Orchid Island Capital, Inc. 10-K

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information and Holders Our common stock trades on the NYSE under the symbol “ORC.” As of February 23, 2024, we had 51,303,301 shares of common stock issued and outstanding which were held by 13 stockholders of record and approximately 57,500 beneficial owners whose shares were held in “street name” by brokers and depository institutions. Dividend Distribution Policy We intend to continue to make regular monthly cash distributions to our stockholders, as more fully described below. To maintain our qualification as a REIT, we must distribute annually to our stockholders an amount at least equal to 90% of our REIT taxable income, determined without regard to the deductions for dividends paid and excluding any net capital gain. We will be subject to income tax on our taxable income that is not distributed and to an excise tax to the extent that certain percentages of our taxable income are not distributed by specified dates. Income as computed for purposes of the foregoing tax rules will not necessarily correspond to our income as determined for financial reporting purposes pursuant to GAAP. Any additional distributions we make will be authorized by and at the discretion of our Board of Directors based upon a variety of factors deemed relevant by our directors, which may include: ● actual results of operations; ● our financial condition; ● our level of retained cash flows; ● our capital requirements; ● any debt service requirements; ● our taxable income; ● the annual distribution requirements under the REIT provisions of the Code; ● applicable provisions of Maryland law; and ● other factors that our Board of Directors may deem relevant. We have not established a minimum distribution payment level, and we cannot assure you of our ability to make distributions to our stockholders in the future. Our charter authorizes us to issue preferred stock that could have a preference over our common stock with respect to distributions. If we issue any preferred stock, the distribution preference on the preferred stock could limit our ability to make distributions to the holders of our common stock. Our ability to make distributions to our stockholders will depend upon the performance of our investment portfolio, and, in turn, upon our Manager’s management of our business. To the extent that our cash available for distribution is less than the amount required to be distributed under the REIT provisions of the Code, we may consider various funding sources to cover any shortfall, including selling certain of our assets, borrowing funds or using a portion of the net proceeds we receive in future securities offerings (and thus all or a portion of such distributions may constitute a return of capital for U.S. federal income tax purposes). We also may elect to pay all or a portion of any distribution in the form of a taxable distribution of our stock or debt securities. In addition, our Board of Directors may change our distribution policy in the future. 40 Table of Contents Performance Graph Set forth below is a graph comparing the yearly percentage change in the cumulative total return on our common stock, with the cumulative total return of the S&P 500 Total Return Index, the FTSE NAREIT Mortgage REIT Index and an index of selected issuers in our Agency REIT Peer Group (composed of AGNC Investment Corp., Annaly Capital Management, Inc., ARMOUR Residential REIT, Inc., Cherry Hill Mortgage Investment Corporation and Dynex Capital, Inc.) for the period beginning December 31, 2018, and ending December 31, 2023, assuming the investment of $100 on December 31, 2018 and the reinvestment of dividends. The information in the performance chart and the table below has been obtained from sources believed to be reliable, but its accuracy nor its completeness can be guaranteed. The historical information set forth below is not necessarily indicative of future performance. 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022 12/31/2023 Orchid Island Capital, Inc. 100.00 106.86 112.47 112.63 62.93 61.01 Agency REIT Peer Group 100.00 102.20 90.93 92.41 73.83 80.55 NAREIT Mortgage REIT TRR Index 100.00 121.33 98.56 113.97 83.64 96.48 S&P 500 Total Return Index 100.00 131.49 155.68 200.37 164.08 207.21 Securities Authorized for Issuance under Equity Compensation Plans Information about securities authorized for issuance under our equity compensation plans required for this Item 5 is incorporated by reference to our definitive Proxy Statement to be filed in connection with our 2024 annual meeting of stockholders. Unregistered Sales of Equity Securities The Company did not issue or sell equity securities that were not registered under the Securities Act during the year ended December 31, 2023. Issuer Purchases of Equity Securities On July 29, 2015, the Company's Board of Directors authorized the repurchase of up to 400,000 shares of the Company's common stock. On February 8, 2018, the Board of Directors approved an increase in the stock repurchase program for up to an additional 904,564 shares of the Company's common stock. On December 9, 2021, the Board of Directors approved an increase in the number of shares of the Company’s common stock available in the stock repurchase program for up to an additional 3,372,399 shares. On October 12, 2022, the Board of Directors approved an increase in the stock repurchase program for up to an additional 4,300,000 shares of the Company's common stock, bringing the remaining authorization under the stock repurchase program to up to 6,183,601 shares, representing approximately 18% of the Company’s then outstanding shares of common stock. Unless modified or revoked by the Board, the authorization does not expire. 41 Table of Contents The table below presents the Company's share repurchase activity for the three months ended December 31, 2023. Maximum Number of Shares Shares That Total Weighted- Purchased as May Yet Be Number Average Part of Publicly Repurchased of Shares Price Paid Announced Under the Repurchased (1) Per Share Programs Authorization October 1, 2023 - October 31, 2023 - $ - - 4,928,350 November 1, 2023 - November 30, 2023 - $ - - 4,928,350 December 1, 2023 - December 31, 2023 700,691 $ 7.81 699,748 4,228,602 Totals / Weighted Average 700,691 $ 7.81 699,748 4,228,602 (1) Includes 943 shares of the Company’s common stock acquired by the Company in connection with the satisfaction of tax withholding obligations on vested employment related awards under equity incentive plans. These repurchases do not reduce the number of shares available under the stock repurchase program authorization. ITEM 6. RESERVED. 42 Table of Contents ITEM 7. MANAGEMENT ’ S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes to those statements included in Item 8 of this Form 10-K. The discussion may contain certain forward-looking statements that involve risks and uncertainties. Forward-looking statements are those that are not historical in nature. As a result of many factors, such as those set forth under “Risk Factors” in this Form 10-K, our actual results may differ materially from those anticipated in such forward-looking statements. Common Stock Reverse Split On August 30, 2022, the Company effected a 1-for-5 reverse stock split of its common stock and proportionately decreased the number of authorized shares of common stock. All share and per share information has been retroactively adjusted to reflect the reverse split. Overview We are a specialty finance company that invests in residential mortgage-backed securities (“RMBS”) which are issued and guaranteed by a federally chartered corporation or agency (“Agency RMBS”). Our investment strategy focuses on, and our portfolio consists of, two categories of Agency RMBS: (i) traditional pass-through Agency RMBS, such as mortgage pass-through certificates issued by the Federal National Mortgage Association ("Fannie Mae"), the Federal Home Loan Mortgage Corporation ("Freddie Mac" and together with Fannie Mae, the "Enterprises") or the Government National Mortgage Association ("Ginnie Mae" and, together with the Enterprises the “GSEs”) and collateralized mortgage obligations (“CMOs”) issued by the GSEs (“PT RMBS”) and (ii) structured Agency RMBS, such as interest-only securities (“IOs”), inverse interest-only securities (“IIOs”) and principal only securities (“POs”), among other types of structured Agency RMBS. We were formed by Bimini Capital Management, Inc. ("Bimini") in August 2010, commenced operations on November 24, 2010 and completed our initial public offering (“IPO”) on February 20, 2013. We are externally managed by Bimini Advisors, LLC ("Bimini Advisors," or our "Manager"), an investment adviser registered with the Securities and Exchange Commission (the “SEC”). Our business objective is to provide attractive risk-adjusted total returns over the long term through a combination of capital appreciation and the payment of regular monthly distributions. We intend to achieve this objective by investing in and strategically allocating capital between the two categories of Agency RMBS described above. We seek to generate income from (i) the net interest margin on our leveraged PT RMBS portfolio and the leveraged portion of our structured Agency RMBS portfolio, and (ii) the interest income we generate from the unleveraged portion of our structured Agency RMBS portfolio. We intend to fund our PT RMBS and certain of our structured Agency RMBS through short-term borrowings structured as repurchase agreements. PT RMBS and structured Agency RMBS typically exhibit materially different sensitivities to movements in interest rates. Declines in the value of one portfolio may be offset by appreciation in the other. The percentage of capital that we allocate to our two Agency RMBS asset categories will vary and will be actively managed in an effort to maintain the level of income generated by the combined portfolios, the stability of that income stream and the stability of the value of the combined portfolios. We believe that this strategy will enhance our liquidity, earnings, book value stability and asset selection opportunities in various interest rate environments. We operate so as to qualify to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). We generally will not be subject to U.S. federal income tax to the extent that we currently distribute all of our REIT taxable income (as defined in the Code) to our stockholders and maintain our REIT qualification. The Company’s common stock trades on the New York Stock Exchange under the symbol “ORC”. Capital Raising Activities On August 4, 2020, we entered into an equity distribution agreement (the “August 2020 Equity Distribution Agreement”) with four sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $150,000,000 of shares of our common stock in transactions that were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total of 5,498,730 shares under the August 2020 Equity Distribution Agreement for aggregate gross proceeds of approximately $150.0 million, and net proceeds of approximately $147.4 million, after commissions and fees, prior to its termination in June 2021. 43 Table of Contents On January 20, 2021, we entered into an underwriting agreement (the “January 2021 Underwriting Agreement”) with J.P. Morgan Securities LLC (“J.P. Morgan”), relating to the offer and sale of 1,520,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from the Company pursuant to the January 2021 Underwriting Agreement at $26.00 per share. In addition, we granted J.P. Morgan a 30-day option to purchase up to an additional 228,000 shares of our common stock on the same terms and conditions, which J.P. Morgan exercised in full on January 21, 2021. The closing of the offering of 1,748,000 shares of our common stock occurred on January 25, 2021, with proceeds to us of approximately $45.2 million, net of offering expenses. On March 2, 2021, we entered into an underwriting agreement (the “March 2021 Underwriting Agreement”) with J.P. Morgan, relating to the offer and sale of 1,600,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from the Company pursuant to the March 2021 Underwriting Agreement at $27.25 per share. In addition, we granted J.P. Morgan a 30-day option to purchase up to an additional 240,000 shares of our common stock on the same terms and conditions, which J.P. Morgan exercised in full on March 3, 2021. The closing of the offering of 1,840,000 shares of our common stock occurred on March 5, 2021, with proceeds to us of approximately $50.0 million, net of offering expenses. On June 22, 2021, we entered into an equity distribution agreement (the “June 2021 Equity Distribution Agreement”) with four sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $250,000,000 of shares of our common stock in transactions that were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total of 9,881,467 shares under the June 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately $250.0 million, and net proceeds of approximately $246.2 million, after commissions and fees, prior to its termination in October 2021. On October 29, 2021, we entered into an equity distribution agreement (the “October 2021 Equity Distribution Agreement”) with four sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $250,000,000 of shares of our common stock in transactions that were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total of 9,742,188 shares under the October 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately $151.8 million, and net proceeds of approximately $149.3 million, after commissions and fees, prior to its termination in March 2023. On March 7, 2023, we entered into an equity distribution agreement (the “March 2023 Equity Distribution Agreement”) with three sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate amount of $250,000,000 of shares of our common stock in transactions that are deemed to be “at the market” offerings and privately negotiated transactions. Through December 31, 2023, we issued a total of 13,190,039 shares under the March 2023 Equity Distribution Agreement for aggregate gross proceeds of approximately $129.9 million, and net proceeds of approximately $127.8 million, after commissions and fees. Stock Repurchase Program On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to 400,000 shares of our common stock. The timing, manner, price and amount of any repurchases is determined by the Company in its discretion and is subject to economic and market conditions, stock price, applicable legal requirements and other factors. The authorization does not obligate the Company to acquire any particular amount of common stock and the program may be suspended or discontinued at the Company’s discretion without prior notice. On February 8, 2018, the Board of Directors approved an increase in the stock repurchase program for up to an additional 904,564 shares of the Company’s common stock. Coupled with the 156,751 shares remaining from the original 400,000 share authorization, the increased authorization brought the total authorization to 1,061,315 shares, representing 10% of the then outstanding share count. On December 9, 2021, the Board of Directors approved an increase in the number of shares of the Company’s common stock available in the stock repurchase program for up to an additional 3,372,399 shares, bringing the remaining authorization under the stock repurchase program to 3,539,861 shares, representing approximately 10% of the Company’s then outstanding shares of common stock. On October 12, 2022, the Board of Directors approved an increase in the number of shares of the Company’s common stock available in the stock repurchase program for up to an additional 4,300,000 shares, bringing the remaining authorization under the stock repurchase program to 6,183,601 shares, representing approximately 18% of the Company’s then outstanding shares of common stock. This stock repurchase program has no termination date. 44 Table of Contents From the inception of the stock repurchase program through December 31, 2023, the Company repurchased a total of 4,748,361 shares at an aggregate cost of approximately $74.2 million, including commissions and fees, for a weighted average price of $15.63 per share. During the year ended December 31, 2023, the Company repurchased a total of 1,072,789 shares of its common stock at an aggregate cost of approximately $9.4 million, including commissions and fees, for a weighted average price of $8.79 per share. Subsequent to December 31, 2023, and through February 23, 2024, the Company repurchased a total of 332,773 shares at an aggregate cost of approximately $2.8 million, including commissions and fees, for a weighted average price of $8.35 per share. Factors that Affect our Results of Operations and Financial Condition A variety of industry and economic factors may impact our results of operations and financial condition. These factors include: ● interest rate trends; ● increases in our cost of funds resulting from increases in the Federal Funds rate that are controlled by the Federal Reserve (the "Fed") that occurred in 2022 and 2023; ● the difference between Agency RMBS yields and our funding and hedging costs; ● competition for, and supply of, investments in Agency RMBS; ● actions taken by the U.S. government, including the presidential administration, the Fed, the Federal Housing Financing Agency (the “FHFA”), the Federal Deposit Insurance Corporation (the "FDIC"), the Federal Housing Administration (the “FHA”), the Federal Open Market Committee (the “FOMC”) and the U.S. Treasury; ● prepayment rates on mortgages underlying our Agency RMBS and credit trends insofar as they affect prepayment rates; and ● other market developments, including bank failures. In addition, a variety of factors relating to our business may also impact our results of operations and financial condition. These factors include: ● our degree of leverage; ● our access to funding and borrowing capacity; ● our borrowing costs; ● our hedging activities; ● the market value of our investments; and ● the requirements to maintain our qualification as a REIT and the requirements to qualify for a registration exemption under the Investment Company Act. Results of Operations Described below are the Company’s results of operations for the year ended December 31, 2023, as compared to the Company’s results of operations for the years ended December 31, 2022 and 2021. Net Loss Summary Net loss for the year ended December 31, 2023 was $39.2 million, or $0.89 per share. Net loss for the year ended December 31, 2022 was $258.5 million, or $6.90 per share. Net loss for the year ended December 31, 2021 was $64.8 million, or $2.67 per share. The components of net loss for the years ended December 31, 2023, 2022 and 2021 are presented in the table below: (in thousands) 2023 2022 2021 Interest income $ 177,569 $ 144,633 $ 134,700 Interest expense (201,918 ) (61,708 ) (7,090 ) Net interest income (24,349 ) 82,925 127,610 Gains (losses) on RMBS and derivative contracts 3,654 (323,929 ) (177,504 ) Net portfolio loss (20,695 ) (241,004 ) (49,894 ) Expenses (18,531 ) (17,449 ) (14,866 ) Net loss $ (39,226 ) $ (258,453 ) $ (64,760 ) 45 Table of Contents GAAP and Non-GAAP Reconciliations In addition to the results presented in accordance with GAAP, our results of operations discussed below include certain non-GAAP financial information, including “Net Earnings Excluding Realized and Unrealized Gains and Losses”, “Economic Interest Expense”, “Economic Net Interest Income,” “Interest Income – Inclusive of Premium Amortization/Discount Accretion” and “Yield on Average RMBS – Inclusive of Premium Amortization/Discount Accretion.” Net Earnings Excluding Realized and Unrealized Gains and Losses We have elected to account for our Agency RMBS under the fair value option. Securities held under the fair value option are recorded at estimated fair value, with changes in the fair value recorded as unrealized gains or losses through the statements of comprehensive income (loss). In addition, we have not designated our derivative financial instruments used for hedging purposes as hedges for accounting purposes, but rather hold them for economic hedging purposes. Changes in fair value of these instruments are presented in a separate line item in the Company’s statements of comprehensive income (loss) and are not included in interest expense. As such, for financial reporting purposes, interest expense and cost of funds are not impacted by the fluctuation in value of the derivative instruments. Presenting net earnings excluding realized and unrealized gains and losses allows management to: (i) isolate the net interest income and other expenses of the Company over time, free of all fair value adjustments and (ii) assess the effectiveness of our funding and hedging strategies on our capital allocation decisions and our asset allocation performance. Our funding and hedging strategies, capital allocation and asset selection are integral to our risk management strategy, and therefore critical to the management of our portfolio. We believe that the presentation of our net earnings excluding realized and unrealized gains is useful to investors because it provides a means of comparing our results of operations to those of our peers who have not elected the same accounting treatment. Our presentation of net earnings excluding realized and unrealized gains and losses may not be comparable to similarly-titled measures of other companies, who may use different calculations. As a result, net earnings excluding realized and unrealized gains and losses should not be considered as a substitute for our GAAP net income (loss) as a measure of our financial performance or any measure of our liquidity under GAAP. The table below presents a reconciliation of our net income (loss) determined in accordance with GAAP and net earnings excluding realized and unrealized gains and losses. Described below are the Company's results of operations for the years ended December 31, 2023, 2022 and 2021. Net Earnings (Loss) Excluding Realized and Unrealized Gains and Losses (in thousands, except per share data) Per Share Net Net Earnings Earnings (Loss) (Loss) Excluding Excluding Net Realized and Realized and Net Realized and Realized and Income Unrealized Unrealized Income Unrealized Unrealized (Loss) Gains and Gains and (Loss) Gains and Gains and (GAAP) Losses (1) Losses (GAAP) Losses (1) Losses Three Months Ended December 31, 2023 $ 27,127 $ 33,977 $ (6,850 ) $ 0.52 $ 0.65 $ (0.13 ) September 30, 2023 (80,132 ) (66,890 ) (13,242 ) (1.68 ) (1.40 ) (0.28 ) June 30, 2023 10,249 23,828 (13,579 ) 0.25 0.59 (0.34 ) March 31, 2023 3,530 12,739 (9,209 ) 0.09 0.33 (0.24 ) December 31, 2022 34,926 36,727 (1,801 ) 0.95 1.00 (0.05 ) September 30, 2022 (84,513 ) (94,433 ) 9,920 (2.40 ) (2.68 ) 0.28 June 30, 2022 (60,139 ) (82,673 ) 22,534 (1.70 ) (2.33 ) 0.63 March 31, 2022 (148,727 ) (183,550 ) 34,823 (4.20 ) (5.19 ) 0.99 December 31, 2021 (44,564 ) (82,709 ) 38,145 (1.33 ) (2.46 ) 1.13 September 30, 2021 26,038 (2,957 ) 28,995 1.01 (0.11 ) 1.12 June 30, 2021 (16,865 ) (40,926 ) 24,061 (0.85 ) (2.06 ) 1.21 March 31, 2021 (29,369 ) (50,912 ) 21,543 (1.72 ) (2.98 ) 1.26 Years Ended December 31, 2023 $ (39,226 ) $ 3,654 $ (42,880 ) $ (0.89 ) $ 0.08 $ (0.97 ) December 31, 2022 (258,453 ) (323,929 ) 65,476 (6.90 ) (8.65 ) 1.75 December 31, 2021 (64,760 ) (177,504 ) 112,744 (2.67 ) (7.33 ) 4.66 (1) Includes realized and unrealized gains (losses) on RMBS and derivative financial instruments, including net interest income or expense on interest rate swaps. 46 Table of Contents Prior to 2023, we included certain expenses related to our derivative instruments in "Direct REIT operating expenses" in the statements of comprehensive income (loss). Beginning in 2023, we have included these expenses in "Gains (losses) on derivative and hedging instruments." Prior period amounts have been reclassified to conform with the current presentation. The table below presents the effect of this reclassification for each quarter in 2022 and 2021. Realized and Unrealized Gains and Losses - Reclassification of Derivative Transaction Expenses (in thousands, except per share data) Net Earnings (Loss) Excluding Realized and Unrealized Realized and Unrealized Gains and Losses Gains and Losses Prior Reclassified Current Prior Reclassified Current Presentation Expenses Presentation Presentation Expenses Presentation Three Months Ended December 31, 2022 $ 38,389 $ (1,662 ) $ 36,727 $ (3,463 ) $ (1,662 ) $ (1,801 ) September 30, 2022 (93,544 ) (889 ) (94,433 ) 9,031 (889 ) 9,920 June 30, 2022 (82,282 ) (391 ) (82,673 ) 22,143 (391 ) 22,534 March 31, 2022 (183,232 ) (318 ) (183,550 ) 34,505 (318 ) 34,823 December 31, 2021 (82,597 ) (112 ) (82,709 ) 38,033 (112 ) 38,145 September 30, 2021 (2,887 ) (70 ) (2,957 ) 28,925 (70 ) 28,995 June 30, 2021 (40,844 ) (82 ) (40,926 ) 23,979 (82 ) 24,061 March 31, 2021 (50,791 ) (121 ) (50,912 ) 21,422 (121 ) 21,543 Per Share Three Months Ended December 31, 2022 $ 1.04 $ (0.04 ) $ 1.00 $ (0.09 ) $ (0.04 ) $ (0.05 ) September 30, 2022 (2.66 ) (0.02 ) (2.68 ) 0.26 (0.02 ) 0.28 June 30, 2022 (2.32 ) (0.01 ) (2.33 ) 0.62 (0.01 ) 0.63 March 31, 2022 (5.18 ) (0.01 ) (5.19 ) 0.98 (0.01 ) 0.99 December 31, 2021 (2.46 ) - (2.46 ) 1.13 - 1.13 September 30, 2021 (0.11 ) - (0.11 ) 1.12 - 1.12 June 30, 2021 (2.05 ) (0.01 ) (2.06 ) 1.20 (0.01 ) 1.21 March 31, 2021 (2.98 ) - (2.98 ) 1.26 - 1.26 Economic Interest Expense and Economic Net Interest Income We use derivative and other hedging instruments, specifically Fed Funds, SOFR and T-Note futures contracts, short positions in U.S. Treasury securities, interest rate caps, interest rate swaps and swaptions, to hedge a portion of the interest rate risk on repurchase agreements in a rising rate environment. We have not elected to designate our derivative holdings for hedge accounting treatment. Changes in fair value of these instruments are presented in a separate line item in our statements of comprehensive income (loss) and not included in interest expense. As such, for financial reporting purposes, interest expense and cost of funds are not impacted by the fluctuation in value of the derivative instruments. For the purpose of computing economic net interest income and ratios relating to cost of funds measures, GAAP interest expense has been adjusted to reflect the realized and unrealized gains or losses on certain derivative instruments the Company uses, specifically Fed Funds, SOFR and T-Note futures, and interest rate swaps and swaptions, that pertain to each period presented. We believe that adjusting our interest expense for the periods presented by the gains or losses on these derivative instruments would not accurately reflect our economic interest expense for these periods. The reason is that these derivative instruments may cover periods that extend into the future, not just the current period. Any realized or unrealized gains or losses on the instruments reflect the change in market value of the instrument caused by changes in underlying interest rates applicable to the term covered by the instrument, not just the current period. For each period presented, we have combined the effects of the derivative financial instruments in place for the respective period with the actual interest expense incurred on borrowings to reflect total economic interest expense for the applicable period. Interest expense, including the effect of derivative instruments for the period, is referred to as economic interest expense. Net interest income, when calculated to include the effect of derivative instruments for the period, is referred to as economic net interest income. This presentation includes gains or losses on all contracts in effect during the reporting period, covering the current period as well as periods in the future. 47 Table of Contents From time to time, we invest in TBAs, which are forward contracts for the purchase or sale of Agency RMBS at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific Agency RMBS to be delivered into the contract are not known until shortly before the settlement date. We may choose, prior to settlement, to move the settlement of these securities out to a later date by entering into a dollar roll transaction. The Agency RMBS purchased or sold for a forward settlement date are typically priced at a discount to equivalent securities settling in the current month. Consequently, forward purchases of Agency RMBS and dollar roll transactions represent a form of off-balance sheet financing. These TBAs are accounted for as derivatives and marked to market through the income statement. Gains or losses on TBAs are included with gains or losses on other derivative contracts and are not included in interest income for purposes of the discussions below. We believe that economic interest expense and economic net interest income provide meaningful information to consider, in addition to the respective amounts prepared in accordance with GAAP. The non-GAAP measures help management to evaluate its financial position and performance without the effects of certain transactions and GAAP adjustments that are not necessarily indicative of our current investment portfolio or operations. The unrealized gains or losses on derivative instruments presented in our statements of comprehensive income (loss) are not necessarily representative of the total interest rate expense that we will ultimately realize. This is because as interest rates move up or down in the future, the gains or losses we ultimately realize, and which will affect our total interest rate expense in future periods, may differ from the unrealized gains or losses recognized as of the reporting date. Our presentation of the economic value of our hedging strategy has important limitations. First, other market participants may calculate economic interest expense and economic net interest income differently than the way we calculate them. Second, while we believe that the calculation of the economic value of our hedging strategy described above helps to present our financial position and performance, it may be of limited usefulness as an analytical tool. Therefore, the economic value of our investment strategy should not be viewed in isolation and is not a substitute for interest expense and net interest income computed in accordance with GAAP. The tables below present a reconciliation of the adjustments to interest expense shown for each period relative to our derivative instruments, and the income statement line item, gains (losses) on derivative instruments, calculated in accordance with GAAP for the years ended December 31, 2023, 2022 and 2021 and each quarter during 2023, 2022 and 2021. Gains (Losses) on Derivative Instruments (in thousands) Economic Hedges Recognized in Attributed to Attributed to Income TBA Securities Gain (Loss) Current Future Statement Short Long Period Periods (GAAP) Positions Positions (Non-GAAP) (Non-GAAP) Three Months Ended December 31, 2023 $ (149,016 ) $ (29,750 ) $ (2,262 ) $ 25,161 $ (142,165 ) September 30, 2023 142,042 21,511 (2,024 ) 24,440 98,115 June 30, 2023 93,367 15,599 (574 ) 23,482 54,860 March 31, 2023 (41,156 ) (5,990 ) - 19,211 (54,377 ) December 31, 2022 (12,319 ) (9,700 ) - 9,414 (12,033 ) September 30, 2022 183,930 10,642 106 4,154 169,028 June 30, 2022 103,367 1,013 1,067 1,605 99,682 March 31, 2022 177,498 2,539 27 (1,605 ) 176,537 December 31, 2021 10,833 2,568 - (8,061 ) 16,326 September 30, 2021 5,305 (2,306 ) - (1,318 ) 8,929 June 30, 2021 (34,997 ) (5,963 ) - (5,186 ) (23,848 ) March 31, 2021 45,351 9,133 (8,559 ) (4,165 ) 48,942 Years Ended December 31, 2023 $ 45,237 $ 1,370 $ (4,860 ) $ 92,294 $ (43,567 ) December 31, 2022 452,476 4,494 1,200 13,568 433,214 December 31, 2021 26,492 3,432 (8,559 ) (18,730 ) 50,349 48 Table of Contents The table below presents the effect of the reclassification of derivative expenses discussed above for each quarter in 2022 and 2021. Gains (Losses) on Derivative Instruments - Reclassification of Derivative Transaction Expenses (in thousands) Recognized in Income Statement Attributed to Current Period Prior Reclassified Current Prior Reclassified Current Presentation Expenses Presentation Presentation Expenses Presentation Three Months Ended December 31, 2022 $ (10,657 ) $ 1,662 $ (12,319 ) $ 11,076 $ 1,662 $ 9,414 September 30, 2022 184,819 889 183,930 5,043 889 4,154 June 30, 2022 103,758 391 103,367 1,996 391 1,605 March 31, 2022 177,816 318 177,498 (1,287 ) 318 (1,605 ) December 31, 2021 10,945 112 10,833 (7,949 ) 112 (8,061 ) September 30, 2021 5,375 70 5,305 (1,248 ) 70 (1,318 ) June 30, 2021 (34,915 ) 82 (34,997 ) (5,104 ) 82 (5,186 ) March 31, 2021 45,472 121 45,351 (4,044 ) 121 (4,165 ) Economic Interest Expense and Economic Net Interest Income (in thousands) Interest Expense on Borrowings Gains (Losses) on Derivative Instruments Net Interest Income GAAP Attributed Economic GAAP Economic Interest Interest to Current Interest Net Interest Net Interest Income Expense Period (1) Expense (2) Income Income (3) Three Months Ended December 31, 2023 $ 49,539 $ 52,325 $ 25,161 $ 27,164 $ (2,786 ) $ 22,375 September 30, 2023 50,107 58,705 24,440 34,265 (8,598 ) 15,842 June 30, 2023 39,911 48,671 23,482 25,189 (8,760 ) 14,722 March 31, 2023 38,012 42,217 19,211 23,006 (4,205 ) 15,006 December 31, 2022 31,897 29,512 9,414 20,098 2,385 11,799 September 30, 2022 35,611 21,361 4,154 17,207 14,250 18,404 June 30, 2022 35,268 8,180 1,605 6,575 27,088 28,693 March 31, 2022 41,857 2,655 (1,605 ) 4,260 39,202 37,597 December 31, 2021 44,421 2,023 (8,061 ) 10,084 42,398 34,337 September 30, 2021 34,169 1,570 (1,318 ) 2,888 32,599 31,281 June 30, 2021 29,254 1,556 (5,186 ) 6,742 27,698 22,512 March 31, 2021 26,856 1,941 (4,165 ) 6,106 24,915 20,750 Years Ended December 31, 2023 $ 177,569 $ 201,918 $ 92,294 $ 109,624 $ (24,349 ) $ 67,945 December 31, 2022 144,633 61,708 13,568 48,140 82,925 96,493 December 31, 2021 134,700 7,090 (18,730 ) 25,820 127,610 108,880 (1) Reflects the effect of derivative instrument hedges for only the period presented. (2) Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP interest expense. (3) Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP net interest income. Net Interest Income During the year ended December 31, 2023, we generated $24.4 million of net interest expense, consisting of $177.6 million of interest income from RMBS assets offset by $201.9 million of interest expense on borrowings. For the comparable period ended December 31, 2022, we generated $82.9 million of net interest income, consisting of $144.6 million of interest income from RMBS assets offset by $61.7 million of interest expense on borrowings. The $32.9 million increase in interest income was driven by an 83 basis points ("bps") increase in yield on average RMBS that was partially offset by a $34.3 million decrease in average RMBS. The $140.2 million increase in interest expense for the year ended December 31, 2023 was driven by a 354 bps increase in the average cost of funds, offset by a $57.0 million decrease in average borrowings. 49 Table of Contents For the year ended December 31, 2021, we generated $127.6 million of net interest income, consisting of $134.7 million of interest income from RMBS assets offset by $7.1 million of interest expense on borrowings. The $9.9 million increase in interest income for the year ended December 31, 2022, compared to the year ended December 31, 2021, was due to a 72 bps increase in yield on average RMBS, that was partially offset by a $745.5 million decrease in average RMBS. The $54.6 million increase in interest expense for the year ended December 31, 2022 was due to a 138 bps increase in the average cost of funds, partially offset by a $665.5 million decrease in average borrowings. On an economic basis, our interest expense on borrowings for the years ended December 31, 2023, 2022 and 2021 was $109.6 million, $48.1 million and $25.8 million, respectively, resulting in $68.0 million, $96.5 million and $108.9 million of economic net interest income, respectively. The tables below provide information on our portfolio average balances, interest income, yield on assets, average borrowings, interest expense, cost of funds, net interest income and net interest spread for each quarter in 2023, 2022 and 2021 and for the years ended December 31, 2023, 2022 and 2021 on both a GAAP and economic basis. ($ in thousands) Average Yield on Interest Expense Average Cost of Funds RMBS Interest Average Average GAAP Economic GAAP Economic Held (1) Income RMBS Borrowings (1) Basis Basis (2) Basis Basis (3) Three Months Ended December 31, 2023 $ 4,207,118 $ 49,539 4.71 % $ 4,066,298 $ 52,325 $ 27,164 5.15 % 2.67 % September 30, 2023 4,447,098 50,107 4.51 % 4,314,332 58,705 34,265 5.44 % 3.18 % June 30, 2023 4,186,939 39,911 3.81 % 3,985,577 48,671 25,189 4.88 % 2.53 % March 31, 2023 3,769,954 38,012 4.03 % 3,573,941 42,217 23,006 4.72 % 2.57 % December 31, 2022 3,370,608 31,897 3.79 % 3,256,153 29,512 20,098 3.63 % 2.47 % September 30, 2022 3,571,037 35,611 3.99 % 3,446,420 21,361 17,207 2.48 % 2.00 % June 30, 2022 4,260,727 35,268 3.31 % 4,111,544 8,180 6,575 0.80 % 0.64 % March 31, 2022 5,545,844 41,857 3.02 % 5,354,107 2,655 4,260 0.20 % 0.32 % December 31, 2021 6,056,259 44,421 2.93 % 5,728,988 2,023 10,084 0.14 % 0.70 % September 30, 2021 5,136,331 34,169 2.66 % 4,864,287 1,570 2,888 0.13 % 0.24 % June 30, 2021 4,504,887 29,254 2.60 % 4,348,192 1,556 6,742 0.14 % 0.62 % March 31, 2021 4,032,716 26,856 2.66 % 3,888,633 1,941 6,106 0.20 % 0.63 % Years Ended December 31, 2023 $ 4,152,777 $ 177,569 4.28 % $ 3,985,037 $ 201,918 $ 109,624 5.07 % 2.75 % December 31, 2022 4,187,054 144,633 3.45 % 4,042,056 61,708 48,140 1.53 % 1.19 % December 31, 2021 4,932,548 134,700 2.73 % 4,707,525 7,090 25,820 0.15 % 0.55 % 50 Table of Contents ($ in thousands) Net Interest Income Net Interest Spread GAAP Economic GAAP Economic Basis Basis (2) Basis Basis (4) Three Months Ended December 31, 2023 $ (2,786 ) $ 22,375 (0.44 )% 2.04 % September 30, 2023 (8,598 ) 15,842 (0.93 )% 1.33 % June 30, 2023 (8,760 ) 14,722 (1.07 )% 1.28 % March 31, 2023 (4,205 ) 15,006 (0.69 )% 1.46 % December 31, 2022 2,385 11,799 0.16 % 1.32 % September 30, 2022 14,250 18,404 1.51 % 1.99 % June 30, 2022 27,088 28,693 2.51 % 2.67 % March 31, 2022 39,202 37,597 2.82 % 2.70 % December 31, 2021 42,398 34,337 2.79 % 2.23 % September 30, 2021 32,599 31,281 2.53 % 2.42 % June 30, 2021 27,698 22,512 2.46 % 1.98 % March 31, 2021 24,915 20,750 2.46 % 2.03 % Years Ended December 31, 2023 $ (24,349 ) $ 67,945 (0.79 )% 1.53 % December 31, 2022 82,925 96,493 1.92 % 2.26 % December 31, 2021 127,610 108,880 2.58 % 2.18 % (1) Portfolio yields and costs of borrowings presented in the tables above and the tables on pages 51 and 52 are calculated based on the average balances of the underlying investment portfolio/borrowings balances and are annualized for the periods presented. Average balances for quarterly periods are calculated using two data points, the beginning and ending balances. (2) Economic interest expense and economic net interest income presented in the table above and the tables on page 52 includes the effect of our derivative instrument hedges for only the periods presented. (3) Represents interest cost of our borrowings and the effect of derivative instrument hedges attributed to the period divided by average RMBS. (4) Economic net interest spread is calculated by subtracting average economic cost of funds from realized yield on average RMBS. Average Asset Yield The table below presents the average portfolio size, income and yields of our respective sub-portfolios, consisting of structured RMBS and PT RMBS for the years ended December 31, 2023, 2022 and 2021 and for each quarter during 2023, 2022 and 2021. ($ in thousands) Average RMBS Held Interest Income Realized Yield on Average RMBS PT Structured PT Structured PT Structured RMBS RMBS Total RMBS RMBS Total RMBS RMBS Total Three Months Ended December 31, 2023 $ 4,189,599 $ 17,519 $ 4,207,118 $ 49,135 $ 404 $ 49,539 4.69 % 9.21 % 4.71 % September 30, 2023 4,429,159 17,939 4,447,098 49,661 446 50,107 4.48 % 9.96 % 4.51 % June 30, 2023 4,168,333 18,606 4,186,939 39,495 416 39,911 3.79 % 8.95 % 3.81 % March 31, 2023 3,750,184 19,770 3,769,954 37,594 418 38,012 4.01 % 8.44 % 4.03 % December 31, 2022 3,335,154 35,454 3,370,608 31,204 693 31,897 3.74 % 7.83 % 3.79 % September 30, 2022 3,458,277 112,760 3,571,037 32,298 3,313 35,611 3.74 % 11.75 % 3.99 % June 30, 2022 4,069,334 191,393 4,260,727 31,894 3,374 35,268 3.14 % 7.05 % 3.31 % March 31, 2022 5,335,353 210,491 5,545,844 40,066 1,791 41,857 3.00 % 3.40 % 3.02 % December 31, 2021 5,878,376 177,883 6,056,259 42,673 1,748 44,421 2.90 % 3.93 % 2.93 % September 30, 2021 5,016,550 119,781 5,136,331 33,111 1,058 34,169 2.64 % 3.53 % 2.66 % June 30, 2021 4,436,135 68,752 4,504,887 29,286 (32 ) 29,254 2.64 % (0.18 )% 2.60 % March 31, 2021 3,997,965 34,751 4,032,716 26,869 (13 ) 26,856 2.69 % (0.15 )% 2.66 % Years Ended December 31, 2023 $ 4,134,319 $ 18,459 $ 4,152,778 $ 175,885 $ 1,684 $ 177,569 4.25 % 9.12 % 4.28 % December 31, 2022 4,049,530 137,524 4,187,054 135,462 9,171 144,633 3.35 % 6.67 % 3.45 % December 31, 2021 4,832,257 100,291 4,932,548 131,939 2,761 134,700 2.73 % 2.75 % 2.73 % 51 Table of Contents Interest Expense and the Cost of Funds We had average outstanding borrowings of $3,985.0 million and $4,042.1 million and total interest expense of $201.9 million and $61.7 million for the years ended December 31, 2023 and 2022, respectively. Our average cost of funds was 5.07% for the year ended December 31, 2023, compared to 1.53% for the comparable period in 2022. There was a $57.0 million decrease in average outstanding borrowings during the year ended December 31, 2023 as compared to the year ended December 31, 2022. For the year ended December 31, 2021, we had average borrowings of $4,707.5 million and total interest expense of $7.1 million, resulting in an average cost of funds of 0.15%. There was a 138 bps increase in the average cost of funds and an $665.5 million decrease in average outstanding borrowings during the year ended December 31, 2022 as compared to the year ended December 31, 2021. Our economic interest expense was $109.6 million, $48.1 million and $25.8 million for the years ended December 31, 2023, 2022 and 2021, respectively. There was a 156 bps increase in the average economic cost of funds to 2.75% for the year ended December 31, 2023 from 1.19% for the year ended December 31, 2022. The reason for the increase in economic cost of funds is primarily due to the higher cost of our borrowings noted above, offset by the positive performance of our hedging activities during the period. There was a 64 bps increase in the average economic cost of funds to 1.19% for the year ended December 31, 2022 from 0.55% for the year ended December 31, 2021. Since all of our repurchase agreements are short-term, changes in market rates directly affect our interest expense. Our average cost of funds calculated on a GAAP basis was 2 bps below one-month average SOFR and 22 bps above six-month average SOFR for the year ended December 31, 2023. Our average economic cost of funds was 234 bps below one-month average SOFR and 210 bps below six-month average SOFR for the year ended December 31, 2023. The average term to maturity of the outstanding repurchase agreements was 26 days at December 31, 2023 and 27 days at December 31, 2022. The tables below present the average balance of borrowings outstanding, interest expense and average cost of funds, and one-month average and six-month average SOFR rates for each quarter in 2023, 2022 and 2021 and for the years ended December 31, 2023, 2022 and 2021 on both a GAAP and economic basis. ($ in thousands) Average Interest Expense Average Cost of Funds Balance of GAAP Economic GAAP Economic Borrowings Basis Basis Basis Basis Three Months Ended December 31, 2023 $ 4,066,298 $ 52,325 $ 27,164 5.15 % 2.67 % September 30, 2023 4,314,332 58,705 34,265 5.44 % 3.18 % June 30, 2023 3,985,577 48,671 25,189 4.88 % 2.53 % March 31, 2023 3,573,941 42,217 23,006 4.72 % 2.57 % December 31, 2022 3,256,153 29,512 20,098 3.63 % 2.47 % September 30, 2022 3,446,420 21,361 17,207 2.48 % 2.00 % June 30, 2022 4,111,544 8,180 6,575 0.80 % 0.64 % March 31, 2022 5,354,107 2,655 4,260 0.20 % 0.32 % December 31, 2021 5,728,988 2,023 10,084 0.14 % 0.70 % September 30, 2021 4,864,287 1,570 2,888 0.13 % 0.24 % June 30, 2021 4,348,192 1,556 6,742 0.14 % 0.62 % March 31, 2021 3,888,633 1,941 6,106 0.20 % 0.63 % Years Ended December 31, 2023 $ 3,985,037 $ 201,918 $ 109,624 5.07 % 2.75 % December 31, 2022 4,042,056 61,708 48,140 1.53 % 1.19 % December 31, 2021 4,707,525 7,090 25,820 0.15 % 0.55 % 52 Table of Contents Average GAAP Cost of Funds Average Economic Cost of Funds Relative to Average Relative to Average Average SOFR One-Month Six-Month One-Month Six-Month One-Month Six-Month SOFR SOFR SOFR SOFR Three Months Ended December 31, 2023 5.34 % 5.35 % (0.19 )% (0.20 )% (2.67 )% (2.68 )% September 30, 2023 5.32 % 5.17 % 0.12 % 0.27 % (2.14 )% (1.99 )% June 30, 2023 5.07 % 4.78 % (0.19 )% 0.10 % (2.54 )% (2.25 )% March 31, 2023 4.63 % 4.09 % 0.09 % 0.63 % (2.06 )% (1.52 )% December 31, 2022 4.06 % 2.89 % (0.43 )% 0.74 % (1.59 )% (0.42 )% September 30, 2022 2.47 % 1.43 % 0.01 % 1.05 % (0.47 )% 0.57 % June 30, 2022 1.09 % 0.39 % (0.29 )% 0.41 % (0.45 )% 0.25 % March 31, 2022 0.16 % 0.07 % 0.04 % 0.13 % 0.16 % 0.25 % December 31, 2021 0.05 % 0.05 % 0.09 % 0.09 % 0.65 % 0.65 % September 30, 2021 0.05 % 0.03 % 0.08 % 0.10 % 0.19 % 0.21 % June 30, 2021 0.03 % 0.03 % 0.11 % 0.11 % 0.59 % 0.59 % March 31, 2021 0.01 % 0.06 % 0.19 % 0.14 % 0.62 % 0.57 % Years Ended December 31, 2023 5.09 % 4.85 % (0.02 )% 0.22 % (2.34 )% (2.10 )% December 31, 2022 1.94 % 1.20 % (0.41 )% 0.33 % (0.75 )% (0.01 )% December 31, 2021 0.04 % 0.04 % 0.11 % 0.11 % 0.51 % 0.51 % Gains or Losses The table below presents our gains or losses for the years ended December 31, 2023, 2022 and 2021. (in thousands) 2023 2022 2021 Realized losses on sales of RMBS $ (22,642 ) $ (133,695 ) $ (5,542 ) Unrealized losses on RMBS and U.S. Treasury Notes (18,941 ) (642,710 ) (198,454 ) Total losses on RMBS and U.S. Treasury Notes (41,583 ) (776,405 ) (203,996 ) Gains (losses) on interest rate futures 32,650 206,907 (1,026 ) Gains on interest rate swaps 19,657 167,641 23,398 Gains (losses) on payer swaptions (short positions) 4,113 (81,050 ) 9,062 (Losses) gains on payer swaptions (long positions) (8,734 ) 152,365 (2,580 ) (Losses) gains on interest rate caps (219 ) 919 - Gains on interest rate floors (long positions) 1,785 - 2,765 Losses on interest rate floors (short positions) (525 ) - - Gains on TBA securities (short positions) 1,370 4,494 3,432 (Losses) gains on TBA securities (long positions) (4,860 ) 1,200 (8,559 ) Total $ 3,654 $ (323,929 ) $ (177,504 ) We invest in RMBS with the intent to earn net income from the realized yield on those assets over their related funding and hedging costs, and not for the purpose of making short term gains from sales. However, we have sold, and may continue to sell, existing assets to acquire new assets, which our management believes might have higher risk-adjusted returns in light of current or anticipated interest rates, federal government programs or general economic conditions or to manage our balance sheet as part of our asset/liability management strategy. During the years ended December 31, 2023, 2022 and 2021, the Company received proceeds of $835.1 million, $2,759.9 million, and $2,851.7 million, respectively, from the sales and maturities of RMBS and U.S. Treasury securities. 53 Table of Contents Realized and unrealized gains and losses on RMBS are driven in part by changes in yields and interest rates, the spreads that Agency RMBS trade relative to comparable duration U.S. Treasuries or swaps, as well as varying levels of demand for RMBS, which affect the pricing of the securities in our portfolio. The unrealized gains and losses on RMBS may also include the premium lost as a result of prepayments on the underlying mortgages, decreasing unrealized gains or increasing unrealized losses as prepayment speeds or premiums increase. To the extent RMBS are carried at a discount to par, unrealized gains or losses on RMBS would also include discount accreted as a result of prepayments on the underlying mortgages, increasing unrealized gains or decreasing unrealized losses as speeds on discounts increase. Gains and losses on interest rate futures contracts are affected by changes in implied forward rates during the reporting period. The table below presents historical interest rate data for each quarter end during 2023, 2022 and 2021. 5 Year 10 Year 15 Year 30 Year U.S. U.S Fixed-Rate Fixed-Rate 90 Day Treasury Treasury Mortgage Mortgage Average Rate (1) Rate (1) Rate (2) Rate (2) SOFR (3) December 31, 2023 3.84 % 3.87 % 5.93 % 6.61 % 5.36 % September 30, 2023 4.61 % 4.57 % 6.72 % 7.31 % 5.27 % June 30, 2023 4.13 % 3.82 % 6.06 % 6.71 % 5.00 % March 31, 2023 3.61 % 3.49 % 5.56 % 6.32 % 4.51 % December 31, 2022 4.00 % 3.88 % 5.68 % 6.42 % 3.62 % September 30, 2022 4.04 % 3.80 % 5.96 % 6.70 % 2.13 % June 30, 2022 3.00 % 2.97 % 4.83 % 5.70 % 0.70 % March 31, 2022 2.42 % 2.33 % 3.83 % 4.67 % 0.09 % December 31, 2021 1.26 % 1.51 % 2.33 % 3.11 % 0.05 % September 30, 2021 1.00 % 1.53 % 2.28 % 3.01 % 0.05 % June 30, 2021 0.87 % 1.44 % 2.34 % 3.02 % 0.02 % March 31, 2021 0.94 % 1.75 % 2.45 % 3.17 % 0.04 % (1) Historical 5 and 10 Year U.S. Treasury Rates are obtained from quoted end of day prices on the Chicago Board Options Exchange. (2) Historical 30 Year and 15 Year Fixed Rate Mortgage Rates are obtained from Freddie Mac’s Primary Mortgage Market Survey. (3) Historical SOFR is obtained from the Federal Reserve Bank of New York. The SOFR averages are compounded averages of the SOFR over rolling 30 and 180 calendar day periods. Unrealized Gains and Losses on PT RMBS For the purpose of recording income on the Company’s investments in PT RMBS, interest income is based on the stated interest rate of the security. Using the fair value accounting method, premiums or discounts to the face value of the PT RMBS present at the date of purchase are not amortized. Premium lost and discount accretion resulting from monthly principal repayments are reflected in unrealized gains (losses) on RMBS in the statements of comprehensive income (loss). The following table adjusts the Company’s interest income as reported on the Company’s statements of comprehensive income (loss) for the periods indicated to show interest income adjusted for premium amortization and discount accretion on its mortgage-backed security investments. The purpose of presenting this non-GAAP measure of interest income is to provide management and investors with an alternative way of evaluating yield on RMBS that may be more comparable to some of its peers who amortize premiums and discounts on their PT RMBS investments. 54 Table of Contents ($ in thousands) Unrealized Gains (Losses) on PT RMBS Inclusive of Price Premium Amortization/ Premium Only Discount Accretion Average Yield on Amortization/ Unrealized Yield on RMBS Interest Average As Discount Gains Interest Average Held Income RMBS Reported (1) Accretion (2) (Losses) Income (3) RMBS (3) Three Months Ended December 31, 2023 $ 4,207,118 $ 49,539 4.71 % $ 206,222 $ 8,067 $ 198,155 $ 57,606 5.48 % September 30, 2023 4,447,098 50,107 4.51 % (210,159 ) 7,252 (217,411 ) 57,359 5.16 % June 30, 2023 4,186,939 39,911 3.81 % (68,898 ) 4,886 (73,784 ) 44,797 4.28 % March 31, 2023 3,769,954 38,012 4.03 % 53,444 4,774 48,670 42,786 4.54 % December 31, 2022 3,370,608 31,897 3.79 % 50,182 6,748 43,434 38,645 4.59 % September 30, 2022 3,571,037 35,611 3.99 % (211,727 ) 4,647 (216,374 ) 40,258 4.51 % June 30, 2022 4,260,727 35,268 3.31 % (176,042 ) 726 (176,768 ) 35,994 3.38 % March 31, 2022 5,545,844 41,857 3.02 % (326,212 ) (8,431 ) (317,781 ) 33,426 2.41 % December 31, 2021 6,056,259 44,421 2.93 % (90,357 ) (11,492 ) (78,865 ) 32,929 2.17 % September 30, 2021 5,136,331 34,169 2.66 % (15,219 ) (9,769 ) (5,450 ) 24,400 1.90 % June 30, 2021 4,504,887 29,254 2.60 % 2,973 (9,184 ) 12,157 20,070 1.78 % March 31, 2021 4,032,716 26,856 2.66 % (98,885 ) (11,099 ) (87,786 ) 15,757 1.56 % Years Ended December 31, 2023 $ 4,152,777 $ 177,569 4.28 % $ (19,391 ) $ 24,979 $ (44,370 ) $ 202,548 4.88 % December 31, 2022 4,187,054 144,633 3.45 % (663,799 ) 3,690 (667,489 ) 148,323 3.54 % December 31, 2021 4,932,548 134,700 2.73 % (201,488 ) (41,544 ) (159,944 ) 93,156 1.89 % (1) As reported in the Company’s statements of comprehensive income (loss) using the fair value accounting method. (2) Premium amortization/discount accretion for each period is calculated using the beginning of period market value of all securities. Amounts presented are intended to approximate amortization/accretion using the yield method over the life of the security based on premium/discount present at purchase date. (3) Interest Income – Inclusive of Premium Amortization/Discount Accretion and Yield on Average RMBS – Inclusive of Premium Amortization/Discount Accretion are non-GAAP measures. See “—GAAP and Non-GAAP Reconciliations,” for a description of our non-GAAP measures. Expenses Total operating expenses were $18.5 million, $17.5 million and $14.9 million for the years ended December 31, 2023, 2022 and 2021, respectively. The table below provides a breakdown of operating expenses for the years ended December 31, 2023, 2022 and 2021. (in thousands) 2023 2022 2021 Management fees $ 10,491 $ 10,447 $ 8,156 Overhead allocation 2,389 2,042 1,632 Incentive compensation 1,419 957 1,132 Directors fees and liability insurance 1,322 1,251 1,169 Audit, legal and other professional fees 1,495 1,143 1,112 Direct REIT operating expenses 715 831 1,090 Other administrative 700 778 575 Total expenses $ 18,531 $ 17,449 $ 14,866 We are externally managed and advised by Bimini Advisors pursuant to the terms of a management agreement. The management agreement has been renewed through February 20, 2025 and provides for automatic one-year extension options thereafter and is subject to certain termination rights. Under the terms of the management agreement, the Manager is responsible for administering the business activities and day-to-day operations of the Company. The Manager receives a monthly management fee in the amount of: ● One-twelfth of 1.5% of the first $250 million of the Company’s month end equity, as defined in the management agreement, ● One-twelfth of 1.25% of the Company’s month end equity that is greater than $250 million and less than or equal to $500 million, and ● One-twelfth of 1.00% of the Company’s month end equity that is greater than $500 million. 55 Table of Contents The Company is obligated to reimburse the Manager for any direct expenses incurred on its behalf and to pay the Manager the Company’s pro rata portion of certain overhead costs set forth in the management agreement. On April 1, 2022, pursuant to the third amendment to the management agreement entered into on November 16, 2021, the Manager began providing certain repurchase agreement trading, clearing and administrative services to the Company that had been previously provided by AVM, L.P. under an agreement terminated on March 31, 2022. In consideration for such services, the Company will pay the following fees to the Manager: ● a daily fee equal to the outstanding principal balance of repurchase agreement funding in place as of the end of such day multiplied by 1.5 basis points for the amount of aggregate outstanding principal balance less than or equal to $5 billion, and multiplied by 1.0 basis point for any amount of aggregate outstanding principal balance in excess of $5 billion, and ● a fee for the clearing and operational services provided by personnel of the Manager equal to $10,000 per month. Should the Company terminate the management agreement without cause, it will pay the Manager a termination fee equal to three times the average annual management fee, as defined in the management agreement, before or on the last day of the term of the agreement. The following table summarizes the management fee and overhead allocation expenses for each quarter in 2023, 2022 and 2021 and for the years ended December 31, 2023, 2022 and 2021. ($ in thousands) Average Average Advisory Services Orchid Orchid Management Overhead Three Months Ended MBS Equity Fee Allocation Total December 31, 2023 $ 4,207,118 $ 851,532 $ 2,275 $ 617 $ 2,892 September 30, 2023 4,447,098 964,230 2,870 557 3,427 June 30, 2023 4,186,939 899,109 2,704 639 3,343 March 31, 2023 3,769,954 865,722 2,642 576 3,218 December 31, 2022 3,370,608 823,516 2,566 560 3,126 September 30, 2022 3,571,037 839,935 2,616 522 3,138 June 30, 2022 4,260,727 866,539 2,631 519 3,150 March 31, 2022 5,545,844 853,577 2,634 441 3,075 December 31, 2021 6,056,259 806,382 2,587 443 3,030 September 30, 2021 5,136,331 672,384 2,156 390 2,546 June 30, 2021 4,504,887 542,679 1,792 395 2,187 March 31, 2021 4,032,716 456,687 1,621 404 2,025 Years Ended December 31, 2023 $ 4,152,777 $ 895,148 $ 10,491 $ 2,389 $ 12,880 December 31, 2022 4,187,054 845,892 10,447 2,042 12,489 December 31, 2021 4,932,548 619,533 8,156 1,632 9,788 Financial Condition: Mortgage-Backed Securities As of December 31, 2023, our RMBS portfolio consisted of $3,894.0 million of Agency RMBS at fair value and had a weighted average coupon on assets of 4.30%. During the year ended December 31, 2023, we received principal repayments of $326.7 million compared to $440.1 million for the year ended December 31, 2022. The average three month prepayment speeds for the quarters ended December 31, 2023 and 2022 were 5.5% and 5.0%, respectively. 56 Table of Contents The following table presents the 3-month constant prepayment rate (“CPR”) experienced on our structured and PT RMBS sub-portfolios, on an annualized basis, for the quarterly periods presented. CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. Specifically, the CPR in the chart below represents the three month prepayment rate of the securities in the respective asset category. Structured PT RMBS RMBS Total Three Months Ended Portfolio (%) Portfolio (%) Portfolio (%) December 31, 2023 5.4 7.9 5.5 September 30, 2023 6.1 5.7 6.0 June 30, 2023 5.6 7.0 5.6 March 31, 2023 3.9 5.7 4.0 December 31, 2022 4.9 6.0 5.0 September 30, 2022 6.1 10.4 6.5 June 30, 2022 8.3 13.7 9.4 March 31, 2022 8.1 19.5 10.7 The following tables summarize certain characteristics of the Company’s PT RMBS and structured RMBS as of December 31, 2023 and 2022: ($ in thousands) Weighted Percentage Average of Weighted Maturity Fair Entire Average in Longest Asset Category Value Portfolio Coupon Months Maturity December 31, 2023 Fixed Rate RMBS $ 3,877,082 99.6 % 4.33 % 334 1-Nov-53 Interest-Only Securities 16,572 0.4 % 4.01 % 223 25-Jul-48 Inverse Interest-Only Securities 358 0.0 % 0.00 % 274 15-Jun-42 Total Mortgage Assets $ 3,894,012 100.0 % 4.30 % 331 1-Nov-53 December 31, 2022 Fixed Rate RMBS $ 3,519,906 99.4 % 3.47 % 339 1-Nov-52 Interest-Only Securities 19,669 0.6 % 4.01 % 234 25-Jul-48 Inverse Interest-Only Securities 427 0.0 % 0.00 % 286 15-Jun-42 Total Mortgage Assets $ 3,540,002 100.0 % 3.46 % 336 1-Nov-52 ($ in thousands) December 31, 2023 December 31, 2022 Percentage of Percentage of Agency Fair Value Entire Portfolio Fair Value Entire Portfolio Fannie Mae $ 2,714,192 69.7 % $ 2,320,960 65.6 % Freddie Mac 1,179,820 30.3 % 1,219,042 34.4 % Total Portfolio $ 3,894,012 100.0 % $ 3,540,002 100.0 % December 31, 2023 December 31, 2022 Weighted Average Pass-through Purchase Price $ 104.10 $ 106.41 Weighted Average Structured Purchase Price $ 18.74 $ 18.74 Weighted Average Pass-through Current Price $ 95.70 $ 91.46 Weighted Average Structured Current Price $ 13.51 $ 14.05 Effective Duration (1) 4.40 5.58 (1) Effective duration is the approximate percentage change in price for a 100 bps change in rates. An effective duration of 4.40 indicates that an interest rate increase of 1.0% would be expected to cause a 4.40% decrease in the value of the RMBS in the Company’s investment portfolio at December 31, 2023. An effective duration of 5.58 indicates that an interest rate increase of 1.0% would be expected to cause a 5.58% decrease in the value of the RMBS in the Company’s investment portfolio at December 31, 2022. These figures include the structured securities in the portfolio, but do not include the effect of the Company’s funding cost hedges. Effective duration quotes for individual investments are obtained from The Yield Book, Inc. 57 Table of Contents The following table presents a summary of portfolio assets acquired during the years ended December 31, 2023 and 2022. ($ in thousands) 2023 2022 Total Cost Average Price Weighted Average Yield Total Cost Average Price Weighted Average Yield Pass-through RMBS $ 1,521,070 $ 100.27 5.40 % $ 1,004,526 $ 100.03 4.59 % Borrowings As of December 31, 2023, we had established borrowing facilities in the repurchase agreement market with a number of commercial banks and other financial institutions and had borrowings in place with 21 of these counterparties. None of these lenders are affiliated with the Company. These borrowings are secured by the Company’s RMBS and cash, and bear interest at prevailing market rates. We believe our established repurchase agreement borrowing facilities provide borrowing capacity in excess of our needs. As of December 31, 2023, we had obligations outstanding under the repurchase agreements of approximately $3,705.6 million with a net weighted average borrowing cost of 5.55%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 4 to 113 days, with a weighted average remaining maturity of 26 days. Securing the repurchase agreement obligations as of December 31, 2023 are RMBS with an estimated fair value, including accrued interest, of approximately $3,900.5 million. Through February 23, 2024, we have been able to maintain our repurchase facilities with comparable terms to those that existed at December 31, 2023 with maturities extending to various dates through July 15, 2024. The table below presents information about our period end, maximum and average balances of borrowings for each quarter in 2023 and 2022. ($ in thousands) Difference Between Ending Ending Maximum Average Borrowings and Balance of Balance of Balance of Average Borrowings Three Months Ended Borrowings Borrowings Borrowings Amount Percent December 31, 2023 $ 3,705,649 $ 4,426,947 $ 4,066,298 $ (360,649 ) (8.87 )% September 30, 2023 4,426,947 4,494,858 4,314,332 112,615 2.61 % June 30, 2023 4,201,717 4,201,717 3,985,577 216,140 5.42 % March 31, 2023 3,769,437 3,849,137 3,573,941 195,496 5.47 % December 31, 2022 3,378,445 3,414,950 3,256,153 122,292 3.76 % September 30, 2022 3,133,861 4,047,606 3,446,420 (312,559 ) (9.07 )% June 30, 2022 3,758,980 4,464,544 4,111,544 (352,564 ) (8.57 )% March 31, 2022 4,464,109 6,244,106 5,354,107 (889,998 ) (16.62 )% (1) (1) The lower ending balance relative to the average balance during the quarter ended March 31, 2022 reflects the disposal of RMBS pledged as collateral. During the quarter ended March 31, 2022, the Company’s investment in RMBS decreased $510.4 million. 58 Table of Contents Leverage We use two primary measures of leverage. Economic leverage is calculated by dividing the sum of total liabilities and our net notional TBA position, divided by stockholders' equity. Adjusted leverage is calculated by dividing our repurchase agreements by stockholders' equity. Our economic leverage at December 31, 2023 was 6.7 to 1, compared to 6.3 to 1 as of December 31, 2022. Our adjusted leverage at December 31, 2023 was 7.9 to 1, compared to 7.7 to 1 as of December 31, 2022. The following table presents information related to our historical leverage. ($ in thousands) Ending Ending Ending Ending Repurchase Total Net TBA Stockholders' Adjusted Economic Agreements Liabilities Positions Equity Leverage Leverage December 31, 2023 $ 3,705,649 $ 3,795,002 $ (645,700 ) $ 469,944 7.9:1 6.7:1 September 30, 2023 4,426,947 4,470,052 (502,500 ) 466,841 9.5:1 8.5:1 June 30, 2023 4,201,717 4,240,845 (250,000 ) 490,086 8.6:1 8.1:1 March 31, 2023 3,769,437 3,814,651 (875,000 ) 451,361 8.4:1 6.5:1 December 31, 2022 3,378,445 3,426,973 (675,000 ) 438,762 7.7:1 6.3:1 September 30, 2022 3,133,861 3,405,463 (475,000 ) 400,377 7.8:1 7.3:1 June 30, 2022 3,758,980 3,968,007 - 506,362 7.4:1 7.8:1 March 31, 2022 4,464,109 4,595,014 - 592,418 7.5:1 7.8:1 Liquidity and Capital Resources Liquidity is our ability to turn non-cash assets into cash, purchase additional investments, repay principal and interest on borrowings, fund overhead, fulfill margin calls and pay dividends. We have both internal and external sources of liquidity. However, our material unused sources of liquidity include cash balances, unencumbered assets and our ability to sell encumbered assets to raise cash. Our balance sheet also generates liquidity on an on-going basis through payments of principal and interest we receive on our RMBS portfolio. Management believes that we currently have sufficient liquidity and capital resources available for (a) the acquisition of additional investments consistent with the size and nature of our existing RMBS portfolio, (b) the repayments on borrowings and (c) the payment of dividends to the extent required for our continued qualification as a REIT. We may also generate liquidity from time to time by selling our equity or debt securities in public offerings or private placements. Internal Sources of Liquidity Our internal sources of liquidity include our cash balances, unencumbered assets and our ability to liquidate our encumbered security holdings. Our balance sheet also generates liquidity on an on-going basis through payments of principal and interest we receive on our RMBS portfolio. Because our PT RMBS portfolio consists entirely of government and agency securities, we do not anticipate having difficulty converting our assets to cash should our liquidity needs ever exceed our immediately available sources of cash. Our structured RMBS portfolio also consists entirely of governmental agency securities, although they typically do not trade with comparable bid / ask spreads as PT RMBS. However, we anticipate that we would be able to liquidate such securities readily, even in distressed markets, although we would likely do so at prices below where such securities could be sold in a more stable market. To enhance our liquidity even further, we may pledge a portion of our structured RMBS as part of a repurchase agreement funding, but retain the cash in lieu of acquiring additional assets. In this way we can, at a modest cost, retain higher levels of cash on hand and decrease the likelihood we will have to sell assets in a distressed market in order to raise cash. Our strategy for hedging our funding costs typically involves taking short positions in interest rate futures, treasury futures, interest rate swaps, interest rate swaptions or other instruments. When the market causes these short positions to decline in value we are required to meet margin calls with cash. This can reduce our liquidity position to the extent other securities in our portfolio move in price in such a way that we do not receive enough cash via margin calls to offset the derivative related margin calls. If this were to occur in sufficient magnitude, the loss of liquidity might force us to reduce the size of the levered portfolio, pledge additional structured securities to raise funds or risk operating the portfolio with less liquidity. 59 Table of Contents External Sources of Liquidity Our primary external sources of liquidity are our ability to (i) borrow under master repurchase agreements, (ii) use the TBA security market and (iii) sell our equity or debt securities in public offerings or private placements. Our borrowing capacity will vary over time as the market value of our interest earning assets varies. Our master repurchase agreements have no stated expiration, but can be terminated at any time at our option or at the option of the counterparty. However, once a definitive repurchase agreement under a master repurchase agreement has been entered into, it generally may not be terminated by either party. A negotiated termination can occur, but may involve a fee to be paid by the party seeking to terminate the repurchase agreement transaction. Under our repurchase agreement funding arrangements, we are required to post margin at the initiation of the borrowing. The margin posted represents the haircut, which is a percentage of the market value of the collateral pledged. To the extent the market value of the asset collateralizing the financing transaction declines, the market value of our posted margin will be insufficient and we will be required to post additional collateral. Conversely, if the market value of the asset pledged increases in value, we would be over collateralized and we would be entitled to have excess margin returned to us by the counterparty. Our lenders typically value our pledged securities daily to ensure the adequacy of our margin and make margin calls as needed, as do we. Typically, but not always, the parties agree to a minimum threshold amount for margin calls so as to avoid the need for nuisance margin calls on a daily basis. Our master repurchase agreements do not specify the haircut; rather haircuts are determined on an individual repo transaction basis. Throughout the year ended December 31, 2023, haircuts on our pledged collateral remained stable and as of December 31, 2023, our weighted average haircut was approximately 4.5% of the value of our collateral. TBAs represent a form of off-balance sheet financing and are accounted for as derivative instruments. (See Note 5 to our Financial Statements in this Form 10-K for additional details on of our TBAs). Under certain market conditions, it may be uneconomical for us to roll our TBAs into future months and we may need to take or make physical delivery of the underlying securities. If we were required to take physical delivery to settle a long TBA, we would have to fund our total purchase commitment with cash or other financing sources and our liquidity position could be negatively impacted. Our TBAs are also subject to margin requirements governed by the Mortgage-Backed Securities Division ("MBSD") of the FICC and by our Master Securities Forward Transaction Agreements ("MSFTAs"), which may establish margin levels in excess of the MBSD. Such provisions require that we establish an initial margin based on the notional value of the TBA, which is subject to increase if the estimated fair value of our TBAs or the estimated fair value of our pledged collateral declines. The MBSD has the sole discretion to determine the value of our TBAs and of the pledged collateral securing such contracts. In the event of a margin call, we must generally provide additional collateral on the same business day. Settlement of our TBA obligations by taking delivery of the underlying securities as well as satisfying margin requirements could negatively impact our liquidity position. However, since we do not use TBA dollar roll transactions as our primary source of financing, we believe that we will have adequate sources of liquidity to meet such obligations. We invest a portion of our capital in structured Agency RMBS. We generally do not apply leverage to this portion of our portfolio. The leverage inherent in structured securities replaces the leverage obtained by acquiring PT securities and funding them in the repo market. This structured RMBS strategy has been a core element of the Company’s overall investment strategy since inception. However, we have and may continue to pledge a portion of our structured RMBS in order to raise our cash levels, but generally will not pledge these securities in order to acquire additional assets. In future periods, we expect to continue to finance our activities in a manner that is consistent with our current operations through repurchase agreements. As of December 31, 2023, we had cash and cash equivalents of $171.9 million. We generated cash flows of $490.0 million from principal and interest payments on our RMBS and had average repurchase agreements outstanding of $3,985.0 million during the year ended December 31, 2023. As described more fully below, we may also access liquidity by selling our equity or debt securities in public offerings or private placements. 60 Table of Contents Stockholders ’ Equity On August 4, 2020, we entered into the August 2020 Equity Distribution Agreement with four sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $150,000,000 of shares of our common stock in transactions that were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total of 5,498,730 shares under the August 2020 Equity Distribution Agreement for aggregate gross proceeds of approximately $150.0 million, and net proceeds of approximately $147.4 million, after commissions and fees, prior to its termination in June 2021. On January 20, 2021, we entered into the January 2021 Underwriting Agreement with J.P. Morgan Securities LLC (“J.P. Morgan”), relating to the offer and sale of 1,520,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from the Company pursuant to the January 2021 Underwriting Agreement at $26.00 per share. In addition, we granted J.P. Morgan a 30-day option to purchase up to an additional 228,000 shares of our common stock on the same terms and conditions, which J.P. Morgan exercised in full on January 21, 2021. The closing of the offering of 1,748,000 shares of our common stock occurred on January 25, 2021, with proceeds to us of approximately $45.2 million, net of offering expenses. On March 2, 2021, we entered into the March 2021 Underwriting Agreement with J.P. Morgan, relating to the offer and sale of 1,600,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from the Company pursuant to the March 2021 Underwriting Agreement at $27.25 per share. In addition, we granted J.P. Morgan a 30-day option to purchase up to an additional 240,000 shares of our common stock on the same terms and conditions, which J.P. Morgan exercised in full on March 3, 2021. The closing of the offering of 1,840.000 shares of our common stock occurred on March 5, 2021, with proceeds to us of approximately $50.0 million, net of offering expenses. On June 22, 2021, we entered into the June 2021 Equity Distribution Agreement with four sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $250,000,000 of shares of our common stock in transactions that were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total of 9,881,467 shares under the June 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately $250.0 million, and net proceeds of approximately $246.2 million, after commissions and fees, prior to its termination in October 2021. On October 29, 2021, we entered into an equity distribution agreement (the “October 2021 Equity Distribution Agreement”) with four sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $250,000,000 of shares of our common stock in transactions that were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total of 9,742,188 shares under the October 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately $151.8 million, and net proceeds of approximately $149.3 million, after commissions and fees, prior to its termination in March 2023. On March 7, 2023, we entered into an equity distribution agreement (the “March 2023 Equity Distribution Agreement”) with three sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate amount of $250,000,000 of shares of our common stock in transactions that are deemed to be “at the market” offerings and privately negotiated transactions. Through December 31, 2023, we issued a total of 13,190,039 shares under the March 2023 Equity Distribution Agreement for aggregate gross proceeds of approximately $129.9 million, and net proceeds of approximately $127.8 million, after commissions and fees. Outlook Economic Summary The fourth quarter of 2023 may prove to be the pivotal quarter in the current interest rate cycle. As the third quarter came to a close and we moved into October the trajectory of economic growth, interest rates and expectations for monetary policy were all heading higher. In addition to the usual stimulants for higher interest rates – persistent levels of elevated inflation and economic growth – surging budget deficits drove rate expectations even higher. Indeed, over the course of October incoming economic data related to the labor market and inflation exceeded market expectations. Gross domestic product for the third quarter of 2023 was 4.9%, well above levels deemed consistent with price stability and the demand/supply balance sought by the Fed. The quarterly refunding announcement for the U.S. Treasury’s planned borrowing needs in the fourth quarter significantly exceeded expectations. Risk assets were impacted as sentiment eroded and the markets contemplated the impact of still higher levels of interest rates and the potential duration that rates might remain elevated. 61 Table of Contents The market pivoted sharply in the fourth quarter of 2023, followed shortly thereafter by the Fed. The primary impetus for the change in the market’s outlook was the trend in inflation data. While incoming data often exceeded expectations on a relative basis – the trend in inflation was nonetheless downward. While service inflation remained elevated, goods inflation was trending negative, and the net effect was persistently lower levels of both headline and core inflation. The annualized 3- and 6-month trends were below 3% and appeared headed towards the Fed’s 2% target. FOMC member Christopher Waller stated that if the trend in inflation data continued, the FOMC would likely ease monetary policy soon. Coincidentally the incoming economic data began to come in below expectations and the U.S. Treasury revised their upcoming borrowing needs downward. The reversal in the market's outlook was cemented when, at the conclusion of the FOMC’s December meeting, Chairman Powell strongly hinted that the Fed was finished with their tightening cycle and the focus of discussions had turned to a removal of restrictive monetary policy in 2024. The interest rate market and all risk assets responded strongly to the reversal and rallied strongly into year-end. Interest Rates Starting at the end of the second quarter of 2023 interest rates began to move steadily higher, driven by the factors discussed above. In late October, rates across the curve appeared headed sustainably above 5% and the market anticipated the Fed would keep the Fed funds rate above 5% through the end of 2024. The yield on the 2-year U.S. Treasury came within 9 basis points of the level of Fed funds on October 18, 2023, implying the market was pricing Fed funds to remain essentially unchanged for the next two years. Frequent comments by Fed officials supported this thinking, as they continually pushed back against market pricing of rate cuts in early 2024. The message was consistent – rates will need to be higher for longer until the Fed was assured inflation was headed sustainably lower towards their 2% target. The market’s apparent anxiousness for the Fed to ease monetary policy became particularly acute when the data turned in the fourth quarter of 2023, and inflation appeared headed towards the Fed’s target. When Governor Waller made his comments about the possibility of easing in the near future, which were reinforced by Chairman Powell’s comments at the Fed meeting in December, interest rates moved decisively lower. By year end, market pricing reflected six 25 basis point rate cuts by the end of 2024. As we move into 2024 the inflation data has maintained the trend in place described above. However, the labor market data remains strong, and most measures of economic growth have not softened. In fact, gross domestic product for the fourth quarter of 2023 was 3.3% on an annualized basis. Comments by Fed officials have consistently pushed back on market pricing of the timing and extent of interest rate cuts for 2024. Financial conditions have also eased since early fourth quarter and the federal government is still running stimulative deficits with little to no evidence that policy will change in the near term. The risk that inflation could re-accelerate has been mentioned by many Fed officials. To date in 2024 the market has reversed yet again, and rates have retraced some of the decline seen in November and December. The Agency RMBS Market As with interest rates across the curve, Agency RMBS spreads to comparable duration U.S. Treasuries or swaps continued widening into October as the outlook continued to deteriorate. By late October the spread of the current coupon 30-year Agency RMBS to a comparable duration U.S. Treasury security reached its cycle wide for the cycle. As the market reversed and risk appetite rapidly recovered the spread contracted quickly – declining by over 50 basis points by year-end. Since year end, the sector, as reflected by the spread of the current coupon Agency RMBS, has reversed yet again, albeit modestly. The recovery in risk sentiment, coupled with the decline in interest rates, appears to have stimulated bank demand for the Agency RMBS sector. The regional banking crisis of March of 2023, a result of the severe decline in valuations of Agency RMBS acquired by banks prior to the Fed rate hiking cycle and subsequent increase in rates across the curve, may not be fully over. A funding program put in place in March of 2023 that allows such institutions to cheaply fund RMBS positions at par and avoid having to sell them and realize significant losses, expires in March of 2024. However, the partial recovery in Agency RMBS prices that occurred in November and December has erased some of their unrealized losses. The attractiveness of the asset class, coupled with softening loan demand, appears to have enticed banks to resume purchases. It may be that the recovery of demand for the sector by these banks is supporting pricing of Agency RMBS year-to-date. Based on ICE Bank of America data for the fixed income indices, for the fourth quarter of 2023 Agency RMBS generated a return of 7.4% and 1.7% versus comparable duration swaps, respectively. The 30-year fixed rate sector generated returns of 7.8% and 1.8% versus comparable duration swaps, respectively. With respect to individual sectors of the Agency RMBS index, longer duration sectors and coupons outperformed owing to the significant rally of interest rates. Across the 30-year fixed rate coupon stack returns varied from 8.5% for 2.0% coupons to 3.0% for 7.0% coupons. Excess returns for the same coupons were 2.1% and 0.4%, respectively, and the distribution of returns followed the durations of the various coupons in a consistent fashion. 62 Table of Contents The Agency RMBS sector outperformed investment grade corporates on an absolute basis but trailed sub-investment grade corporates, again on an absolute basis. Relative to comparable duration swaps for the fourth quarter, Agency RMBS trailed investment grade corporates by 120 basis points but outperformed sub-investment grades corporates by 20 basis points. Note prior to the sharp reversal in the markets at the end of October total returns for all three sectors were negative year to date, and all three sectors – Agency RMBS, investment grade and sub-investment grade corporates – generated positive absolute and excess returns for the year. In response to the significant increase in interest rates and volatility, with the corresponding weakness in Agency RMBS assets early in the fourth quarter, we reduced our leverage and increased hedges. Specifically, we reduced our holding of 30-year fixed rate 3.0% coupons by approximately 40% - given their long duration - and modestly added a 30-year 7.0% coupon position. Recent Legislative and Regulatory Developments In response to the deterioration in the markets for U.S. Treasuries, Agency RMBS and other mortgage and fixed income markets resulting from the impacts of the COVID-19 pandemic, the Fed implemented a program of quantitative easing. Through November of 2021, the Fed was committed to purchasing $80 billion of U.S. Treasuries and $40 billion of Agency RMBS each month. In November of 2021, it began tapering its net asset purchases each month, ended net asset purchases by early March of 2022, and ended asset purchases entirely in September of 2022. On May 4, 2022, the FOMC announced a plan for reducing the Fed’s balance sheet. In June of 2022, in accordance with this plan, the Fed began reducing its balance sheet by a maximum of $30 billion of U.S. Treasuries and $17.5 billion of Agency RMBS each month. On September 21, 2022, the FOMC announced the Fed’s decision to continue reducing the balance sheet by a maximum of $60 billion of U.S. Treasuries and $35 billion of Agency RMBS per month. As interest rates have increased and prepayment speeds have slowed, the actual balance sheet reduction of Agency RMBS has trended well below the cap during 2023. Recently the Fed has indicated they may taper their quantitative tightening by slowing the rate of run-off of their portfolio, although it is likely they will allow their holdings of Agency RMBS to continue at the current pace and slow the run-off of U.S. Treasuries in a way that achieves their desired rate of portfolio run-off. On September 30, 2019, the FHFA announced that Fannie Mae and Freddie Mac were allowed to increase their capital buffers to $25 billion and $20 billion, respectively, from the prior limit of $3 billion each. This step could ultimately lead to the Enterprises being privatized and represents the first concrete step on the road to Enterprise reform. In December 2020, the FHFA released a final rule on a new regulatory framework for the Enterprises which seeks to implement both a risk-based capital framework and minimum leverage capital requirements. On January 14, 2021, the U.S. Treasury and the FHFA executed letter agreements allowing the Enterprises to continue to retain capital up to their regulatory minimums, including buffers, as prescribed in the December rule. These letter agreements provide, in part, (i) there will be no exit from conservatorship until all material litigation is settled and the Enterprise has common equity Tier 1 capital of at least 3% of its assets, (ii) the Enterprises will comply with the FHFA’s regulatory capital framework, (iii) higher-risk single-family mortgage acquisitions will be restricted to then current levels, and (iv) the U.S. Treasury and the FHFA will establish a timeline and process for future Enterprise reform. However, no definitive proposals or legislation have been released or enacted with respect to ending the conservatorship, unwinding the Enterprises, or materially reducing the roles of the Enterprises in the U.S. mortgage market. On September 14, 2021, the U.S. Treasury and the FHFA suspended certain policy provisions in the January agreement, including limits on loans acquired for cash consideration, multifamily loans, loans with higher risk characteristics and second homes and investment properties. On February 25, 2022, the FHFA published a final rule, effective as of April 26, 2022, amending the Enterprise capital framework established in December 2020 by, among other things, replacing the fixed leverage buffer equal to 1.5% of an Enterprise’s adjusted total assets with a dynamic leverage buffer equal to 50% of an Enterprise’s stability capital buffer, reducing the risk weight floor from 10% to 5%, and removing the requirement that the Enterprises must apply an overall effectiveness adjustment to their credit risk transfer exposures. On June 14, 2022, the Enterprises announced that they would each charge a 50 bps fee for commingled securities issued on or after July 1, 2022 to cover the additional capital required for such securities under the Enterprise capital framework, which was subsequently reduced on January 19, 2023 to 9.375 bps for commingled securities issued on or after April 1, 2023 to address industry concern that the fee posed a risk to the fungibility of the Uniform Mortgage-Backed Security (“UMBS”) and negatively impacted liquidity and pricing in the market for TBA securities. On November 30, 2023, the FHFA published a final rule, to become effective April 1, 2024, which will, among other things, reduce the risk weight and credit conversion factor for guarantees on commingled securities to 5% and 50%, respectively; replace the current exposure methodology with the standardized approach for counterparty credit risk as the method for computing exposure and risk-weighted asset amounts for derivatives and cleared transactions; update the credit score assumption to 680 for single-family mortgage exposures originated without a representative credit score; and introduce a risk weight of 20% for guarantee assets. 63 Table of Contents The scope and nature of the actions the U.S. government or the Fed will ultimately undertake are unknown and will continue to evolve. Effect on Us Regulatory developments, movements in interest rates and prepayment rates affect us in many ways, including the following: Effects on our Assets A change in or elimination of the guarantee structure of Agency RMBS may increase our costs (if, for example, guarantee fees increase) or require us to change our investment strategy altogether. For example, the elimination of the guarantee structure of Agency RMBS may cause us to change our investment strategy to focus on non-Agency RMBS, which in turn would require us to significantly increase our monitoring of the credit risks of our investments in addition to interest rate and prepayment risks. If prepayment rates are relatively low (due, in part, to the refinancing problems described above), lower long-term interest rates can increase the value of our Agency RMBS. This is because investors typically place a premium on assets with coupon/yields that are higher than coupon/yields available in the market. To the extent such securities pre-pay slower than would otherwise be the case, we benefit from an above market coupon/yield for longer, enhancing the return from the security. Although lower long-term interest rates may increase asset values in our portfolio, we may not be able to invest new funds in similarly yielding assets. If prepayment levels increase, the value of any of our Agency RMBS that are carried at a premium to par that are affected by such prepayments may decline. This is because a principal prepayment accelerates the effective term of an Agency RMBS, which would shorten the period during which an investor would receive above-market returns (assuming the yield on the prepaid asset is higher than market yields). Also, prepayment proceeds may not be able to be reinvested in similar-yielding assets. Agency RMBS backed by mortgages with high interest rates are more susceptible to prepayment risk because holders of those mortgages are most likely to refinance to a lower rate. If prepayment levels decrease, the value of any of our Agency RMBS that are carried at a discount to par that are affected by such prepayments may increase. This is because a principal prepayment accelerates the effective term of an Agency RMBS, which would shorten the timeframe over which an investor would receive the principal of the underlying loans. Agency RMBS backed by mortgages with low interest rates are less susceptible to prepayment risk because holders of those mortgages are less likely to refinance to a higher rate. IOs and IIOs, however, may be the types of Agency RMBS most sensitive to increased prepayment rates. Because the holder of an IO or IIO receives no principal payments, the values of IOs and IIOs are entirely dependent on the existence of a principal balance on the underlying mortgages. If the principal balance is eliminated due to prepayment, IOs and IIOs essentially become worthless. Although increased prepayment rates can negatively affect the value of our IOs and IIOs, they have the opposite effect on POs. Because POs act like zero-coupon bonds, meaning they are purchased at a discount to their par value and have an effective interest rate based on the discount and the term of the underlying loan, an increase in prepayment rates would reduce the effective term of our POs and accelerate the yields earned on those assets, which would increase our net income. Higher long-term rates can also affect the value of our Agency RMBS. As long-term rates rise, rates available to borrowers also rise. This tends to cause prepayment activity to slow and extend the expected average life of mortgage cash flows. As the expected average life of the mortgage cash flows increases, coupled with higher discount rates, the value of Agency RMBS declines. Some of the instruments we use to hedge our Agency RMBS assets, such as interest rate futures, swaps and swaptions, are stable average life instruments. This means that to the extent we use such instruments to hedge our Agency RMBS assets, our hedges may not adequately protect us from price declines, and therefore may negatively impact our book value. It is for this reason we use interest only securities in our portfolio. As interest rates rise, the expected average life of these securities increases, causing generally positive price movements as the number and size of the cash flows increase the longer the underlying mortgages remain outstanding. This makes interest only securities desirable hedge instruments for pass-through Agency RMBS. The Agency RMBS market began to experience severe dislocations in mid-March 2020 as a result of the economic, health and market turmoil brought about by COVID-19. On March 23, 2020, the Fed announced that it would purchase Agency RMBS and U.S. Treasuries in the amounts needed to support smooth market functioning, which largely stabilized the Agency RMBS market, but ended these purchases in March 2022 and announced plans to reduce its balance sheet. The Fed’s continued reduction of its balance sheet could negatively impact our investment portfolio. 64 Table of Contents Because we base our investment decisions on risk management principles rather than anticipated movements in interest rates, in a volatile interest rate environment we may allocate more capital to structured Agency RMBS with shorter durations. We believe these securities have a lower sensitivity to changes in long-term interest rates than other asset classes. We may attempt to mitigate our exposure to changes in long-term interest rates by investing in IOs and IIOs, which typically have different sensitivities to changes in long-term interest rates than PT RMBS, particularly PT RMBS backed by fixed-rate mortgages. Effects on our borrowing costs We leverage our PT RMBS portfolio and a portion of our structured Agency RMBS with principal balances through the use of short-term repurchase agreement transactions. The interest rates on our debt are determined by the short term interest rate markets. Increases in the Fed Funds rate or SOFR typically increase our borrowing costs, which could affect our interest rate spread if there is no corresponding increase in the interest we earn on our assets. The impact of these increases would be most prevalent with respect to our Agency RMBS backed by fixed rate mortgage loans because the interest rate on a fixed-rate mortgage loan does not change even though market rates may change. In order to protect our net interest margin against increases in short-term interest rates, we may enter into interest rate swaps, which economically convert our floating-rate repurchase agreement debt to fixed-rate debt or utilize other hedging instruments such as Fed Funds, SOFR and T-Note futures contracts or interest rate swaptions. Summary The second half of 2023 was a very challenging period for the financial markets, especially the fixed income markets in the U.S. The U.S. economy proved incredibly resilient in the face of continued rate increases by the Fed since March of 2022 of 500 basis points. Growth for the third quarter was a surprising 4.9%, as measured by GDP. The preliminary growth rate for the fourth quarter was 3.3%, still above what is deemed to be a sustainable rate. Fiscal deficits in the U.S. continue to grow and are expected to remain at elevated levels for the next few years. The combination of these factors, among others, drove U.S. Treasury rates higher as the market expected the Fed, while at or near the end of their tightening cycle, was not going to lower rates well into 2024. A series of events in November and December triggered a violent reversal in the market outlook, the level of interest rates, the performance of risk assets and the outlook for monetary policy. The primary development was incoming inflation data. While the inflation data was at times above consensus expectations by economists, it was nonetheless steadily declining. Most measures of inflation now exhibit a clear downward trend towards the Fed’s 2% target. While there were some instances of labor market and/or growth data that was soft released during the fourth quarter, generally the data remains firm, and the labor market has yet to materially weaken. Yet, it appeared the Fed was willing to contemplate reducing rates if the inflation trend continued. Comments by various Fed officials, including Chairman Powell, hinted at a pending shift in the outlook for monetary policy. The market quickly responded to this development. Interest rates declined by over 100 basis points in the case of the 10-year U.S. Treasury note, from late October to late December. Fed funds futures pricing implied the market expected the Fed to lower rates by over 150 basis points in 2024. Risk assets of every type performed strongly over the last two months of the year, in many cases reversing year-to-date negative returns as of November 1, 2023, into strong positive returns for the year. In response to the significant increase in interest rates and volatility early in the fourth quarter, with the corresponding weakness in Agency RMBS assets, Orchid reduced its leverage and increased hedges. Specifically, holdings of 30-year fixed rate 3.0% coupons were reduced by approximately 40% - given their long duration - and a modest 30-year 7.0% coupon position was added. As the market recovered in November and December Agency RMBS had very strong absolute returns – nearly 8% for the fixed rate Agency RMBS sub-sector – and 1.7% above comparable duration U.S. Treasuries. However, public comments by Fed officials since late December have consistently pushed back against market expectations of the extent and timing of interest rate cuts. The incoming data remains quite strong – particularly labor market and growth data. Since year-end interest rates have partially reversed their declines late in the year, although the market still appears to expect significant rate cuts throughout the year – still over 80 basis points by the end of 2024. Given the suddenness of the reversal in the market – with the resulting material decline in interest rates and volatility – coupled with still strong data and persistent signaling by Fed officials that the markets are overestimating their pending policy adjustments, Orchid’s Agency RMBS portfolio has not grown since early November and the hedges have remained very high relative to the level of funding. To the extent the Fed does lower the Fed funds rate, we expect Orchid’s earnings stand to benefit as we believe current hedge positions are sufficient to off-set increased funding levels such that the net-interest margin of the portfolio is consistent with the current dividend rate. Agency RMBS securities are still very attractively priced so the portfolio could be expanded, even without additional equity capital, as the current leverage ratio is at the low end of its historical range. 65 Table of Contents Critical Accounting Estimates Our financial statements are prepared in accordance with GAAP. GAAP requires our management to make some complex and subjective decisions and assessments. Our most critical accounting policies involve decisions and assessments which could significantly affect reported assets, liabilities, revenues and expenses. Management has identified its most critical accounting estimates: Mortgage-Backed Securities Our investments in Agency RMBS are accounted for at fair value. We acquire our Agency RMBS for the purpose of generating long-term returns, and not for the short-term investment of idle capital. As discussed in Note 13 to the financial statements, our Agency RMBS are valued using Level 2 valuations, and such valuations currently are determined by our manager based on independent pricing sources and/or third party broker quotes, when available. Because the price estimates may vary, our Manager must make certain judgments and assumptions about the appropriate price to use to calculate the fair values. Alternatively, our Manager could opt to have the value of all of our positions in Agency RMBS determined by either an independent third-party or do so internally. In managing our portfolio, Bimini Advisors employs the following four-step process at each valuation date to determine the fair value of our Agency RMBS: • First, our Manager obtains fair values from subscription-based independent pricing sources. These prices are used by both our Manager as well as many of our repurchase agreement counterparty on a daily basis to establish margin requirements for our borrowings. • Second, our Manager requests non-binding quotes from one to four broker-dealers for certain Agency RMBS in order to validate the values obtained by the pricing service. Our Manager requests these quotes from broker-dealers that actively trade and make markets in the respective asset class for which the quote is requested. • Third, our Manager reviews the values obtained by the pricing source and the broker-dealers for consistency across similar assets. • Finally, if the data from the pricing services and broker-dealers is not homogenous or if the data obtained is inconsistent with our Manager’s market observations, our Manager makes a judgment to determine which price appears the most consistent with observed prices from similar assets and selects that price. To the extent our Manager believes that none of the prices are consistent with observed prices for similar assets, which is typically the case for only an immaterial portion of our portfolio each quarter, our Manager may use a third price that is consistent with observed prices for identical or similar assets. In the case of assets that have quoted prices such as Agency RMBS backed by fixed-rate mortgages, our Manager generally uses the quoted or observed market price. For assets such as Agency RMBS backed by ARMs or structured Agency RMBS, our Manager may determine the price based on the yield or spread that is identical to an observed transaction or a similar asset for which a dealer mark or subscription-based price has been obtained. Management believes its pricing methodology to be consistent with the definition of fair value described in Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements. Derivative Financial Instruments We use derivative instruments to manage interest rate risk, facilitate asset/liability strategies and manage other exposures, and we may continue to do so in the future. The principal instruments that we have used to date are Fed Funds, SOFR, T-Note and Eurodollar futures contracts, interest rate swaps, interest rate swaptions, interest rate caps and TBA securities, but we may enter into other derivatives in the future. We account for TBA securities as derivative instruments. Gains and losses associated with TBA securities transactions are reported in gain (loss) on derivative instruments in the accompanying statements of comprehensive income (loss). 66 Table of Contents We have elected not to treat any of our derivative financial instruments as hedges in order to align the accounting treatment of its derivative instruments with the treatment of our portfolio assets under the fair value option election. All derivative instruments are carried at fair value, and changes in fair value are recorded in earnings for each period. Our futures contracts are Level 1 valuations, as they are exchange-traded instruments and quoted market prices are readily available. Our interest rate swaps, interest rate swaptions and TBA securities are Level 2 valuations. The fair value of interest rate swaps is determined using a discounted cash flow approach using forward market interest rates and discount rates, which are observable inputs. The fair value of interest rate swaptions is determined using an option pricing model. The fair value of our TBA securities are determined by the Company based on independent pricing sources and/or third party broker quotes, similar to how the fair value of our Agency RMBS is derived, as discussed above. Income Recognition Since we commenced operations, we have elected to account for all of our Agency RMBS under the fair value option. All of our Agency RMBS are either pass-through securities or structured Agency RMBS, including CMOs, IOs, IIOs or POs. Income on pass-through securities, POs and CMOs that contain principal balances is based on the stated interest rate of the security. As a result of accounting for our RMBS under the fair value option, premium or discount present at the date of purchase is not amortized. For IOs, IIOs and CMOs that do not contain principal balances, income is accrued based on the carrying value and the effective yield. The difference between income accrued and the interest received on the security is characterized as a return of investment and serves to reduce the asset’s carrying value. At each reporting date, the effective yield is adjusted prospectively for future reporting periods based on the new estimate of prepayments, current interest rates and current asset prices. The new effective yield is calculated based on the carrying value at the end of the previous reporting period, the new prepayment estimates and the contractual terms of the security. Changes in fair value of all of our Agency RMBS during the period are recorded in earnings and reported as unrealized gains (losses) on mortgage-backed securities in the accompanying statements of comprehensive income (loss). For IIO securities, effective yield and income recognition calculations also take into account the index value applicable to the security. Capital Expenditures At December 31, 2023, we had no material commitments for capital expenditures. Dividends In addition to other requirements that must be satisfied to continue to qualify as a REIT, we must pay annual dividends to our stockholders of at least 90% of our REIT taxable income, determined without regard to the deductions for dividends paid and excluding any net capital gains. REIT taxable income (loss) is computed in accordance with the Code, and can be greater than or less than our financial statement net income (loss) computed in accordance with GAAP. These book to tax differences primarily relate to the recognition of interest income on RMBS, unrealized gains and losses on RMBS, and the amortization of losses on derivative instruments that are treated as funding hedges for tax purposes. We intend to pay regular monthly dividends to our stockholders and have declared the following dividends since the completion of our IPO. (in thousands, except per share amounts) Year Per Share Amount Total 2013 $ 6.975 $ 4,662 2014 10.800 22,643 2015 9.600 38,748 2016 8.400 41,388 2017 8.400 70,717 2018 5.350 55,814 2019 4.800 54,421 2020 3.950 53,570 2021 3.900 97,601 2022 2.475 87,906 2023 1.800 81,127 2024 YTD (1) 0.240 12,362 Totals $ 66.690 $ 620,959 (1) On January 10, 2024, the Company declared a dividend of $0.12 per share to be paid on February 27, 2024. On February 14, 2024, the Company declared a dividend of $0.12 per share to be paid on March 26, 2024. The effects of these dividends are included in the table above but are not reflected in the Company’s financial statements as of December 31, 2023. 67 Table of Contents