Ellington Credit Co 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2022 AND DECEMBER 31, 2021 Report of Independent Registered Public Accounting Firm (PCAOB ID NO. 238 ) 73 Consolidated Balance Sheets 75 Consolidated Statements of Operations 76 Consolidated Statements of Shareholders' Equity 77 Consolidated Statements of Cash Flows 78 Notes to Consolidated Financial Statements 80 72 Report of Independent Registered Public Accounting Firm To the Board of Trustees and Shareholders of Ellington Residential Mortgage REIT Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Ellington Residential Mortgage REIT and its subsidiaries (the "Company") as of December 31, 2022 and 2021, 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, 2022 and 2021, 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. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Valuation of Certain Level 3 Investments in Mortgage-backed Securities As described in Notes 2 and 4 to the consolidated financial statements, the Company held $15.9 million of total level 3 investments in mortgage-backed securities, at fair value as of December 31, 2022. The Company has chosen to make a fair value election for its securities portfolio. 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. Management’s estimate of fair value may be based on several assumptions, including but not limited to management’s estimates of yield, projected collateral prepayments, projected collateral losses and projected collateral recoveries, as applicable. Fair value measurements are impacted by the interrelationships of these assumptions. The principal considerations for our determination that performing procedures relating to the valuation of certain level 3 investments in mortgage-backed securities is a critical audit matter are (i) the significant judgment by management in determining the fair value of these investments, which in turn led to (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to the valuation of these level 3 investments and the interrelated assumptions related to yield, projected collateral prepayments, projected collateral losses, and projected collateral recoveries, as applicable; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, developing an independent range of fair value estimates, which included (i) testing the completeness and accuracy of data provided by management; (ii) comparing 73 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 applying assumptions related to yield, projected collateral prepayments, projected collateral losses, and projected collateral recoveries as applicable. /s/ PricewaterhouseCoopers LLP New York, New York March 10, 2023 We have served as the Company's auditor since 2012. 74 ELLINGTON RESIDENTIAL MORTGAGE REIT CONSOLIDATED BALANCE SHEETS December 31, 2022 December 31, 2021 (In thousands except for share amounts) ASSETS Cash and cash equivalents $ 34,816 $ 69,028 Mortgage-backed securities, at fair value (1) 893,301 1,311,361 Other investments, at fair value 208 309 Due from brokers 18,824 88,662 Financial derivatives–assets, at fair value 68,770 6,638 Reverse repurchase agreements 499 117,505 Receivable for securities sold 33,452 — Interest receivable 3,326 4,504 Other assets 436 459 Total Assets $ 1,053,632 $ 1,598,466 LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Repurchase agreements $ 842,455 $ 1,064,835 Payable for securities purchased 42,199 255,136 Due to brokers 45,666 1,959 Financial derivatives–liabilities, at fair value 3,119 1,103 U.S. Treasury securities sold short, at fair value 498 117,195 Dividend payable 1,070 1,311 Accrued expenses 1,097 1,236 Management fee payable to affiliate 423 581 Interest payable 4,696 885 Total Liabilities 941,223 1,444,241 SHAREHOLDERS' EQUITY Preferred shares, par value $0.01 per share, 100,000,000 shares authorized; (0 shares issued and outstanding, respectively) — — Common shares, par value $0.01 per share, 500,000,000 shares authorized; (13,377,840 and 13,109,926 shares issued and outstanding, respectively) 134 131 Additional paid-in-capital 240,940 238,865 Accumulated deficit ( 128,665 ) ( 84,771 ) Total Shareholders' Equity 112,409 154,225 Total Liabilities and Shareholders' Equity $ 1,053,632 $ 1,598,466 (1) Includes assets pledged as collateral to counterparties. See Note 6 for additional details on the Company's borrowings and related collateral. See Notes to Consolidated Financial Statements 75 ELLINGTON RESIDENTIAL MORTGAGE REIT CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2022 December 31, 2021 (In thousands except for per share amounts) INTEREST INCOME (EXPENSE) Interest income $ 35,006 $ 28,364 Interest expense ( 14,820 ) ( 2,723 ) Total net interest income 20,186 25,641 EXPENSES Management fees to affiliate 1,758 2,402 Professional fees 824 938 Compensation expense 710 721 Insurance expense 401 377 Other operating expenses 1,435 1,314 Total expenses 5,128 5,752 OTHER INCOME (LOSS) Net realized gains (losses) on securities ( 73,682 ) 3,818 Net realized gains (losses) on financial derivatives 48,996 ( 2,526 ) Change in net unrealized gains (losses) on securities ( 79,103 ) ( 36,090 ) Change in net unrealized gains (losses) on financial derivatives 58,533 8,600 Total other income (loss) ( 45,256 ) ( 26,198 ) NET INCOME (LOSS) $ ( 30,198 ) $ ( 6,309 ) NET INCOME (LOSS) PER COMMON SHARE: Basic and Diluted $ ( 2.29 ) $ ( 0.50 ) See Notes to Consolidated Financial Statements 76 ELLINGTON RESIDENTIAL MORTGAGE REIT CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Common Shares Common Shares, par value Preferred Shares Preferred Shares, par value Additional Paid-in-Capital Accumulated (Deficit) Earnings Total (In thousands except for share amounts) BALANCE, December 31, 2020 12,343,542 $ 123 — $ — $ 229,614 $ ( 63,335 ) $ 166,402 Common shares issued (1) 738,269 8 8,980 8,988 Issuance of restricted shares 28,115 — — — Share based compensation 271 271 Dividends declared (2) ( 15,127 ) ( 15,127 ) Net income (loss) ( 6,309 ) ( 6,309 ) BALANCE, December 31, 2021 13,109,926 131 — — 238,865 ( 84,771 ) 154,225 Common shares issued (1) 268,780 3 2,025 2,028 Issuance of restricted shares 39,155 — — — Share based compensation 312 312 Repurchase of common shares ( 40,021 ) — ( 262 ) ( 262 ) Dividends declared (2) ( 13,696 ) ( 13,696 ) Net income (loss) ( 30,198 ) ( 30,198 ) BALANCE, December 31, 2022 13,377,840 $ 134 — $ — $ 240,940 $ ( 128,665 ) $ 112,409 (1) Net of discounts and commissions and offering costs. (2) For the years ended December 31, 2022 and 2021, dividends totaling $ 1.04 and $ 1.18 , respectively, per common share outstanding, were declared. See Notes to Consolidated Financial Statements 77 ELLINGTON RESIDENTIAL MORTGAGE REIT CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2022 December 31, 2021 (In thousands) Cash flows provided by (used in) operating activities: Net income (loss) $ ( 30,198 ) $ ( 6,309 ) Reconciliation of net income (loss) to net cash provided by (used in) operating activities: 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 ) Amortization of premiums and accretion of discounts, net 2,290 7,524 Share based compensation 312 271 (Increase) decrease in assets: Interest receivable 1,178 ( 390 ) Other assets ( 7 ) ( 20 ) Increase (decrease) in liabilities: Accrued expenses ( 67 ) 236 Interest payable 3,811 415 Management fees payable to affiliate ( 158 ) ( 45 ) Net cash provided by (used in) operating activities 22,417 27,880 Cash flows provided by (used in) investing activities: Purchases of securities ( 2,357,903 ) ( 1,645,767 ) Proceeds from sale of securities 2,188,450 1,303,872 Principal repayments of mortgage-backed securities 179,855 325,440 Proceeds from investments sold short 412,697 758,924 Repurchase of investments sold short ( 523,100 ) ( 639,931 ) Proceeds from disposition of financial derivatives 82,957 23,468 Purchase of financial derivatives ( 36,018 ) ( 26,139 ) Payments made on reverse repurchase agreements ( 9,169,752 ) ( 10,088,814 ) Proceeds from reverse repurchase agreements 9,286,759 9,971,309 Due from brokers, net 5,679 2,848 Due to brokers, net 40,923 ( 441 ) Net cash provided by (used in) investing activities 110,547 ( 15,231 ) See Notes to Consolidated Financial Statements 78 ELLINGTON RESIDENTIAL MORTGAGE REIT CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Year Ended December 31, 2022 December 31, 2021 Cash flows provided by (used in) financing activities: Net proceeds from the issuance of common shares (1) $ 2,114 $ 9,289 Offering costs paid ( 127 ) ( 390 ) Repurchase of common shares ( 262 ) — Dividends paid ( 13,937 ) ( 17,272 ) Borrowings under repurchase agreements 6,029,970 2,567,574 Repayments of repurchase agreements ( 6,252,350 ) ( 2,517,984 ) Due from brokers, net 63,885 ( 43,072 ) Due to brokers, net 3,531 68 Cash provided by (used in) financing activities ( 167,176 ) ( 1,787 ) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ( 34,212 ) 10,862 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 69,028 58,166 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 34,816 $ 69,028 Supplemental disclosure of cash flow information: Interest paid $ 11,009 $ 2,308 Dividends payable 1,070 1,311 (1) Net of discount and commissions. See Notes to Consolidated Financial Statements 79 ELLINGTON RESIDENTIAL MORTGAGE REIT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2022 1. Organization and Investment Objective Ellington Residential Mortgage REIT, or "EARN," was formed as a Maryland real estate investment trust, or "REIT," on August 2, 2012, and commenced operations on September 25, 2012. EARN conducts its business through its wholly owned subsidiaries, EARN OP GP LLC, or the "General Partner," and Ellington Residential Mortgage LP, or the "Operating Partnership," which were formed as a Delaware limited liability company and a Delaware limited partnership, respectively, on July 31, 2012 and commenced operations on September 25, 2012. The Operating Partnership conducts its business of acquiring, investing in, and managing residential mortgage- and real estate-related assets through its wholly owned subsidiaries. EARN, the General Partner, the Operating Partnership, and their consolidated subsidiaries are hereafter defined as the "Company." Ellington Residential Mortgage Management LLC, or the "Manager," serves as the Manager of the Company pursuant to the terms of the Fifth Amended and Restated Management Agreement, or the "Management Agreement." The Manager is an affiliate of Ellington Management Group, L.L.C., or "EMG," an investment management firm that is an SEC-registered investment adviser with a 28-year history of investing in a broad spectrum of mortgage-backed securities and related derivatives, with an emphasis on the residential mortgage-backed securities, or "RMBS," market. In accordance with the terms of the Management Agreement and the Services Agreement (as described in Note 9), the Manager is responsible for administering the Company's business activities and day-to-day operations, and performs certain services, subject to oversight by the Board of Trustees. See Note 9 for further information on the Management Agreement. The Company acquires and manages 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 RMBS that do not carry such guarantees, or "non-Agency RMBS," such as RMBS backed by prime jumbo, Alternative A-paper, manufactured housing, and subprime residential mortgage loans. Agency RMBS include both Agency pools and Agency collateralized mortgage obligations, or "CMOs," and non-Agency RMBS primarily consist of non-Agency CMOs, both investment grade and non-investment grade. The Company may also acquire and manage CMBS, mortgage servicing rights, credit risk transfer securities, residential mortgage loans, and other mortgage- and real estate-related assets. The Company may also invest in other instruments including, but not limited to, forward-settling To-Be-Announced Agency pass-through certificates, or "TBAs," interest rate swaps and swaptions, U.S. Treasury securities, Eurodollar and U.S. Treasury futures, other financial derivatives, and cash equivalents. The Company's targeted investments may range from unrated first loss securities to AAA senior securities. The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, or "the Code," and conducts its operations to qualify and be taxed as a REIT. As a REIT, the Company is required to distribute annually at least 90 % of its taxable income. As long as the Company continues to qualify as a REIT, it will not be subject to U.S. federal corporate taxes on its taxable income to the extent that it distributes all of its annual taxable income to its shareholders within the time limits prescribed by the Code. It is the intention of the Company to distribute at least 100 % of its taxable income, after application of available tax attributes, within the time limits prescribed by the Code, which may extend into the subsequent taxable year. 2. Significant Accounting Policies (A) Basis of Presentation: The Company's consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, or "U.S. GAAP," and Regulation S-X. Entities in which the Company has a controlling financial interest, through ownership of the majority of the entities' voting equity interests, or through other contractual rights that give the Company control, are consolidated by the Company. All inter-company balances and transactions have been eliminated. The preparation of consolidated financial statements in conformity with U.S. 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. In management's opinion, all material adjustments considered necessary for a fair statement of the Company's consolidated financial statements have been included and are only of a normal recurring nature. (B) Valuation: The Company applies ASC 820-10, Fair Value Measurement ("ASC 820-10"), to its holdings of financial instruments. 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 three levels are defined as follows: 80 • Level 1—inputs to the valuation methodology are observable and reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Currently, the types of financial instruments the Company generally includes in this category are exchange-traded derivatives and equities; • Level 2—inputs to the valuation methodology other than quoted prices included in Level 1 are observable for the asset or liability, either directly or indirectly. Currently, the types of financial instruments that the Company generally includes in this category are Agency RMBS, U.S. Treasury securities, certain non-Agency RMBS, and actively traded derivatives such as TBAs, interest rate swaps, and swaptions; and • Level 3—inputs to the valuation methodology are unobservable and significant to the fair value measurement. Currently, this category includes certain RMBS, such as certain non-Agency RMBS and certain Agency interest only securities, or "IOs," where there is less price transparency. For certain financial instruments, the various inputs that management uses to measure fair value may fall into different levels of the fair value hierarchy. For each such financial instrument, the determination of which category within the fair value hierarchy is appropriate is based on the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the various inputs that management uses to measure fair value, with the highest priority given to inputs that are observable and reflect quoted prices (unadjusted) for identical assets or liabilities in active markets (Level 1), and the lowest priority given to inputs that are unobservable and significant to the fair value measurement (Level 3). The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. The Company may use valuation techniques consistent with the market and income approaches to measure the fair value of its assets and liabilities. The market approach uses third-party valuations and information obtained from market transactions involving identical or similar assets or liabilities. The income approach uses projections of the future economic benefits of an instrument to determine its fair value, such as in the discounted cash flow methodology. The inputs or methodology used for valuing financial instruments are not necessarily an indication of the risk associated with investing in these financial instruments. The leveling of each financial instrument is reassessed at the end of each period. Transfers between levels of the fair value hierarchy are assumed to occur at the end of the reporting period. Summary Valuation Techniques For financial instruments that are traded in an "active market," the best measure of fair value is the quoted market price. However, many of the Company's 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. The following are summary descriptions, for the various categories of financial instruments, of the valuation methodologies management uses in determining fair value of the Company's financial instruments in such categories. Management utilizes such methodologies to assign a fair value (the estimated price that, in an orderly transaction at the valuation date, would be received to sell an asset, or paid to transfer a liability, as the case may be) to each such financial instrument. For the Company's RMBS investments and TBAs, management seeks to obtain at least one third-party valuation, and often obtains multiple valuations when available. Management has been able to obtain third-party valuations on the vast majority of these instruments and expects to continue to solicit third-party valuations in the future. Management generally values each financial instrument at the average of third-party valuations received and not rejected as described below. Third-party valuations are not binding, management may adjust the valuations it receives (e.g., downward adjustments for odd lots), and management may challenge or reject a valuation when, based on its validation criteria, management determines that such valuation is unreasonable or erroneous. Furthermore, based on its validation criteria, management may determine that the average of the third-party valuations received for a given instrument does not result in what management believes to be the fair value of such instrument, and in such circumstances management may override this average with its own good faith valuation. The validation criteria may take into account output from management's own models, recent trading activity in the same or similar instruments, and valuations received from third parties. The use of proprietary models requires the use of a significant amount of judgment and the application of various assumptions including, but not limited to, assumptions concerning future prepayment rates and default rates. Given their relatively high level of price transparency, Agency RMBS pass-throughs and TBAs are typically designated as Level 2 assets. Non-Agency RMBS and Agency interest only and inverse interest only RMBS are generally classified as either Level 2 or Level 3 based on the analysis of available market data and/or third-party valuations. Furthermore, the methodology used by the third-party valuation providers is reviewed at least annually by management, so as to ascertain whether such providers are utilizing observable market data to determine the valuations that they provide. 81 Interest rate swaps and swaptions are typically valued based on internal models that use observable market data, including applicable interest rates in effect as of the measurement date; the model-generated valuations are then typically compared to counterparty valuations for reasonableness. These financial derivatives are generally designated as Level 2 instruments. In valuing its derivatives, the Company also considers the creditworthiness of both the Company and its counterparties, along with collateral provisions contained in each derivative agreement. The Company's repurchase and reverse repurchase agreements are carried at cost, which approximates fair value. Repurchase agreements and reverse repurchase agreements are classified as Level 2 assets and liabilities based on the adequacy of the collateral and their short term nature. The Company's valuation process, including the application of validation criteria, is directed by the Manager's Valuation Committee ("Valuation Committee") and overseen by the Company's audit committee. The Valuation Committee includes senior level executives from various departments within the Manager, and each quarter the Valuation Committee reviews and approves the valuations of the Company's investments. The valuation process also includes a monthly review by the Company's third party administrator. The goal of this review is to replicate various aspects of the Company's valuation process based on the Company's documented procedures. Because of the inherent uncertainty of valuation, the estimated fair value of the Company's 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 the consolidated financial statements. (C) Accounting for Securities: Purchases and sales of securities are recorded on trade date and realized and unrealized gains and losses are calculated based on identified cost. The Company has chosen to make a fair value election pursuant to ASC 825-10, Financial Instruments , for its securities portfolio. Electing the fair value option, or "FVO," allows the Company to record changes in fair value in the Consolidated Statement of Operations, which, in management's view, more appropriately reflects the results of operations for a particular reporting period as all securities activities will be recorded in a similar manner. As such, securities are recorded at fair value on the Consolidated Balance Sheet and the period change in fair value is recorded in current period earnings on the Consolidated Statement of Operations as a component of Change in net unrealized gains (losses) on securities. The Company 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"). When the fair value of a security is less than its amortized cost basis as of the balance sheet date, the security's cost basis is considered impaired. The Company must evaluate the decline in the fair value of the impaired security and determine whether such decline resulted from a credit loss or non-credit related factors. In its assessment of whether a credit loss exists, the Company compares the present value of estimated future cash flows of the impaired security with the amortized cost basis of such security. The estimated future cash flows reflect those that a "market participant" would use and typically include assumptions related to fluctuations in interest rates, prepayment speeds, default rates, collateral performance, and the timing and amount of projected credit losses, as well as incorporating observations of current market developments and events. Cash flows are discounted at an interest rate equal to the current yield used to accrete interest income. If the present value of estimated future cash flows is less than the amortized cost basis of the security, an expected credit loss exists and is included in Unrealized gains (losses) on securities and loans, net, on the Consolidated Statement of Operations. If it is determined as of the financial reporting date that all or a portion of a security's cost basis is not collectible, then the Company will recognize a realized loss to the extent of the adjustment to the security's cost basis. 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. (D) Interest Income: Coupon interest income on investment securities is accrued based on the outstanding principal balance or notional amount and the current coupon rate on each security. The Company amortizes purchase premiums and accretes purchase discounts on its fixed-income securities. For RMBS that are deemed to be of high credit quality at the time of purchase, premiums and discounts are generally amortized/accreted into interest income over the life of such securities using the effective interest method. For such RMBS whose cash flows vary depending on prepayments, an effective yield retroactive to the time of purchase is periodically recomputed based on actual prepayments and changes in projected prepayment activity, and a catch-up adjustment, or "Catch-up Premium Amortization Adjustment," is made to amortization to reflect the cumulative impact of the change in effective yield. For RMBS that are deemed not to be of high credit quality at the time of purchase, interest income is recognized based on the effective interest method. For purposes of estimating future expected cash flows, management uses assumptions including, 82 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. Changes in estimated future cash flows, as applied to the current amortized cost of the security, may result in a prospective change in the yield/interest income recognized on such securities. 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. 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. federal and other tax purposes is likely to differ from the accounting treatment under U.S. GAAP of these items as described above. (E) Cash and Cash Equivalents: Cash and cash equivalents include cash and short term investments with original maturities of three months or less at the date of acquisition. Cash and cash equivalents typically include amounts held in interest bearing overnight accounts and amounts held in money market funds, and these balances generally exceed insured limits. The Company holds its cash at institutions that it believes to be highly creditworthy. (F) Due from brokers/Due to brokers: Due from brokers and Due to brokers accounts on the Consolidated Balance Sheet include collateral transferred to or received from counterparties, including clearinghouses, along with receivables and payables for open and/or closed derivative positions. (G) Financial Derivatives: 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 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. In the case of cleared financial derivatives, the clearinghouse becomes the Company's counterparty and a futures commission merchant acts as intermediary between the Company and the clearinghouse with respect to all facets of the related transaction, including the posting and receipt of required collateral. Collateral received by the Company is reflected on the Consolidated Balance Sheet as "Due to Brokers." Conversely, collateral posted by the Company is reflected as "Due from Brokers" on the Consolidated Balance Sheet. The types of financial derivatives that have been utilized by the Company to date include interest rate swaps, TBAs, swaptions, and futures. Swaps: The Company enters into interest rate swaps. Interest rate swaps are contractual agreements whereby one party pays a floating interest rate on a notional principal amount and receives a fixed-rate payment on the same notional principal, or vice versa, for a fixed period of time. The Company enters into interest rate swap contracts primarily to mitigate interest rate risk. The Company is subject to interest rate risk exposure in the normal course of pursuing its investment objectives. Swaps change in value with movements in interest rates or total return of the reference securities. During the term of swap contracts, changes in value are recognized as unrealized gains or losses on the Consolidated Statement of Operations. When a contract is terminated, the Company realizes a gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Company's basis in the contract, if any. Periodic payments or receipts required by swap agreements are recorded as unrealized gains or losses when accrued and realized gains or losses when received or paid. Upfront payments paid and/or received by the Company to open swap contracts are recorded as an asset and/or liability on the Consolidated Balance Sheet and are recorded as a realized gain or loss on the termination date. TBA Securities: The Company transacts in the forward settling TBA market. A TBA position is a forward contract for the purchase ("long position") or sale ("short position") of Agency RMBS at a predetermined price, face amount, issuer, coupon, and maturity on an agreed-upon future delivery date. For each TBA contract and delivery month, a uniform settlement date for all market participants is determined by the Securities Industry and Financial Markets Association. The specific Agency RMBS to be delivered into the contract at the settlement date are not known at the time of the transaction. The Company typically does not take delivery of TBAs, but rather enters into offsetting transactions and settles the associated receivable and payable balances with its counterparties. The Company uses TBAs to mitigate interest rate risk, usually by taking short positions. The Company also invests in TBAs as a means of acquiring additional exposure to Agency RMBS, or for speculative purposes, including holding long positions. 83 TBAs are accounted for by the Company as financial derivatives. The difference between the contract price and the fair value of the TBA position as of the reporting date is included in Change in net unrealized gains (losses) on financial derivatives in the Consolidated Statement of Operations. Upon settlement of the TBA contract, the realized gain (loss) on the TBA contract is equal to the net cash amount received (paid). Options : The Company enters into swaption contracts. It may purchase or write put, call, straddle, or other similar options contracts. The Company enters into options contracts primarily to help mitigate interest rate risk. When the Company purchases an options contract, the option asset is initially recorded at an amount equal to the premium paid, if any, and is subsequently marked-to-market. Premiums paid for purchasing options contracts that expire unexercised are recognized on the expiration date as realized losses. If an options contract is exercised, the premium paid is subtracted from the proceeds of the sale or added to the cost of the purchase to determine whether the Company has realized a gain or loss on the related investment transaction. When the Company writes an options contract, the option liability is initially recorded at an amount equal to the premium received, if any, and is subsequently marked-to-market. Premiums received for writing options contracts that expire unexercised are recognized on the expiration date as realized gains. If an options contract is exercised, the premium received is subtracted from the cost of the purchase or added to the proceeds of the sale to determine whether the Company has realized a gain or loss on the related investment transaction. When the Company enters into a closing transaction, the Company will realize a gain or loss depending upon whether the amount from the closing transaction is greater or less than the premiums paid or received. In general, the Company's options contracts contain forward-settling premiums. In this case, no money is exchanged upfront; instead, the agreed-upon premium is paid by the buyer upon expiration of the options contract, regardless of whether or not the options contract is exercised. Unrealized gains or (losses) resulting from the options contract being marked-to-market are included in Change in net unrealized gains (losses) on financial derivatives in the Consolidated Statement of Operations. Realized gains or (losses) are included in Net realized gains (losses) on financial derivatives on the Consolidated Statement of Operations. Futures Contracts : The Company enters into Eurodollar futures contracts and U.S. Treasury futures contracts. A futures contract is an exchange-traded agreement to buy or sell an asset for a set price on a future date. 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. Unrealized gains or (losses) are included in Change in net unrealized gains (losses) on financial derivatives in the Consolidated Statement of Operations. Variation margin payments are made or received periodically, depending upon whether unrealized losses or gains are incurred. When the contract is closed, the Company records a realized gain or loss equal to the difference between the proceeds of the closing transaction and the Company's basis in the contract. Realized gains or (losses) are included in Net realized gains (losses) on financial derivatives on the Consolidated Statement of Operations. Financial derivative assets are included in Financial derivatives–assets, at fair value on the Consolidated Balance Sheet while financial derivative liabilities are included in Financial derivatives–liabilities, at fair value on the Consolidated Balance Sheet. The Company has chosen to elect the FVO for its financial derivatives. Electing the FVO allows the Company to record changes in fair value in the Consolidated Statement of Operations, which, in management's view, more appropriately reflects the results of operations for a particular reporting period as all securities activities will be recorded in a similar manner. Changes in unrealized gains and losses on financial derivatives are included in Change in net unrealized gains (losses) on financial derivatives, on the Consolidated Statement of Operations. Realized gains and losses on financial derivatives are included in Net realized gains (losses) on financial derivatives on the Consolidated Statement of Operations. (H) Repurchase Agreements: The Company enters into repurchase agreements with third-party broker-dealers, whereby it sells securities under agreements to repurchase at an agreed upon price and date. The Company accounts for repurchase agreements as collateralized borrowings, with the initial sale price representing the amount borrowed, and with the future repurchase price consisting of the amount borrowed plus interest, at the implied interest rate of the repurchase agreement, on the amount borrowed over the term of the repurchase agreement. The interest rate on a 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. When the Company enters into a repurchase agreement, the lender establishes and maintains an account containing cash and/or securities having a value not less than the repurchase price, including accrued interest, of the repurchase agreement. Repurchase agreements are carried at their contractual amounts, which approximate fair value due to their short-term nature. (I) Reverse Repurchase Agreements: 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 84 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. Repurchase and reverse repurchase agreements that are conducted with the same counterparty can be reported on a net basis if they meet the requirements of ASC 210-20, Balance Sheet Offsetting . There are currently no repurchase and reverse repurchase agreements reported on a net basis in the Company's consolidated financial statements. (J) Securities Sold Short: The Company may purchase or engage in short sales of U.S. Treasury securities to mitigate the potential impact of changes in interest rates on the performance of its portfolio. When the Company sells securities short, it typically satisfies its security delivery settlement obligation by borrowing or purchasing the security sold short from the same or a different counterparty. When borrowing a security sold short from a counterparty, the Company generally is required to deliver cash or securities to such counterparty as collateral for the Company's obligation to return the borrowed security. The Company has chosen to make the fair value election pursuant to ASC 825-10, Financial Instruments , for its securities sold short. Electing the FVO allows the Company to record changes in fair value in the Consolidated Statement of Operations, which, in management's view, more appropriately reflects the results of operations for a particular reporting period as all securities activities will be recorded in a similar manner. As such, securities sold short are recorded at fair value on the Consolidated Balance Sheet and the period change in fair value is recorded in current period earnings on the Consolidated Statement of Operations as a component of Change in net unrealized gains (losses) on securities. A realized gain or loss will be recognized upon the termination of a short sale if the market price is less or greater than the original sale price. Such realized gain or loss is recorded on the Company's Consolidated Statement of Operations in Net realized gains (losses) on securities. (K) Offering Costs/Deferred Offering Costs/Underwriters' Discounts: Offering costs, underwriters' discounts and commissions and fees, are charged against shareholders' equity within Additional paid-in-capital. Offering costs typically include legal, accounting, and other fees associated with the cost of raising equity capital. (L) Share Based Compensation: The Company applies the provisions of ASC 718, Compensation—Stock Compensation ("ASC 718"), with regard to its equity incentive plan. 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. The cost is measured based on the fair value, at the grant date, of the equity or liability instruments issued and is amortized over the vesting period. Restricted shares issued to the Company's independent trustees and partially dedicated personnel are participating securities and receive dividends prior to vesting. Fair value for such awards is based on the closing stock price on the New York Stock Exchange at the grant date. The vesting period for restricted share awards is typically one to two years . Shares issued to the Company's independent trustees and partially dedicated personnel are subject to tax withholding upon vesting. The Company's independent trustees and partially dedicated personnel are permitted to forfeit a portion of their vested shares to pay such withholding tax. Forfeited shares decrease the total number of shares issued and outstanding and are immediately retired upon settlement. (M) Dividends: Dividends payable are recorded on the declaration date. (N) Expenses: Expenses are recognized as incurred on the Consolidated Statement of Operations. (O) Earnings Per Share: In accordance with the provisions of ASC 260, Earnings per Share , the Company calculates basic income (loss) per share by dividing net income (loss) for the period by the weighted average of the Company's common shares outstanding for that period. Diluted income (loss) per share takes into account the effect of dilutive instruments, such as share options and warrants, and uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted average number of shares outstanding. (P) Share Repurchases: Common shares that are repurchased by the Company subsequent to issuance are immediately retired upon settlement and decrease the total number of shares issued and outstanding. The cost of such share repurchases is charged against Additional paid-in-capital on the Company's Consolidated Balance Sheet. (Q) Income Taxes: The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Code. As a REIT, the Company is generally not subject to corporate-level federal and state income tax on net income it distributes to its shareholders within the prescribed timeframes. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including distributing at least 90 % of its annual taxable income to shareholders. Even if the Company qualifies as a REIT, it may be subject to certain federal, state, local and foreign taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income. If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, it will be subject to U.S. federal, state, and local income taxes and may be precluded from qualifying as a REIT for the four taxable years following the year in which the Company fails to qualify as a REIT. 85 The Company follows the authoritative guidance on accounting for and disclosure of uncertainty on tax positions, which requires management to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For uncertain tax positions, the tax benefit to be recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The Company did not have any unrecognized tax benefits resulting from tax positions related to the current period or its open tax years (2019, 2020, 2021, and 2022). In the normal course of business, the Company may be subject to examination by federal, state, local, and foreign jurisdictions, where applicable, for the current period and its open tax years. The Company 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 of such positions, the Company might be found to have a tax liability that has not been recorded in the accompanying consolidated financial statements. Also, management's conclusions regarding the authoritative guidance may be subject to review and adjustment at a later date based on changing tax laws, regulations, and interpretations thereof. There were no amounts accrued for penalties or interest as of or during the periods presented in these consolidated financial statements. 3. Mortgage-Backed Securities The following tables present details of the Company's mortgage-backed securities portfolio at December 31, 2022 and 2021. The Company's Agency RMBS include mortgage pass-through certificates and CMOs representing interests in or obligations backed by pools of residential mortgage loans issued or guaranteed by a U.S. government agency or government-sponsored enterprise, or "GSE." The non-Agency RMBS portfolio is not issued or guaranteed by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or any agency of the U.S. Government and is therefore subject to greater credit risk. By RMBS Type December 31, 2022: ($ in thousands) Gross Unrealized Weighted Average Current Principal Unamortized Premium (Discount) Amortized Cost Gains Losses Fair Value Coupon (1) Yield Life (Years) (2) Agency RMBS: 15-year fixed-rate mortgages $ 47,453 $ 1,446 $ 48,899 $ — $ ( 3,575 ) $ 45,324 3.23 % 2.31 % 3.71 20-year fixed-rate mortgages 10,812 696 11,508 — ( 1,817 ) 9,691 2.84 % 1.77 % 6.72 30-year fixed-rate mortgages 841,823 7,345 849,168 1,316 ( 68,730 ) 781,754 3.65 % 3.38 % 8.38 Adjustable rate mortgages 8,696 899 9,595 — ( 932 ) 8,663 3.58 % 2.37 % 4.50 Reverse mortgages 17,506 2,153 19,659 — ( 1,807 ) 17,852 4.06 % 2.73 % 4.70 Interest only securities n/a n/a 9,212 581 ( 480 ) 9,313 3.89 % 10.56 % 6.63 Total Agency RMBS 926,290 12,539 948,041 1,897 ( 77,341 ) 872,597 3.65 % 3.35 % 7.99 Non-Agency RMBS: Principal and interest securities 16,895 ( 4,481 ) 12,414 879 ( 727 ) 12,566 5.26 % 6.65 % 7.18 Interest only securities n/a n/a 6,289 1,849 — 8,138 0.24 % 17.94 % 9.58 Total Non-Agency RMBS 16,895 ( 4,481 ) 18,703 2,728 ( 727 ) 20,704 0.36 % 10.45 % 8.12 Total RMBS $ 943,185 $ 8,058 $ 966,744 $ 4,625 $ ( 78,068 ) $ 893,301 2.26 % 3.49 % 7.99 (1) Weighted average coupon represents the weighted average pass-through rates of the securities rather than the weighted average gross mortgage rates of the underlying collateral. (2) Average lives of RMBS are generally shorter than stated contractual maturities. Average lives are affected by the contractual maturities of the underlying mortgages, scheduled periodic payments of principal, and unscheduled prepayments of principal. 86 December 31, 2021: ($ in thousands) Gross Unrealized Weighted Average Current Principal Unamortized Premium (Discount) Amortized Cost Gains Losses Fair Value Coupon (1) Yield Life (Years) (2) Agency RMBS: 15-year fixed-rate mortgages $ 125,033 $ 5,066 $ 130,099 $ 1,488 $ ( 877 ) $ 130,710 2.78 % 1.69 % 4.18 20-year fixed-rate mortgages 35,732 1,479 37,211 34 ( 898 ) 36,347 2.31 % 1.50 % 5.96 30-year fixed-rate mortgages 1,027,843 38,504 1,066,347 13,672 ( 7,115 ) 1,072,904 3.03 % 2.37 % 4.97 Adjustable rate mortgages 11,491 543 12,034 59 ( 133 ) 11,960 2.82 % 2.21 % 4.23 Reverse mortgages 35,313 2,339 37,652 242 ( 597 ) 37,297 3.33 % 2.27 % 4.24 Interest only securities n/a n/a 12,983 95 ( 2,789 ) 10,289 3.36 % 5.34 % 3.87 Total Agency RMBS 1,235,412 47,931 1,296,326 15,590 ( 12,409 ) 1,299,507 3.02 % 2.31 % 4.81 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 (1) Weighted average coupon represents the weighted average pass-through rates of the securities rather than the weighted average gross mortgage rates of the underlying collateral. (2) Average lives of RMBS are generally shorter than stated contractual maturities. Average lives are affected by the contractual maturities of the underlying mortgages, scheduled periodic payments of principal, and unscheduled prepayments of principal. By Estimated Weighted Average Life As of December 31, 2022 ($ in thousands) Agency RMBS Agency Interest Only Securities Non-Agency RMBS Estimated Weighted Average Life (1) Fair Value Amortized Cost Weighted Average Coupon (2) Fair Value Amortized Cost Weighted Average Coupon (2) Fair Value Amortized Cost Weighted Average Coupon (2) Less than three years $ 17,005 $ 17,868 3.80 % $ 797 $ 882 4.03 % $ 2,099 $ 2,092 5.67 % Greater than three years and less than seven years 204,858 221,291 4.10 % 3,937 3,827 4.13 % 1,889 1,763 4.67 % Greater than seven years and less than eleven years 640,207 698,391 3.48 % 4,579 4,503 3.61 % 16,049 14,848 0.32 % Greater than eleven years 1,214 1,279 4.50 % — — — % 667 — 4.71 % Total $ 863,284 $ 938,829 3.63 % $ 9,313 $ 9,212 3.89 % $ 20,704 $ 18,703 0.36 % (1) Average lives of RMBS are generally shorter than stated contractual maturities. (2) Weighted average coupon represents the weighted average pass-through rates of the securities rather than the weighted average gross mortgage rates of the underlying collateral. 87 As of December 31, 2021: ($ in thousands) Agency RMBS Agency Interest Only Securities Non-Agency RMBS Estimated Weighted Average Life (1) Fair Value Amortized Cost Weighted Average Coupon (2) Fair Value Amortized Cost Weighted Average Coupon (2) Fair Value Amortized Cost Weighted Average Coupon (2) Less than three years $ 28,443 $ 28,273 3.75 % $ 1,628 $ 2,027 2.10 % $ 561 $ 457 6.00 % Greater than three years and less than seven years 724,996 718,318 3.53 % 7,820 10,095 4.38 % 1,773 1,571 0.35 % Greater than seven years and less than eleven years 280,147 281,786 2.50 % 841 861 2.39 % 9,520 7,890 0.25 % Greater than eleven years 255,632 254,966 2.00 % — — — % — — — % Total $ 1,289,218 $ 1,283,343 2.99 % $ 10,289 $ 12,983 3.36 % $ 11,854 $ 9,918 0.30 % (1) Average lives of RMBS are generally shorter than stated contractual maturities. (2) Weighted average coupon represents the weighted average pass-through rates of the securities rather than the weighted average gross mortgage rates of the underlying collateral. The following tables reflect the components of interest income on the Company's RMBS for the years ended December 31, 2022 and 2021: Year Ended December 31, 2022 Year Ended December 31, 2021 ($ in thousands) Coupon Interest Net Amortization Interest Income Coupon Interest Net Amortization Interest Income Agency RMBS $ 35,721 $ ( 3,855 ) $ 31,866 $ 39,159 $ ( 11,662 ) $ 27,497 Non-Agency RMBS 1,887 ( 329 ) 1,558 210 547 757 Total $ 37,608 $ ( 4,184 ) $ 33,424 $ 39,369 $ ( 11,115 ) $ 28,254 For the years ended December 31, 2022 and 2021, the Catch-up Premium Amortization Adjustment was $ 3.1 million and $ 1.7 million, respectively. At December 31, 2022, the Company had gross unrealized losses on RMBS of $( 78.1 ) million, of which $( 0.2 ) million relates primarily to adverse changes in estimated future cash flows on Agency IOs. 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. The Company determined for certain securities that a portion of such securities' cost basis is not collectible; for the years ended December 31, 2022 and 2021, the Company recognized realized losses on such securities of $( 1.6 ) million and $( 1.2 ) million, respectively. Such realized losses are reflected in Net realized gains (losses) on securities, on the Consolidated Statement of Operations. 88 4. Valuation The following tables present the Company's financial instruments measured at fair value on: December 31, 2022: (In thousands) Description Level 1 Level 2 Level 3 Total Assets: Mortgage-backed securities, at fair value: Agency RMBS: 15-year fixed-rate mortgages $ — $ 45,324 $ — $ 45,324 20-year fixed-rate mortgages — 9,691 — 9,691 30-year fixed-rate mortgages — 781,754 — 781,754 Adjustable rate mortgages — 8,663 — 8,663 Reverse mortgages — 17,852 — 17,852 Interest only securities — 5,228 4,085 9,313 Non-Agency RMBS — 8,870 11,834 20,704 Mortgage-backed securities, at fair value — 877,382 15,919 893,301 Other investments, at fair value: Preferred equity securities 208 — — 208 Total other investments, at fair value 208 — — 208 Financial derivatives–assets, at fair value: TBAs — 3,568 — 3,568 Interest rate swaps — 65,202 — 65,202 Total financial derivatives–assets, at fair value — 68,770 — 68,770 Total mortgage-backed securities, other investments, and financial derivatives–assets, at fair value $ 208 $ 946,152 $ 15,919 $ 962,279 Liabilities: U.S. Treasury securities sold short, at fair value $ — $ ( 498 ) $ — $ ( 498 ) Financial derivatives–liabilities, at fair value: TBAs — ( 664 ) — ( 664 ) Interest rate swaps — ( 2,373 ) — ( 2,373 ) Futures ( 82 ) — — ( 82 ) Total financial derivatives–liabilities, at fair value ( 82 ) ( 3,037 ) — ( 3,119 ) Total U.S. Treasury securities sold short and financial derivatives–liabilities, at fair value $ ( 82 ) $ ( 3,535 ) $ — $ ( 3,617 ) 89 December 31, 2021: (In thousands) Description Level 1 Level 2 Level 3 Total Assets: Mortgage-backed securities, at fair value: Agency RMBS: 15-year fixed-rate mortgages $ — $ 130,710 $ — $ 130,710 20-year fixed-rate mortgages — 36,347 — 36,347 30-year fixed-rate mortgages — 1,072,904 — 1,072,904 Adjustable rate mortgages — 11,960 — 11,960 Reverse mortgages — 37,297 — 37,297 Interest only securities — 4,635 5,654 10,289 Non-Agency RMBS — 4,595 7,259 11,854 Mortgage-backed securities, at fair value — 1,298,448 12,913 1,311,361 Other investments, at fair value: Preferred equity securities 309 — — 309 Total other investments, at fair value 309 — — 309 Financial derivatives–assets, at fair value: TBAs — 908 — 908 Interest rate swaps — 5,454 — 5,454 Futures 276 — — 276 Total financial derivatives–assets, at fair value 276 6,362 — 6,638 Total mortgage-backed securities and financial derivatives–assets, at fair value $ 585 $ 1,304,810 $ 12,913 $ 1,318,308 Liabilities: U.S. Treasury securities sold short, at fair value $ — $ ( 117,195 ) $ — $ ( 117,195 ) Financial derivatives–liabilities, at fair value: TBAs — ( 350 ) — ( 350 ) Interest rate swaps — ( 608 ) — ( 608 ) Futures ( 145 ) — — ( 145 ) Total financial derivatives–liabilities, at fair value ( 145 ) ( 958 ) — ( 1,103 ) Total U.S. Treasury securities sold short and financial derivatives–liabilities, at fair value $ ( 145 ) $ ( 118,153 ) $ — $ ( 118,298 ) 90 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. Year Ended December 31, 2022: (In thousands) Non-Agency RMBS Agency RMBS Beginning balance as of December 31, 2021 $ 7,259 $ 5,654 Purchases 12,807 2,726 Proceeds from sales ( 6,502 ) ( 761 ) Principal repayments ( 128 ) ( 133 ) (Amortization)/accretion, net ( 71 ) ( 1,358 ) Net realized gains (losses) 23 ( 1,062 ) Change in net unrealized gains (losses) 82 1,748 Transfers: Transfers into level 3 3,060 621 Transfers out of level 3 ( 4,696 ) ( 3,350 ) Ending balance as of December 31, 2022 $ 11,834 $ 4,085 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, 2022, as well as Level 3 financial instruments disposed of by the Company during the year ended December 31, 2022. For Level 3 financial instruments held by the Company as of December 31, 2022, change in net unrealized gains (losses) of $ 0.3 million and $ 1.2 million, for the year ended December 31, 2022 relate to non-Agency RMBS and Agency RMBS, respectively. At December 31, 2022, the Company transferred $ 8.0 million of RMBS from Level 3 to Level 2 and $ 3.7 million of RMBS from Level 2 to Level 3. Transfers between hierarchy levels are based on the availability of sufficient observable inputs to meet Level 2 versus Level 3 criteria. The level designation of each financial instrument is reassessed at the end of each period, and is based on pricing information received from third party pricing sources. Year Ended December 31, 2021: (In thousands) Non-Agency RMBS Agency RMBS Beginning balance as of December 31, 2020 $ 13,296 $ 8,196 Purchases 2,701 1,845 Proceeds from sales ( 4,040 ) — Principal repayments ( 1,115 ) — (Amortization)/accretion, net 546 ( 2,566 ) Net realized gains (losses) 270 ( 1,043 ) Change in net unrealized gains (losses) ( 141 ) 172 Transfers: Transfers into level 3 337 1,055 Transfers out of level 3 ( 4,595 ) ( 2,005 ) Ending balance as of December 31, 2021 $ 7,259 $ 5,654 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 as of 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. At December 31, 2021, the Company transferred $ 6.6 million of RMBS from Level 3 to Level 2 and $ 1.4 million of RMBS from Level 2 to Level 3. Transfers between these hierarchy levels are based on the availability of sufficient observable inputs to meet Level 2 versus Level 3 criteria. The level designation of each financial instrument is reassessed at the end of each period, and is based on pricing information received from third party pricing sources. 91 The following tables identify the significant unobservable inputs that affect the valuation of the Company's Level 3 assets and liabilities as of December 31, 2022 and 2021: December 31, 2022: Range Description Fair Value Valuation Technique Significant Unobservable Input Min Max Weighted Average (1) (In thousands) Non-Agency RMBS $ 10,127 Market quotes Non-Binding Third-Party Valuation $ 0.75 $ 81.42 $ 34.63 1,707 Discounted Cash Flows $ 11,834 Yield 5.3 % 21.6 % 9.4 % Projected Collateral Prepayments 25.1 % 56.9 % 31.1 % Projected Collateral Losses 0.0 % 8.7 % 5.7 % Projected Collateral Recoveries 1.6 % 15.4 % 11.1 % Agency RMBS–Interest Only Securities 2,362 Market quotes Non-Binding Third-Party Valuation $ 13.94 $ 18.58 $ 17.62 1,723 Option Adjusted Spread ("OAS") LIBOR OAS (2)(3) 92 5,070 644 4,085 Projected Collateral Prepayments 21.2 % 76.6 % 51.5 % (1) Averages are weighted based on the fair value of the related instrument. (2) Shown in basis points. (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 $ 3 thousand. Including these securities, the weighted average was 641 basis points. December 31, 2021: Range Description Fair Value Valuation Technique Significant Unobservable Input Min Max Weighted Average (1) (In thousands) Non-Agency RMBS $ 2,643 Market quotes Non-Binding Third-Party Valuation $ 52.43 $ 92.28 $ 88.18 4,616 Discounted Cash Flows $ 7,259 Yield 2.2 % 31.8 % 6.0 % Projected Collateral Prepayments 35.7 % 79.1 % 49.2 % Projected Collateral Losses 0.0 % 9.2 % 5.9 % Projected Collateral Recoveries 1.1 % 14.0 % 9.3 % 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) Shown in basis points. (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. Third-party non-binding valuations are validated by comparing such valuations to internally generated prices based on the Company's models and, when available, to recent trading activity in the same or similar instruments. For those instruments valued using discounted cash flows, collateral prepayments, losses, recoveries, and scheduled amortization are projected over the remaining life of the collateral and expressed as a percentage of the collateral's current principal balance. 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 92 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. Material changes in any of the inputs above in isolation could result in a significant change to reported fair value measurements. Fair value measurements are impacted by the interrelationships of these inputs. For example, a higher expectation of collateral prepayments will generally result in a lower expectation of collateral losses. Conversely, higher losses will generally result in lower prepayments. The following table summarizes the estimated fair value of all other financial instruments not included in the disclosures above as of December 31, 2022 and 2021: December 31, 2022 December 31, 2021 (In thousands) Fair Value Carrying Value Fair Value Carrying Value Assets: Cash and cash equivalents $ 34,816 $ 34,816 $ 69,028 $ 69,028 Due from brokers 18,824 18,824 88,662 88,662 Reverse repurchase agreements 499 499 117,505 117,505 Liabilities: Repurchase agreements 842,455 842,455 1,064,835 1,064,835 Due to brokers 45,666 45,666 1,959 1,959 Cash and cash equivalents includes cash held in interest bearing overnight accounts, for which fair value equals the carrying value, and cash held in money market accounts, which are liquid in nature and for which fair value equals the carrying value; such assets are considered Level 1 assets. Due from brokers and Due to brokers include collateral transferred to or received from counterparties, along with receivables and payables for open and/or closed derivative positions. These receivables and payables are short term in nature and any collateral transferred consists primarily of cash; fair value of these items approximates carrying value and such items are considered Level 1 assets and liabilities. The Company's repurchase and reverse repurchase agreements are carried at cost, which approximates fair value due to their short term nature. Repurchase agreements and reverse repurchase agreements are classified as Level 2 assets and liabilities based on the adequacy of the collateral and their short term nature. 5. Financial Derivatives The Company is exposed to certain risks arising from both its business operations and economic conditions. 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 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. Additionally, from time to time, the Company may use short positions in U.S. Treasury securities to mitigate its interest rate risk. 93 The following table details the fair value of the Company's holdings of financial derivatives as of December 31, 2022 and 2021: December 31, 2022 December 31, 2021 (In thousands) 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, net $ 65,651 $ 5,535 Interest Rate Swaps The following tables provide information about the Company's fixed payer interest rate swaps as of December 31, 2022 and 2021: December 31, 2022: Weighted Average Maturity Notional Amount Fair Value Pay Rate Receive Rate Remaining Years to Maturity (In thousands) 2024 $ 76,575 $ 2,483 2.23 % 4.37 % 1.33 2025 59,505 4,914 0.82 4.65 2.30 2027 40,545 1,313 3.01 4.30 4.71 2028 56,338 6,210 1.64 4.42 5.60 2029 49,735 4,128 2.17 4.30 6.25 2030 97,200 6,816 2.50 4.30 7.42 2031 124,124 15,689 1.94 4.47 8.48 2032 104,377 14,525 1.74 4.30 9.13 2037 35,000 2,577 2.85 4.30 14.56 2040 500 171 0.90 4.33 17.82 2041 11,227 3,246 1.59 4.46 18.60 2049 3,633 1,058 1.89 4.32 26.83 2050 792 371 0.90 3.91 27.54 2052 10,000 1,701 2.28 4.30 29.31 Total $ 669,551 $ 65,202 2.03 % 4.38 % 7.35 94 December 31, 2021: Weighted Average Maturity Notional Amount Fair Value Pay Rate Receive Rate Remaining Years to Maturity (In thousands) 2022 $ 5,000 $ 12 0.05 % 0.08 % 0.08 2023 129,095 419 0.43 0.16 1.43 2024 14,700 193 0.30 0.16 2.13 2025 53,101 1,037 0.57 0.18 3.32 2027 472 ( 6 ) 1.61 0.18 5.91 2028 116,894 1,920 1.14 0.17 6.55 2031 61,024 891 1.34 0.17 9.54 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 The following tables provide information about the Company's fixed receiver interest rate swaps as of December 31, 2022 and 2021. December 31, 2022: Weighted Average Maturity Notional Amount Fair Value Pay Rate Receive Rate Remaining Years to Maturity (In thousands) 2032 $ 37,009 $ ( 2,198 ) 4.30 % 2.79 % 9.56 2040 500 ( 175 ) 4.30 0.84 17.82 Total $ 37,509 $ ( 2,373 ) 4.30 % 2.77 % 9.67 December 31, 2021: Weighted Average Maturity Notional Amount Fair Value Pay Rate Receive Rate Remaining Years to Maturity (In thousands) 2022 $ 5,000 $ ( 10 ) 0.05 % 0.06 % 0.80 2023 13,200 283 0.12 1.87 1.31 2026 11,500 ( 77 ) 0.16 1.14 4.78 2040 500 ( 50 ) 0.08 0.84 18.82 Total $ 30,200 $ 146 0.13 % 1.27 % 2.84 95 Futures The following tables provide information about the Company's futures as of December 31, 2022 and 2021. December 31, 2022: Description Notional Amount Fair Value Remaining Months to Expiration ($ in thousands) Liabilities: Long Contracts: U.S. Treasury Futures $ 64,300 $ ( 79 ) 2.80 Short Contracts: U.S. Treasury Futures ( 5,400 ) ( 3 ) 3.00 Total, net $ 58,900 $ ( 82 ) 2.81 December 31, 2021: Description Notional Amount Fair Value Remaining Months to Expiration ($ in thousands) Assets: Short Contracts: U.S. Treasury Futures $ ( 100,500 ) $ 276 3.00 Liabilities: Long Contracts: U.S. Treasury Futures 3,300 ( 29 ) 2.70 Short Contracts: U.S. Treasury Futures ( 153,500 ) ( 116 ) 2.70 Total, net $ ( 250,700 ) $ 131 2.82 TBAs The Company transacts in the forward settling TBA market. Pursuant to these TBA transactions, the Company agrees to purchase or sell, for future delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date. TBAs are generally liquid, have quoted market prices, and represent the most actively traded class of MBS. The Company uses TBAs to mitigate interest rate risk, usually by taking short positions. The Company also invests in TBAs as a means of acquiring additional exposure to Agency RMBS, or for speculative purposes, including holding long positions. The Company does not generally take delivery of TBAs; rather, it settles the associated receivable and payable with its trading counterparties on a net basis. Transactions with the same counterparty for the same TBA that result in a reduction of the position are treated as extinguished. 96 As of December 31, 2022 and 2021, the Company had outstanding contracts to purchase ("long positions") and sell ("short positions") TBA securities as follows: December 31, 2022 December 31, 2021 TBA Securities Notional Amount (1) Cost Basis (2) Market Value (3) Net Carrying Value (4) Notional Amount (1) Cost Basis (2) Market Value (3) Net Carrying Value (4) (In thousands) Purchase contracts: Assets $ — $ — $ — $ — $ 85,766 $ 88,324 $ 88,482 $ 158 Liabilities 81,759 81,498 80,834 ( 664 ) 130,641 132,419 132,237 ( 182 ) 81,759 81,498 80,834 ( 664 ) 216,407 220,743 220,719 ( 24 ) Sale contracts: Assets ( 258,253 ) ( 234,384 ) ( 230,816 ) 3,568 ( 255,987 ) ( 270,334 ) ( 269,584 ) 750 Liabilities — — — — ( 156,645 ) ( 164,510 ) ( 164,678 ) ( 168 ) ( 258,253 ) ( 234,384 ) ( 230,816 ) 3,568 ( 412,632 ) ( 434,844 ) ( 434,262 ) 582 Total TBA securities, net $ ( 176,494 ) $ ( 152,886 ) $ ( 149,982 ) $ 2,904 $ ( 196,225 ) $ ( 214,101 ) $ ( 213,543 ) $ 558 (1) Notional amount represents the principal balance of the underlying Agency RMBS. (2) Cost basis represents the forward price to be paid (received) for the underlying Agency RMBS. (3) Market value represents the current market value of the underlying Agency RMBS (on a forward delivery basis) as of period end. (4) Net carrying value represents the difference between the market value of the TBA contract as of period end and the cost basis and is reported in Financial derivatives-assets at fair value and Financial derivatives-liabilities at fair value on the Consolidated Balance Sheet. The table below details the average notional values of the Company's financial derivatives, using absolute value of month end notional values, for the years ended December 31, 2022 and 2021: Derivative Type Year Ended December 31, 2022 Year Ended December 31, 2021 (In thousands) Interest rate swaps $ 653,115 $ 422,905 TBAs 343,695 720,268 Futures 110,415 232,792 Gains and losses on the Company's financial derivatives for the years ended December 31, 2022 and 2021 are summarized in the tables below: Year Ended December 31, 2022 Derivative Type Net Realized Gains (Losses) on Periodic Settlements of Interest Rate Swaps Net Realized Gains (Losses) on Financial Derivatives Other Than Periodic Settlements of Interest Rate Swaps Net Realized Gains (Losses) on Financial Derivatives Change in Net Unrealized Gains (Losses) on Accrued Periodic Settlements of Interest Rate Swaps Change in Net Unrealized Gains (Losses) on Financial Derivatives Other Than on Accrued Periodic Settlements of Interest Rate Swaps Change in Net Unrealized Gains (Losses) on Financial Derivatives (In thousands) Interest rate swaps $ 626 $ 7,369 $ 7,995 $ 1,282 $ 55,119 $ 56,401 TBAs 19,893 19,893 2,345 2,345 Futures 21,108 21,108 ( 213 ) ( 213 ) Total $ 626 $ 48,370 $ 48,996 $ 1,282 $ 57,251 $ 58,533 97 Year Ended December 31, 2021 Derivative Type Net Realized Gains (Losses) on Periodic Settlements of Interest Rate Swaps Net Realized Gains (Losses) on Financial Derivatives Other Than Periodic Settlements of Interest Rate Swaps Net Realized Gains (Losses) on Financial Derivatives Change in Net Unrealized Gains (Losses) on Accrued Periodic Settlements of Interest Rate Swaps Change in Net Unrealized Gains (Losses) on Financial Derivatives Other Than on Accrued Periodic Settlements of Interest Rate Swaps Change in Net Unrealized Gains (Losses) on Financial Derivatives (In thousands) Interest rate swaps $ ( 1,856 ) $ ( 3,218 ) $ ( 5,074 ) $ ( 355 ) $ 8,940 $ 8,585 TBAs ( 1,150 ) ( 1,150 ) ( 463 ) ( 463 ) Futures 3,698 3,698 478 478 Total $ ( 1,856 ) $ ( 670 ) $ ( 2,526 ) $ ( 355 ) $ 8,955 $ 8,600 From time to time, the Company uses short positions in U.S. Treasury positions as a component of its interest rate hedging portfolio. As of December 31, 2022, the Company held short positions in U.S. Treasury securities, with a principal amount of $ 0.5 million and a fair value of $ 0.5 million. As of December 31, 2021, the Company held short positions in U.S. Treasury securities, with a principal amount of $ 118.8 million and a fair value of $ 117.2 million. 6. Borrowings under Repurchase Agreements The Company enters into repurchase agreements. A repurchase agreement involves the sale of an asset to a counterparty together with a simultaneous agreement to repurchase the transferred asset or similar asset from such counterparty at a future date. The Company accounts for its repurchase agreements as collateralized borrowings, with the transferred assets effectively serving as collateral for the related borrowing. The Company's repurchase agreements typically range in term from 30 to 364 days. The principal economic terms of each repurchase agreement—such as loan amount, interest rate, and maturity date—are typically negotiated on a transaction-by-transaction basis. Other terms and conditions, such as relating to events of default, are typically governed under the Company's master repurchase agreements. Absent an event of default, the Company maintains beneficial ownership of the transferred securities during the term of the repurchase agreement and receives the related principal and interest payments. Interest rates on these borrowings are generally fixed based on prevailing rates corresponding to the terms of the borrowings, and interest is paid at the termination of the repurchase agreement at which time the Company may enter into a new repurchase agreement at prevailing market rates with the same counterparty, repay that counterparty and possibly negotiate financing terms with a different counterparty, or choose to no longer finance the related asset. In response to a decline in the fair value of the transferred securities, whether as a result of changes in market conditions, security paydowns, or other factors, repurchase agreement counterparties will typically make a margin call, whereby the Company will be required to post additional securities and/or cash as collateral with the counterparty in order to re-establish the agreed-upon collateralization requirements. In the event of increases in fair value of the transferred securities, the Company generally can require the counterparty to post collateral with it in the form of cash or securities. The Company is generally permitted to sell or re-pledge any securities posted by the counterparty as collateral; however, upon termination of the repurchase agreement, or other circumstance in which the counterparty is no longer required to post such margin, the Company must return to the counterparty the same security that had been posted. The contractual amount (loan amount) of the Company's repurchase agreements approximates fair value, based on the short-term nature of the debt and the adequacy of the collateral. At any given time, the Company seeks to have its outstanding borrowings under repurchase agreements with several different counterparties in order to reduce the exposure to any single counterparty. As of December 31, 2022 and 2021, the Company had outstanding borrowings under repurchase agreements with 16 and 15 counterparties, respectively. 98 The following table details the Company's outstanding borrowings under repurchase agreements as of December 31, 2022 and 2021: 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 Agency RMBS: (In thousands) (In thousands) 30 days or less $ 559,178 4.00 % 14 $ 162,089 0.18 % 13 31-60 days 207,066 2.68 43 235,321 0.21 43 61-90 days 61,492 4.00 73 114,931 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 Agency RMBS 827,736 3.67 26 1,064,835 0.18 111 Non-Agency RMBS: 30 days or less 4,748 5.33 4 — — — 31-60 days 3,503 5.88 48 — — — 61-90 days 6,468 5.73 66 — — — Total Non-Agency RMBS 14,719 5.64 42 — — — Total $ 842,455 3.70 % 26 $ 1,064,835 0.18 % 111 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 December 31, 2022 and 2021, the fair value of RMBS transferred as collateral under outstanding borrowings under repurchase agreements was $ 0.9 billion and $ 1.0 billion, respectively. Collateral transferred under outstanding borrowings under repurchase agreements as of December 31, 2022 includes RMBS in the amount of $ 33.0 million that were sold prior to period end but for which such sale had not yet settled. In addition as of December 31, 2022 and 2021, the Company was posting to repurchase agreement counterparties net cash collateral of $ 10.3 million and $ 77.7 million, respectively, as a result of margin calls with various repurchase agreement counterparties. Amount at risk represents the excess, if any, for each counterparty of the fair value of collateral held by such counterparty over the amounts outstanding under repurchase agreements. There was no counterparty for which the amount at risk was greater than 10 % of shareholders' equity as of either December 31, 2022 or 2021. 7. Offsetting of Assets and Liabilities The Company records certain financial instruments at fair value as described in Note 2. In connection with its financial derivatives, repurchase agreements, and related trading agreements, the Company and its counterparties are required to pledge collateral. Cash or other collateral is exchanged as required with each of the Company's counterparties in connection with open derivative positions and repurchase agreements. 99 The following tables present information about certain assets and liabilities representing financial instruments as of December 31, 2022 and 2021. The Company has not previously entered into master netting agreements with any of its counterparties. Certain of the Company's repurchase and reverse repurchase agreements and financial derivative transactions are governed by underlying agreements that generally provide a right of net settlement, as well as a right of offset in the event of default or in the event of a bankruptcy of either party to the transaction. December 31, 2022: Description Amount of Assets (Liabilities) Presented in the Consolidated Balance Sheet (1) Financial Instruments Available for Offset Financial Instruments Transferred or Pledged as Collateral (2)(3) Cash Collateral (Received) Pledged (2)(3) Net Amount (In thousands) Assets: Financial derivatives–assets $ 68,770 $ ( 2,995 ) $ — $ ( 41,453 ) $ 24,322 Reverse repurchase agreements 499 ( 499 ) — — — Liabilities: Financial derivatives–liabilities ( 3,119 ) 2,995 — — ( 124 ) Repurchase agreements ( 842,455 ) 499 831,685 10,271 — (1) In the Company's Consolidated Balance Sheet, all balances associated with repurchase and reverse repurchase agreements and financial derivatives are presented on a gross basis. (2) For the purpose of this presentation, for each row the total amount of financial instruments transferred or pledged and cash collateral (received) or pledged may not exceed the applicable gross amount of assets or (liabilities) as presented here. Therefore, the Company has reduced the amount of financial instruments transferred or pledged as collateral related to the Company's repurchase agreements and cash collateral pledged on the Company's financial derivative assets and liabilities. Total financial instruments transferred or pledged as collateral on the Company's repurchase agreements as of December 31, 2022 were $ 882.0 million. As of December 31, 2022 total cash collateral (received) pledged on financial derivative assets excludes $ 4.3 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. As a result, in preparing the above table, the Company has made assumptions in allocating pledged or posted collateral among the various rows. December 31, 2021: Description Amount of Assets (Liabilities) Presented in the Consolidated Balance Sheet (1) Financial Instruments Available for Offset Financial Instruments Transferred or Pledged as Collateral (2)(3) Cash Collateral (Received) Pledged (2)(3) Net Amount (In thousands) Assets: Financial derivatives–assets $ 6,638 $ ( 820 ) $ — $ — $ 5,818 Reverse repurchase agreements 117,505 ( 31,306 ) ( 86,199 ) — — Liabilities: Financial derivatives–liabilities ( 1,103 ) 820 — 271 ( 12 ) Repurchase agreements ( 1,064,835 ) 31,306 955,842 77,687 — (1) In the Company's Consolidated Balance Sheet, all balances associated with repurchase and reverse repurchase agreements and financial derivatives are presented on a gross basis. (2) For the purpose of this presentation, for each row the total amount of financial instruments transferred or pledged and cash collateral (received) or pledged may not exceed the applicable gross amount of assets or (liabilities) as presented here. Therefore, the Company has reduced the amount of financial instruments transferred or pledged as collateral related to the Company's repurchase agreements and cash collateral pledged on the Company's financial derivative assets and liabilities. 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, 2021 total cash collateral 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. As a result, in preparing the above table, the Company has made assumptions in allocating pledged or posted collateral among the various rows. 100 8. Earnings Per Share Basic earnings per share, or "EPS," is calculated by dividing net income (loss) for the period by the weighted average of the Company's common shares outstanding for the period. Diluted EPS takes into account the effect of outstanding dilutive instruments, such as share options and warrants, if any, and uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted average number of shares outstanding. As of December 31, 2022 and 2021, the Company did not have any dilutive instruments outstanding. The following table presents a reconciliation of the earnings/(losses) and shares used in calculating basic EPS for the years ended December 31, 2022 and 2021: Year Ended (In thousands except for share amounts) December 31, 2022 December 31, 2021 Numerator: Net income (loss) $ ( 30,198 ) $ ( 6,309 ) Denominator: Basic and diluted weighted average shares outstanding 13,163,106 12,683,761 Basic and diluted earnings per share $ ( 2.29 ) $ ( 0.50 ) 9. Related Party Transactions Management Agreement The Company is party to the Management Agreement, which has a current term that expires on September 24, 2023, and has been, and is expected to be, renewed automatically each year thereafter for an additional one-year period, subject to certain termination rights. The Company is externally managed and advised by the Manager. Pursuant to the terms of the Management Agreement, the Manager provides the Company with its management team, including its officers, and appropriate support personnel. The Company does not have any employees. The Manager is responsible for the day-to-day operations of the Company. The Manager receives an annual management fee in an amount equal to 1.50 % per annum of shareholders' equity (as defined in the Management Agreement) as of the end of each fiscal quarter (before deductions for any management fee with respect to such fiscal period). The management fee is payable quarterly in arrears. For the years ended December 31, 2022 and 2021, the total management fee incurred was $ 1.8 million and $ 2.4 million, respectively. Services Agreement The Manager and EMG are parties to a services agreement, pursuant to which EMG is required to provide to the Manager sufficient personnel, services, and resources to enable the Manager to carry out its obligations and responsibilities under the Management Agreement. The Company is a named third-party beneficiary to the services agreement and, as a result, has, as a non-exclusive remedy, a direct right of action against EMG in the event of any breach by the Manager of any of its duties, obligations, or agreements under the Management Agreement that arise out of or result from any breach by EMG of its obligations under the services agreement. The services agreement will terminate upon the termination of the Management Agreement. Pursuant to the services agreement, the Manager makes certain payments to EMG in connection with the services provided. The Manager and EMG have overlapping ownership and are under common control. Expense Reimbursement Under the terms of the Management Agreement, the Company is required to reimburse the Manager for operating expenses related to the Company that are incurred by the Manager, including expenses relating to legal, accounting, due diligence, other services, and all other costs and expenses. The Company's reimbursement obligation is not subject to any dollar limitation. Expenses will be reimbursed in cash within 60 days following delivery of the expense statement by the Manager; provided, however, that such reimbursement may be offset by the Manager against amounts due to the Company from the Manager. 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, 101 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, 2022 and 2021, the Company reimbursed the Manager $ 2.3 million and $ 2.5 million, respectively, for previously incurred operating and compensation expenses. As of both December 31, 2022 and 2021, the outstanding payable to the Manager for operating and compensation expenses was $ 0.4 million and is included in Accrued expenses on the Consolidated Balance Sheet. Termination Fee The Management Agreement requires the Company to pay a termination fee to the Manager in the event of (1) the Company's termination or non-renewal of the Management Agreement without cause or (2) the Manager's termination of the Management Agreement upon a default by the Company in the performance of any material term of the Management Agreement. Such termination fee will be equal to 5 % of Shareholders' Equity, as defined in the Management Agreement as of the month-end preceding the date of the notice of termination or non-renewal of the Management Agreement. 10. Capital 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. The Board of Trustees may authorize the issuance of additional shares of either class. As of December 31, 2022 and 2021, there were 13,377,840 and 13,109,926 common shares outstanding, respectively. No preferred shares have been issued. 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, 2022 and 2021: Year Ended December 31, 2022 December 31, 2021 Common Shares Outstanding (12/31/2021 and 12/31/2020, respectively) 13,109,926 12,343,542 Share Activity: Common shares issued 268,780 738,269 Restricted common shares issued 39,155 28,115 Common shares repurchased ( 40,021 ) — Common Shares Outstanding (12/31/2022 and 12/31/2021, respectively) 13,377,840 13,109,926 Unvested restricted shares outstanding (12/31/2022 and 12/31/2021, respectively) 44,804 32,567 The below table provides details on the Company's restricted shares granted pursuant to share award agreements which are unvested at December 31, 2022: Grant Recipient Number of Restricted Shares Granted Grant Date Vesting Date (1) Independent trustees: 27,044 September 13, 2022 September 12, 2023 Partially dedicated employees: 5,649 December 16, 2021 December 16, 2023 6,056 December 15, 2022 December 15, 2023 6,055 December 15, 2022 December 15, 2024 (1) Date at which such restricted shares will vest and become non-forfeitable. As of December 31, 2022 and 2021, there were 237,740 and 268,831 shares available for future issuance under the Company's 2013 Equity Incentive Plan, respectively. 102 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. The program, which is open-ended in duration, allows the Company to make repurchases from time to time on the open market or in negotiated transactions, including through Rule 10b5-1 plans. Repurchases are at the Company's discretion, subject to applicable law, share availability, price and its financial performance, among other considerations. During the year ended December 31, 2022, the Company repurchased 40,021 of its common shares at an aggregate cost of $ 0.3 million, and an average price per share of $ 6.56 . From inception of the current share repurchase program adopted on June 13, 2018 through December 31, 2022, the Company repurchased 474,192 of its common shares at an aggregate cost of $ 4.4 million, and an average price per share of $ 9.21 . 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, 2022, the Company issued 268,780 common shares under the ATM program which provided $ 2.0 million of net proceeds after $ 0.1 million of agent commissions and offering costs. From commencement of the ATM program through December 31, 2022, the Company issued 432,049 common shares under the ATM program. Distribution Policy The timing and frequency of distributions will be determined by the Board of Trustees based upon a variety of factors deemed relevant by the Company's trustees, including restrictions under applicable law, capital requirements of the Company, and the REIT requirements of the Code. Distributions to shareholders generally will be taxable as ordinary income, although a portion of such distributions may be designated as long-term capital gain or qualified dividend income, or may constitute a return of capital. The Company will furnish annually to each shareholder a statement setting forth distributions paid or deemed paid during the preceding year and their U.S. federal income tax treatment. It is the intention of the Company to distribute at least 100 % of its REIT taxable income, after application of available tax attributes, within the time limits prescribed by the Internal Revenue Code, which may extend into the subsequent taxable year. 11. Commitments and Contingencies From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of business. The Company provides current trustees and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Company. In the normal course of business the Company may also enter into contracts that contain a variety of representations, warranties, and general indemnifications. The Company's maximum exposure under these arrangements, including future claims that may be made against the Company that have not yet occurred, is unknown. The Company has not incurred any costs to defend lawsuits or settle claims related to these indemnification agreements. The Company has no liabilities recorded for these agreements as of December 31, 2022 and 2021 and management is not aware of any significant contingencies at December 31, 2022. 12. Subsequent Events 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 . 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 . 103 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None.