Ellington Credit Co 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Executive Summary 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. 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. We were initially formed through a strategic venture among affiliates of Ellington Management Group, L.L.C., an investment management firm and registered investment adviser with a 28-year history of investing in a broad spectrum of residential and commercial mortgage-backed securities, or "MBS," and related derivatives, with an emphasis on the RMBS market, and the Blackstone Tactical Opportunity Funds, or the "Blackstone Funds." We are externally managed and advised by our Manager, an affiliate of Ellington. Since our inception, the Blackstone Funds had held special non-voting membership interests in the holding company that owns our Manager. In August 2021, an Ellington affiliate purchased these special non-voting membership interests from the Blackstone Funds. We use leverage in both our Agency and non-Agency RMBS strategies, although we expect leverage in our non-Agency strategy to be significantly lower. We have financed our RMBS exclusively through repurchase agreements, which we account for as collateralized borrowings. As of December 31, 2022, we had outstanding borrowings under repurchase agreements in the amount of $842.5 million with 16 counterparties. We have elected to be taxed as a REIT for U.S. federal income tax purposes. Accordingly, we generally will not be subject to U.S. federal income taxes on our taxable income that we distribute currently to our shareholders as long as we maintain our qualification as a REIT. We intend to conduct our operations so that neither we nor any of our subsidiaries is required to register as an investment company under the Investment Company Act of 1940, as amended, or the "Investment Company Act." As of December 31, 2022, our book value per share was $8.40 as compared to $11.76 as of December 31, 2021. Trends and Recent Market Developments Market Overview • After maintaining its target range of 0.00%–0.25% for the federal funds rate throughout 2021 and at its first meeting of 2022 in January, the U.S. Federal Reserve, or the "Federal Reserve," rapidly tightened its monetary policy to combat elevated inflation through the rest of 2022. At its March and May meetings, the Federal Reserve increased the target range by 0.25% and 0.50%, respectively, and then implemented rate hikes of 0.75% at each of its next four meetings, increasing the target range to 3.75%-4.00% in November. At its December meeting, the Federal Reserve announced another interest rate hike, this time by 0.50%, increasing the target range of the federal funds rate to 4.25%-4.50%, its highest level since 2007. Minutes of the December meeting noted that despite "welcome reductions" in inflation in October and November, "it would take substantially more evidence of progress to be confident that inflation was on a sustained downward path." After initiating the tapering of its asset purchases in the fourth quarter of 2021, the Federal Reserve announced plans for reducing the size of its balance sheet at its May 2022 meeting, whereby it would only reinvest principal payments that exceeded monthly caps of $30 billion for Treasury securities and $17.5 billion for Agency MBS, beginning in June. Those monthly caps increased in September to $60.0 billion and $35.0 billion, respectively, where they remained through year end. Similarly, other central banks around the globe continued to tighten their monetary policies during 2022. • Interest rates rose sharply in 2022, particularly short-term interest rates, with various segments of the yield curve inverting during the year. Over the course of the year, the yield on the 2-year U.S. Treasury increased by 369 basis 52 points to 4.43% as of December 31, 2022, while the 10-year U.S. Treasury increased by 236 basis points to 3.87%. Meanwhile, interest rate volatility was elevated through much of the year, with the MOVE Index in October reaching its highest point since the COVID-related market volatility of March 2020, before subsiding somewhat into year end. • Mortgage rates also rose sharply during much of 2022, in sympathy with the increase in interest rates. After starting the year at 3.11%, the Freddie Mac survey 30-year mortgage rate increased by at least a full percentage point in each of the first three quarters, rising a cumulative 359 basis points to 6.70% as of September 29th. Mortgage rates continued to rise in October, with the Freddie Mac 30-year mortgage rate exceeding 7.00% in late October and early November for the first time since April 2002, before declining to 6.41% as of December 29, 2022. Driven by higher mortgage rates, the Mortgage Bankers Association's Refinance Index fell precipitously throughout the year, declining by 87% year over year to its lowest level since May 1997. Fannie Mae 30-year MBS prepayments dropped steadily as well, declining from a CPR of 18.7% in December of 2021 to 4.5% in December of 2022. Despite the sharply higher mortgage rates, home prices continued to appreciate during the first half of the year, with the S&P CoreLogic Case-Schiller US National Home Price NSA Index rising 10.7%, after increasing by 18.9% in 2021. The index reversed course from there, however, declining by 4.4% during the second half of the year, but was still up by 5.8% for the full year. The combination of drastically higher mortgage rates and substantial home price appreciation put significant downward pressure on housing affordability, with the National Association of Realtors Housing Affordability Index declining by 28.8% for the year through December. • LIBOR rates and the Secured Overnight Financing Rate, or "SOFR," also rose significantly during the year, increasing during each quarter of 2022. For the year, one-month LIBOR increased a cumulative 429 basis points to 4.39% as of December 31, 20222, while three-month LIBOR increased by 456 basis points to 4.77%. In anticipation of additional interest rate increases by the Federal Reserve, the spread between one- and three-month LIBOR widened during the first nine months of the year, reaching 61 basis points as of September 30, 2022, compared to just 11 basis points at the start of the year. During the fourth quarter, as the Fed began to slow the pace of its interest rate hikes, the spread tightened to 38 basis points. SOFR increased as well; one-month SOFR rose by 430 basis points to 4.36% at year end, and three-month SOFR rose by 450 basis points to 4.59%. LIBOR and SOFR drive many of our financing costs. • After positive GDP growth in each quarter of 2021, U.S. real GDP contracted at an estimated annualized rate of 1.6% in the first quarter and 0.6% in the second quarter of 2022. Real GDP then reversed course during the second half of 2022, expanding at an estimated annualized rate of 3.2% in the third quarter and 2.9% in the fourth quarter of 2022. Meanwhile, the unemployment rate remained low throughout 2022, dropping from 3.9% at the end of 2021, to 3.6% as of both March 31st and June 30th, and to 3.5% as of both September 30th and December 31st. • Inflation increased steadily during the first six months of 2022. The 12-month percentage change in the Consumer Price Index for All Urban Consumers ("CPI-U"), not seasonally adjusted, increased from 7.5% in January to 9.1% in June, which was the highest reading since November 1981. While still elevated, inflation did subside over the second half of the year, with the 12-month percentage change in CPI-U registering 6.5% in December 2022. • Elevated volatility, rising interest rates, and yield spread widening drove underperformance of Agency MBS during the first nine months of 2022, and despite a rebound in the fourth quarter, for the year overall. For the first nine months of the year, the Bloomberg Barclays U.S. MBS Index ("BB MBS Index") generated a negative return of (13.66%), and a negative excess return (on a duration-adjusted basis) of (3.11%) relative to the Bloomberg Barclays U.S. Treasury Index. In the fourth quarter, the BB MBS Index generated a positive return of 1.85%, as interest rate volatility moderated and yield spreads tightened, and a positive excess return of 0.88%. For the full year 2022, the BB MBS index generated a negative return of (11.81%), which was its worst performance on record, and a negative excess return of (2.23%), its second-worst performance on record. • Similarly, the Bloomberg Barclays U.S. Corporate Bond Index ("BB IG Index") and the Bloomberg Barclays U.S. Corporate High Yield Bond Index ("BB HY Index") generated negative returns during the first three quarters of 2022, before rebounding in the fourth quarter, but still finished the year with significant negative performance on both an absolute and relative basis. For the full year, the BB IG Index generated a negative return of (15.76%) and a negative excess return of (1.25%), while the BB HY Index generated a negative return of (11.19%) and a negative excess return of (3.71%). • U.S. equities experienced significant losses in 2022 as well, with the Dow Jones Industrial Average declining by 8.8%, the S&P 500 falling by 19.4%, and the NASDAQ down 33.1%. Meanwhile, London's FTSE 100 index increased by 0.9% for the year, and the MSCI World global equity index decreased 19.5%. Similar to the MOVE index, the VIX volatility index was elevated throughout much of the year. 53 Portfolio Overview and Outlook As of December 31, 2022, our mortgage-backed securities portfolio consisted of $836.8 million of fixed-rate Agency "specified pools," $8.7 million of Agency RMBS backed by adjustable rate mortgages, or "Agency ARMs," $17.9 million of Agency reverse mortgage pools, $9.3 million of Agency interest-only securities, or "Agency IOs," $12.6 million of non-Agency RMBS, and $8.1 million of non-Agency interest-only securities, or "non-Agency IOs." 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 government-sponsored refinancing programs, and mortgages with various other characteristics. Our Agency RMBS holdings decreased by 33% to $863.3 million as of December 31, 2022, as compared to $1.289 billion as of December 31, 2021. The decrease was driven by net sales, paydowns, and net losses. Over the same period, our holdings of non-Agency RMBS increased by 39% to $12.6 million, and our holdings of interest-only securities increased by 33% to $17.5 million driven by a larger portfolio of non-Agency IOs. Our debt-to-equity ratio, adjusted for unsettled purchases and sales, increased to 7.6:1 as of December 31, 2022, as compared to 6.9:1 as of December 31, 2021. The increase was driven by lower shareholders’ equity year over year, partially offset by a decline in borrowings on our smaller Agency RMBS portfolio. 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. As of December 31, 2022, the majority of our borrowings were secured by specified pools. As of December 31, 2022, we had cash and cash equivalents of $34.8 million, in addition to other unencumbered assets of $2.9 million. This compares to cash and cash equivalents of $69.0 million and other unencumbered assets of $16.7 million as of December 31, 2021. During the first nine months of 2022, interest rates rose rapidly and volatility was elevated, as the Federal Reserve tightened its monetary policy to combat elevated inflation. Agency RMBS durations extended in response to the higher interest rates, while the elevated volatility contributed to substantial yield spread widening. As a result, net losses on our Agency RMBS significantly exceeded net gains on our interest rate hedges and net interest income for the period. In the fourth quarter, inflation moderated and the Federal Reserve ratcheted back the pace of its interest rate hikes. Volatility declined incrementally and investor demand for Agency RMBS increased; together, this drove Agency RMBS yield spreads tighter, while pay-ups also increased. For the quarter, significant net gains on our specified pools exceeded net losses on our interest rate hedges, and we generated an overall net gain. Despite the strong fourth quarter, however, we had a significant net loss in our Agency strategy, and overall, for the full year. In the current higher interest rate environment, the specified pool market has become less focused on prepayment protection, and more focused on extension protection. Many of our specified pools are considered to offer significant extension protection relative to their TBA counterparts. Thus despite higher mortgage rates, average pay-ups on our specified pool portfolio actually increased during the year, as the increase in the value of the extension protection provided by these specified pools more than offset the reduction in the value of the prepayment protection. In addition, the pools that we sold during the year had lower average pay-ups than the held population. Due to the combination of these factors, overall pay-ups on our specified pools increased to 1.26% as of December 31, 2022, as compared to 1.07% as of December 31, 2021. Our non-Agency RMBS portfolio generated strong results in 2022, as net interest income exceeded modest net mark-to-market losses. During the course of the year, w e increased our allocation to non-Agency RMBS and expect to continue to do so given current market opportunities. 54 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—declined during the year. The decrease was driven by a smaller Agency RMBS portfolio, partially offset by lower shareholder's equity and a smaller net short TBA position. 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 ($ In thousands) December 31, 2022 $ 81,759 $ (258,253) $ 893,301 $ (149,982) 6.6:1 September 30, 2022 20,679 (203,248) 934,668 (161,287) 7.5:1 June 30, 2022 53,043 (211,157) 947,647 (144,047) 6.8:1 March 31, 2022 65,263 (234,872) 1,094,183 (171,002) 6.9:1 December 31, 2021 216,407 (412,632) 1,311,361 (213,543) 7.1:1 (1) Market value represents the current market value of the underlying Agency RMBS (on a forward delivery basis) as of period end. We expect to continue to target specified pools that, taking into account their particular composition and based on our prepayment projections, should: (1) generate attractive yields relative to other Agency RMBS and U.S. Treasury securities, (2) have less prepayment sensitivity to government policy shocks, and/or (3) create opportunities for trading gains once the market recognizes their value, which for newer pools may come only after several months, when actual prepayment experience can be observed. We believe that our research team, proprietary prepayment models, and extensive databases remain essential tools in our implementation of this strategy. 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, 2022, September 30, 2022, June 30, 2022, March 31, 2022, and December, 31, 2021. Three-Month Period Ended December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021 Three-Month Constant Prepayment Rates 6.1% 9.8% 13.9% 17.0% 20.7% (1) Excludes recent purchases of fixed rate Agency specified pools with no prepayment history. 55 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, 2022 and 2021. December 31, 2022 December 31, 2021 Coupon (%) Current Principal Fair Value Weighted Average Loan Age (Months) Current Principal Fair Value Weighted Average Loan Age (Months) (In thousands) (In thousands) Fixed-rate Agency RMBS: 15-year fixed-rate mortgages: 1.50-1.99 $ 3,608 $ 3,153 27 $ — $ — — 2.00–2.49 — — — 39,608 40,857 10 2.50–2.99 3,764 3,497 41 26,752 27,734 32 3.00–3.49 15,596 14,746 50 22,935 24,062 48 3.50–3.99 12,627 12,244 78 21,311 22,638 54 4.00–4.49 11,712 11,539 52 14,121 15,101 46 4.50–4.99 146 145 155 306 318 147 Total 15-year fixed-rate mortgages 47,453 45,324 56 125,033 130,710 33 20-year fixed-rate mortgages: 2.00–2.49 4,750 4,038 30 28,153 28,289 16 2.50–2.99 1,852 1,625 29 2,200 2,255 17 3.00–3.49 1,362 1,236 34 1,998 2,090 22 4.00–4.49 1,500 1,447 29 1,751 1,928 17 4.50–4.99 563 554 51 806 871 39 5.00–5.49 785 791 52 824 914 40 Total 20-year fixed-rate mortgages 10,812 9,691 33 35,732 36,347 18 30-year fixed-rate mortgages: 2.00–2.49 48,278 39,718 22 342,662 342,371 3 2.50–2.99 96,776 82,982 26 159,754 164,340 8 3.00–3.49 175,838 156,401 32 81,860 85,828 32 3.50–3.99 125,167 116,561 76 170,743 183,150 63 4.00–4.49 164,444 157,268 58 135,518 146,946 67 4.50–4.99 123,176 120,663 48 100,695 109,672 61 5.00–5.49 86,820 86,325 25 30,130 33,303 73 5.50–5.99 8,567 8,710 38 4,828 5,442 68 6.00–6.49 10,610 10,887 7 1,653 1,852 39 6.50–6.99 2,147 2,239 — — — — Total 30-year fixed-rate mortgages 841,823 781,754 44 1,027,843 1,072,904 33 Total fixed-rate Agency RMBS $ 900,088 $ 836,769 44 $ 1,188,608 $ 1,239,961 32 For the year ended December 31, 2022, we had total net realized and unrealized losses on our Agency securities of $(156.2) million, or $(11.86) per share. Our Agency portfolio turnover was approximately 147% for the year ended December 31, 2022, and we recognized net realized losses of $(77.2) million. For the year ended December 31, 2022, we continued to hedge interest rate risk through the use of interest rate swaps, and short positions in TBAs, U.S. Treasury securities, and futures. We had total net realized and unrealized gains of $122.6 million, or $9.31 per share, on our interest rate hedging portfolio, as interest rates increased significantly during the year. These gains 56 were partially offset by net realized and unrealized losses of $(11.7) million, or $(0.89) per share, on our long TBAs held for investment. We ended the year with a net short TBA position, both on a notional basis and as measured by 10-year equivalents. Ten-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. The relative makeup of our interest rate hedging portfolio can change materially from period to period. After giving effect to dividends declared during the year ended December 31, 2022 of $1.04 per share, our book value per share decreased to $8.40 as of December 31, 2022, from $11.76 as of December 31, 2021, and we had a negative economic return of (19.7%) for the year ended December 31, 2022. Economic return for a period is computed by adding back dividends declared during the period to ending book value per share, and comparing that amount to book value per share as of the beginning of the period. 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 quantitative tightening, shifting central bank and government policies, regulatory changes, and disruptive technological developments, exhibits high levels of interest rate risk, prepayment risk (including extension risk), financing and liquidity risk. Financing For the year ended December 31, 2022, our average repo borrowing cost increased to 1.40%, as compared to 0.19% for the year ended December 31, 2021. This increase in average repo borrowing cost was the result of significant increases in short-term interest rates during the year ended December 31, 2022. As of December 31, 2022 and December 31, 2021, the weighted average borrowing rate on our repurchase agreements was 3.70% and 0.18%, respectively. 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. Most of our outstanding repo financing is still provided by banks and bank affiliates; however, we have also entered into repo agreements with non-bank dealers. Our debt-to-equity ratio was 7.5:1 as of December 31, 2022, as compared to 6.9:1 as of December 31, 2021. Adjusted for unsettled purchases and sales, our debt-to equity ratio was 7.6:1 as of December 31, 2022, as compared to 6.9:1 as of December 31, 2021. The increase was primarily due to lower shareholders’ equity, partially offset by a decrease in borrowings on the Company's smaller Agency RMBS portfolio. 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. 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," 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. The preparation of our consolidated financial statements in accordance with U.S. GAAP requires us 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. Our critical accounting estimates are those which require assumptions to be made about matters that are highly uncertain. Actual results could differ from those estimates and such differences could have a material impact on our financial condition and/or results of operations. We believe that all of the decisions and assessments upon which our consolidated financial statements are based were reasonable at the time made based upon information available to us at that time. We rely on the experience of our Manager and Ellington and analysis of historical and current market data in order to arrive at what we believe to be reasonable estimates. See Note 2 of the notes to our consolidated financial statements for a complete discussion of our significant accounting policies. We have identified our most critical accounting estimates to be the following: Valuation : We have elected the fair value option for the vast majority of our assets and liabilities for which such election is permitted, as provided for under ASC 825, Financial Instruments ("ASC 825"). Electing the fair value option allows us to record changes in fair value in our Consolidated Statement of Operations, which, in our view, more appropriately reflects the results of our operations for a particular reporting period as all securities activities will be recorded in a similar manner. As such, the mortgage-backed securities are recorded at fair value on our Consolidated Balance Sheet and the period change in fair value is recorded in current period earnings on our Consolidated Statement of Operations as a component of Change in net 57 unrealized gains (losses) on securities. Purchase and sales transactions are generally recorded on trade date. Realized and unrealized gains and losses are calculated based on identified cost. For financial instruments that are traded in an "active market," the best measure of fair value is the quoted market price. However, many of our financial instruments are not traded in an active market. Therefore, management generally uses third-party valuations when available. 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. 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. Because of the inherent uncertainty of valuation, the estimated fair value of our financial instruments may differ significantly from the values that would have been used had a ready market for the financial instruments existed, and the differences could be material to our consolidated financial statements. The determination of estimated fair value of those of our financial instruments that are not traded in an active market requires the use of both macroeconomic and microeconomic assumptions and/or inputs, which are generally based on current market and economic conditions. Changes in market and/or economic conditions could have a significant adverse effect on the estimated fair value of our financial instruments. Changes to assumptions, including assumed market yields, may significantly impact the estimated fair value of our investments. Our valuations are sensitive to changes in interest rates; see the interest rate sensitivity analysis included in Item 7A. Quantitative and Qualitative Disclosures about Market Risk in this Annual Report on Form 10-K for further information. Interest Income : Coupon interest income on investment securities is accrued based on the outstanding principal balance and the current coupon rate on each security. We generally amortize premiums and accrete discounts on our fixed-income investments using the effective interest method. For certain of our securities, 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 macroeconomic assumptions, such as future housing prices, GDP growth rates, and unemployment rates). These assumptions require the use of a significant amount of judgment. Any resulting changes in effective yield are recognized prospectively based on the current amortized cost of the investment as adjusted for credit impairment, if any. The effective yield on our debt securities that are deemed to be of high credit quality (including Agency RMBS, exclusive of interest only securities) can be significantly impacted by our estimate of future prepayments. Future prepayment rates are difficult to predict. We estimate prepayment rates over the remaining life of our securities using models that generally incorporate the forward yield curve, current mortgage rates, mortgage rates on the outstanding loans, age and size of the outstanding loans, and other factors. We compare estimated prepayments to actual prepayments on a quarterly basis, and effective yields are recalculated retroactive to the time of purchase. When differences arise between our previously calculated effective yields and our current calculated effective yields, a catch-up adjustment, or "Catch-up Premium Amortization Adjustment," is made to interest income to reflect the cumulative impact of the changes in effective yields. For the years ended December 31, 2022 and 2021, we recognized a Catch-up Premium Amortization Adjustment of $3.1 million and $1.7 million, respectively. The Catch-up Premium Amortization Adjustment is reflected as an increase (decrease) to interest income on the Consolidated Statement of Operations. Our accretion of discounts and amortization of premiums on securities for U.S. federal and other tax purposes is likely to differ from the accounting treatment under U.S. GAAP of these items as described above. See the Note 2 of the notes to our consolidated financial statements for more information on the assumptions and methods that we use to amortize purchase premiums and accrete purchase discounts. Income Taxes : We made an election to be taxed as a REIT for U.S. federal income tax purposes and are generally not subject to corporate-level federal and state income tax on net income we distribute to our shareholders within the prescribed timeframes. 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. Also, management's conclusions regarding the authoritative guidance may be subject to review and adjustment at a later date based on changing tax laws, 58 regulations, and interpretations thereof. See Note 2 to our consolidated financial statements for additional details on income taxes. Recent Accounting Pronouncements Refer to the notes to our consolidated financial statements for a description of relevant recent accounting pronouncements. Financial Condition Investment portfolio The following tables summarize our securities portfolio as of December 31, 2022 and 2021: December 31, 2022 December 31, 2021 (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) 15-year fixed-rate mortgages $ 47,453 $ 45,324 $ 95.51 $ 48,899 $ 103.05 $ 125,033 $ 130,710 $ 104.54 $ 130,099 $ 104.05 20-year fixed-rate mortgages 10,812 9,691 89.63 11,508 106.44 35,732 36,347 101.72 37,211 104.14 30-year fixed-rate mortgages 841,823 781,754 92.86 849,168 100.87 1,027,843 1,072,904 104.38 1,066,347 103.75 ARMs 8,696 8,663 99.62 9,595 110.34 11,491 11,960 104.08 12,034 104.73 Reverse mortgages 17,506 17,852 101.98 19,659 112.30 35,313 37,297 105.62 37,652 106.62 Total Agency RMBS 926,290 863,284 93.20 938,829 101.35 1,235,412 1,289,218 104.36 1,283,343 103.88 Non-Agency RMBS (2) 16,895 12,566 74.38 12,414 73.48 10,672 9,056 84.86 7,234 67.78 Total RMBS (2) 943,185 875,850 92.86 951,243 100.85 1,246,084 1,298,274 104.19 1,290,577 103.57 Agency IOs n/a 9,313 n/a 9,212 n/a n/a 10,289 n/a 12,983 n/a Non-Agency IOs n/a 8,138 n/a 6,289 n/a n/a 2,798 n/a 2,684 n/a Total mortgage-backed securities $ 893,301 $ 966,744 $ 1,311,361 $ 1,306,244 U.S. Treasury securities sold short (500) (498) 99.60 (499) 99.80 (118,750) (117,195) 98.69 (117,322) 98.80 Reverse repurchase agreements 499 499 100.00 499 100.00 117,505 117,505 100.00 117,505 100.00 Total $ 893,302 $ 966,744 $ 1,311,671 $ 1,306,427 (1) Represents the dollar amount (not shown in thousands) per $100 of current principal of the price or cost for the security. (2) Excludes IOs. 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, 2022 and 2021, investments in non-Agency RMBS constituted a relatively small portion of our total investments, although we expect to increase our portfolio of non-Agency RMBS given current market opportunities. Our most prevalent method of financing RMBS is through short-term repos, which generally have maturities of 364 days or less. The weighted average lives of the RMBS that we own are generally much longer. Consequently, the weighted average term of our repurchase agreement financings will almost always be substantially shorter than the expected average maturity of our RMBS. This mismatch in maturities, together with the uncertainty of RMBS prepayments, and other potential changes in timing and/or amount of cash flows on our RMBS assets, creates the risk that changes in interest rates will cause our financing costs with respect to our RMBS to increase relative to the income on our RMBS over the term of our investments. 59 Financial Derivatives The following table summarizes our portfolio of financial derivative holdings as of December 31, 2022 and 2021: (In thousands) December 31, 2022 December 31, 2021 Financial derivatives–assets, at fair value: TBA securities purchase contracts $ — $ 158 TBA securities sale contracts 3,568 750 Fixed payer interest rate swaps 65,202 5,165 Fixed receiver interest rate swaps — 289 Futures — 276 Total financial derivatives–assets, at fair value 68,770 6,638 Financial derivatives–liabilities, at fair value: TBA securities purchase contracts (664) (182) TBA securities sale contracts — (168) Fixed payer interest rate swaps — (465) Fixed receiver interest rate swaps (2,373) (143) Futures (82) (145) Total financial derivatives–liabilities, at fair value (3,119) (1,103) Total $ 65,651 $ 5,535 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. These interest rate hedges generally seek to reduce the interest rate sensitivity of our liabilities or, in other words, reduce the volatility of our financing cost over time attributable to interest rate changes. Our interest rate hedging transactions may include: • Interest rate swaps (a contract exchanging a variable rate for a fixed rate, or vice versa); • Interest rate swaptions (options to enter into interest rate swaps at a future date); • TBA forward contracts on Agency pass-through certificates; • Short sales of U.S. Treasury securities; • Eurodollar and U.S. Treasury futures; and • Other derivatives. We generally enter into these transactions to offset the potential adverse effects of rising interest rates on short-term repurchase agreements. Our repurchase agreements generally have maturities of up to 364 days and carry interest rates that are determined by reference to a benchmark rate such as LIBOR or SOFR for those same periods. As each then-existing fixed-rate repo borrowing matures, it will generally be replaced with a new fixed-rate repo borrowing based on market interest rates established at that future date. In the case of interest rate swaps, most of our contracts are structured such that we receive payments based on a variable interest rate and make payments based on a fixed interest rate. The variable interest rate on which payments are received is generally calculated based on various reset mechanisms for a benchmark rate such as LIBOR or SOFR. To the extent that the benchmark rates used to calculate the payments we receive on our interest rate swaps continue to be highly correlated with our repo borrowing costs, our interest rate swap contracts should help to reduce the variability of our overall repo borrowing costs, thus reducing risk to the extent we hold fixed-rate assets that are financed with repo borrowings. In the case of TBAs, many 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 and certain other risks, we also hold net long positions in certain TBA securities as a means of acquiring exposure to Agency RMBS. 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. 60 Leverage The following table summarizes our outstanding liabilities under repurchase agreements as of December 31, 2022 and 2021. We had no other borrowings outstanding. December 31, 2022 December 31, 2021 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 $ 563,926 4.01 % 14 $ 162,089 0.18 % 13 31-60 days 210,569 2.73 44 235,321 0.21 43 61-90 days 67,960 4.16 72 114,931 0.18 72 91-120 days — — — 104,361 0.17 106 121-150 days — — — 148,855 0.16 133 151-180 days — — — 56,337 0.15 163 181-364 days — — — 242,941 0.19 238 Total $ 842,455 3.70 % 26 $ 1,064,835 0.18 % 111 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. As of December 31, 2022 and 2021, our total debt-to-equity ratio was 7.5:1 and 6.9:1, respectively. Collateral transferred with respect to our outstanding repo borrowings, including net cash collateral posted, as of December 31, 2022 and 2021 had an aggregate fair value of $0.9 billion and $1.1 billion. 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. Shareholders' Equity As of December 31, 2022, our shareholders' equity decreased to $112.4 million from $154.2 million as of December 31, 2021. This decrease principally consisted of a net loss of $(30.2) million and dividends declared of $13.7 million, partially offset by net proceeds from the issuance of common shares of $2.0 million. As of December 31, 2022, our book value per share was $8.40, as compared to $11.76 as of December 31, 2021. 61 Results of Operations for the Years Ended December 31, 2022 and 2021 The following table summarizes our results of operations for the years ended December 31, 2022 and 2021: Year Ended December 31, (In thousands except for per share amounts) 2022 2021 Interest Income (Expense) Interest income $ 35,006 $ 28,364 Interest expense (14,820) (2,723) Net interest income 20,186 25,641 Expenses Management fees to affiliate 1,758 2,402 Other operating expenses 3,370 3,350 Total expenses 5,128 5,752 Other Income (Loss) Net realized and change in net unrealized gains (losses) on securities (152,785) (32,272) Net realized and change in net unrealized gains (losses) on financial derivatives 107,529 6,074 Total Other Income (Loss) (45,256) (26,198) Net Income (Loss) $ (30,198) $ (6,309) Net Income (Loss) Per Common Share $ (2.29) $ (0.50) Adjusted Distributable Earnings Beginning with the financial results for the quarter ended June 30, 2022, the supplemental non-GAAP financial measure that we previously referred to as "Core Earnings," we now refer to as "Adjusted Distributable Earnings." We calculate Adjusted Distributable Earnings (formerly referred to as Core Earnings) as net income (loss), excluding realized and change in net unrealized gains and (losses) on securities and financial derivatives, and excluding other income or loss items that are of a non-recurring nature. Adjusted Distributable Earnings also excludes the effect of the Catch-up Premium Amortization Adjustment on interest income. 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. Adjusted Distributable Earnings includes net realized and change in net unrealized gains (losses) associated with periodic settlements on interest rate swaps. Adjusted Distributable Earnings is a supplemental non-GAAP financial measure. We believe that the presentation of Adjusted Distributable Earnings provides information useful to investors, because: (i) we believe that it is a useful indicator of both current and projected long-term financial performance, in that it excludes the impact of certain current period earnings components that we believe are less useful in forecasting long-term performance and dividend-paying ability; (ii) we use it to evaluate the effective net yield provided by our portfolio, after the effects of financial leverage; and (iii) we believe that presenting Adjusted Distributable Earnings assists our investors in measuring and evaluating our operating performance, and comparing our operating performance to that of our residential mortgage REIT peers. Please note, however, that: (I) our calculation of Adjusted Distributable Earnings may differ from the calculation of similarly titled non-GAAP financial measures by our peers, with the result that these non-GAAP financial measures might not be directly comparable; and (II) Adjusted Distributable Earnings excludes certain items, such as most realized and unrealized gains and losses, that may impact the amount of cash that is actually available for distribution. In addition, because Adjusted Distributable Earnings is an incomplete measure of our financial results and differs from net income (loss) computed in accordance with U.S. GAAP, it should be considered supplementary to, and not as a substitute for, net income (loss) computed in accordance with U.S. GAAP. Furthermore, Adjusted Distributable Earnings is different from REIT taxable income. As a result, the determination of whether we have met the requirement to distribute at least 90% of our annual REIT taxable income (subject to certain adjustments) to its shareholders, in order to maintain qualification as a REIT, is not based on whether we have distributed 90% of our Adjusted Distributable Earnings. 62 In setting our dividend, our Board of Trustees considers our earnings, liquidity, financial condition, REIT distribution requirements, and financial covenants, along with other factors that the Board of Trustees may deem relevant from time to time. The following table reconciles, for the years ended December 31, 2022 and 2021, Adjusted Distributable 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, (In thousands except for share amounts) 2022 2021 Net Income (Loss) $ (30,198) $ (6,309) Adjustments: Net realized (gains) losses on securities 73,682 (3,818) Change in net unrealized (gains) losses on securities 79,103 36,090 Net realized (gains) losses on financial derivatives (48,996) 2,526 Change in net unrealized (gains) losses on financial derivatives (58,533) (8,600) Net realized gains (losses) on periodic settlements of interest rate swaps 626 (1,856) Change in net unrealized gains (losses) on accrued periodic settlements of interest rate swaps 1,282 (355) Non-recurring expenses — 58 Negative (positive) component of interest income represented by Catch-up Premium Amortization Adjustment (3,144) (1,662) Subtotal 44,020 22,383 Adjusted Distributable Earnings $ 13,822 $ 16,074 Weighted Average Shares Outstanding 13,163,106 12,683,761 Adjusted Distributable Earnings Per Share $ 1.05 $ 1.27 Results of Operations for the Years Ended December 31, 2022 and 2021 Net Income (Loss) Net income (loss) for the year ended December 31, 2022 was $(30.2) million, as compared to $(6.3) million for the year ended December 31, 2021. The period-over-period decline in our results of operations was primarily due to an increase in total other loss and a decrease in net interest income. Interest Income Our portfolio as of both December 31, 2022 and 2021 consisted primarily of Agency RMBS, and to a lesser extent, non-Agency RMBS. Before interest expense, we earned approximately $33.4 million and $28.3 million in interest income on these securities for the years ended December, 2022 and 2021, respectively. The period-over-period increase in interest income primarily resulted from higher asset yields on both our Agency and non-Agency RMBS, in addition to higher average holdings on our non-Agency RMBS portfolio, partially offset by lower average holdings on our Agency RMBS portfolio. The Catch-up Premium Amortization Adjustment causes variability in our interest income and portfolio yields. For the years ended December 31, 202, and 2021, we had a positive Catch-up Premium Amortization Adjustment of approximately $3.1 million and $1.7 million, respectively, which increased interest income. Excluding the Catch-up Premium Amortization Adjustments, the weighted average yield of our overall portfolio was 2.80% and 2.36% for the years ended December 31, 2022 and 2021, respectively. The following table details our interest income, average holdings of yield-bearing assets, and weighted average yield based on amortized cost for the years ended December 31, 2022 and 2021: Agency (1) Non-Agency (1) Total (1) (In thousands) Interest Income Average Holdings Yield Interest Income Average Holdings Yield Interest Income Average Holdings Yield Year ended December 31, 2022 $ 31,866 $ 1,067,399 2.99 % $ 1,558 $ 14,115 11.04 % $ 33,424 $ 1,081,514 3.09 % Year ended December 31, 2021 $ 27,497 $ 1,118,346 2.46 % $ 757 $ 8,485 8.91 % $ 28,254 $ 1,126,831 2.51 % (1) Amounts exclude interest income on cash and cash equivalents (including when posted as margin) and long U.S. Treasury securities. 63 Interest Expense For the years ended December 31, 2022 and 2021, the majority of interest expense that we incurred was related to our repo borrowings, which we use to finance our assets. We also incur interest expense in connection with our short positions in U.S. Treasury securities as well as on our counterparties' cash collateral held by us. Our total interest expense for the year ended December 31, 2022 was $14.8 million, which primarily consisted of $14.1 million of interest expense on our repo borrowings, and $0.7 million of interest expense related to our short positions in U.S. Treasury securities. Our total interest expense for the year ended December 31, 2021 was $2.7 million, which primarily consisted of $2.1 million of interest expense on our repo borrowings, and $0.6 million of interest expense related to our short positions in U.S. Treasury securities. The period-over-period increase in our total interest expense resulted mainly from higher rates on our repo borrowings stemming from the significant increase in short-term interest rates. The following tables shows information related to our average cost of funds (1) on repurchase agreements for the years ended December 31, 2022 and 2021: Year Ended December 31, 2022 Year Ended December 31, 2021 Average Borrowed Funds Interest Expense Average Cost of Funds Average Borrowed Funds Interest Expense Average Cost of Funds (In thousands) Agency RMBS $ 982,375 $ 13,398 1.36 % $ 1,094,419 $ 2,128 0.19 % Non-Agency RMBS 9,686 313 3.23 % — — — U.S. Treasury Securities 15,246 394 2.58 % 3,374 2 0.06 % Total $ 1,007,307 $ 14,105 1.40 % $ 1,097,793 $ 2,130 0.19 % (1) This metric does not take into account other instruments that we use to hedge interest rate risk, such as TBAs, swaptions, and futures. Among other instruments, we use interest rate swaps and short U.S. Treasury securities to hedge against the risk of rising interest rates. The following table shows information related to the components of our average cost of funds including the amortization of upfront payments and the actual and accrued periodic payments on our interest rate swaps and interest expense on short U.S. Treasury securities for the years ended December 31, 2022 and 2021: Repurchase Agreements Interest Rate Swaps (1) Short U.S. Treasury Securities (1)(2) Total (1) Average Borrowed Funds Interest Expense Average Cost of Funds Net periodic expense paid or payable Adjustment to Average Cost of Funds Interest expense Adjustment to Average Cost of Funds Interest and net periodic expense paid or payable Adjusted Average Cost of Funds (In thousands) Year ended December 31, 2022 $ 1,007,307 $ 14,105 1.40 % $ (2,200) (0.22) % $ 675 0.07 % $ 12,580 1.25 % Year ended December 31, 2021 $ 1,097,793 $ 2,130 0.19 % $ 2,149 0.20 % $ 561 0.05 % $ 4,840 0.44 % (1) As an alternative cost of funds measure, we add to our repo borrowing cost the net periodic amounts paid or payable by us on our interest rate swaps and the interest expense we incur on our short positions in U.S. Treasury securities, and express the total as a percentage of our average outstanding repurchase agreement borrowings. (2) Includes interest expense on reverse repurchase agreements with negative interest rates, which can occur when we borrow certain bonds that we have sold short. For the year ended December 31, 2022, the weighted average yield of our portfolio of Agency and non-Agency RMBS excluding the impact of the Catch-up Premium Amortization Adjustment was 2.80%, while our total adjusted average cost of funds, including interest rate swaps and short U.S. Treasury securities, was 1.25%, resulting in a net interest margin of 1.55%. By comparison, for the year ended December 31, 2021, the weighted average yield of our portfolio of Agency and non-Agency RMBS excluding the impact of the Catch-up Premium Amortization Adjustment was 2.36%, while our total adjusted average cost of funds, including interest rate swaps and short U.S. Treasury securities, was 0.44%, resulting in a net interest margin of 1.92%. 64 Management Fees For the years ended December 31, 2022 and 2021, our management fee expense was approximately $1.8 million and $2.4 million, respectively. Management fees are calculated based on our shareholders' equity at the end of each quarter. The decrease in the management fee year over year was due to a smaller capital base at each quarter end in 2022, as compared to the respective quarter ends in 2021. Other Operating Expenses Other operating expenses, as presented above, include professional fees, compensation expense, insurance expense, and various other expenses incurred in connection with the operation of our business. For both of the years ended December 31, 2022 and 2021, our other operating expenses were approximately $3.4 million. 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, 2022, Other income (loss) was $(45.3) million, consisting primarily of net realized and unrealized losses of $(152.8) million on our securities, which were partially offset by net realized and unrealized gains of $107.5 million on our financial derivatives. Net realized and unrealized losses of $(152.8) million on our securities consists primarily of net realized and unrealized losses of $(156.2) million on our Agency RMBS, driven by significantly lower asset prices year over year due to rising interest rates and widening yield spreads. The net realized and unrealized gains on our financial derivatives of $107.5 million consisted of net realized and unrealized gains of $64.4 million on our interest rate swaps, $22.2 million on our net short positions in TBAs, and $20.9 million on our U.S. Treasury futures. The net gains on our financial derivatives were primarily the result of the significant increase in interest rates, and in the case of short positions in TBAs, also of widening yields spreads. For the year ended December 31, 2021, Other income (loss) was $(26.2) million, consisting primarily of net realized and unrealized losses of $(32.3) million on securities, partially offset by net realized and unrealized gains of $6.1 million on our financial derivatives. Net realized and unrealized losses of $(32.3) million on securities primarily consisted of $(34.5) million of net realized and unrealized losses on our Agency RMBS which were partially offset by net realized gains of $1.9 million on our short U.S. Treasury securities. Net realized and unrealized gains of $6.1 million on our financial derivatives primarily consisted of $7.7 million of net realized and unrealized gains on our swaps and futures partially offset by net realized and unrealized losses of $(1.6) million on our TBAs, where net gains on our higher-coupon short holdings were exceeded by net losses on our lower-coupon long holdings. During 2021, interest rate volatility and long-term interest rates increased during much of the year. Yield spreads on most of our Agency RMBS holdings widened and their prices declined, leading to net realized and unrealized losses. For the year ended December 31, 2021, net realized and unrealized gains of $1.9 million and $6.1 million on our short U.S. Treasury securities and our financial derivatives, respectively, were primarily the result of the increase in long-term interest rates. Liquidity and Capital Resources Liquidity refers to our ability to generate and obtain adequate amounts of cash to meet our requirements, including repaying our borrowings, funding and maintaining RMBS and other assets, paying dividends, and other general business needs. Our short-term (the 12 months following period end) and long-term (beyond 12 months from period end) liquidity requirements include acquisition costs for assets we acquire, payment of our management fee, compliance with margin requirements under our repurchase agreements, TBA and other financial derivative contracts, repayment of repurchase agreement borrowings to the extent we are unable or unwilling to extend our repurchase agreements, the payment of dividends, and payment of our general operating expenses. Our capital resources primarily include cash on hand, cash flow from our investments (including monthly principal and interest payments received on our RMBS and proceeds from the sale of RMBS), borrowings under repurchase agreements, and proceeds from equity offerings. We expect that these sources of funds will be sufficient to meet our short-term and long-term liquidity needs. We borrow funds in the form of repurchase agreements. The terms of our repo borrowings are predominantly governed by Master Repurchase Agreements, or "MRAs," which generally conform to the terms in the standard master repurchase agreement as published by the Securities Industry and Financial Markets Association as to repayment and margin requirements. In addition, each lender may require that we include supplemental terms and conditions to the standard master repurchase agreement. Typical supplemental terms and conditions include the addition of or changes to provisions relating to margin calls, net asset value requirements, cross default provisions, certain key person events, changes in corporate structure, and requirements that all controversies related to the repurchase agreement be litigated in a particular jurisdiction. These provisions may differ for each of our lenders. 65 As of December 31, 2022 and December 31, 2021, we had $0.8 billion and $1.1 billion outstanding under our repurchase agreements, respectively. As of December 31, 2022, our outstanding repurchase agreements were with 16 counterparties. The amounts borrowed under our repurchase agreements are generally subject to the application of "haircuts." A haircut is the percentage discount that a repo lender applies to the market value of an asset serving as collateral for a repo borrowing, for the purpose of determining whether such repo borrowing is adequately collateralized. As of December 31, 2022 and December 31, 2021, the weighted average contractual haircut applicable to the assets that serve as collateral for our outstanding repo borrowings was 5.5% and 5.2%, respectively. 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 Borrowings Outstanding at Quarter End Average Borrowings Outstanding Maximum Borrowings Outstanding at Any Month End (In thousands) December 31, 2022 $ 842,455 $ 899,752 $ 881,401 September 30, 2022 938,046 928,942 940,321 June 30, 2022 950,339 1,070,229 1,087,826 March 31, 2022 1,211,163 1,133,738 1,211,163 December 31, 2021 1,064,835 1,068,384 1,088,712 September 30, 2021 1,062,197 1,114,820 1,140,182 June 30, 2021 1,135,497 1,166,954 1,196,779 March 31, 2021 1,106,724 1,040,521 1,106,724 December 31, 2020 1,015,245 1,033,128 1,050,840 September 30, 2020 1,061,640 1,030,402 1,096,065 June 30, 2020 909,821 941,242 920,712 March 31, 2020 (1) 1,109,342 1,281,507 1,308,377 (1) During 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, 2022, we had an aggregate amount at risk under our repurchase agreements with 17 counterparties of $49.8 million. As of December 31, 2021, we had an aggregate amount at risk under our repurchase agreements with 15 counterparties of $52.7 million. Amounts at risk represent the excess, if any, for each counterparty of the fair value of collateral held by such counterparty over the amounts outstanding under repurchase agreements. If the amounts outstanding under repurchase agreements with a particular counterparty are greater than the collateral held by the counterparty, there is no amount at risk for the particular counterparty. Amounts at risk under our repurchase agreements as of December 31, 2022 and December 31, 2021 does not include $1.5 million and $2.6 million, respectively, of net accrued interest receivable, which is defined as accrued interest on securities held as collateral less interest payable on cash borrowed. Our derivatives are predominantly subject to bilateral master trade agreements or clearing in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the "Dodd-Frank Act." We may be required to deliver or receive cash or securities as collateral upon entering into derivative transactions. Changes in the relative value of derivative transactions may require us or the counterparty to post or receive additional collateral. Entering into derivative contracts involves market risk in excess of amounts recorded on our balance sheet. In the case of cleared derivatives, the clearinghouse becomes our counterparty and the future commission merchant acts as an intermediary between us and the clearinghouse with respect to all facets of the related transaction, including the posting and receipt of required collateral. As of December 31, 2022, we had an aggregate amount at risk under our derivative contracts, excluding TBAs, with three counterparties of approximately $24.5 million. As of December 31, 2021, we had an aggregate amount at risk under our derivatives contracts, excluding TBAs, with two counterparties of approximately $11.3 million. Amounts at risk under our derivatives contracts represent the excess, if any, for each counterparty of the fair value of our derivative contracts 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 financial derivatives plus our collateral held directly by the counterparty, there is no amount at risk for the particular counterparty. We purchase and sell TBAs and Agency pass-through certificates on a when-issued or delayed delivery basis. The 66 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, 2022, in connection with our forward settling TBA and Agency pass-through certificates, we had an aggregate amount at risk with eight counterparties of approximately $4.6 million. As of December 31, 2021, in connection with our forward settling TBA and Agency pass-through certificates, we had an aggregate amount at risk with four counterparties of approximately $4.1 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 contracts 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 contracts plus our collateral held directly by the counterparty, there is no amount at risk for the particular counterparty. As of December 31, 2022, we had cash and cash equivalents of $34.8 million. The timing and frequency of distributions will be determined by our Board of Trustees based upon a variety of factors deemed relevant by our trustees, including restrictions under applicable law, our capital requirements, and the REIT requirements of the Code. The declaration of dividends to our shareholders and the amount of such dividends are at the discretion of our Board of Trustees. The following table sets forth the dividend distributions authorized by the Board of Trustees for the periods indicated below: Year Ended December 31, 2022: Dividend Per Share Dividend Amount Declaration Date Record Date Payment Date (In thousands) $ 0.08 $ 1,070 December 7, 2022 December 30, 2022 January 25, 2023 0.08 1,063 November 7, 2022 November 30, 2022 December 27, 2022 0.08 1,060 October 6, 2022 October 31, 2022 November 25, 2022 0.08 1,060 September 8, 2022 September 30, 2022 October 25, 2022 0.08 1,058 August 4, 2022 August 31, 2022 September 26, 2022 0.08 1,046 July 8, 2022 July 29, 2022 August 25, 2022 0.08 1,046 June 7, 2022 June 30, 2022 July 25, 2022 0.08 1,049 May 2, 2022 May 31, 2022 June 27, 2022 0.10 1,311 April 7, 2022 April 29, 2022 May 25, 2022 0.10 1,311 March 7, 2022 March 31, 2022 April 25, 2022 0.10 1,311 February 7, 2022 February 28, 2022 March 25, 2022 0.10 1,311 January 7, 2022 January 31, 2022 February 25, 2022 Year Ended December 31, 2021: Dividend Per Share Dividend Amount Declaration Date Record Date Payment Date (In thousands) $ 0.10 1,311 December 7, 2021 December 30, 2021 January 25, 2022 0.10 1,310 November 5, 2021 November 30, 2021 December 27, 2021 0.10 1,294 October 7, 2021 October 29, 2021 November 26, 2021 0.30 3,881 September 14, 2021 September 30, 2021 October 25, 2021 0.30 3,876 June 9, 2021 June 30, 2021 July 26, 2021 0.28 3,456 March 3, 2021 March 31, 2021 April 26, 2021 On January 9, 2023, the Board of Trustees approved a monthly dividend in the amount of $0.08 per share payable on February 27, 2023 to shareholders of record as of January 31, 2023. On February 7, 2023, the Board of Trustees approved a monthly dividend in the amount of $0.08 per share payable on March 27, 2023 to shareholders of record as of February 28, 2023. 67 On March 7, 2023, the Board of Trustees approved a monthly dividend in the amount of $0.08 per share payable on April 25, 2023 to shareholders of record as of March 31, 2023. For the year ended December 31, 2022, our operating activities provided net cash of $22.4 million and our investing activities provided net cash of $110.5 million. 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 $155.0 million. Thus our operating and investing activities, when combined with our net repo financing activities, used net cash of $22.0 million. We also received proceeds from the issuance of common shares, net of agent commissions and offering costs paid of $2.0 million. We used $13.9 million to pay dividends, and $0.3 million to repurchase common shares. As a result of these activities, there was a decrease in our cash holdings of $34.2 million, from $69.0 million as of December 31, 2021 to $34.8 million as of December 31, 2022. For the year ended December 31, 2021, our operating activities provided net cash of $27.9 million and our investing activities used net cash of $15.2 million. 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) provided net cash of $6.6 million. Thus our operating and investing activities, when combined with our net repo financing activities, provided net cash of $19.2 million. We also received proceeds from the issuance of common shares, net of agent commissions and offering costs paid of $8.9 million. We used $17.3 million to pay dividends. As a result of these activities, there was an increase in our cash holdings of $10.9 million, from $58.2 million as of December 31, 2020 to $69.0 million as of December 31, 2021. On April 2, 2021, we commenced an "at-the-market" offering program, or "ATM program," by entering into equity distribution agreements with third party sales agents under which we are authorized to offer and sell up to $75.0 million of common shares from time to time. During the year ended December 31, 2022, we issued 268,780 common shares under the ATM program which provided $2.0 million of net proceeds after $38 thousand of agent commissions and $86 thousand of offering costs. From December 31, 2022 through March 3, 2023, we issued 406,760 common shares under the ATM program, which provided $3.1 million of net proceeds after $0.1 million of agent commissions and offering costs. From commencement of the ATM program through March 3, 2023, we issued 838,809 common shares under the ATM program, which provided $7.1 million of net proceeds after $0.1 million of agent commissions and $0.1 million of offering costs. As of December 31, 2022, we had $67.7 million of common shares available to be issued remaining under the ATM program. 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. The program, which is open-ended in duration, allows us to make repurchases from time to time on the open market or in negotiated transactions, including through Rule 10b5-1 plans. 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, 2022, we repurchased 40,021 common shares at an aggregate cost of $0.3 million, and an average price per share of $6.56. Under the current repurchase program adopted on June 13, 2018, we have repurchased 474,192 common shares through March 3, 2023 at an average price per share of $9.21 and an aggregate cost of $4.4 million, and have authorization to repurchase an additional 725,808 common shares. Based on our current portfolio, amount of free cash on hand, debt-to-equity ratio and current and anticipated availability of credit, we believe that our capital resources will be sufficient to enable us to meet anticipated short-term and long-term liquidity requirements. We are not required by our investment guidelines to maintain any specific debt-to-equity ratio, and we believe that the appropriate leverage for the particular assets we hold depends on the credit quality and risk of those assets, as well as the general availability and terms of stable and reliable financing for those assets. Contractual Obligations and Commitments We are a party to a management agreement with our Manager. Pursuant to that agreement, our Manager is entitled to receive a management fee based on shareholders' equity, reimbursement of certain expenses and, in certain circumstances, a termination fee. Such fees and expenses do not have fixed and determinable payments. For a description of the management agreement provisions, see Note 9 to our consolidated financial statements. We enter into repurchase agreements with third-party broker-dealers whereby we sell securities to such broker-dealers at agreed-upon purchase prices at the initiation of the repurchase agreements and agree to repurchase such securities at predetermined repurchase prices and termination dates, thus providing the broker-dealers with an implied interest rate on the funds initially transferred to us by the broker-dealers. We may enter into reverse repurchase agreements with third-party broker-dealers whereby we purchase securities under agreements to resell at an agreed-upon price and date. In general, we most often 68 will enter into reverse repurchase agreement transactions in order to effectively borrow securities that we can then deliver to counterparties to whom we have made short sales of the same securities. The implied interest rates on the repurchase agreements and reverse repurchase agreements we enter into are based upon competitive market rates at the time of initiation. Repurchase agreements and reverse repurchase agreements that are conducted with the same counterparty may be reported on a net basis if they meet the requirements of ASC 210-20, Balance Sheet, Offsetting . As of both December 31, 2022 and December 31, 2021, there were no repurchase agreements and reverse repurchase agreements reported on a net basis on the Consolidated Balance Sheet. As of December 31, 2022, we had $0.8 billion of outstanding borrowings with 16 counterparties. Off-Balance Sheet Arrangements As of December 31, 2022, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitment or intent to provide funding to any such entities. As such, we are not materially exposed to any market, credit, liquidity, or financing risk that could arise if we had engaged in such relationships. Inflation Virtually all of our assets and liabilities are interest rate-sensitive in nature. As a result, interest rates and other factors generally influence our performance more than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.