What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-03-11 compared with 2021-03-16 · 95 added, 106 removed, 987 unchanged (17% of the section changed)

1 unchanged sentence

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2020 AND DECEMBER 31, 2019, AND FOR THE YEARS ENDED DECEMBER 31, 2020 AND DECEMBER 31, 2019:

CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2021 AND DECEMBER 31, 2020

Report of Independent Registered Public Accounting Firm

(PCAOB ID NO.

Consolidated Balance Sheet

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Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Ellington Residential Mortgage REIT and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, 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 have audited the accompanying consolidated balance sheets of Ellington Residential Mortgage REIT and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, 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”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

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(ii) comparing management’s estimate of fair value to independent sources, where available;

and (iii) for a sample of investments, the involvement of professionals with specialized skill and knowledge to assist in developing an independent range of estimates of fair value by independently developing assumptions related to yield, projected collateral prepayments, projected collateral losses, and projected collateral recoveries, as applicable.

and (iii) for a sample of investments, the involvement of professionals with specialized skill and knowledge to assist in developing an independent range of estimates of fair value by applying assumptions related to yield, projected collateral prepayments, projected collateral losses, and projected collateral recoveries as applicable.

/s/ PricewaterhouseCoopers LLP

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Reverse repurchase agreements

Receivable for securities sold

Interest receivable 4,504 4,114

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BALANCE, December 31, 2019 12,455,758 $ 124 — $ — $ 230,358 $ ( 69,638 ) $ 160,844

12,507,213 $ 125 — $ — $ 230,888 $ ( 77,191 ) $ 153,822

Issuance of restricted shares 23,926 — — — — —

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BALANCE, December 31, 2020 12,343,542 123 — — 229,614 ( 63,335 ) 166,402

Common shares issued (2)

738,269 8 — — 8,980 8,988

Issuance of restricted shares 28,115 — — —

Share based compensation — — — 271 271

Repurchase of common shares ( 136,142 ) ( 1 ) ( 985 ) ( 986 )

Dividends declared (1)

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(1) For the years ended December 31, 2021 and 2020, dividends totaling $ 1.18 and $ 1.12 , respectively, per common share outstanding, were declared.

(2) Net of underwriters' discounts and commissions and offering costs.

See Notes to Consolidated Financial Statements

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CONSOLIDATED STATEMENT OF CASH FLOWS

Year Ended December 31,

December 31, 2021 December 31, 2020

(In thousands)

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CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)

Year Ended December 31,

December 31, 2021 December 31, 2020

Cash flows provided by (used in) financing activities:

Net proceeds from the issuance of common shares (1)

Offering costs paid ( 390 ) —

Repurchase of common shares — ( 986 )

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Dividends payable 1,311 3,456

(1) Net of underwriters' discount and commissions.

See Notes to Consolidated Financial Statements

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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.

COVID-19 Impact

During the first quarter of 2020, there was a worldwide outbreak of a novel coronavirus disease, or "COVID-19." The outbreak was declared a pandemic by the World Health Organization and numerous countries, including the United States, have responded by instituting quarantines or lockdowns, imposing restrictions on travel, restrictions on the ability of individuals to assemble in groups, and restrictions on the ability of certain businesses to operate, all of which have resulted in significant disruptions in the U.S.

and global economies.

In mid-March 2020, adverse economic conditions related to the COVID-19 pandemic began to impact the Company's financial position and results of operations.

The COVID-19 pandemic has contributed to volatility, dislocations in the financial markets, and illiquidity.

As a result, the Company received margin calls under its repurchase agreements that were higher than typical historical levels.

The Company satisfied all of these margin calls.

Actions during the second half of March 2020 by the U.S.

Federal Reserve helped stabilize the market for Agency RMBS.

In light of the heightened levels of market volatility and systemic liquidity risk experienced during the first quarter of 2020, the Company proactively reduced the size of its Agency RMBS portfolio, thereby bolstering its liquidity and lowering its leverage.

Actions by the Federal Reserve continued to stabilize the market for Agency RMBS during the second quarter, and margin calls under the Company's financing arrangements reverted to more typical levels.

The Company's management team has implemented business continuity plans, and the Company, the Manager, and EMG continue to be fully operational in a largely work-from-home environment.

Significant Accounting Policies

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GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.

Actual results could differ from those estimates and those differences could be material (particularly in light of the significant volatility, lack of pricing transparency, and market dislocations that have been caused by the COVID-19 pandemic, and associated responses to the pandemic).

Actual results could differ from those estimates and those differences could be material (particularly in light of the significant volatility, lack of pricing transparency, and market dislocations that have been caused by the novel coronavirus disease, or "COVID-19," pandemic, and associated responses to the pandemic).

In management's opinion, all material adjustments considered necessary for a fair statement of the Company's interim consolidated financial statements have been included and are only of a normal recurring nature.

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ASC 820-10 establishes a three-level valuation hierarchy for disclosure of fair value measurements.

The valuation hierarchy is based upon the observability of inputs to the valuation of an asset or liability as of the measurement date.

The valuation

hierarchy is based upon the observability of inputs to the valuation of an asset or liability as of the measurement date.

The three levels are defined as follows:

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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.

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, 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.

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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.

Periods after January 1, 2020— For periods subsequent to the Company's application of the principles of ASU 2016-13, Financial Instruments—Credit Losses ("ASU 2016-13"), as discussed below, the Company evaluates the cost basis of its securities on at least a quarterly basis under ASC 326-30, Financial Instruments—Credit Losses:

The Company applies the principles of ASU 2016-13, Financial Instruments—Credit Losses ("ASU 2016-13") and evaluates the cost basis of its securities on at least a quarterly basis under ASC 326-30, Financial Instruments—Credit Losses:

Available-for-Sale Debt Securities ("ASC 326-30").

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This adjustment to the amortized cost basis of the security is reflected in Net realized gains (losses) on securities, on the Consolidated Statement of Operations.

Periods prior to January 1, 2020— For periods prior to the Company's application of the principles of ASU 2016-13, the Company evaluated 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 was less than its amortized cost basis as of the balance sheet date, the security was considered impaired, and the impairment was designated as either temporary or other-than-temporary.

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

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

Any resulting OTTI adjustments made to the amortized cost basis of the security were 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 not to be of high credit quality at the time of purchase, interest income is recognized based on the effective interest method.

For purposes of estimating future expected cash flows, management uses assumptions including, but not limited to, assumptions for future prepayment rates, default rates, and loss severities (each of which may in turn incorporate various macro-economic assumptions, such as future housing prices).

For purposes of estimating future expected cash flows, management uses assumptions including,

but not limited to, assumptions for future prepayment rates, default rates, and loss severities (each of which may in turn incorporate various macro-economic assumptions, such as future housing prices).

These assumptions are re-evaluated not less than quarterly.

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Certain of the Company's debt securities, at the date of acquisition, have experienced or are expected to experience more-than-insignificant deterioration in credit quality since origination.

For periods subsequent to the Company's application of the principles of ASU 2016-13, if at the date of acquisition for a particular asset the Company projects a significant difference between contractual cash flows and expected cash flows, it establishes an initial estimate for credit losses as an upward adjustment to the acquisition cost of the asset for the purpose of calculating interest income using the effective yield method.

If at the date of acquisition for a particular asset the Company projects a significant difference between contractual cash flows and expected cash flows, it establishes an initial estimate for credit losses as an upward adjustment to the acquisition cost of the asset for the purpose of calculating interest income using the effective yield method.

The Company's accretion of discounts and amortization of premiums on securities for U.S.

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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 may be required to deliver or may receive cash or

securities as collateral upon entering into derivative transactions.

The Company's financial derivatives are predominantly subject to bilateral master trade agreements 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.

In addition, changes in the relative value of financial derivative transactions may require the Company or the counterparty to post or receive additional collateral.

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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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The Company enters into reverse repurchase agreement transactions with third-party broker-dealers, whereby it purchases securities under agreements to resell at an agreed upon price and date.

The interest rate on a reverse repurchase agreement is based on competitive market rates (or competitive market spreads, in the case of agreements with floating interest rates) at the time such agreement is entered into.

The interest rate on a reverse repurchase agreement is based on competitive market rates (or competitive market spreads, in the case of agreements

with floating interest rates) at the time such agreement is entered into.

Reverse repurchase agreements are carried at their contractual amounts, which approximate fair value due to their short-term nature.

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ASC 718 covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans.

ASC 718 requires that compensation cost relating to share-based payment transactions be recognized in the

financial statements.

ASC 718 requires that compensation cost relating to share-based payment transactions be recognized in the financial statements.

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.

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(R) Recent Accounting Pronouncements :

In August 2018, the Financial Accounting Standards Board, or "FASB," issued ASU 2018-13, Fair Value Measurement—Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13").

This amends ASC 820, Fair Value Measurement , to remove or modify various current disclosure requirements related to fair value measurement.

Additionally ASU 2018-13 requires certain additional disclosures around fair value measurement.

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.

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

In June 2016, the FASB issued ASU 2016-13, which introduced a new model related to the accounting for credit losses on financial assets subject to credit losses and measured at amortized cost, and certain off-balance sheet credit exposures.

ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.

ASU 2016-13 amends the guidance which required an OTTI charge only when fair value is below the amortized cost of an asset.

length of time the fair value of an available-for-sale debt security has been below the amortized cost will no longer impact the determination of whether a credit loss exists;

as a result, there is no longer an other-than-temporary impairment model.

In addition, credit losses on available-for-sale debt securities will now be limited to the difference between the security's amortized cost basis and its fair value.

The new debt security model will also require the use of an allowance to record estimated credit losses.

While ASU 2016-13 is generally not applicable for securities for which the fair value option has been elected, the Company has applied the principles of ASU 2016-13 as described above.

The adoption of ASU 2016-13 did not have a material impact on the Company's consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform—Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"), which provides optional guidance for a limited period meant to ease the potential burden in accounting for, or recognizing the effects of, reform to LIBOR and certain other reference rates.

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However, ASU 2020-04 is only applicable to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform, and that were entered into or evaluated prior to January 1, 2023.

The Company is currently evaluating the impact that the adoption of ASU 2020-04 would have on its consolidated financial statements.

In January 2021, the FASB issued ASU No.

2021-01, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2021-01"), which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications apply to derivatives that are affected by the reform to LIBOR.

The amendments in this update were effective immediately for all entities.

ASU 2021-01 provides increased clarity as the Company continues to evaluate the transition of reference rates and it is currently evaluating the impact that the adoption of ASU 2020-04 would have on the consolidated financial statements.

Mortgage-Backed Securities

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Non-Agency RMBS:

Principal and interest securities 10,672 ( 3,438 ) 7,234 1,822 — 9,056 1.47 % 6.25 % 7.49

Interest only securities

n/a n/a 2,684 114 — 2,798 0.27 % 11.58 % 6.79

Total Non-Agency RMBS 10,672 ( 3,438 ) 9,918 1,936 — 11,854 0.30 % 7.69 % 6.82

Total RMBS $ 1,246,084 $ 44,493 $ 1,306,244 $ 17,526 $ ( 12,409 ) $ 1,311,361 2.48 % 2.33 % 5.21

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For the years ended December 31, 2021 and 2020, the Catch-up Premium Amortization Adjustment was $ 1.7 million and $( 4.6 ) million, respectively.

At December 31, 2021, the Company had gross unrealized losses on RMBS of $( 12.4 ) million, of which $( 2.2 ) million relates to adverse changes in estimated future cash flows on Agency IOs, primarily resulting from an increase in expected prepayments.

At December 31, 2020, the Company had gross unrealized losses on RMBS of $( 3.3 ) million, of which $( 2.6 ) million relates to adverse changes in estimated future cash flows on Agency IOs and non-Agency RMBS, primarily resulting from an increase in expected prepayments.

Certain of the Company's securities, at the date of acquisition, have experienced or are expected to experience more-than-insignificant deterioration in credit quality since origination, and the Company has established an initial estimate for credit losses on such securities for the purpose of calculating interest income;

As of December 31, 2020, certain of the Company's securities, at the date of acquisition, have experienced or are expected to experience more-than-insignificant deterioration in credit quality since origination, and the Company has established an initial estimate for credit losses on such securities for the purpose of calculating interest income.

As of December 31, 2020, the estimated credit losses on such securities was $( 0.7 ) million.

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 impairment charge was due to an adverse change in estimated future cash flows resulting from an increase in expected prepayments.

The Company determined for certain securities that a portion of such securities' cost basis is not collectible;

for the year ended December 31, 2021, the Company recognized realized losses on such securities of $( 1.2 ) million, which are reflected in Net realized gains (losses) on securities, on the Consolidated Statement of Operations.

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

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Preferred equity securities 309 — — 309

Treasury securities — — — —

Total other investments, at fair value 309 — — 309

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Interest rate swaps — 5,454 — 5,454

Futures 276 — — 276

Total financial derivatives–assets, at fair value 276 6,362 — 6,638

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$ 585 $ 1,304,810 $ 12,913 $ 1,318,308

Treasury securities sold short, at fair value $ — $ ( 117,195 ) $ — $ ( 117,195 )

Financial derivatives–liabilities, at fair value:

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Total financial derivatives–liabilities, at fair value ( 145 ) ( 958 ) — ( 1,103 )

Treasury securities sold short and financial derivatives–liabilities, at fair value $ ( 145 ) $ ( 118,153 ) $ — $ ( 118,298 )

December 31, 2020:

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Mortgage-backed securities, at fair value — 1,059,888 21,492 1,081,380

Other investments, at fair value:

Preferred equity securities 292 — — 292

Total other investments, at fair value 292 — — 292

Financial derivatives–assets, at fair value:

1 unchanged sentence

Interest rate swaps — 1,071 — 1,071

Futures 434 — — 434

Total financial derivatives–assets, at fair value — 2,791 — 2,791

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$ 292 $ 1,062,679 $ 21,492 $ 1,084,463

Treasury securities sold short, at fair value $ — $ ( 2,070 ) $ — $ ( 2,070 )

Financial derivatives–liabilities, at fair value:

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Total financial derivatives–liabilities, at fair value $ ( 346 ) $ ( 6,284 ) $ — $ ( 6,630 )

Treasury securities sold short and financial derivatives–liabilities, at fair value

$ ( 96 ) $ ( 4,021 ) $ — $ ( 4,117 )

The following tables present additional information about the Company's investments which are measured at fair value for which the Company has utilized Level 3 inputs to determine fair value.

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Beginning balance as of December 31, 2020 $ 13,296 $ 8,196

$ 3,273 $ 7,639

Purchases 2,701 1,845

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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, 2020, as well as Level 3 financial instruments disposed of by the Company during the year ended December 31, 2020.

The table above incorporates changes in net unrealized gains (losses) for both Level 3 financial instruments held by the Company at December 31, 2021, as well as Level 3 financial instruments disposed of by the Company during the year ended December 31, 2021.

For Level 3 financial instruments held by the Company as of December 31, 2021, change in net unrealized gains (losses) of $( 0.2 ) million and $ 0.2 million, for the year ended December 31, 2021 relate to non-Agency RMBS and Agency RMBS, respectively.

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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, 2020, as well as Level 3 financial instruments disposed of by the Company during the year ended December 31, 2020.

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.

For Level 3 financial instruments held by the Company as of December 31, 2020, change in net unrealized gains (losses) of $ 0.2 million and $( 2.4 ) million, for the year ended December 31, 2020 relate to non-Agency RMBS and Agency RMBS, respectively.

At December 31, 2020, the Company transferred $ 1.8 million of RMBS from Level 3 to Level 2 and $ 6.2 million of RMBS from Level 2 to Level 3.

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7,259 Yield 2.2 % 31.8 % 6.0 %

2.2 % 28.6 % 4.5 %

Projected Collateral Prepayments 35.7 % 79.1 % 49.2 %

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Projected Collateral Recoveries 1.1 % 14.0 % 9.3 %

Agency RMBS–Interest Only Securities 8,196 Option Adjusted Spread ("OAS") LIBOR OAS (3)(4)

Agency RMBS–Interest Only Securities 3,713 Market quotes Non-Binding Third-Party Valuation $ 6.64 $ 15.90 $ 13.42

1,941 Option Adjusted Spread ("OAS") LIBOR OAS (2)(3)

224 5,020 953

5,654 Projected Collateral Prepayments 17.3 % 85.4 % 72.4 %

(1) Averages are weighted based on the fair value of the related instrument.

(2) For the range minimum, the range maximum, and the weighted average yield, excludes non-Agency RMBS with a negative yield, with a total fair value of $ 0.9 million.

Including these securities the weighted average yield was 4.1 %.

(2) Shown in basis points.

(4) For the range minimum, the range maximum, and the weighted average of LIBOR OAS, excludes Agency interest only securities with a negative LIBOR OAS, with a total fair value of $ 0.5 million.

(3) For the range minimum, the range maximum, and the weighted average of LIBOR OAS, excludes Agency interest only securities with a negative LIBOR OAS, with a total fair value of $ 15 thousand.

Including these securities, the weighted average was 950 basis points.

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13,296 Yield (2)

2.2 % 28.6 % 4.5 %

Projected Collateral Prepayments 31.7 % 56.2 % 41.8 %

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Projected Collateral Recoveries 9.4 % 21.5 % 15.2 %

Agency RMBS–Interest Only Securities 2,615 Market quotes Non-Binding Third-Party Valuation $ 6.67 $ 17.14 $ 11.96

5,024 Option Adjusted Spread ("OAS")

7,639 LIBOR OAS (3)

77 25,553 824

Agency RMBS–Interest Only Securities 8,196 Option Adjusted Spread ("OAS") LIBOR OAS (3)(4)

Projected Collateral Prepayments 25.8 % 100.0 % 82.9 %

(1) Conformed to current period presentation.

(1) Averages are weighted based on the fair value of the related instrument.

(2) For the range minimum, the range maximum, and the weighted average yield, excludes non-Agency RMBS with a negative yield, with a total fair value of $ 0.9 million.

Including these securities, the weighted average yield was 4.1 %

(3) Shown in basis points.

(4) For the range minimum, the range maximum, and the weighted average of LIBOR OAS, excludes Agency interest only securities with a negative LIBOR OAS, with a total fair value of $ 0.5 million.

Including these securities, the weighted average was 385 basis points.

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.

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For those assets valued using the LIBOR Option Adjusted Spread, or "OAS," valuation methodology, cash flows are projected using the Company's models over multiple interest rate scenarios, and these projected cash flows are then discounted using the LIBOR rates implied by each interest rate scenario.

The LIBOR OAS of an asset is then computed as the unique constant yield spread

that, when added to all LIBOR rates in each interest rate scenario generated by the model, will equate (a) the expected present value of the projected asset cash flows over all model scenarios to (b) the actual current market price of the asset.

LIBOR OAS is therefore model-dependent.

The LIBOR OAS of an asset is then computed as the unique constant yield spread that, when added to all LIBOR rates in each interest rate scenario generated by the model, will equate (a) the expected present value of the projected asset cash flows over all model scenarios to (b) the actual current market price of the asset.

is therefore model-dependent.

Generally speaking, LIBOR OAS measures the additional yield spread over LIBOR that an asset provides at its current market price after taking into account any interest rate options embedded in the asset.

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Specifically, the Company's primary source of financing is repurchase agreements and the Company enters into financial derivative and other instruments to manage exposure to variable cash flows on portions of its borrowings under those repurchase agreements.

Since the interest rates on repurchase agreements typically change with market interest rates such as LIBOR, the Company is exposed to constantly changing interest rates, which accordingly affects cash flows associated with the Company's borrowings.

Since the interest rates on repurchase agreements typically change with market interest rates such as LIBOR or the Secured Overnight Financing Rate, or "SOFR," the Company is constantly exposed to changing interest rates, which accordingly affects cash flows associated with the Company's borrowings.

To mitigate the effect of changes in these interest rates and their related cash flows, the Company may enter into a variety of derivative contracts, including interest rate swaps, futures, swaptions, and TBAs.

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2040 500 45 0.90 0.08 18.82

2041 11,227 196 1.59 0.14 19.60

2049 3,633 ( 155 ) 1.89 0.12 27.83

2050 792 148 0.90 0.12 28.54

Total $ 396,438 $ 4,700 0.84 % 0.17 % 5.30

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2050 792 97 0.90 0.22 29.54

2029 170 2 1.72 1.90 9.89

2042 10,303 501 1.81 1.91 22.93

2048 630 ( 157 ) 3.18 1.92 28.93

2049 3,633 158 1.89 1.94 29.84

Total $ 298,858 $ ( 4,751 ) 0.86 % 0.22 % 4.24

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2023 13,200 614 0.21 1.87 2.31

2030 25,880 ( 356 ) 0.23 0.73 9.60

2040 500 ( 20 ) 0.09 0.84 19.82

Total $ 44,580 $ 237 0.21 % 0.99 % 6.68

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($ in thousands)

Short Contracts:

Treasury Futures ( 100,500 ) 276 3.00

Long Contracts:

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(In thousands)

Interest rate swaps $ 402,407 $ 651,793

TBAs $ 720,268 $ 642,362

Interest rate swaps 422,905 402,407

Futures 232,792 104,454

Options — 1,492

Gains and losses on the Company's financial derivatives for the years ended December 31, 2021 and 2020 are summarized in the tables below:

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Futures ( 5,958 ) ( 5,958 ) ( 684 ) ( 684 )

Options ( 100 ) ( 100 ) — —

Total $ ( 810 ) $ ( 12,394 ) $ ( 13,204 ) $ ( 134 ) $ ( 5,821 ) $ ( 5,955 )

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Treasury securities, with a principal amount of $ 118.8 million and a fair value of $ 117.2 million;

the Company did not hold short positions in U.S.

the Company did not hold any short positions in U.S.

Treasury securities as of December 31, 2020.

Such securities are included on the Company's Consolidated Balance Sheet under the caption U.S.

Treasury securities sold short, at fair value.

Borrowings under Repurchase Agreements

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151-180 days 56,337 0.15 163 53,150 0.32 162

181-364 days 242,941 0.19 238 18,762 0.26 257

Total $ 1,064,835 0.18 % 111 $ 1,015,245 0.25 % 48

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

As of December 31, 2020 and 2019, the fair value of RMBS transferred as collateral under outstanding borrowings under repurchase agreements was $ 1.0 billion and $ 1.3 billion, respectively.

Collateral transferred under outstanding borrowings as of December 31, 2019 includes RMBS in the amount of $ 3.0 million that were sold prior to year end but for which such sale had not yet settled.

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

As of both December 31, 2021 and 2020, the fair value of RMBS transferred as collateral under outstanding borrowings under repurchase agreements was $ 1.0 billion.

In addition as of December 31, 2021 and 2020, the Company was posting to repurchase agreement counterparties net cash collateral of $ 77.7 million and $ 34.7 million, respectively, as a result of margin calls with various repurchase agreement counterparties.

15 unchanged sentences

Financial derivatives–assets $ 6,638 $ ( 820 ) $ — $ — $ 5,818

Reverse repurchase agreements 117,505 ( 31,306 ) ( 86,199 ) — —

Financial derivatives–liabilities ( 1,103 ) 820 — 271 ( 12 )

4 unchanged sentences

Total financial instruments transferred or pledged as collateral on the Company's repurchase agreements as of December 31, 2021 were $ 1.0 billion.

As of December 31, 2020 total cash collateral (received) pledged on financial derivative assets and liabilities excludes $ 3.7 million and $ 3.9 million respectively of net excess cash collateral.

As of December 31, 2021 total cash collateral (received) pledged on financial derivative assets excludes $ 9.2 million of net excess cash collateral.

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

7 unchanged sentences

Financial derivatives–assets $ 2,791 $ ( 1,774 ) $ — $ ( 230 ) $ 787

Reverse repurchase agreements 2,084 ( 2,084 ) — — —

Financial derivatives–liabilities ( 6,630 ) 1,774 — 4,530 ( 326 )

41 unchanged sentences

The Company will not reimburse the Manager for the salaries and other compensation of the Manager's personnel except that the Company will be responsible for expenses incurred by the Manager in employing certain dedicated or partially dedicated personnel as further described below.

The Company reimburses the Manager for the allocable share of the compensation, including, without limitation, wages, salaries, and employee benefits paid or reimbursed, as approved by the Compensation Committee of the Board of 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.

For the years ended December 31, 2020 and 2019, the Company reimbursed the Manager $ 2.0 million and $ 2.1 million, respectively, for previously incurred operating and compensation expenses.

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.

During the years ended December 31, 2021 and 2020, the Company reimbursed the Manager $ 2.5 million and $ 2.0 million, respectively, for previously incurred operating and compensation expenses.

As of December 31, 2021 and 2020, the outstanding payable to the Manager for operating and compensation expenses was $ 0.4 million and $ 0.3 million, respectively, and is included in Accrued expenses on the Consolidated Balance Sheet.

3 unchanged sentences

Registration Rights Agreement

The Company is a party to a registration rights agreement with an affiliate of EMG and with the Blackstone Tactical Opportunities Funds (the "Blackstone Funds") pursuant to which the Company has granted its initial investors and each of their permitted transferees and other holders of the Company's "registrable common shares" (as such term is defined in the registration rights agreement) who become parties to the registration rights agreement with certain demand and/or piggy-back registration and shelf takedown rights .

The Company is a party to a registration rights agreement, the "Registration Rights Agreement," with an affiliate of EMG and with the Blackstone Tactical Opportunities Funds (the "Blackstone Funds") pursuant to which the Company has granted its initial investors and each of their permitted transferees and other holders of the Company's "Registrable Common Stock" (as such term is defined in the registration rights agreement) who become parties to the registration rights agreement with certain demand and/or piggy-back registration and shelf takedown rights.

In April 2021, the Blackstone Funds registered all of their Registrable Common Stock.

The Company has authorized 500,000,000 common shares, $ 0.01 par value per share, and 100,000,000 preferred shares, $ 0.01 par value per share.

2 unchanged sentences

No preferred shares have been issued.

On April 2, 2021, the Company commenced an "at-the-market" offering program, or "ATM program," by entering into equity distribution agreements with third party sales agents under which it was authorized to offer and sell up to $ 75.0 million of common shares from time to time.

During the year ended December 31, 2021, the Company issued 163,269 common shares under the ATM program which provided $ 1.9 million of net proceeds after $ 29 thousand of agent commissions and offering costs.

On June 17, 2021, the Company completed a public follow-on offering of 3,250,000 common shares, of which 2,675,000 common shares were sold by the Blackstone Funds and 575,000 common shares were sold by the Company.

The offering generated net proceeds to the Company of $ 7.1 million, after underwriters' discounts and commissions and offering costs.

The Company did not receive any proceeds from the common shares sold by the Blackstone Funds.

Detailed below is a roll forward of the Company's common shares outstanding for the years ended December 31, 2021 and 2020:

3 unchanged sentences

Share Activity:

Restricted shares issued 23,926 22,361

Shares repurchased ( 136,142 ) ( 73,816 )

Common shares issued 738,269 —

Restricted common shares issued 28,115 23,926

Common shares repurchased — ( 136,142 )

Common Shares Outstanding (12/31/2021 and 12/31/2020, respectively)

11 unchanged sentences

(1) Date at which such restricted shares will vest and become non-forfeitable.

As of December 31, 2020, there were 274,798 shares available for future issuance under the Company's 2013 Equity Incentive Plan.

As of December 31, 2021 and 2020, there were 268,831 and 274,798 shares available for future issuance under the Company's 2013 Equity Incentive Plan, respectively.

On June 13, 2018, the Company's Board of Trustees approved the adoption of a share repurchase program under which the Company is authorized to repurchase up to 1.2 million common shares.

2 unchanged sentences

During the year ended December 31, 2020, the Company repurchased 136,142 of its common shares at an aggregate cost of $ 1.0 million, and an average price per share of $ 7.24 ;

the Company did not repurchase any shares during the year ended December 31, 2021.

From inception of the current share repurchase program adopted on June 13, 2018 through December 31, 2021, the Company repurchased 434,171 of its common shares at an aggregate cost of $ 4.1 million, and an average price per share of $ 9.45 .

36 unchanged sentences

Basic and Diluted (1)

$ 0.01 $ ( 0.36 ) $ 0.07 $ ( 0.21 )

CASH DIVIDENDS PER COMMON SHARE:

Dividends declared $ 0.28 $ 0.30 $ 0.30 $ 0.30

(1) For the year ended December 31, 2021 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 the number of common shares outstanding during the year due to issuances of common shares, as EPS is calculated using average common shares outstanding during the period.

(In thousands except for per share amounts)

23 unchanged sentences

Subsequent Events

On March 3, 2021 , the Company's Board of Trustees approved a dividend for the first quarter of 2021 in the amount of $ 0.28 per share payable on April 26, 2021 to shareholders of record as of March 31, 2021 .

On January 7, 2022 , the Board of Trustees approved a monthly dividend in the amount of $ 0.10 per share payable on February 25, 2022 to shareholders of record as of January 31, 2022 .

On February 7, 2022 , the Board of Trustees approved a monthly dividend in the amount of $ 0.10 per share payable on March 25, 2022 to shareholders of record as of February 28, 2022 .

On March 7, 2022 , the Board of Trustees approved a monthly dividend in the amount of $ 0.10 per share payable on April 25, 2022 to shareholders of record as of March 31, 2022 .

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

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