Orchid Island Capital, Inc. 10-Q

ITEM 2. 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 1 of this Form 10-Q. 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 our most recent Annual Report on Form 10-K, our actual results may differ materially from those anticipated in such forward-looking statements. 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 Fannie Mae, Freddie Mac or Ginnie Mae (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 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, 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 January 23, 2020, we entered into an equity distribution agreement (the “January 2020 Equity Distribution Agreement”) with three sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $200,000,000 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 3,170,727 shares under the January 2020 Equity Distribution Agreement for aggregate gross proceeds of $19.8 million, and net proceeds of approximately $19.4 million, after commissions and fees, prior to its termination in August 2020. 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 24 of 27,493,650 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 an underwriting agreement (the “January 2021 Underwriting Agreement”) with J.P. Morgan Securities LLC (“J.P. Morgan”), relating to the offer and sale of 7,600,000 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 $5.20 per share. In addition, we granted J.P. Morgan a 30-day option to purchase up to an additional 1,140,000 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 8,740,000 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 8,000,000 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 $5.45 per share. In addition, we granted J.P. Morgan a 30-day option to purchase up to an additional 1,200,000 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 9,200,000 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 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 September 30, 2021, we issued a total of 41,568,338 shares under the June 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately $211.0 million, and net proceeds of approximately $207.5 million, after commissions and fees. Subsequent to September 30, 2021 and through October 28, 2021, we issued a total of 7,838,998 shares under the June 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately $39.0 million, and net proceeds of approximately $38.4 million, after commissions and fees. Stock Repurchase Agreement On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to 2,000,000 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 4,522,822 shares of the Company’s common stock. Coupled with the 783,757 shares remaining from the original 2,000,000 share authorization, the increased authorization brought the total authorization to 5,306,579 shares, representing 10% of the Company’s then outstanding share count. This stock repurchase program has no termination date. From the inception of the stock repurchase program through September 30, 2021, the Company repurchased a total of 5,685,511 shares at an aggregate cost of approximately $40.4 million, including commissions and fees, for a weighted average price of $7.10 per share. The Company did not repurchase any shares of its common stock during the nine and three months ended September 30, 2021. The remaining authorization under the repurchase program as of September 30, 2021 was 837,311 shares. 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; ● the difference between Agency RMBS yields and our funding and hedging costs; 25 ● 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”), 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. 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 qualify 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 nine and three months ended September 30, 2021, as compared to the Company’s results of operations for the nine and three months ended September 30, 2020. Net (Loss) Income Summary Net loss for the nine months ended September 30, 2021 was $20.2 million, or $0.19 per share. Net loss for the nine months ended September 30, 2020 was $14.4 million, or $0.22 per share. Net income for the three months ended September 30, 2021 was $26.0 million, or $0.20 per share. Net income for the three months ended September 30, 2020 was $28.1 million, or $0.42 per share. The components of net (loss) income for the nine and three months ended September 30, 2021 and 2020, along with the changes in those components are presented in the table below: (in thousands) Nine Months Ended September 30, Three Months Ended, September 30, 2021 2020 Change 2021 2020 Change Interest income $ 90,279 $ 90,152 $ 127 $ 34,169 $ 27,223 $ 6,946 Interest expense (5,067) (23,045) 17,978 (1,570) (2,043) 473 Net interest income 85,212 67,107 18,105 32,599 25,180 7,419 (Losses) gains on RMBS and derivative contracts (94,522) (73,712) (20,810) (2,887) 5,745 (8,632) Net portfolio (loss) income (9,310) (6,605) (2,705) 29,712 30,925 (1,213) Expenses (10,886) (7,746) (3,140) (3,674) (2,849) (825) Net (loss) income $ (20,196) $ (14,351) $ (5,845) $ 26,038 $ 28,076 $ (2,038) 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” and “Economic Net Interest Income.” Net Earnings Excluding Realized and Unrealized Gains and Losses 26 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 operations. 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 operations 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. Net Earnings Excluding Realized and Unrealized Gains and Losses (in thousands, except per share data) Per Share Net Earnings Net Earnings Excluding Excluding Realized and Realized and Realized and Realized and Net Unrealized Unrealized Net Unrealized Unrealized Income Gains and Gains and Income Gains and Gains and (GAAP) Losses (1) Losses (GAAP) Losses Losses Three Months Ended September 30, 2021 $ 26,038 $ (2,887) $ 28,925 $ 0.20 $ (0.02) $ 0.22 June 30, 2021 (16,865) (40,844) 23,979 (0.17) (0.41) 0.24 March 31, 2021 (29,369) (50,791) 21,422 (0.34) (0.60) 0.26 December 31, 2020 16,479 (4,605) 21,084 0.23 (0.07) 0.30 September 30, 2020 28,076 5,745 22,331 0.42 0.09 0.33 June 30, 2020 48,772 28,749 20,023 0.74 0.43 0.31 March 31, 2020 (91,199) (108,206) 17,007 (1.41) (1.68) 0.27 Nine Months Ended September 30, 2021 $ (20,196) $ (94,522) $ 74,326 $ (0.19) $ (0.90) $ 0.71 September 30, 2020 (14,351) (73,712) 59,361 (0.22) (1.12) 0.90 (1) Includes realized and unrealized gains (losses) on RMBS and derivative financial instruments, including net interest income or expense on interest rate swaps . Economic Interest Expense and Economic Net Interest Income We use derivative and other hedging instruments, specifically Eurodollar, Fed Funds and Treasury Note (“T-Note”) futures contracts, short positions in U.S. Treasury securities, interest rate swaps and swaptions, to hedge a portion of the interest rate risk on repurchase agreements in a rising rate environment. 27 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 operations 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 Eurodollar, Fed Funds and U.S. Treasury 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. The Company may 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 operations 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 each quarter of 2021 to date and 2020. 28 Gains (Losses) on Derivative Instruments (in thousands) Funding Hedges Recognized in Attributed to Attributed to Income U.S. Treasury and TBA Current Future Statement Securities Gain (Loss) Period Periods (GAAP) (Short Positions) (Long Positions) (Non-GAAP) (Non-GAAP) Three Months Ended September 30, 2021 $ 5,375 $ (2,306) $ - $ (1,248) $ 8,929 June 30, 2021 (34,915) (5,963) - (5,104) (23,848) March 31, 2021 45,472 9,133 (8,559) (4,044) 48,942 December 31, 2020 8,538 (436) 5,480 (5,790) 9,284 September 30, 2020 4,079 131 3,336 (6,900) 7,512 June 30, 2020 (8,851) 582 1,133 (5,751) (4,815) March 31, 2020 (82,858) (7,090) - (4,900) (70,868) Nine Months Ended September 30, 2021 $ 15,932 $ 864 $ (8,559) $ (10,396) $ 34,023 September 30, 2020 (87,630) (6,377) 4,469 (17,551) (68,171) 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 September 30, 2021 $ 34,169 $ 1,570 $ (1,248) $ 2,818 $ 32,599 $ 31,351 June 30, 2021 29,254 1,556 (5,104) 6,660 27,698 22,594 March 31, 2021 26,856 1,941 (4,044) 5,985 24,915 20,871 December 31, 2020 25,893 2,011 (5,790) 7,801 23,882 18,092 September 30, 2020 27,223 2,043 (6,900) 8,943 25,180 18,280 June 30, 2020 27,258 4,479 (5,751) 10,230 22,779 17,028 March 31, 2020 35,671 16,523 (4,900) 21,423 19,148 14,248 Nine Months Ended September 30, 2021 $ 90,279 $ 5,067 $ (10,396) $ 15,463 $ 85,212 $ 74,816 September 30, 2020 90,152 23,045 (17,551) 40,596 67,107 49,556 (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 nine months ended September 30, 2021, we generated $85.2 million of net interest income, consisting of $90.3 million of interest income from RMBS assets offset by $5.1 million of interest expense on borrowings. For the comparable period ended September 30, 2020, we generated $67.1 million of net interest income, consisting of $90.2 million of interest income from RMBS assets offset by $23.0 million of interest expense on borrowings. The $0.1 million increase in interest income was due to a $1,284.9 million increase in average RMBS, partially offset by a 103 basis point ("bps") decrease in the yield on average RMBS. The $18.0 million decrease in interest expense was due to a 84 bps decrease in the average cost of funds, partially offset by a $1,250.5 million increase in average outstanding 29 borrowings. On an economic basis, our interest expense on borrowings for the nine months ended September 30, 2021 and 2020 was $15.5 million and $40.6 million, respectively, resulting in $74.8 million and $49.6 million of economic net interest income, respectively. During the three months ended September 30, 2021, we generated $32.6 million of net interest income, consisting of $34.2 million of interest income from RMBS assets offset by $1.6 million of interest expense on borrowings. For the three months ended September 30, 2020, we generated $25.2 million of net interest income, consisting of $27.2 million of interest income from RMBS assets offset by $2.0 million of interest expense on borrowings. The $6.9 million increase in interest income was due to a $1,713.8 million increase in average RMBS, partially offset by a 52 bps decrease in the yield on average RMBS. The $0.5 million decrease in interest expense was due to a 12 bps decrease in the average cost of funds, partially offset by a $1,636.3 million increase in average outstanding borrowings. On an economic basis, our interest expense on borrowings for the three months ended September 30, 2021 and 2020 was $2.8 million and $8.9 million, respectively, resulting in $31.4 million and $18.3 million of economic net interest income, respectively. The tables below provide information on our portfolio average balances, interest income, yield on assets, average borrowings, interest expense, cost of funds, net interest income and net interest spread for the nine months ended September 30, 2021 and 2020 and each quarter of 2021 to date and 2020 on both a GAAP and economic basis. ($ 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 September 30, 2021 $ 5,136,331 $ 34,169 2.66% $ 4,864,287 $ 1,570 $ 2,818 0.13% 0.23% June 30, 2021 4,504,887 29,254 2.60% 4,348,192 1,556 6,660 0.14% 0.61% March 31, 2021 4,032,716 26,856 2.66% 3,888,633 1,941 5,985 0.20% 0.62% December 31, 2020 3,633,631 25,893 2.85% 3,438,444 2,011 7,801 0.23% 0.91% September 30, 2020 3,422,564 27,223 3.18% 3,228,021 2,043 8,943 0.25% 1.11% June 30, 2020 3,126,779 27,258 3.49% 2,992,494 4,479 10,230 0.60% 1.37% March 31, 2020 3,269,859 35,671 4.36% 3,129,178 16,523 21,423 2.11% 2.74% Nine Months Ended September 30, 2021 $ 4,557,978 $ 90,279 2.64% $ 4,367,037 $ 5,067 $ 15,463 0.15% 0.47% September 30, 2020 3,273,068 90,152 3.67% 3,116,564 23,045 40,596 0.99% 1.74% ($ in thousands) Net Interest Income Net Interest Spread GAAP Economic GAAP Economic Basis Basis (2) Basis Basis (4) Three Months Ended September 30, 2021 $ 32,599 $ 31,351 2.53% 2.43% June 30, 2021 27,698 22,594 2.46% 1.99% March 31, 2021 24,915 20,871 2.46% 2.04% December 31, 2020 23,882 18,093 2.62% 1.94% September 30, 2020 25,180 18,280 2.93% 2.07% June 30, 2020 22,779 17,028 2.89% 2.12% March 31, 2020 19,148 14,248 2.25% 1.62% Nine Months Ended September 30, 2021 $ 85,212 $ 74,816 2.49% 2.17% September 30, 2020 67,107 49,556 2.68% 1.93% (1) Portfolio yields and costs of borrowings presented in the tables above and the tables on pages 30 and 31 are calculated based on the average balances of the underlying investment portfolio/borrowings balances and are annualized for the periods presented. Average 30 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 31 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. Interest Income and Average Asset Yield Our interest income for the nine months ended September 30, 2021 and 2020 was $90.3 million and $90.2 million, respectively. We had average RMBS holdings of $4,558.0 million and $3,273.1 million for the nine months ended September 30, 2021 and 2020, respectively. The yield on our portfolio was 2.64% and 3.67% for the nine months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, there was a $0.1 million increase in interest income due to the $1,284.9 million increase in average RMBS, partially offset by the 103 bps decrease in the yield on average RMBS. Our interest income for the three months ended September 30, 2021 and 2020 was $34.2 million and $27.2 million, respectively. We had average RMBS holdings of $5,136.3 million and $3,422.6 million for the three months ended September 30, 2021 and 2020, respectively. The yield on our portfolio was 2.66% and 3.18% for the three months ended September 30, 2021 and 2020, respectively. For the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, there was a $6.9 million increase in interest income due to the $1,713.8 million increase in average RMBS, partially offset by the 52 bps decrease in the yield on average RMBS. The table below presents the average portfolio size, income and yields of our respective sub-portfolios, consisting of structured RMBS and PT RMBS, for the nine months ended September 30, 2021 and 2020, and for each quarter of 2021 to date and 2020. ($ 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 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% December 31, 2020 3,603,885 29,746 3,633,631 25,933 (40) 25,893 2.88% (0.53)% 2.85% September 30, 2020 3,389,037 33,527 3,422,564 27,021 202 27,223 3.19% 2.41% 3.18% June 30, 2020 3,088,603 38,176 3,126,779 27,004 254 27,258 3.50% 2.67% 3.49% March 31, 2020 3,207,467 62,392 3,269,859 35,286 385 35,671 4.40% 2.47% 4.36% Nine Months Ended September 30, 2021 $ 4,483,550 $ 74,428 $ 4,557,978 $ 89,266 $ 1,013 $ 90,279 2.65% 1.81% 2.64% September 30, 2020 3,228,369 44,699 3,273,068 89,311 841 90,152 3.69% 2.51% 3.67% Interest Expense and the Cost of Funds We had average outstanding borrowings of $4,367.0 million and $3,116.6 million and total interest expense of $5.1 million and $23.0 million for the nine months ended September 30, 2021 and 2020, respectively. Our average cost of funds was 0.15% for the nine months ended September 30, 2021, compared to 0.99% for the comparable period in 2020. The $18.0 million decrease in interest expense was due to the 84 bps decrease in the average cost of funds, partially offset by the $1,250.5 million increase in average outstanding borrowings during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. Our economic interest expense was $15.5 million and $40.6 million for the nine months ended September 30, 2021 and 2020, 31 respectively. There was a 127 bps decrease in the average economic cost of funds to 0.47% for the nine months ended September 30, 2021 from 1.74% for the nine months ended September 30, 2020. We had average outstanding borrowings of $4,864.3 million and $3,228.0 million and total interest expense of $1.6 million and $2.0 million for the three months ended September 30, 2021 and 2020, respectively. Our average cost of funds was 0.13% and 0.25% for three months ended September 30, 2021 and 2020, respectively. There was a 12 bps decrease in the average cost of funds and a $1,636.3 million increase in average outstanding borrowings during the three months ended September 30, 2021, compared to the three months ended September 30, 2020. Our economic interest expense was $2.8 million and $8.9 million for the three months ended September 30, 2021 and 2020, respectively. There was a 88 bps decrease in the average economic cost of funds to 0.23% for the three months ended September 30, 2021 from 1.11% for the three months ended September 30, 2020. Since all of our repurchase agreements are short-term, changes in market rates directly affect our interest expense. Our average cost of funds calculated on a GAAP basis was 4 bps above the average one-month LIBOR and 3 bps below the average six-month LIBOR for the quarter ended September 30, 2021. Our average economic cost of funds was 14 bps above the average one-month LIBOR and 7 bps above the average six-month LIBOR for the quarter ended September 30, 2021. The average term to maturity of the outstanding repurchase agreements decreased to 30 days at September 30, 2021 from 31 days at December 31, 2020. The tables below present the average balance of borrowings outstanding, interest expense and average cost of funds, and average one-month and six-month LIBOR rates for the nine months ended September 30, 2021 and 2020, and for each quarter in 2021 to date and 2020 on both a GAAP and economic basis. ($ in thousands) Average Interest Expense Average Cost of Funds Balance of GAAP Economic GAAP Economic Borrowings Basis Basis Basis Basis Three Months Ended September 30, 2021 $ 4,864,287 $ 1,570 $ 2,818 0.13% 0.23% June 30, 2021 4,348,192 1,556 6,660 0.14% 0.61% March 31, 2021 3,888,633 1,941 5,985 0.20% 0.62% December 31, 2020 3,438,444 2,011 7,801 0.23% 0.91% September 30, 2020 3,228,021 2,043 8,943 0.25% 1.11% June 30, 2020 2,992,494 4,479 10,230 0.60% 1.37% March 31, 2020 3,129,178 16,523 21,423 2.11% 2.74% Nine Months Ended September 30, 2021 $ 4,367,037 $ 5,067 $ 15,463 0.15% 0.47% September 30, 2020 3,116,564 23,045 40,596 0.99% 1.74% Average GAAP Cost of Funds Average Economic Cost of Funds Relative to Average Relative to Average Average LIBOR One-Month Six-Month One-Month Six-Month One-Month Six-Month LIBOR LIBOR LIBOR LIBOR Three Months Ended September 30, 2021 0.09% 0.16% 0.04% (0.03)% 0.14% 0.07% June 30, 2021 0.10% 0.18% 0.04% (0.04)% 0.51% 0.43% March 31, 2021 0.13% 0.23% 0.07% (0.03)% 0.49% 0.39% December 31, 2020 0.15% 0.27% 0.08% (0.04)% 0.76% 0.64% September 30, 2020 0.17% 0.35% 0.08% (0.10)% 0.94% 0.76% June 30, 2020 0.55% 0.70% 0.05% (0.10)% 0.82% 0.67% March 31, 2020 1.34% 1.43% 0.77% 0.68% 1.40% 1.31% Nine Months Ended 32 September 30, 2021 0.10% 0.19% 0.05% (0.04)% 0.37% 0.28% September 30, 2020 0.68% 0.83% 0.31% 0.16% 1.06% 0.91% Gains or Losses The table below presents our gains or losses for the nine and three months ended September 30, 2021 and 2020. (in thousands) Nine Months Ended September 30, Three Months Ended September 30, 2021 2020 Change 2021 2020 Change Realized (losses) gains on sales of RMBS $ (3,068) $ (24,522) $ 21,454 $ 2,977 $ 498 $ 2,479 Unrealized (losses) gains on RMBS (107,386) 38,440 (145,826) (11,239) 1,168 (12,407) Total (losses) gains on RMBS (110,454) 13,918 (124,372) (8,262) 1,666 (9,928) Gains (losses) on interest rate futures 852 (13,161) 14,013 574 (119) 693 Gains (losses) on interest rate swaps 12,446 (67,713) 80,159 3,000 489 2,511 Gains (losses) on payer swaptions (short positions) 3,507 (1,561) 5,068 2,295 (672) 2,967 Gains (losses) on payer swaptions (long positions) 5,477 (3,287) 8,764 1,767 914 853 Gains (losses) on interest rate floors 1,345 - 1,345 45 - 45 Gains (losses) on TBA securities (short positions) 864 (6,282) 7,146 (2,306) 95 (2,401) (Losses) gains on TBA securities (long positions) (8,559) 4,469 (13,028) - 3,336 (3,336) (Losses) gains on U.S. Treasury securities (short - (95) 95 - 36 (36) Total (losses) gains from derivative instruments 15,932 (87,630) 103,562 5,375 4,079 1,296 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 nine months ended September 30, 2021 and 2020, we received proceeds of $2,598.9 million and $2,692.2 million, respectively, from the sales of RMBS. Most of these sales during the nine months ended September 30, 2020 occurred during the second half of March 2020 as we sold assets in order to maintain sufficient cash and liquidity and reduce risk associated with the market turmoil brought about by COVID-19. During the three months ended September 30, 2021 and 2020, we received proceeds of $918.0 million and $668.9 million, respectively, from the sales of RMBS. Realized and unrealized gains and losses on RMBS are driven in part by changes in yields and interest rates, which affect the pricing of the securities in our portfolio. The unrealized gains and losses on RMBS also include the premium lost as a result of prepayments on the underlying mortgages, decreasing unrealized gains or increasing unrealized losses as speeds or premiums 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 2021 to date and 2020. 5 Year 10 Year 15 Year 30 Year Three U.S. Treasury U.S. Treasury Fixed-Rate Fixed-Rate Month Rate (1) Rate (1) Mortgage Rate (2) Mortgage Rate (2) LIBOR (3) September 30, 2021 1.00% 1.53% 2.18% 2.90% 0.12% June 30, 2021 0.87% 1.44% 2.27% 2.98% 0.13% March 31, 2021 0.94% 1.75% 2.39% 3.08% 0.19% December 31, 2020 0.36% 0.92% 2.22% 2.68% 0.23% September 30, 2020 0.27% 0.68% 2.39% 2.89% 0.24% June 30, 2020 0.29% 0.65% 2.60% 3.16% 0.31% March 31, 2020 0.38% 0.70% 2.89% 3.45% 1.10% (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. 33 (3) Historical LIBOR is obtained from the Intercontinental Exchange Benchmark Administration Ltd. Expenses For the nine and three months ended September 30, 2021, the Company’s total operating expenses were approximately $10.9 million and $3.7 million, respectively, compared to approximately $7.7 million and $2.8 million, respectively, for the nine and three months ended September 30, 2020. The table below presents a breakdown of operating expenses for the nine and three months ended September 30, 2021 and 2020. (in thousands) Nine Months Ended September 30, Three Months Ended September 30, 2021 2020 Change 2021 2020 Change Management fees $ 5,569 $ 3,897 $ 1,672 $ 2,156 $ 1,252 $ 904 Overhead allocation 1,189 1,072 117 390 377 13 Accrued incentive compensation 884 (117) 1,001 259 158 101 Directors fees and liability insurance 874 750 124 279 242 37 Audit, legal and other professional fees 832 841 (9) 212 240 (28) Direct REIT operating expenses 1,024 852 172 309 406 (97) Other administrative 514 451 63 69 174 (105) Total expenses $ 10,886 $ 7,746 $ 3,140 $ 3,674 $ 2,849 $ 825 We are externally managed and advised by Bimini Advisors, LLC (the “Manager”) pursuant to the terms of a management agreement. The management agreement has been renewed through February 20, 2022 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 $500 million. The Company is obligated to reimburse the Manager for any direct expenses incurred on its behalf and to pay the Manager the Company’s pro rata portion of certain overhead costs set forth in the management agreement. Should the Company terminate the management agreement without cause, it will pay the Manager a termination fee equal to three times the average annual management fee, as defined in the management agreement, before or on the last day of the term of the agreement. The following table summarizes the management fee and overhead allocation expenses for each quarter in 2021 to date and 2020. ($ in thousands) Average Average Advisory Services Orchid Orchid Management Overhead Three Months Ended MBS Equity Fee Allocation Total 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 December 31, 2020 3,633,631 387,503 1,384 442 1,826 September 30, 2020 3,422,564 368,588 1,252 377 1,629 June 30, 2020 3,126,779 361,093 1,268 348 1,616 March 31, 2020 3,269,859 376,673 1,377 347 1,724 34 Nine Months Ended September 30, 2021 $ 4,557,978 $ 557,250 $ 5,569 $ 1,189 $ 6,758 September 30, 2020 3,273,068 368,785 3,897 1,072 4,969 Financial Condition: Mortgage-Backed Securities As of September 30, 2021, our RMBS portfolio consisted of $5,601.4 million of Agency RMBS at fair value and had a weighted average coupon on assets of 3.02%. During the nine months ended September 30, 2021, we received principal repayments of $413.0 million compared to $384.3 million for the nine months ended September 30, 2020. The average three month prepayment speeds for the quarters ended September 30, 2021 and 2020 were 12.4% and 17.0%, respectively. The following table presents the 3-month constant prepayment rate (“CPR”) experienced on our structured and PT RMBS sub-portfolios, on an annualized basis, for the quarterly periods presented. CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. Specifically, the CPR in the chart below represents the three month prepayment rate of the securities in the respective asset category. Structured PT RMBS RMBS Total Three Months Ended Portfolio (%) Portfolio (%) Portfolio (%) September 30, 2021 9.8 25.1 12.4 June 30, 2021 10.9 29.9 12.9 March 31, 2021 9.9 40.3 12.0 December 31, 2020 16.7 44.3 20.1 September 30, 2020 14.3 40.4 17.0 June 30, 2020 13.9 35.3 16.3 March 31, 2020 9.8 22.9 11.9 The following tables summarize certain characteristics of the Company’s PT RMBS and structured RMBS as of September 30, 2021 and December 31, 2020: ($ in thousands) Weighted Percentage Average of Weighted Maturity Fair Entire Average in Longest Asset Category Value Portfolio Coupon Months Maturity September 30, 2021 Fixed Rate RMBS $ 5,458,562 97.4% 2.96% 342 1-Oct-51 Total Mortgage-backed Pass-through 5,458,562 97.4% 2.96% 342 1-Oct-51 Interest-Only Securities 140,078 2.5% 3.39% 250 25-Aug-51 Inverse Interest-Only Securities 2,783 0.1% 3.75% 304 15-Jun-42 Total Structured RMBS 142,861 2.6% 3.40% 253 25-Aug-51 Total Mortgage Assets $ 5,601,423 100.0% 3.02% 326 1-Oct-51 December 31, 2020 Fixed Rate RMBS $ 3,560,746 95.5% 3.09% 339 1-Jan-51 Fixed Rate CMOs 137,453 3.7% 4.00% 312 15-Dec-42 Total Mortgage-backed Pass-through 3,698,199 99.2% 3.13% 338 1-Jan-51 Interest-Only Securities 28,696 0.8% 3.98% 268 25-May-50 Total Structured RMBS 28,696 0.8% 3.98% 268 25-May-50 35 Total Mortgage Assets $ 3,726,895 100.0% 3.19% 333 1-Jan-51 ($ in thousands) September 30, 2021 December 31, 2020 Percentage of Percentage of Agency Fair Value Entire Portfolio Fair Value Entire Portfolio Fannie Mae $ 4,315,090 77.0% $ 2,733,960 73.4% Freddie Mac 1,286,333 23.0% 992,935 26.6% Total Portfolio $ 5,601,423 100.0% $ 3,726,895 100.0% September 30, 2021 December 31, 2020 Weighted Average Pass-through Purchase Price $ 107.61 $ 107.43 Weighted Average Structured Purchase Price $ 15.53 $ 20.06 Weighted Average Pass-through Current Price $ 106.88 $ 108.94 Weighted Average Structured Current Price $ 13.40 $ 10.87 Effective Duration (1) 3.350 2.360 (1) Effective duration is the approximate percentage change in price for a 100 bps change in rates. An effective duration of 3.350 indicates that an interest rate increase of 1.0% would be expected to cause a 3.350% decrease in the value of the RMBS in the Company’s investment portfolio at September 30, 2021. An effective duration of 2.360 indicates that an interest rate increase of 1.0% would be expected to cause a 2.360% decrease in the value of the RMBS in the Company’s investment portfolio at December 31, 2020. 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. The following table presents a summary of portfolio assets acquired during the nine months ended September 30, 2021 and 2020, including securities purchased during the period that settled after the end of the period, if any. ($ in thousands) 2021 2020 Total Cost Average Price Weighted Average Yield Total Cost Average Price Weighted Average Yield Pass-through RMBS $ 4,871,121 $ 106.96 1.56% $ 3,012,072 $ 107.22 1.67% Structured RMBS 125,728 13.04 3.80% - - - Borrowings As of September 30, 2021, 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 23 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 September 30, 2021, we had obligations outstanding under the repurchase agreements of approximately $5,213.9 million with a net weighted average borrowing cost of 0.13%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 1 to 349 days, with a weighted average remaining maturity of 30 days. Securing the repurchase agreement obligations as of September 30, 2021 are RMBS with an estimated fair value, including accrued interest, of approximately $5,430.3 million and a weighted average maturity of 344 months, and cash pledged to counterparties of approximately $47.5 million. Through October 28, 2021, we have been able to maintain our repurchase facilities with comparable terms to those that existed at September 30, 2021 with maturities through September 14, 2022. The table below presents information about our period end, maximum and average balances of borrowings for each quarter in 36 2021 to date and 2020. ($ 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 September 30, 2021 $ 5,213,869 $ 5,214,254 $ 4,864,287 $ 349,582 7.19% June 30, 2021 4,514,704 4,517,953 4,348,192 166,512 3.83% March 31, 2021 4,181,680 4,204,935 3,888,633 293,047 7.54% December 31, 2020 3,595,586 3,597,313 3,438,444 157,142 4.57% September 30, 2020 3,281,303 3,286,454 3,228,021 53,282 1.65% June 30, 2020 3,174,739 3,235,370 2,992,494 182,245 6.09% March 31, 2020 2,810,250 4,297,621 3,129,178 (318,928) (10.19)% (1) (1) The lower ending balance relative to the average balance during the quarter ended March 31, 2020 reflects the disposal of RMBS pledged as collateral in order to maintain cash and liquidity in response to the dislocations in the financial and mortgage markets resulting from the economic impacts of COVID-19. During the quarter ended March 31, 2020, the Company’s investment in RMBS decreased $642.1 million. 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. Our principal immediate sources of liquidity include cash balances, unencumbered assets and borrowings under repurchase agreements. Our borrowing capacity will vary over time as the market value of our interest earning assets varies. 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. 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. 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, as it did during the three months ended March 31, 2020. 37 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 repurchase transaction basis. Throughout the nine months ended September 30, 2021, haircuts on our pledged collateral remained stable and as of September 30, 2021, our weighted average haircut was approximately 5.0% of the value of our collateral. While we did not have any TBAs at September 30, 2021, we do acquire TBAs from time to time. TBAs represent a form of off-balance sheet financing and are accounted for as derivative instruments. (See Note 4 to our Financial Statements in this Form 10-Q for additional details on 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, 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. As discussed earlier, 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 repurchase 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. The following table summarizes the effect on our liquidity and cash flows from contractual obligations for repurchase agreements and interest expense on repurchase agreements. (in thousands) Obligations Maturing Within One Year One to Three Years Three to Five Years More than Five Years Total Repurchase agreements $ 5,213,869 $ - $ - $ - $ 5,213,869 Interest expense on repurchase agreements (1) 1,281 - - - 1,281 Totals $ 5,215,150 $ - $ - $ - $ 5,215,150 (1) Interest expense on repurchase agreements is based on current interest rates as of September 30, 2021 and the remaining term of the liabilities existing at that date. In future periods, we expect to continue to finance our activities in a manner that is consistent with our current operations through 38 repurchase agreements. As of September 30, 2021, we had cash and cash equivalents of $424.1 million. We generated cash flows of $497.8 million from principal and interest payments on our RMBS and had average repurchase agreements outstanding of $4,367.0 million during the nine months ended September 30, 2021. Stockholders’ Equity On January 23, 2020, we entered into the January 2020 Equity Distribution Agreement with three sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $200,000,000 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 3,170,727 shares under the January 2020 Equity Distribution Agreement for aggregate gross proceeds of $19.8 million, and net proceeds of approximately $19.4 million, after commissions and fees, prior to its termination in August 2020. 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 27,493,650 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 7,600,000 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 $5.20 per share. In addition, we granted J.P. Morgan a 30-day option to purchase up to an additional 1,140,000 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 8,740,000 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 8,000,000 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 $5.45 per share. In addition, we granted J.P. Morgan a 30-day option to purchase up to an additional 1,200,000 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 9,200,000 shares of our common stock occurred on March 5, 2021, with proceeds to us of approximately $50.0 million, net of offering expenses payable. 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 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 September 30, 2021, we issued a total of 41,568,338 shares under the June 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately $211.0 million, and net proceeds of approximately $207.5 million, after commissions and fees. Subsequent to September 30, 2021 and through October 29, 2021, we issued a total of 7,838,998 shares under the June 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately $39.0 million, and net proceeds of approximately $38.4 million, after commissions and fees. Outlook Economic Summary The effects of COVID-19 continued to dominate economic activity during the third quarter of 2021, particularly the Delta variant that first emerged in earnest during July. Daily new infections from the Delta variant rose rapidly during the summer but appeared to peak in early September and have been slowly falling since. COVID related deaths have followed a similar pattern. Progress on vaccinations has slowed, and most of the new cases were among the unvaccinated. This has led to 39 various measures by governments and corporations to mandate employees receive vaccinations. The net effect of a spreading virus and a reluctance on the part of many to get vaccinated has been subdued job growth during the third quarter of 2021. This is particularly true among workers with high exposure to customers, such as those in the leisure and hospitality industries. The various forms of pandemic related supplemental unemployment insurance ended in early September, so job growth may accelerate in the fourth quarter. In the interim, the combination of a reluctance to return to work on the part of many individuals, coupled with sufficient income via unemployment insurance, has resulted in both robust demand for goods and services and shortages of labor in many industries. Coupled with a demand/supply imbalance in favor of demand for many commodities and parts, the combination of the two forces has led to severe supply shortages across the economy. The supply imbalances for goods and services have in turn led to price pressures for both, driving inflation to multi-decade highs. The Fed chairman, among other members of the Federal Open Market Committee (“FOMC”) have maintained these inflationary forces are temporary and will ease once the effects of the COVID pandemic fade and workers can return to work. Yet, as implied by market pricing of inflation linked U.S. Treasury securities and opinions expressed by various market participants, inflation may prove to be more than transitory, and of late even FOMC members themselves have admitted inflation has remained high longer than they had anticipated. Over the course of the third quarter and into the fourth, expectations for growth in the U.S. economy during the third quarter continued to decline. On October 28, 2021, the advanced read on gross domestic product growth for the U.S. economy was reported to be 2.0%. Expectations for growth during the quarter were approximately 4% to 7% at the beginning of the quarter. As noted above, job growth has decelerated and supply constraints of goods and services are keeping activity levels suppressed. Over the course of the balance of the year it should become apparent whether or not the supply constraints, especially with respect to labor, are transitory or not now that essentially all forms of pandemic related unemployment insurance have ended and the new cases of the Delta variant of the COVID virus are subsiding. This in turn should also answer the question about the transitory nature of inflation. The housing market remains robust as evidenced by sales of new and existing homes, as well as new home construction. However, as home prices have risen at 10% – 20% over the last year and supply shortages of goods and materials are constraining new home construction, this trend may slow. If this were to occur, it would be beneficial for the Company’s RMBS portfolio as prepayments related to housing turnover may decelerate. Legislative Response and the Fed Congress passed the CARES Act quickly in response to the pandemic’s emergence in the spring of 2021and followed with additional legislation over the ensuing months. However, as certain provisions of the CARES Act expired, such as supplemental unemployment insurance in July of 2021, there appeared to be a need for additional stimulus for the economy to deal with the surge in the pandemic that occurred as cold weather set in, particularly over the Christmas holiday. As mentioned above, the Federal government eventually passed an additional stimulus package in late December of 2020 and again in March of 2021. In addition, the Fed has provided, and continues to provide, as much support to the markets and the economy as it can within the constraints of its mandate. During the third quarter of 2020, the Fed unveiled a new monetary policy framework focused on average inflation rate targeting that allows the Fed Funds rate to remain quite low, even if inflation is expected to temporarily surpass the 2% target level. Further, the Fed has indicated that it will look past the presence of very tight labor markets, should they be present at the time. This marks a significant shift from their prior policy framework, which was focused on the unemployment rate as a key indicator of impending inflation. Adherence to this policy could steepen the U.S. Treasury curve as short-term rates could remain low for a considerable period but longer-term rates could rise given the Fed’s intention to let inflation potentially run above 2% in the future as the economy more fully recovers. The response of U.S. Treasury rates appeared to follow this pattern precisely during the first quarter of 2021, but have since reversed since early in the second quarter 2021. Interest Rates Interest rates across the U.S. Treasury curve and U.S. dollar swap curve were little changed during the third quarter of 2021. The only notable development within the rates complex was the slight flattening of both curves between the five- and 40 30-year points as the market anticipates the eventual tapering of asset purchases beginning in the fourth quarter of 2021 and increases to the Fed funds rate in either the second half of 2022 or early 2023. As described above, the Delta variant of the COVID virus has dominated economic activity, both during the third quarter of 2021 and generally since March of 2020. However, the FOMC and the Fed chairman have looked through the effects of the pandemic and see the impact fading. At the conclusion of the September FOMC meeting, the Fed chairman was not ambiguous in expressing his view that the economy had made “substantial further progress” towards achieving their dual mandates of price stability and full employment. As a result, the Fed appeared to indicate that it was close to commencing the tapering of their asset purchases. More specifically, the Fed chairman indicated they are likely to begin the tapering of their asset purchases this year and that they would likely complete the tapering by mid next year. The Fed also released their summary of economic projections, or “Dot Plot” as it is known, at the conclusion of the meeting and, as was the case with the June FOMC Dot Plot, the Dot Plot indicated FOMC members anticipated increasing the Fed Funds rate sooner and by a larger amount than the market anticipated. Nine of the eighteen FOMC members, as evidenced by the Dot Plot released in September, expect the Fed to increase the funds rate at least once in 2022. This surprised the market, and the market pricing of forward short-term rates quickly adjusted to reflect these expectations. As the fourth quarter has unfolded and inflationary pressures have continued to build, market pricing of forward short-term rates have continued to reflect additional increases to the Fed Funds rate. Further, as inflation persists at higher levels and continues to challenge the Fed’s assertion that it will prove transitory, longer maturity rates have moved higher so far in the fourth quarter. The level of the 10-year U.S. Treasury is close to matching the year-to-date high yield established on March 31, 2021. The Agency RMBS Market Performance for the Agency RMBS market for the third quarter was a modest 0.01%, generally in-line with most other asset classes. The excess return to comparable duration U.S. Treasuries and swaps for the Agency RMBS sub-index was 0.1% for both for the quarter. Within the Agency RMBS sector, higher coupon fixed rate securities outperformed lower coupons, specifically the coupon currently in widespread production. Total returns for the third quarter for 2.0% and 2.5% securities were -0.4% and 0.00%, respectively. For 3.0% and 3.5% coupons the returns were 0.6% and 0.5%, respectively. Thirty-year and fifteen-year securities both returned 0.1% for the quarter. As mentioned above, at the conclusion of the September FOMC meeting the chairman made it quite clear the Fed was likely to begin to taper their asset purchases this year and conclude the $40 billion per month purchases of Agency RMBS assets by mid-2022. Given the length of time the Fed has been supporting the Agency RMBS market, coupled with banks that are flush with deposits that need to be invested, price levels in the Agency RMBS market were quite rich prior to this development, especially the coupons the Fed routinely purchases, which have been the 2.0% and 2.5% coupons predominantly. These factors are what drove the relative underperformance of these two coupons for the quarter and has continued to do so into the fourth quarter. The second driver of Agency RMBS performance, both for the third quarter of 2021 and beyond, is, as always, the level of prepayments. With interest rates relatively steady during the third quarter and, after such a prolonged period of low interest rates prepayment speeds on higher coupon, premium priced securities were expected to eventually slow. This appears to be finally happening, as evidenced by the August and September prepayment reports, released in September and October, respectively. As interest rates have moved higher so far in the fourth quarter, approaching levels last seen at the conclusion of the first quarter, market participants expect this trend to continue, and which is reflected in the performance of these coupons quarter to date. Recent Legislative and Regulatory Developments The Fed conducted large scale overnight repo operations from late 2019 until July 2020 to address disruptions in the U.S. Treasury, Agency debt and Agency MBS financing markets. These operations ceased in July 2020 after the central bank successfully tamed volatile funding costs that had threatened to cause disruption across the financial system. 41 The Fed has taken a number of other actions to stabilize markets as a result of the impacts of the COVID-19 pandemic. In March of 2020, the Fed announced a $700 billion asset purchase program to provide liquidity to the U.S. Treasury and Agency RMBS markets. The Fed also lowered the Fed Funds rate to a range of 0.0% – 0.25%, after having already lowered the Fed Funds rate by 50 bps earlier in the month. Later that same month the Fed announced a program to acquire U.S. Treasuries and Agency RMBS in the amounts needed to support smooth market functioning. With these purchases, market conditions improved substantially. Currently, the Fed is committed to purchasing $80 billion of U.S. Treasuries and $40 billion of Agency RMBS each month. Chairman Powell and the Fed have reiterated their commitment to this level of asset purchases at every meeting since their meeting on June 30, 2020. At the September 2021 meeting, the Fed generally assessed that, provided that the economic recovery remained broadly on track, a gradual tapering process that concluded around the middle of next year would likely be appropriate. The Fed noted that if a decision to begin tapering purchases occurred at the next meeting, the process of tapering could commence with the monthly purchase calendars beginning in either mid-November or mid- December. The Fed has taken various other steps to support certain other fixed income markets, to support mortgage servicers and to implement various portions of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The CARES Act was passed by Congress and signed into law on March 27, 2020. This over $2 trillion COVID-19 relief bill, among other things, provided for direct payments to each American making up to $75,000 a year, increased unemployment benefits for up to four months (on top of state benefits), funding to hospitals and health providers, loans and investments to businesses, states and municipalities and grants to the airline industry. On April 24, 2020, President Trump signed an additional funding bill into law that provided an additional $484 billion of funding to individuals, small businesses, hospitals, health care providers and additional coronavirus testing efforts. Various provisions of the CARES Act began to expire in July 2020, including a moratorium on evictions, expanded unemployment benefits, and a moratorium on foreclosures. On August 8, 2020, President Trump issued Executive Order 13945, directing the Department of Health and Human Services, the Centers for Disease Control and Prevention (“CDC”), the Department of Housing and Urban Development, and Department of the Treasury to take measures to temporarily halt residential evictions and foreclosures, including through temporary financial assistance. On December 27, 2020, an additional $900 billion coronavirus aid package was signed into law as part of the Consolidated Appropriations Act of 2021, providing for extensions of many of the CARES Act policies and programs as well as additional relief. The package provided for, among other things, direct payments to most Americans with a gross income of less than $75,000 a year, extension of unemployment benefits through March 14, 2021, funding for procurement of vaccines and health providers, loans to qualified businesses, funding for rental assistance and funding for schools. On January 29, 2021, the CDC issued guidance extending eviction moratoriums for covered persons through March 31, 2021, which was extended to July 31, 2021. On August 26, 2021, the U.S. Supreme Court issued a decision ending the CDC eviction moratorium. In addition, on February 9, 2021, the FHFA announced that the foreclosure moratorium begun under the CARES Act for loans backed by Fannie Mae and Freddie Mac and the eviction moratorium for real estate owned by Fannie Mae and Freddie Mac were extended until March 31, 2021, which was further extended through September 30, 2021. On July 30, 2021, the FHA announced an extension of the eviction moratorium through September 30, 2021 for foreclosed borrowers and other occupants and noted the expiration of the foreclosure moratorium on July 31, 2021. On March 11, 2021, the $1.9 trillion American Rescue Plan Act of 2021 was signed into law. This stimulus program furthered the Federal government’s efforts to stabilize the economy and provide assistance to sectors of the population still suffering from the various physical and economic effects of the pandemic. 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. On June 30, 2020, the FHFA released a proposed rule on a new regulatory framework for the GSEs which seeks to implement both a risk-based capital framework and minimum leverage capital requirements. The final rule on the new capital framework for the GSEs was published in the federal register in December 2020. On January 14, 2021, the U.S. Treasury and the FHFA executed letter agreements allowing the GSEs 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 GSE has common equity Tier 1 capital of at least 3% of its assets, (ii) the GSEs will comply with the FHFA’s regulatory 42 capital framework, (iii) higher-risk single-family mortgage acquisitions will be restricted to current levels, and (iv) the U.S. Treasury and the FHFA will establish a timeline and process for future GSE reform. However, no definitive proposals or legislation have been released or enacted with respect to ending the conservatorship, unwinding the GSEs, or materially reducing the roles of the GSEs in the U.S. mortgage market. On June 23, 2021, President Biden removed the director of the FHFA and appointed an acting director. On September 14, 2021, the FHFA suspended certain provisions added to the letter agreements on January 14, 2021, including limits on the enterprises' cash windows, multifamily lending, loans with higher risk characteristics, and second homes and investment properties. The enterprises will continue to build capital under the continuing provisions of the letter agreements. Additionally, the FHFA is reviewing the enterprise regulatory capital framework and expects to announce further action in the near future. In 2017, policymakers announced that LIBOR will be replaced by December 31, 2021. The directive was spurred by the fact that banks are uncomfortable contributing to the LIBOR panel given the shortage of underlying transactions on which to base levels and the liability associated with submitting an unfounded level. The ICE Benchmark Administration, in its capacity as administrator of USD LIBOR, has confirmed that it will cease publication of (i) the one-week and two-month USD LIBOR settings immediately following the LIBOR publication on December 31, 2021, and (ii) the overnight and one, three, six and 12- month USD LIBOR settings immediately following the LIBOR publication on June 30, 2023. A joint statement by key regulatory authorities calls on banks to cease entering into new contracts that use USD LIBOR as a reference rate by no later than December 31, 2021. The Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, has proposed replacing USD-LIBOR with a new SOFR, a rate based on U.S. repo trading. Many banks believe that it may take four to five years to complete the transition to SOFR, for certain, despite the 2021 deadline. We will monitor the emergence of this new rate carefully as it will potentially become the new benchmark for hedges and a range of interest rate investments. At this time, however, no consensus exists as to what rate or rates may become accepted alternatives to LIBOR. Effective January 1, 2021, Fannie Mae, in alignment with Freddie Mac, will extend the timeframe for its delinquent loan buyout policy for Single-Family Uniform Mortgage-Backed Securities (UMBS) and Mortgage-Backed Securities (MBS) from four consecutively missed monthly payments to twenty-four consecutively missed monthly payments (i.e., 24 months past due). This new timeframe will apply to outstanding single-family pools and newly issued single-family pools and was first reflected when January 2021 factors were released on the fourth business day in February 2021. For Agency RMBS investors, when a delinquent loan is bought out of a pool of mortgage loans, the removal of the loan from the pool is the same as a total prepayment of the loan. The respective GSEs currently anticipate, however, that delinquent loans will be repurchased in most cases before the 24-month deadline under one of the following exceptions listed below. • a loan that is paid in full, or where the related lien is released and/or the note debt is satisfied or forgiven; • a loan repurchased by a seller/servicer under applicable selling and servicing requirements; • a loan entering a permanent modification, which generally requires it to be removed from the MBS. During any modification trial period, the loan will remain in the MBS until the trial period ends; • a loan subject to a short sale or deed-in-lieu of foreclosure; or • a loan referred to foreclosure. Because of these exceptions, the GSEs currently believe based on prevailing assumptions and market conditions this change will have only a marginal impact on prepayment speeds, in aggregate. Cohort level impacts may vary. For example, more than half of loans referred to foreclosure are historically referred within six months of delinquency. The degree to which speeds are affected depends on delinquency levels, borrower response, and referral to foreclosure timelines. The scope and nature of the actions the U.S. government or the Fed will ultimately undertake are unknown and will continue to evolve, especially in light of the COVID-19 pandemic, President Biden’s new administration and the new Congress in the United States. Effect on Us 43 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. Lower long-term interest rates can affect the value of our Agency RMBS in a number of ways. 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 higher-coupon Agency RMBS. This is because investors typically place a premium on assets with yields that are higher than market yields. 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 our Agency RMBS 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. 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 the Company uses 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. As described above, 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. In March of 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, a commitment it reaffirmed at all subsequent Fed meetings. At the September 2021 meeting, the Fed generally assessed that, provided that the economic recovery remained broadly on track, a gradual tapering process that concluded around the middle of next year would likely be appropriate. The Fed noted that if a decision to begin tapering purchases occurred at the next meeting, the process of tapering could commence with the monthly purchase calendars beginning in either mid-November or mid-December. If the Fed modifies, reduces or suspends its purchases of Agency RMBS, our investment portfolio could be negatively impacted. Further, the moratoriums on foreclosures described 44 above will likely delay potential defaults on loans that would otherwise be bought out of Agency MBS pools as described above. Depending on the ultimate resolution of the foreclosures, when and if it occurs, these loans may be removed from the pool into which they were securitized. If this were to occur, it would have the effect of delaying a prepayment on the Company’s securities until such time. As the majority of the Company’s Agency RMBS assets were acquired at a premium to par, this will tend to increase the realized yield on the asset in question. 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. An increase in the Fed Funds rate or LIBOR would 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. This 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 Eurodollar, Fed Funds and T-Note futures contracts or interest rate swaptions. Summary Once again COVID-19 dominated economic activity this quarter. However, we may be at a crossroads as the effects of the Delta variant appears to be waning and the number of people with either a vaccination and/or prior infections of the virus grow. Pandemic related relief measures such as supplemental unemployment insurance payments and foreclosure moratoriums are essentially over. Hopefully the combination of all of these factors will lead to surging job growth and act to quickly lessen the severe supply shortage of goods and labor. This in turn should slow the stubbornly high inflation the economy has suffered. If these events come to pass, the economy appears to be positioned to perform very well, and the Fed has stated that it will slowly remove the considerable accommodation they have provided the market via a tapering of their asset purchases and eventually increases to the Fed Funds rate. If these events do not unfold and the supply shortages of goods and labor remain, the economy will likely continue to suffer from elevated levels of inflation. Under this scenario the path of economic growth is less certain, and the path of monetary policy could prove to be quite challenging for the Fed. The performance of the Agency RMBS market was very modest in absolute returns, at 0.0% and 0.1% versus comparable duration interest rates and swaps. Performance for the sector was generally in line with other sectors of the fixed income markets. Within the Agency RMBS universe, performance was skewed towards higher coupons and away from lower coupons that comprise the bulk of recent production and Fed purchases. This has continued into the fourth quarter, in large part because the Fed has made it quite clear the hurdle needed for them to begin to taper their asset purchases has been met and they plan to commence doing so this year, likely ending in mid-2022. Prepayment speeds, particularly on high coupon securities, have moderated and are likely to do so even more with rates higher so far in the fourth quarter and the typical seasonal slow down as we approach the winter months. Critical Accounting Estimates 45 Our condensed 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 estimates involve decisions and assessments which could significantly affect reported assets, liabilities, revenues and expenses. There have been no changes to our critical accounting estimates as discussed in our annual report on Form 10-K for the year ended December 31, 2020. Capital Expenditures At September 30, 2021, we had no material commitments for capital expenditures. Off-Balance Sheet Arrangements At September 30, 2021, we did not have any off-balance sheet arrangements. Dividends In addition to other requirements that must be satisfied 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 deduction 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 $ 1.395 $ 4,662 2014 2.160 22,643 2015 1.920 38,748 2016 1.680 41,388 2017 1.680 70,717 2018 1.070 55,814 2019 0.960 54,421 2020 0.790 53,570 2021 - YTD (1) 0.650 74,045 Totals $ 12.305 $ 416,008 (1) On October 12, 2021, the Company declared a dividend of $0.065 per share to be paid on November 26, 2021. The effect of this dividend is included in the table above, but is not reflected in the Company’s financial statements as of September 30, 2021. Inflation Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with GAAP and our distributions will be determined by our Board of Directors consistent with our obligation to distribute to our stockholders at least 90% of our REIT taxable income on an annual basis in order to maintain our REIT qualification; in each case, our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation. 46