

equities had their worst quarter since the 2008–2009 financial crisis, with the Dow Jones Industrial Average ("DJIA") declining 23%, the S&P down 20%, and the NASDAQ down 14%.

Stock markets were highly volatile during the quarter, as the S&P 500 declined 34% between February 19th and March 23rd, and then increased 18% over the next three days.

Because of rapid price declines that tripped market "circuit breakers," trading was halted temporarily on the major U.S.

stock exchanges on four trading days during the quarter.

The CBOE Volatility Index, which measures expected moves in the S&P 500 index, registered an all-time high of 82.69 on March 16th.

London's FTSE 100 declined 25%, while the MSCI World global equity index declined 21%.

Despite the continuing negative economic impacts of COVID-19, U.S.

equities rebounded dramatically in the second quarter, with the DJIA and S&P 500 indexes posting their biggest quarterly gains since 1998 and offsetting most of the losses suffered in March, amidst optimism over the reopening of the economy, possible additional stimulus measures, and advances on COVID-19 treatments and a possible vaccine.

The DJIA rose 17.8% and the S&P 500 rose 20.0% quarter over quarter, while the tech-heavy NASDAQ composite index increased 30.6%.

Equity volatility declined during the second quarter, but remained higher than pre-COVID-19 levels.

The CBOE Volatility Index steadily declined for most of the second quarter, finishing at 30.43 at June 30th.

Meanwhile, London's FTSE 100 index increased 8.8% quarter over quarter, while the MSCI World global equity index rebounded by 18.8% over the same period.

The strong performance of equities continued into the second half of the year, driven by record-low interest rates, expectations of additional stimulus, advances on a possible COVID-19 vaccine, as well as continued outperformance by the tech sector.

In July, the tech-heavy NASDAQ composite index closed at an all-time high, while in August, the S&P 500 reversed all of its losses for the year and reached a new all-time high as well.

Performance waned in September amidst a tech selloff and dimming hopes for new stimulus, but U.S.

equities still posted a strong third quarter.

Quarter over quarter, the S&P 500 rose 8.5%, the DJIA 7.6%, and the NASDAQ 11%.

The CBOE Volatility Index, which measures expected moves in the S&P 500 index, increased moderately in September but remained at levels well below those seen in March and April.

Meanwhile, London's FTSE 100 index decreased 4.9% and the MSCI World global equity index rose 7.5%, over the same period.

In the second half of October, U.S.

equities slumped and equity volatility increased in response to fading stimulus hopes and an accelerating number of COVID-19 cases.

However, in November and December, stocks rallied following the U.S.

presidential election and in response to advances in the development of COVID-19 vaccines as well as the passage of an additional stimulus package.

During December, each of the S&P 500, DJIA, and NASDAQ indexes set fresh new highs;

and for the full year, these indexes gained 16%, 7%, and 44%, respectively.

After rising in October, the VIX volatility index declined steadily into year end.

Portfolio Overview and Outlook

As of December 31, 2019 , our mortgage-backed securities portfolio consisted of $1.241 billion of fixed-rate Agency "specified pools," $33.3 million of Agency RMBS backed by adjustable rate mortgages, or "Agency ARMs," $99.9 million of Agency reverse mortgage pools, $18.2 million of Agency interest only securities, or "Agency IOs," and $8.9 million of non-Agency RMBS.

As of December 31, 2020, our mortgage-backed securities portfolio consisted of $962.8 million of fixed-rate Agency "specified pools," $20.4 million of Agency RMBS backed by adjustable rate mortgages, or "Agency ARMs," $67.5 million of Agency reverse mortgage pools, $13.0 million of Agency interest only securities, or "Agency IOs," and $17.6 million of non-Agency RMBS.

Specified pools are fixed-rate Agency pools consisting of mortgages with special characteristics, such as mortgages with low loan balances, mortgages backed by investor properties, mortgages originated through the government-sponsored "Making Homes Affordable" refinancing programs, and mortgages with various other characteristics.

Our overall RMBS portfolio decreased by 9% to $1.402 billion as of December 31, 2019 , as compared to $1.540 billion as of December 31, 2018.

Our overall debt-to-equity ratio, adjusted for unsettled purchases and sales, decreased to 8.1:1 as of December 31, 2019 from 9.2:1 as of December 31, 2018.

In March 2020, in light of the heightened levels of market volatility and systemic liquidity risk, we proactively reduced the size of our Agency portfolio, thereby bolstering our liquidity and lowering our leverage.

By reducing our Agency portfolio in an orderly and measured way, we avoided forced asset sales.

Our Agency RMBS portfolio decreased by 25% to $1.043 billion as of March 31, 2020, as compared to $1.393 billion as of December 31, 2019.

As the year progressed and economic uncertainty remained high, we maintained a smaller Agency portfolio, lower debt-to-equity ratio, and higher cash balance, relative to our historical averages.

For the full year 2020, our Agency RMBS holdings decreased approximately 24% to $1.064 billion as of December 31, 2020, from $1.393 billion as of December 31, 2019.

In contrast to our Agency RMBS portfolio, we significantly increased our non-Agency RMBS holdings following the market distress of March and April.

During the second quarter of 2020, we opportunistically purchased approximately $40 million of non-Agency RMBS at depressed prices, and as the year progressed and prices recovered, we sold the majority of

these investments at substantial gains.

For the full year 2020, our non-Agency RMBS holdings increased by 99% to $17.6 million from $8.9 million.

We expect to continue to vary our allocation to non-Agency RMBS as market opportunities change over time.

The increase in our shareholders' equity during the year, combined with the decline in the size of our overall RMBS portfolio, caused our debt-to-equity ratio, adjusted for unsettled purchases and sales, to decrease to 6.1:1 as of December 31, 2020 from 8.1:1 as of December 31, 2019.

Our debt-to-equity ratio may fluctuate period over period based on portfolio management decisions, market conditions, capital markets activities, and the timing of security purchase and sale transactions.

Despite fluctuations in interest rates and yield spreads, increasing prepayment rates, and at times an inverted yield curve, our Agency RMBS portfolio had excellent performance in 2019.

Pay-ups on our specified pools steadily increased during the year, and along with declining interest rates, helped generate net realized and unrealized gains on our portfolio.

Pay-ups are price premiums for specified pools relative to their TBA counterparts, and reflect the prepayment protection that specified pools provide.

TBAs are forward-settling Agency RMBS where the mortgage pass-through certificates to be delivered are "To-Be-Announced." The decline in mortgage rates and associated increase in actual and projected prepayments during the year drove the expansion of pay-ups.

Average pay-ups on our specified pools increased to 2.05% as of December 31, 2019 , as compared to 1.86% as of September 30, 2019, 1.56% as of June 30, 2019, 0.99% as of March 31, 2019, and 0.58% as of December 31, 2018.

At different points in 2019, in response to market opportunities, we either increased or decreased our net mortgage assets-to-equity ratio—which we define as the net aggregate market value of our mortgage-backed securities (including the underlying market values of our long and short TBA positions) divided by total shareholders' equity—by varying the sizes of our net short TBA position and/or our long RMBS portfolio.

The following table summarizes our net mortgage assets-to-equity ratio and provides additional details, for each of the following period ends, to illustrate these fluctuations.

Notional Amount of Long TBAs

Notional Amount of Short TBAs

Fair Value of Mortgage-backed Securities

Net Short TBA Underlying Market Value (1)

As of December 31, 2020, substantially all of our borrowings were secured by specified pools.

As of December 31, 2020, we had cash and cash equivalents of $58.2 million, along with other unencumbered assets of approximately $47.4 million.

This compares to cash and cash equivalents of $35.4 million and unencumbered assets of $53.6 million held by us at December 31, 2019.

During the first half of March, with heightened interest rate volatility and a flight to the safe haven of U.S.

Treasury securities, yield spreads on Agency RMBS widened significantly.

As a result, we received margin calls under our financing arrangements that were higher than typical historical levels.

We satisfied all of these margin calls.

Actions by the Federal Reserve during the second half of March helped stabilize the market for Agency RMBS, causing yield spreads to tighten significantly.

For the first quarter of 2020, the precipitous decline in interest rates and high levels of interest rate volatility generated net realized and unrealized losses on our hedges, and while our Agency RMBS assets did appreciate in price, they significantly underperformed our hedges.

Furthermore, TBAs outperformed specified pools, depressing pay-ups on our specified pool portfolio.

Pay-ups are price premiums for specified pools relative to their TBA counterparts, and generally reflect, among other factors, the prepayment protection that specified pools provide.

As a result, we experienced a significant net loss for the first quarter.

In the second quarter, forceful actions by the Federal Reserve continued to stabilize the market for Agency RMBS, and our Agency portfolio performed exceptionally well, driven by significantly higher pay-ups on our specified pools.

Our Agency strategy continued to perform well in the second half of 2020, driven by continued strong performance from our specified pools, and solid net interest income.

During most of 2020, mortgage rates declined and actual and expected prepayment rates rose, which benefited pay-ups on our prepayment-protected specified pools.

Average pay-ups on our specified pools increased to 2.40% as of December 31, 2020, as compared to 1.77% 1 as of December 31, 2019.

1 Conformed to current period calculation methodology.

As the year progressed, we also increased our holdings of long TBAs held for investment, which we concentrated in current coupon production.

These investments performed well, driven by Federal Reserve purchasing activity.

Finally, our opportunistic investments in non-Agency RMBS generated excellent results for the year.

With the decline in our overall RMBS portfolio and the increase in our shareholders' equity during the year, and despite a smaller net notional short TBA position, our net mortgage assets-to-equity ratio—which we define as the net aggregate market value of our mortgage-backed securities (including the underlying market values of our long and short TBA positions) divided by total shareholders' equity—was considerably lower at the end of 2020 as compared to the end of 2019.

From time to time, in response to market opportunities and other factors, we increase or decrease our net mortgage assets-to-equity ratio by varying the sizes of our net short TBA position and/or our long RMBS portfolio.

The following table summarizes our net mortgage assets-to-equity ratio and provides additional details, for the last five quarters, to illustrate this fluctuation.

Notional Amount of Long TBAs Notional Amount of Short TBAs Fair Value of Mortgage-backed Securities Net Short TBA Underlying Market Value (1)

Net Mortgage Assets-to-Equity Ratio

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(1) Market value represents the current market value of the underlying Agency RMBS (on a forward delivery basis) as of period end.

During the year we continued to hedge interest rate risk, primarily through the use of interest rate swaps, short positions in TBAs, U.S.

Treasury securities, and futures.

The decline in interest rates during the year generated net realized and unrealized losses on our interest rate hedges.

We expect to continue to target specified pools that, taking into account their particular composition and based on our prepayment projections, should:

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We believe that our research team, proprietary prepayment models, and extensive databases remain essential tools in our implementation of this strategy.

Our non-Agency RMBS performed well during the year, driven by strong net interest income and net realized and unrealized gains.

Fundamentals underlying non-Agency RMBS remain strong, led by a stable housing market.

Our total investment in non-Agency RMBS was $8.9 million and $11.2 million as of December 31, 2019 and 2018, respectively.

To the extent that more attractive entry points develop in non-Agency RMBS, we may increase our capital allocation to this sector.

The following table summarizes prepayment rates for our portfolio of fixed-rate specified pools (excluding those backed by reverse mortgages) for the three-month periods ended December 31, 2020, September 30, 2020, June 30, 2020, March 31, 2020, and December 31, 2019.

Three-Month Period Ended

December 31, 2019

September 30, 2019

March 31, 2019

December 31, 2018

December 31, 2020 September 30,

2020 June 30, 2020 March 31, 2020 December 31, 2019

Three-Month Constant Prepayment Rates 21.0% 21.4% 18.0% 15.4% 14.9%

The following table provides details about the composition of our portfolio of fixed-rate specified pools (excluding those backed by reverse mortgages) as of December 31, 2020 and 2019.

December 31, 2019

December 31, 2018

Current Principal

Weighted Average Loan Age (Months)

Current Principal

(In thousands)

December 31, 2020 December 31, 2019 (1)

Coupon (%) Current Principal Fair Value Weighted Average Loan Age (Months) Current Principal Fair Value Weighted

(In thousands) (In thousands)

Fixed-rate Agency RMBS:

15-year fixed-rate mortgages:

2.50–2.99 $ 16,385 $ 17,236 42 $ 4,900 $ 4,953 40

3.00–3.49 14,001 14,824 37 33,474 34,537 62

3.50–3.99 25,113 27,177 50 110,637 115,902 31

4.00–4.49 21,529 23,347 33 23,480 24,944 22

4.50–4.99 550 575 135 859 895 123

Total 15-year fixed-rate mortgages 77,578 83,159 42 173,350 181,231 36

20-year fixed-rate mortgages:

2.00–2.49 32,333 33,633 4 — — —

2.50–2.99 3,212 3,382 5 — — —

3.00–3.49 2,496 2,647 10 — — —

4.00–4.49 2,161 2,492 5 — — —

4.50–4.99 1,300 1,417 27 — — —

5.00–5.49 1,057 1,192 28 1,276 1,385 16

Total 20-year fixed-rate mortgages 42,559 44,763 6 1,276 1,385 16

30-year fixed-rate mortgages:

2.50–2.99 16,361 17,383 3 — — —

3.00–3.49 98,654 105,085 28 35,314 36,169 43

3.50–3.99 245,320 266,547 51 216,421 227,606 45

4.00–4.49 191,033 209,502 55 335,843 356,323 36

4.50–4.99 146,843 162,645 49 230,635 246,829 32

5.00–5.49 54,804 61,719 51 124,558 134,235 27

5.50–5.99 7,890 8,951 49 45,374 48,674 19

6.00–6.49 2,658 3,049 27 8,306 9,042 15

Total 30-year fixed-rate mortgages 763,563 834,881 48 996,451 1,058,878 35

Total fixed-rate Agency RMBS $ 883,700 $ 962,803 45 $ 1,171,077 $ 1,241,494 35

Prices on our Agency RMBS portfolio generally rose during the year ended December 31, 2019 and we had total net realized and unrealized gains on our Agency RMBS of $51.9 million, or $4.16 per share.

Our Agency RMBS portfolio turnover was 52% for the year.

During the year ended December 31, 2019 , we continued to hedge interest rate risk, primarily through the use of interest rate swaps and short positions in TBAs, U.S.

(1) Conformed to current period presentation.

For the year ended December 31, 2020, we had total net realized and unrealized gains on our Agency RMBS of $27.0 million, or $2.19 per share.

Our Agency RMBS portfolio turnover was 64% for the year ended December 31, 2020, and we recognized net realized gains of $11.8 million.

During the year ended December 31, 2020, we continued to hedge interest rate risk, primarily through the use of interest rate swaps, and to a lesser extent through the use of short positions in TBAs, U.S.

Treasury securities, and futures.

For the year, we had total net realized and unrealized losses of $(33.0) million, or $(2.65) per share, on our interest rate hedging portfolio, as interest rates declined.

In our hedging portfolio, the relative proportion, based on 10-year equivalents, of net short positions in TBAs decreased year over year relative to our other interest rate hedges.

We had total net realized and unrealized losses of $(21.8) million, or $(1.77) per share, on our interest rate hedging portfolio, as interest rates declined precipitously during the year.

We increased the amount of long TBAs held for investment during the year, especially in lower coupon TBAs.

In conjunction with these investments, we ended the year with a small net short overall TBA position on a notional basis but a small net long overall TBA position as measured by 10-year equivalents.

10-year equivalents for a group of positions represent the amount of 10-year U.S.

Treasury securities that would be expected to experience a similar change in market value under a standard parallel move in interest rates.

Treasury securities that would be expected to experience a similar

change in market value under a standard parallel move in interest rates.

The relative makeup of our interest rate hedging portfolio can change materially from period to period.

After giving effect to aggregate dividends during the year of $1.18 per share, our book value per share increased to $12.91 as of December 31, 2019 , from $12.30 as of December 31, 2018, and we had an economic return of 14.6% for the year ended December 31, 2019 .

After giving effect to dividends during the year ended December 31, 2020 of $1.12 per share, our book value per share increased to $13.48 as of December 31, 2020, from $12.91 as of December 31, 2019, and we had an economic return of 13.1% for the year ended December 31, 2020.

Economic return is computed by adding back dividends declared to ending book value per share, and comparing that amount to book value per share as of the beginning of the quarter.

Our net Agency premium as a percentage of the fair value of our specified pool holdings is one metric that we use to measure the overall prepayment risk of our specified pool portfolio.

Net Agency premium represents the total premium (excess of market value over outstanding principal balance) on our specified pool holdings less the total premium on related net short TBA positions.

Net Agency premium represents the total premium (excess of market value over outstanding principal balance) on our specified pool holdings less the total premium on net short TBA positions.

The lower our net Agency premium, the less we believe that our specified pool portfolio is exposed to market-wide increases in Agency RMBS prepayments.

As of December 31, 2020 and 2019, our net Agency premium as a percentage of fair value of our specified pool holdings was approximately 6.8% and 5.3%, respectively.

Excluding TBA positions used to hedge our specified pool holdings, our Agency premium as a percentage of fair value was approximately 5.8% and 2.9% as of December 31, 2019 and 2018, respectively.

Excluding TBA positions, our Agency premium as a percentage of fair value was approximately 8.2% and 5.8% as of December 31, 2020 and 2019, respectively.

Our Agency premium percentage and net Agency premium percentage may fluctuate from period to period based on a variety of factors, including market factors such as interest rates and mortgage rates, and, in the case of our net Agency premium percentage, based on the degree to which we hedge prepayment risk with short TBAs.

We believe that our focus on purchasing pools with specific prepayment characteristics provides a measure of protection against prepayments.

We believe that our adaptive and active style of portfolio management is well suited to the current MBS market environment, which continues to be shaped by interest rate risk, prepayment risk, shifting central bank and government policies, regulatory changes, and developing technologies.

We believe that our adaptive and active style of portfolio management is well suited to the current MBS market environment, which, especially given the current effects and future uncertainties related to the COVID-19 pandemic, exhibits high levels of interest rate risk, prepayment risk, financing and liquidity risk, shifting central bank and government policies, regulatory changes, and disruptive technological developments.

For the year ended December 31, 2020, our average repo borrowing cost decreased to 0.91% as compared to 2.52% for the year ended December 31, 2019.

The year-over-year decline in average repo borrowing cost was due to a significant decrease in short-term interest rates as well as a significant decline in financing spreads as measured against LIBOR.

As of December 31, 2020, the weighted average borrowing rate on our repurchase agreements declined to 0.25% from 2.00% as of December 31, 2019.

For the year ended December 31, 2019 , however, our average borrowing cost on repo increased to 2.52% as compared to 2.06% for the year ended December 31, 2018.

While large banks still dominate the repo market, non-bank firms, not subject to the same regulations as banks, are active in providing repo financing.

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however, we have also entered into repo agreements with non-bank dealers.

In general, we continue to see strong appetite and competitive terms from both types of lenders.

Our debt-to-equity ratio was 6.1:1 as of December 31, 2020, as compared to 8.1:1 as of December 31, 2019.

Adjusted for unsettled security purchases and sales, our debt-to-equity ratio was 8.1:1 as of December 31, 2019 , as compared to 9.2:1 as of December 31, 2018.

Critical Accounting Policies

Critical Accounting Estimates

Our 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 we have a controlling financial interest, through ownership of the majority of the entities' voting equity interests, or through other contractual rights that give us control, are consolidated by us.

GAAP," and Regulation S-X.

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

All inter-company balances and transactions have been eliminated.

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If third-party valuations are not available, management uses other valuation techniques, such as the discounted cash flow methodology.

Summary descriptions, for the various categories of financial instruments, of the valuation methodologies management uses in determining fair value of our financial instruments are detailed in Note 2 of the notes to our consolidated financial statements.

Management utilizes such methodologies to assign a good faith

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

Summary descriptions, for the various categories of financial

instruments, of the valuation methodologies management uses in determining fair value of our financial instruments are detailed in Note 2 of the notes to our consolidated financial statements.

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

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

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We may take positions with respect to certain tax issues which depend on legal interpretation of facts or applicable tax regulations.

Should the relevant tax regulators successfully challenge any such positions;

we might be found to have a tax liability that has not been recorded in the accompanying consolidated financial statements.

Should the relevant tax regulators successfully challenge any such positions, we might be found to have a tax liability that has not been recorded in the accompanying consolidated financial statements.

Also, management's conclusions regarding the authoritative guidance may be subject to review and adjustment at a later date based on changing tax laws, regulations, and interpretations thereof.

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The following tables summarize our securities portfolio as of December 31, 2020 and 2019:

December 31, 2019

December 31, 2018

(In thousands)

Current Principal

Average Price (1)

Average Cost (1)

Current Principal

Average Price (1)

Average Cost (1)

December 31, 2020 December 31, 2019

(In thousands) Current Principal Fair Value Average Price (1)

Cost Average Cost (1)

Current Principal Fair Value Average Price (1)

Cost Average Cost (1)

Agency RMBS (2)

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30-year fixed-rate mortgages 763,563 834,881 109.34 799,360 104.69 996,451 1,058,878 106.26 1,041,550 104.53

ARMs 19,459 20,442 105.05 19,981 102.68 32,122 33,255 103.53 33,049 102.89

Reverse mortgages 61,653 67,474 109.44 65,494 106.23 91,560 99,934 109.15 98,407 107.48

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Total RMBS (2)

987,952 1,068,331 108.14 1,024,595 103.71 1,305,706 1,383,534 105.96 1,358,134 104.02

Agency IOs n/a 13,049 n/a 15,434 n/a n/a 18,244 n/a 17,795 n/a

Total mortgage-backed securities 1,081,380 1,040,029 1,401,778 1,375,929

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Reverse repurchase agreements — — — — — 2,084 2,084 100.00 2,084 100.00

Total $ 1,081,380 $ 1,040,029 $ 1,401,792 $ 1,375,943

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

(2) Excludes Agency IOs.

The vast majority of our capital is allocated to our Agency RMBS strategy, which includes investments in Agency pools and Agency collateralized mortgage obligations, or "CMOs." As of both December 31, 2019 and 2018, investments in non-Agency RMBS constituted a relatively small portion of our total investments.

The majority of our capital is allocated to our Agency RMBS strategy, which includes investments in Agency pools and Agency collateralized mortgage obligations, or "CMOs." As of both December 31, 2020 and 2019, investments in non-Agency RMBS constituted a relatively small portion of our total investments.

Our most prevalent method of financing RMBS is through short-term repos, which generally have maturities of 180 days or less.

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The following table summarizes our portfolio of financial derivative holdings as of December 31, 2020 and 2019:

(In thousands)

December 31, 2019

December 31, 2018

(In thousands) December 31, 2020 December 31, 2019

Financial derivatives–assets, at fair value:

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Fixed receiver interest rate swaps 614 81

Futures — 434

Total financial derivatives–assets, at fair value 2,791 4,180

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Fixed receiver interest rate swaps (377) (15)

Futures (346) (96)

Total financial derivatives–liabilities, at fair value (6,630) (2,047)

Total $ (3,839) $ 2,133

Pursuant to our hedging program, we engage in a variety of interest rate hedging activities that are designed to reduce the interest rate risk with respect to the liabilities incurred to acquire or hold RMBS.

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While for the time being we are continuing to enter into LIBOR-based interest rate swap agreements, we are currently considering entering into SOFR-based interest rate swap agreements as well.

In the case of TBAs, most of our positions are short TBA positions with a negative duration, meaning that as interest rates rise, the value of the short position increases, so these positions serve as a hedge against increases in interest rates.

In the event that interest rates rise, the increase in value of the short TBA position serves to offset corollary increases in our current and/or future borrowing costs under our repurchase agreements.

In the case of TBAs, most of our positions are short TBA positions with negative duration, meaning that should interest rates rise, the value of the short position would be expected to increase.

This expected increase in value would then serve to offset corollary expected increases in our current and/or future borrowing costs under our repurchase agreements, and so in this manner our short TBA positions serve as a hedge against potential increases in interest rates.

While we use TBAs to hedge interest rate risk, we also hold net long positions in certain TBA securities as a means of acquiring exposure to Agency RMBS.

As of December 31, 2019 , as part of our interest rate hedging program, we also held short positions in U.S.

Treasury securities, with a total principal amount of $2.1 million and a fair value of $2.1 million .

As of December 31, 2018, we also held short positions in U.S.

As of December 31, 2019, we held short positions in U.S.

Treasury securities, with a total principal amount of $2.1 million and a fair value of $2.1 million;

we did not hold short positions in U.S.

Treasury securities as of December 31, 2020.

The composition and relative mix of our hedging instruments may vary from period to period given the amount of our liabilities outstanding or anticipated to be entered into, the overall market environment and our view as to which instruments best enable us to execute our hedging goals.

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We had no other borrowings outstanding.

December 31, 2019

December 31, 2018

Weighted Average

Remaining Days to Maturity

Borrowings Outstanding

Interest Rate

Remaining Days to Maturity

Borrowings Outstanding

Interest Rate

Remaining Days to Maturity

December 31, 2020 December 31, 2019

Weighted Average Weighted Average

Remaining Days to Maturity Borrowings Outstanding Interest Rate Remaining Days to Maturity Borrowings Outstanding Interest Rate Remaining Days to Maturity

(In thousands)

30 days or less $ 307,544 0.27 % 15 $ 513,092 2.10 % 15

31-60 days 541,104 0.23 44 549,541 1.91 45

61-90 days 92,314 0.26 74 233,639 1.97 74

121-150 days 2,371 0.27 126 — — —

151-180 days 53,150 0.32 162 — — —

181-360 days 18,762 0.26 257 — — —

Total $ 1,015,245 0.25 % 48 $ 1,296,272 2.00 % 39

We finance our assets with what we believe to be a prudent amount of leverage, which will vary from time to time based upon the particular characteristics of our portfolio, availability of financing, and market conditions.

In response to the significant volatility of the first quarter caused by the COVID-19 pandemic, we strategically reduced the size of our portfolio in order to lower our leverage and enhance our liquidity position, and have continued to maintain a leverage ratio lower than we have historically.

As of December 31, 2020 and 2019, our total debt-to-equity ratio was 6.1:1 and 8.1:1, respectively.

Collateral transferred with respect to our outstanding repo borrowings as of December 31, 2019 and 2018 had an aggregate fair value of $1.3 billion and $1.6 billion, respectively.

Adjusted for unsettled security purchases and sales, our debt-to-equity ratio was 8.1:1 and 9.2:1 as of December 31, 2019 and 2018, respectively.

Collateral transferred with respect to our outstanding repo borrowings, including net cash collateral posted, as of December 31, 2020 and 2019 had an aggregate fair value of $1.1 billion and $1.3 billion, respectively.

Our debt-to-equity ratio may fluctuate period over period based on portfolio management decisions, market conditions, capital markets conditions, and the timing of security purchase and sale transactions.

As of December 31, 2020, we had cash and cash equivalents of $58.2 million, along with other unencumbered assets of approximately $47.4 million.

Shareholders' Equity

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Net realized and change in net unrealized gains (losses) on securities

27,742 51,511

Net realized and change in net unrealized gains (losses) on financial derivatives

(19,159) (32,537)

Total Other Income (Loss) 8,583 18,974

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The Catch-up Premium Amortization Adjustment is a quarterly adjustment to premium amortization triggered by changes in actual and projected prepayments on our Agency RMBS (accompanied by a corresponding offsetting adjustment to realized and unrealized gains and losses).

The adjustment is calculated as of the beginning of each quarter based on our then-current assumptions about cashflows and prepayments, and can vary significantly from quarter to quarter.

The adjustment is calculated as of the beginning of each quarter based on our then-current assumptions about cashflows and prepayments, and can vary significantly from period to period.

Core Earnings includes net realized and change in net unrealized gains (losses) associated with periodic settlements on interest rate swaps.

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However, because Core Earnings is an incomplete measure of our financial results and differs from net income (loss) computed in accordance with GAAP, it should be considered as supplementary to, and not as a substitute for, net income (loss) computed in accordance with GAAP.

In previous periods, we presented two related supplemental non-GAAP financial measures, which we referred to as "Core Earnings" and "Adjusted Core Earnings." Subsequent to September 30, 2019, we modified our definition of Core Earnings to exclude the effect of the Catch-up Premium Amortization Adjustment.

This new definition of Core Earnings now matches the definition of what we previously presented as Adjusted Core Earnings, and so we will no longer present a supplemental non-GAAP financial measure called "Adjusted Core Earnings." As a result, when comparing Core Earnings for periods ending on or after December 31, 2019 against periods ending on or before September 30, 2019, "Core Earnings" as presented in those later periods should be compared against "Adjusted Core Earnings" as presented in those earlier periods.

These changes are intended to help investors focus on what we believe is the more useful supplemental non-GAAP financial measure when measuring and evaluating our operating performance, and when comparing our operating performance to that of our peer companies.

Similarly, net interest margin for the year ended December 31, 2019 (and future periods) should be compared against adjusted net interest margin as presented in earlier periods.

The following table reconciles, for the years ended December 31, 2019 and 2018, Core Earnings (based on the newly modified definition of "Core Earnings" described above) to the line on the Consolidated Statement of Operations entitled Net Income (Loss), which we believe is the most directly comparable GAAP measure:

The following table reconciles, for the years ended December 31, 2020 and 2019, Core Earnings to the line on the Consolidated Statement of Operations entitled Net Income (Loss), which we believe is the most directly comparable GAAP measure:

Year Ended December 31,

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Change in net unrealized gains (losses) on accrued periodic settlements of interest rate swaps

Deferred offering costs expensed 351 —

Negative (positive) component of interest income represented by Catch-up Premium Amortization Adjustment 4,619 5,903

Subtotal (4,557) (10,959)

Core Earnings $ 15,555 $ 11,297

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Core Earnings Per Share $ 1.26 $ 0.91

Conformed to current period presentation.

Results of Operations for the Years Ended December 31, 2020 and 2019

Net Income (Loss)

Net income (loss) for the year ended December 31, 2020 was $20.1 million, as compared to $22.3 million for the year ended December 31, 2019.

The year-over-year reversal in net income (loss) was primarily due to a reversal from Total Other (Loss) for the year ended December 31, 2018 , to Total Other Income for the year ended December 31, 2019 , partially offset by a decline in net interest income.

The decrease in net income year over year was primarily due to a decrease in total other income partially offset by an increase in net interest income.

Interest Income

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Before interest expense, we earned approximately $26.9 million and $42.4 million in interest income on these securities for the years ended December 31, 2020 and 2019, respectively.

The year-over-year decrease in interest income primarily resulted from lower average holdings on our Agency RMBS portfolio, combined with a larger negative Catch-up Premium Amortization Adjustment, both of which decreased interest income.

The year-over-year decrease in interest income primarily resulted from lower average holdings in our Agency RMBS portfolio and lower overall average asset yields.

The Catch-up Premium Amortization Adjustment causes variability in our interest income and portfolio yields.

For the years ended December 31, 2019 and 2018, we had a negative Catch-up Premium Amortization Adjustment of approximately $(5.9) million and $(38) thousand, respectively, which decreased interest income.

For the years ended December 31, 2020 and 2019, we had a negative Catch-up Premium Amortization Adjustment of approximately $(4.6) million and $(5.9) million, respectively, which decreased interest income.

Excluding the Catch-up Premium Amortization Adjustments, the weighted average yield of our overall portfolio was 2.82% and 3.29% for the years ended December 31, 2020 and 2019, respectively.

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Non-Agency (1)

(In thousands)

Interest Income

Average Holdings

Interest Income

Average Holdings

Interest Income

Average Holdings

(In thousands) Interest Income Average Holdings Yield Interest Income Average Holdings Yield Interest Income Average Holdings Yield

Year ended December 31, 2020 $ 25,337 $ 1,095,537 2.31 % $ 1,552 $ 20,837 7.45 % $ 26,889 $ 1,116,374 2.41 %

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Treasury securities.

The year-over-year increase in our total interest expense resulted mainly from higher rates on our repo borrowings stemming from the increase in short-term interest rates and wider spreads, partially offset by lower average outstanding borrowings.

Our average outstanding repo borrowings for the year ended December 31, 2019 was $1.38 billion , and we had an average cost of funds on repo borrowings of 2.52% .

Our average outstanding repo borrowings for the year ended December 31, 2018 was $1.52 billion , and we had an average cost of funds on repo borrowings of 2.06% .

The year-over-year decrease in our total interest expense resulted mainly from lower rates on our repo borrowings stemming from the decrease in short-term interest rates, as well as lower average outstanding borrowings.

The following table shows information related to our average cost of funds (1) for the years ended December 31, 2020 and 2019:

Interest Rate

Agreements Interest Rate

Treasury Securities (2)

Average Borrowed Funds

Interest Expense

Net periodic expense paid or payable

Interest expense

Interest and net periodic expense paid or payable

Average Borrowed Funds Interest Expense Average

Funds Net periodic expense paid or payable Average

Funds Interest expense Average

Funds Interest and net periodic expense paid or payable Average

(In thousands)

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Management Fees

For years ended December 31, 2019 and 2018, our management fee expense was approximately $2.4 million and $2.5 million , respectively.

The decrease in management fee was primarily due to a smaller capital base year over year.

For each of the years ended December 31, 2020 and 2019, our management fee expense was approximately $2.4 million.

Management fees are calculated based on our shareholders' equity at the end of each quarter.

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For the years ended December 31, 2020 and 2019, our other operating expenses were approximately $3.5 million and $2.9 million, respectively.

The increase in other operating expenses for the year ended December 31, 2020 was primarily due to an increase in professional fees resulting from deferred offering costs that were expensed during the year as well as an increase in compensation expense.

Other Income (Loss)

Other income (loss) consists of net realized and net change in unrealized gains (losses) on securities and financial derivatives.

For the year ended December 31, 2019 , Other income (loss) was $19.0 million , consisting of net realized and change in net unrealized gains of $51.5 million on our securities, primarily our Agency RMBS, partially offset by net realized

and change in net unrealized losses of $(32.5) million on our financial derivatives.

For the year ended December 31, 2020, Other income (loss) was $8.6 million, consisting primarily of net realized and change in net unrealized gains of $27.0 million on our Agency RMBS and $3.2 million on our non-Agency RMBS, which were partially offset by net realized and change in net unrealized losses of $(2.7) million on our short U.S.

Treasury securities and $(19.2) million on our financial derivatives.

The gains on our Agency RMBS holdings were mainly driven by appreciation of our fixed rate specified pools in response to declining interest rates.

For the year ended December 31, 2020, as measured by

sales and excluding paydowns, we turned over approximately 64% of our Agency RMBS portfolio and, as a result of these sales, we generated net realized gains of $11.8 million on our Agency RMBS portfolio.

For the year ended December 31, 2020, we had net realized and change in net unrealized losses on our financial derivatives of $(19.2) million, which consisted of net realized and change in net unrealized losses of $(16.9) million on our interest rate swaps and $(6.6) million on our futures, which were partially offset by net realized and change in net unrealized gains of $4.4 million on our TBAs.

The net losses on our financial derivatives were largely incurred during the three-month period ended March 31, 2020, when interest rates declined sharply and were highly volatile during the market stresses caused by the spread of the COVID-19 pandemic.

Other income (loss) for the year ended December 31, 2019 was $19.0 million, consisting of net realized and change in net unrealized gains of $51.5 million on our securities, primarily our Agency RMBS, partially offset by net realized and change in net unrealized losses of $(32.5) million on our financial derivatives.

The increase in prices on our Agency RMBS holdings, primarily as a result of the decrease in interest rates during the year ended December 31, 2019, led to significant gains on our securities portfolio.

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For the year ended December 31, 2019, as measured by sales and excluding paydowns, we turned over approximately 52% of our Agency RMBS portfolio and, as a result of these sales, we generated net realized gains of $2.8 million on our Agency RMBS portfolio.

Other income (loss) for the year ended December 31, 2018 was $(27.8) million and consisted of net realized and change in net unrealized losses of $(35.8) million on our securities, primarily our Agency RMBS, partially offset by net realized and change in net unrealized gains of $7.9 million on our financial derivatives.

During the year ended December 31, 2018, the increase in interest rates and overall decline in RMBS prices led to significant realized and unrealized losses on our securities portfolio, as well as significant realized and unrealized net gains on our interest rate hedges.

The net realized and unrealized losses on securities primarily consisted of $(40.2) million of net losses on our Agency RMBS, partially offset by net gains of $4.0 million on our net short U.S.

Treasury securities;

while the net realized and unrealized gains on our financial derivatives primarily included net gains of $14.4 million from our net TBA short positions and interest rate swaps, partially offset by net losses on our futures of $(6.3) million.

For the year ended December 31, 2018, as measured by sales and excluding paydowns, we turned over approximately 72% of our Agency RMBS portfolio and, as a result of these sales, we generated net realized losses of $(29.3) million on our Agency RMBS portfolio.

Liquidity and Capital Resources

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

Quarter Ended

Quarter Ended Borrowings

Outstanding at

Borrowings Outstanding

Maximum Borrowings Outstanding at Any Month End

Quarter End Average

Borrowings Outstanding Maximum Borrowings Outstanding at Any Month End

(In thousands)

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March 31, 2020 (1)

1,109,342 1,281,507 1,308,377

December 31, 2019 1,296,272 1,301,270 1,319,839

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March 31, 2018 1,589,319 1,588,515 1,590,790

For the quarter ended June 30, 2017, the significant increase between average borrowings outstanding and total borrowings as of June 30, 2017 was the result of our deployment of the proceeds from our follow-on offering of common shares during the quarter.

Based on our higher equity base, we increased our repo borrowings so as to maintain our desired debt-to-equity ratio.

(1) For the quarter ended March 31, 2020 in response to significant volatility and heightened risks in the financial markets as a result of the spread of COVID-19, we significantly reduced our outstanding borrowings to lower leverage and increase our liquidity.

As of December 31, 2020, we had an aggregate amount at risk under our repurchase agreements with 15 counterparties of $53.7 million.

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We also had $3.9 million of initial margin for cleared over-the-counter, or "OTC," derivatives posted to central clearinghouses as of that date.

As of December 31, 2018, we had an aggregate amount at risk under our derivatives contracts, excluding TBAs, with three counterparties of approximately $11.6 million.

As of December 31, 2019, we had an aggregate amount at risk under our derivatives contracts, excluding TBAs, with two counterparties of approximately $10.4 million.

We also had $9.0 million of initial margin for cleared OTC derivatives posted to central clearinghouses as of that date.

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The delayed delivery for these securities means that these transactions are more prone to market fluctuations between the trade date and the ultimate settlement date, and therefore are more vulnerable, especially in the absence of margining arrangements with respect to these transactions, to increasing amounts at risk with the applicable counterparties.

As of December 31, 2020, in connection with our forward settling TBA and Agency pass-through certificates, we had an aggregate amount at risk with four counterparties of approximately $3.5 million.

As of December 31, 2019, in connection with our forward settling TBA and Agency pass-through certificates, we had an aggregate amount at risk with five counterparties of approximately $1.2 million.

As of December 31, 2018, in connection with our forward settling TBA and Agency pass-through certificates, we had an aggregate amount at risk with eight counterparties of approximately $2.5 million.

Amounts at risk in connection with our forward settling TBA and Agency pass-through certificates represent the excess, if any, for each counterparty of the net fair value of the forward settling securities plus our collateral held directly by the counterparty less the counterparty's collateral held by us.

Amounts at risk in connection with our forward settling TBA and Agency pass-through certificates represent the excess, if any,

for each counterparty of the net fair value of the forward settling securities plus our collateral held directly by the counterparty less the counterparty's collateral held by us.

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

Earlier this year, in response to the significant volatility caused by the COVID-19 pandemic, we strategically reduced the size of our portfolio in order to lower our leverage and enhance our liquidity position.

As of December 31, 2020, the size of our portfolio and our debt-to-equity ratio remained lower than our historical averages, while our cash and cash equivalents remained higher than our historical averages.

We held cash and cash equivalents of approximately $58.2 million and $35.4 million as of December 31, 2020 and 2019, respectively.

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Year Ended December 31, 2020

Dividend Amount

Declaration Date

Per Share Dividend Amount Declaration Date Record Date Payment Date

(In thousands)

First Quarter

March 4, 2019

March 29, 2019

April 25, 2019

Second Quarter

June 11, 2019

June 28, 2019

July 25, 2019

Third Quarter

September 11, 2019

September 30, 2019

October 25, 2019

Fourth Quarter

December 13, 2019

December 31, 2019

January 27, 2020

First Quarter $ 0.28 $ 3,449 March 4, 2020 March 31, 2020 April 27, 2020

Second Quarter 0.28 3,450 June 10, 2020 June 30, 2020 July 27, 2020

Third Quarter 0.28 3,454 September 10, 2020 September 30, 2020 October 26, 2020

Fourth Quarter 0.28 3,456 December 17, 2020 December 31, 2020 January 25, 2021

Year Ended December 31, 2019

Dividend Amount

Declaration Date

Per Share Dividend Amount Declaration Date Record Date Payment Date

(In thousands)

First Quarter

March 7, 2018

March 29, 2018

April 25, 2018

Second Quarter

June 13, 2018

June 29, 2018

July 25, 2018

Third Quarter

September 12, 2018

September 28, 2018

October 25, 2018

Fourth Quarter

December 11, 2018

December 31, 2018

January 25, 2019

First Quarter $ 0.34 $ 4,239 March 4, 2019 March 29, 2019 April 25, 2019

Second Quarter 0.28 3,491 June 11, 2019 June 28, 2019 July 25, 2019

Third Quarter 0.28 3,485 September 11, 2019 September 30, 2019 October 25, 2019

Fourth Quarter 0.28 3,488 December 13, 2019 December 31, 2019 January 27, 2020

For the year ended December 31, 2020, our operating activities provided net cash of $24.4 million and our investing activities provided net cash of $304.1 million.

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Our repo activity used to finance our purchase of securities (including repayments, in conjunction with the sales of securities, of amounts borrowed under our repurchase agreements as well as collateral posted in connection with our repo activity) used net cash of $206.4 million.

Thus our operating and investing activities, when combined with our net repo financing activities, used net cash of $9.1 million.

Thus our operating and investing activities, when combined with our net repo financing activities, provided net cash of $33.0 million.

We used $15.5 million to pay dividends and $0.7 million to repurchase common shares.

As a result of these activities, there was a decrease in our cash holdings of $37.5 million, from $56.1 million as of December 31, 2017 to $18.6 million as of December 31, 2018.

As a result of these activities, there was an increase in our cash holdings of $16.8 million, from $18.6 million as of December 31, 2018 to $35.4 million as of December 31, 2019.

On June 13, 2018, our Board of Trustees approved the adoption of a share repurchase program under which we are authorized to repurchase up to 1.2 million common shares.

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Repurchases are at our discretion, subject to applicable law, share availability, price and our financial performance, among other considerations.

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

During the year ended December 31, 2020, we repurchased 136,142 common shares at an average price

per share of $7.24 and a total cost of $1.0 million.

Under the current repurchase program adopted on June 13, 2018, we have repurchased 434,171 common shares through March 5, 2021 at an average price per share of $9.45 and an aggregate cost of $4.1 million, and have authorization to repurchase an additional 765,829 common shares.

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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 7. Management’s Discussion and Analysis