Orchid Island Capital, Inc. 10-K

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. 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 August 2, 2017, we entered into an equity distribution agreement (the “August 2017 Equity Distribution Agreement”) with two sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $125,000,000 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 15,123,178 shares under the August 2017 Equity Distribution Agreement for aggregate gross proceeds of $125.0 million, and net proceeds of approximately $123.1 million, after commissions and fees, prior to its termination in July 2019. On July 30, 2019, we entered into an underwriting agreement (the “2019 Underwriting Agreement”) with Morgan Stanley & Co. LLC, Citigroup Global Markets Inc. and J.P. Morgan Securities LLC, as representatives of the underwriters named therein, relating to the offer and sale of 7,000,000 shares of the Company’s common stock at a price to the public of $6.55 per share. The underwriters 48 purchased the shares pursuant to the 2019 Underwriting Agreement at a price of $6.3535 per share. The closing of the offering of 7,000,000 shares of common stock occurred on August 2, 2019, with net proceeds to us of approximately $44.2 million after deduction of underwriting discounts and commissions and other estimated offering expenses. 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 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 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 49,407,336 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 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, 2021, we issued a total of 15,835,700 shares under the October 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately $78.3 million, and net proceeds of approximately $77.0 million, after commissions and fees. Stock Repurchase Program 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 49 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 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 16,861,994 shares, bringing the remaining authorization under the stock repurchase program to 17,699,305 shares, representing approximately 10% of the Company’s currently outstanding shares of common stock. This stock repurchase program has no termination date. From the inception of the stock repurchase program through December 31, 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. During the year ended December 31, 2020, the Company repurchased a total of 19,891 shares at an aggregate cost of approximately $0.1 million, including commissions and fees, for a weighted average price of $3.42 per share. There were no shares repurchased during the year ended December 31, 2021. 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 Fed and are likely to occur in 2022; ● 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 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 years ended December 31, 2021, as compared to the Company’s results of operations for the years ended December 31, 2020 and 2019. Net (Loss) Income Summary Net loss for the year ended December 31, 2021 was $64.8 million, or $0.54 per share. Net income for the year ended December 31, 50 2020 was $2.1 million, or $0.03 per share. Net income for the year ended December 31, 2019 was $24.3 million, or $0.43 per share. The components of net (loss) income for the years ended December 31, 2021, 2020 and 2019 are presented in the table below: (in thousands) 2021 2020 2019 Interest income $ 134,700 $ 116,045 $ 142,324 Interest expense (7,090) (25,056) (83,666) Net interest income 127,610 90,989 58,658 Losses on RMBS and derivative contracts (177,119) (78,317) (24,008) Net portfolio (loss) income (49,509) 12,672 34,650 Expenses (15,251) (10,544) (10,385) Net (loss) income $ (64,760) $ 2,128 $ 24,265 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 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. 51 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 December 31, 2021 $ (44,564) $ (82,597) $ 38,033 $ (0.27) $ (0.49) $ 0.22 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 December 31, 2019 18,612 3,840 14,772 0.29 0.06 0.23 September 30, 2019 (8,477) (19,431) 10,954 (0.14) (0.32) 0.18 June 30, 2019 3,533 (7,670) 11,203 0.07 (0.15) 0.22 March 31, 2019 10,597 (747) 11,344 0.22 (0.02) 0.24 Years Ended December 31, 2021 $ (64,760) $ (177,119) $ 112,359 $ (0.54) $ (1.46) $ 0.92 December 31, 2020 2,128 (78,317) 80,445 0.03 (1.17) 1.20 December 31, 2019 24,265 (24,008) 48,273 0.43 (0.43) 0.86 (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 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. 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 52 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 the years ended December 31, 2021, 2020 and 2019 and each quarter during 2021, 2020 and 2019. 53 Gains (Losses) on Derivative Instruments (in thousands) Economic 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 December 31, 2021 $ 10,945 $ 2,568 $ - $ (7,949) $ 16,326 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) December 31, 2019 10,792 (512) - 3,823 7,481 September 30, 2019 (8,648) 572 1,907 1,244 (12,371) June 30, 2019 (34,288) (1,684) - 1,464 (34,068) March 31, 2019 (19,032) (4,641) - 2,427 (16,818) Years Ended December 31, 2021 $ 26,877 $ 3,432 $ (8,559) $ (18,345) $ 50,349 December 31, 2020 (79,092) (6,813) 9,949 (23,341) (58,887) December 31, 2019 (51,176) (6,265) 1,907 8,958 (55,776) 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, 2021 $ 44,421 $ 2,023 $ (7,949) $ 9,972 $ 42,398 $ 34,449 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 December 31, 2019 37,529 20,022 3,823 16,199 17,507 21,330 September 30, 2019 35,907 22,321 1,244 21,077 13,586 14,830 June 30, 2019 36,455 22,431 1,464 20,967 14,024 15,488 March 31, 2019 32,433 18,892 2,427 16,465 13,541 15,968 Years Ended December 31, 2021 $ 134,700 $ 7,090 $ (18,345) $ 25,435 $ 127,610 $ 109,265 December 31, 2020 116,045 25,056 (23,341) 48,397 90,989 67,648 December 31, 2019 142,324 83,666 8,958 74,708 58,658 67,616 (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. 54 Net Interest Income During 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. For the comparable period ended December 31, 2020, we generated $91.0 million of net interest income, consisting of $116.0 million of interest income from RMBS assets offset by $25.1 million of interest expense on borrowings. The $18.7 million increase in interest income was driven by a $1,569.3 million increase in average RMBS that was partially offset by a 72 basis point ("bps") decrease in yield on average RMBS. The $18.0 million decrease in interest expense for the year ended December 31, 2021 was driven by a 63 bps decrease in the average cost of funds, offset by a $1,510.5 million increase in average borrowings. For the year ended December 31, 2019, we generated $58.7 million of net interest income, consisting of $142.3 million of interest income from RMBS assets offset by $83.7 million of interest expense on borrowings. The $26.3 million decrease in interest income for the year ended December 31, 2020, compared to the year ended December 31, 2019, was due to a 69 bps decrease in yield on average RMBS, combined with a $71.6 million decrease in average RMBS during the period. The $58.6 million decrease in interest expense for the year ended December 31, 2020 was due to a $114.7 million decrease in average borrowings, combined with a 175 bps decrease in the average cost of funds. On an economic basis, our interest expense on borrowings for the years ended December 31, 2021, 2020 and 2019 was $25.4 million, $48.4 million and $74.7 million, respectively, resulting in $109.3 million, $67.6 million and $67.6 million of economic net interest income, respectively. The tables below provide information on our portfolio average balances, interest income, yield on assets, average borrowings, interest expense, cost of funds, net interest income and net interest spread for each quarter in 2021, 2020 and 2019 and for the years ended December 31, 2021, 2020 and 2019 on both a GAAP and economic basis. ($ 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, 2021 $ 6,056,259 $ 44,421 2.93% $ 5,728,988 $ 2,023 $ 9,972 0.14% 0.70% 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% December 31, 2019 3,705,920 37,529 4.05% 3,631,042 20,022 16,199 2.21% 1.78% September 30, 2019 3,674,087 35,907 3.91% 3,571,752 22,321 21,077 2.50% 2.36% June 30, 2019 3,307,885 36,455 4.41% 3,098,133 22,431 20,967 2.90% 2.71% March 31, 2019 3,051,509 32,433 4.25% 2,945,895 18,892 16,465 2.57% 2.24% Years Ended December 31, 2021 $ 4,932,548 $ 134,700 2.73% $ 4,707,525 $ 7,090 $ 25,435 0.15% 0.54% December 31, 2020 3,363,208 116,045 3.45% 3,197,034 25,056 48,397 0.78% 1.51% December 31, 2019 3,434,850 142,324 4.14% 3,311,705 83,666 74,708 2.53% 2.26% 55 ($ in thousands) Net Interest Income Net Interest Spread GAAP Economic GAAP Economic Basis Basis (2) Basis Basis (4) Three Months Ended December 31, 2021 $ 42,398 $ 34,449 2.79% 2.23% 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% December 31, 2019 17,507 21,330 1.84% 2.27% September 30, 2019 13,586 14,830 1.41% 1.55% June 30, 2019 14,024 15,488 1.51% 1.70% March 31, 2019 13,541 15,968 1.68% 2.01% Years Ended December 31, 2021 $ 127,610 $ 109,265 2.58% 2.19% December 31, 2020 90,989 67,649 2.67% 1.94% December 31, 2019 58,658 67,616 1.61% 1.88% (1) Portfolio yields and costs of borrowings presented in the tables above and the tables on pages 60 and 61 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 61 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 years ended December 31, 2021 and 2020 was $134.7 million and $116.0 million, respectively. We had average RMBS holdings of $4,932.5 million and $3,363.2 million for the years ended December 31, 2021 and 2020, respectively. The yield on our portfolio was 2.73% and 3.45% for the years ended December 31, 2021 and 2020, respectively. For the year ended December 31, 2021 as compared to the year ended December 31, 2020, there was a $18.7 million increase in interest income due to a $1,569.3 million increase in average RMBS, offset by a 72 bps decrease in the yield on average RMBS. For the year ended December 31, 2019, we had interest income of $142.3 million and average RMBS holdings of $3,434.9 million, resulting in a yield on our portfolio of 4.14%. For the year ended December 31, 2020, as compared to the year ended December 31, 2019, there was a $26.3 million decrease in interest income due to a $71.6 million decrease in average RMBS, combined with a 69 bps decrease in the yield on average RMBS. The table below presents the average portfolio size, income and yields of our respective sub-portfolios, consisting of structured RMBS and PT RMBS for the years ended December 31, 2021, 2020 and 2019 and for each quarter during 2021, 2020 and 2019. 56 ($ 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, 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% 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% December 31, 2019 3,611,461 94,459 3,705,920 36,600 929 37,529 4.05% 3.93% 4.05% September 30, 2019 3,558,075 116,012 3,674,087 36,332 (425) 35,907 4.08% (1.47)% 3.91% June 30, 2019 3,181,976 125,909 3,307,885 34,992 1,463 36,455 4.40% 4.65% 4.41% March 31, 2019 2,919,415 132,094 3,051,509 30,328 2,105 32,433 4.16% 6.37% 4.25% Years Ended December 31, 2021 $ 4,832,257 $ 100,291 $ 4,932,548 $ 131,939 $ 2,761 $ 134,700 2.73% 2.75% 2.73% December 31, 2020 3,322,248 40,960 3,363,208 115,244 801 116,045 3.47% 1.96% 3.45% December 31, 2019 3,317,732 117,118 3,434,850 138,252 4,072 142,324 4.17% 3.48% 4.14% Interest Expense and the Cost of Funds We had average outstanding borrowings of $4,707.5 million and $3,197.0 million and total interest expense of $7.1 million and $25.1 million for the years ended December 31, 2021 and 2020, respectively. Our average cost of funds was 0.15% for the year ended December 31, 2021, compared to 0.78% for the comparable period in 2020. There was a $1,510.5 million increase in average outstanding borrowings during the year ended December 31, 2021 as compared to the year ended December 31, 2020. For the year ended December 31, 2019, we had average borrowings of $3,311.7 million and total interest expense of $83.7 million, resulting in an average cost of funds of 2.53%. There was a 175 bps decrease in the average cost of funds and an $114.7 million decrease in average outstanding borrowings during the year ended December 31, 2020 as compared to the year ended December 31, 2019. Our economic interest expense was $25.4 million, $48.4 million and $74.7 million for the years ended December 31, 2021, 2020 and 2019, respectively. There was a 97 bps decrease in the average economic cost of funds to 0.54% for the year ended December 31, 2021 from 1.51% for the year ended December 31, 2020. The reason for the decrease in economic cost of funds is primarily due to the lower cost of our borrowings noted above, offset by the negative performance of our hedging activities during the period. There was a 75 bps decrease in the average economic cost of funds to 1.51% for the year ended December 31, 2020 from 2.26% for the year ended December 31, 2019. Since all of our repurchase agreements are short-term, changes in market rates directly affect our interest expense. Our average cost of funds calculated on a GAAP basis was 5 bps above average one-month LIBOR and 9 bps below average six-month LIBOR for the quarter ended December 31, 2021. Our average economic cost of funds was equal to average one-month LIBOR and 47 bps above average six-month LIBOR for the quarter ended December 31, 2021. The average term to maturity of the outstanding repurchase agreements was 27 days and 31 days at December 31, 2021 and 2020, respectively. The tables below present the average balance of borrowings outstanding, interest expense and average cost of funds, and average one-month and six-month LIBOR rates for each quarter in 2021, 2020 and 2019 and for the years ended December 31, 2021, 2020 and 2019 on both a GAAP and economic basis. 57 ($ 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, 2021 $ 5,728,988 $ 2,023 $ 9,972 0.14% 0.70% 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% December 31, 2019 3,631,042 20,022 16,199 2.21% 1.78% September 30, 2019 3,571,752 22,321 21,077 2.50% 2.36% June 30, 2019 3,098,133 22,431 20,967 2.90% 2.71% March 31, 2019 2,945,895 18,892 16,465 2.57% 2.24% Years Ended December 31, 2021 $ 4,707,525 $ 7,090 $ 25,435 0.15% 0.54% December 31, 2020 3,197,034 25,056 48,397 0.78% 1.51% December 31, 2019 3,311,705 83,666 74,708 2.53% 2.26% 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 December 31, 2021 0.09% 0.23% 0.05% (0.09)% 0.61% 0.47% 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% December 31, 2019 1.90% 1.98% 0.31% 0.23% (0.12)% (0.20)% September 30, 2019 2.22% 2.18% 0.28% 0.32% 0.14% 0.18% June 30, 2019 2.45% 2.49% 0.45% 0.41% 0.26% 0.22% March 31, 2019 2.51% 2.77% 0.06% (0.20)% (0.27)% (0.53)% Years Ended December 31, 2021 0.10% 0.20% 0.05% (0.05)% 0.44% 0.34% December 31, 2020 0.55% 0.69% 0.23% 0.09% 0.96% 0.82% December 31, 2019 2.27% 2.35% 0.26% 0.18% (0.01)% (0.09)% 58 Gains or Losses The table below presents our gains or losses for the years ended December 31, 2021, 2020 and 2019. (in thousands) 2021 2020 2019 Realized losses on sales of RMBS $ (5,542) $ (24,986) $ (10,877) Unrealized (losses) gains on RMBS (198,454) 25,761 38,045 Total (losses) gains on RMBS (203,996) 775 27,168 Losses on interest rate futures (856) (13,044) (18,858) Gains (losses) on interest rate swaps 23,613 (66,212) (26,582) Gains (losses) on payer swaptions (short positions) 9,062 (3,070) (1,379) (Losses) gains on payer swaptions (long positions) (2,580) 98 - Gains on interest rate floors 2,765 - - Gains (losses) on TBA securities (short positions) 3,432 (6,719) (6,264) (Losses) gains on TBA securities (long positions) (8,559) 9,950 1,907 Losses on U.S. Treasury securities - (95) - Total $ (177,119) $ (78,317) $ (24,008) 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, 2021, 2020 and 2019, the Company received proceeds of $2,851.7 million, $4,200.5 million and $3,321.2 million, respectively, from the sales of RMBS. Approximately $1.1 billion of the sales during the year ended December 31, 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. 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. 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, 2020 and 2019. 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) December 31, 2021 1.26% 1.51% 2.35% 3.10% 0.21% 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% December 31, 2019 1.69% 1.92% 3.18% 3.72% 1.91% September 30, 2019 1.55% 1.68% 3.12% 3.61% 2.13% June 30, 2019 1.76% 2.00% 3.24% 3.80% 2.40% March 31, 2019 2.24% 2.41% 3.72% 4.27% 2.61% (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 LIBOR is obtained from the Intercontinental Exchange Benchmark Administration Ltd. 59 Expenses Total operating expenses were $15.3 million, $10.5 million and $10.4 million for the years ended December 31, 2021, 2020 and 2019, respectively. The table below provides a breakdown of operating expenses for the years ended December 31, 2021, 2020 and 2019. (in thousands) 2021 2020 2019 Management fees $ 8,156 $ 5,281 $ 5,528 Overhead allocation 1,632 1,514 1,380 Accrued incentive compensation 1,132 38 115 Directors fees and liability insurance 1,169 998 998 Audit, legal and other professional fees 1,112 1,045 1,105 Direct REIT operating expenses 1,475 1,057 997 Other administrative 575 611 262 Total expenses $ 15,251 $ 10,544 $ 10,385 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, 2023 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 $500 million. The Company is obligated to reimburse the Manager for any direct expenses incurred on its behalf and to pay the Manager the Company’s pro rata portion of certain overhead costs set forth in the management agreement. The Company has contracted with AVM, L.P. (“AVM”) to provide repurchase agreement trading, clearing and administrative services to the Company. Commencing in 2022, the Manager will begin performing these functions and the contracted relationship with AVM may be reduced or eliminated. Following the termination of the arrangements with AVM, the Company will pay the Manager additional fees for its performance of repurchase agreement funding transaction services and related clearing and operational services as set forth in the management agreement, as amended. Should the Company terminate the management agreement without cause, it will pay the Manager a termination fee equal to three times the average annual management fee, as defined in the management agreement, before or on the last day of the term of the agreement. The following table summarizes the management fee and overhead allocation expenses for each quarter in 2021, 2020 and 2019 and for the years ended December 31, 2021, 2020 and 2019. 60 ($ in thousands) Average Average Advisory Services Orchid Orchid Management Overhead Three Months Ended MBS Equity Fee Allocation Total 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 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 December 31, 2019 3,705,920 414,018 1,477 379 1,856 September 30, 2019 3,674,087 394,788 1,440 351 1,791 June 30, 2019 3,307,885 363,961 1,326 327 1,653 March 31, 2019 3,051,509 363,204 1,285 323 1,608 Years Ended December 31, 2021 $ 4,932,548 $ 619,533 $ 8,156 $ 1,632 $ 9,788 December 31, 2020 3,363,208 373,464 5,281 1,514 6,795 December 31, 2019 3,434,850 383,993 5,528 1,380 6,908 Financial Condition: Mortgage-Backed Securities As of December 31, 2021, our RMBS portfolio consisted of $6,511.1 million of Agency RMBS at fair value and had a weighted average coupon on assets of 3.03%. During the year ended December 31, 2021, we received principal repayments of $591.1 million compared to $523.7 million for the year ended December 31, 2020. The average three month prepayment speeds for the quarters ended December 31, 2021 and 2020 were 11.4% and 20.1%, respectively. The following table presents the 3-month constant prepayment rate (“CPR”) experienced on our structured and PT RMBS sub- portfolios, on an annualized basis, for the quarterly periods presented. CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. Specifically, the CPR in the chart below represents the three month prepayment rate of the securities in the respective asset category. Structured PT RMBS RMBS Total Three Months Ended Portfolio (%) Portfolio (%) Portfolio (%) December 31, 2021 9.0 24.6 11.4 September 30, 2021 9.8 25.1 12.4 June 30, 2021 10.9 29.9 12.9 March 31, 2021 9.9 40.3 12.0 December 31, 2020 16.7 44.3 20.1 September 30, 2020 14.3 40.4 17.0 June 30, 2020 13.9 35.3 16.3 March 31, 2020 9.8 22.9 11.9 61 The following tables summarize certain characteristics of the Company’s PT RMBS and structured RMBS as of December 31, 2021 and 2020: ($ in thousands) Weighted Percentage Average of Weighted Maturity Fair Entire Average in Longest Asset Category Value Portfolio Coupon Months Maturity December 31, 2021 Fixed Rate RMBS $ 6,298,189 96.7% 2.93% 342 1-Dec-51 Total Mortgage-backed Pass-through 6,298,189 96.7% 2.93% 342 1-Dec-51 Interest-Only Securities 210,382 3.2% 3.40% 263 25-Jan-52 Inverse Interest-Only Securities 2,524 0.1% 3.75% 300 15-Jun-42 Total Structured RMBS 212,906 3.3% 3.41% 264 25-Jan-52 Total Mortgage Assets $ 6,511,095 100.0% 3.03% 325 25-Jan-52 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 Total Mortgage Assets $ 3,726,895 100.0% 3.19% 333 1-Jan-51 ($ in thousands) December 31, 2021 December 31, 2020 Percentage of Percentage of Agency Fair Value Entire Portfolio Fair Value Entire Portfolio Fannie Mae $ 4,719,349 72.5% $ 2,733,960 73.4% Freddie Mac 1,791,746 27.5% 992,935 26.6% Total Portfolio $ 6,511,095 100.0% $ 3,726,895 100.0% December 31, 2021 December 31, 2020 Weighted Average Pass-through Purchase Price $ 107.19 $ 107.43 Weighted Average Structured Purchase Price $ 15.21 $ 20.06 Weighted Average Pass-through Current Price $ 105.31 $ 108.94 Weighted Average Structured Current Price $ 14.08 $ 10.87 Effective Duration (1) 3.390 2.360 (1) Effective duration is the approximate percentage change in price for a 100 bps change in rates. An effective duration of 3.390 indicates that an interest rate increase of 1.0% would be expected to cause a 3.390% decrease in the value of the RMBS in the Company’s investment portfolio at December 31, 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. 62 The following table presents a summary of portfolio assets acquired during the years ended December 31, 2021 and 2020. ($ in thousands) 2021 2020 Total Cost Average Price Weighted Average Yield Total Cost Average Price Weighted Average Yield Pass-through RMBS $ 6,224,819 $ 106.68 1.63% $ 4,858,602 $ 107.71 1.38% Structured RMBS 205,906 13.61 3.88% 832 12.96 2.80% Borrowings As of December 31, 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 December 31, 2021, we had obligations outstanding under the repurchase agreements of approximately $6,244.1 million with a net weighted average borrowing cost of 0.15%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 5 to 257 days, with a weighted average remaining maturity of 27 days. Securing the repurchase agreement obligations as of December 31, 2021 are RMBS with an estimated fair value, including accrued interest, of approximately $6,525.2 million and a weighted average maturity of 345 months, and cash pledged to counterparties of approximately $57.3 million. Through February 25, 2022, we have been able to maintain our repurchase facilities with comparable terms to those that existed at December 31, 2021 with maturities extending to various dates through September 14, 2022. The table below presents information about our period end, maximum and average balances of borrowings for each quarter in 2021 and 2020. ($ 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 December 31, 2021 $ 6,244,106 $ 6,419,689 $ 5,728,988 $ 515,118 8.99% 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 sale 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. 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. At the 63 onset of the COVID-19 pandemic in the spring of 2020, the markets the Company operates in were severely disrupted and the Company was forced to rely on these sources of liquidity. 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. 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 repurchase transaction basis. Throughout the year ended December 31, 2021, haircuts on our pledged collateral remained stable and as of December 31, 2021, our weighted average haircut was approximately 4.9% of the value of our collateral. TBAs represent a form of off-balance sheet financing and are accounted for as derivative instruments. (See Note 4 to our Financial 64 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, 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. 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, 2021, we had cash and cash equivalents of $385.1 million. We generated cash flows of $716.5 million from principal and interest payments on our RMBS and had average repurchase agreements outstanding of $4,707.5 million during the year ended December 31, 2021. As described more fully below, we may also access liquidity by selling our equity or debt securities in public offerings or private placements. Stockholders’ Equity On August 2, 2017, we entered into the August 2017 Equity Distribution Agreement with two sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $125,000,000 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 15,123,178 shares under the August 2017 Equity Distribution Agreement for aggregate gross proceeds of $125.0 million, and net proceeds of approximately $123.1 million, after commissions and fees, prior to its termination in July 2019. On July 30, 2019, we entered into the 2019 Underwriting Agreement with Morgan Stanley & Co. LLC, Citigroup Global Markets Inc. and J.P. Morgan Securities LLC, as representatives of the underwriters named therein, relating to the offer and sale of 7,000,000 shares of the Company’s common stock at a price to the public of $6.55 per share. The underwriters purchased the shares pursuant to the 2019 Underwriting Agreement at a price of $6.3535 per share. The closing of the offering of 7,000,000 shares of common stock occurred on August 2, 2019, with net proceeds to us of approximately $44.2 million after deduction of underwriting discounts and commissions and other estimated offering expenses. 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 65 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. 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 49,407,336 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 the October 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 December 31, 2021, we issued a total of 15,835,700 shares under the October 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately $78.3 million, and net proceeds of approximately $77.0 million, after commissions and fees. Outlook Economic Summary COVID-19 continued to impact the United States and the rest of the world during the fourth quarter of 2021 and into the first quarter of 2022. The most recent variant, Omicron, spreads much more readily than past variants, but also tends to be much less severe. Instances of new cases spiked rapidly, starting in December of 2021 and peaked, in the U.S., the week ended January 16, 2022 at 5.58 million. Since then cases have declined fairly rapidly, as have hospitalizations, which have also tended to involve much shorter stays in the hospital, especially in comparison to the Delta variant. Despite the Omicron wave, the economy added 467,000 jobs in January 2022 and retail sales also rose well above estimates at 3.8%, causing the markets and the Fed to meaningfully revise expectations for the path of monetary policy in 2022 and beyond. 66 The rationale for the shift in expectations for monetary policy was found in the economic data that was released during the fourth quarter of 2021. There were several economic indicators that reached milestone levels and made it clear the economy had more than recovered from the pandemic. The Fed focuses on two areas of economic performance – inflation and the labor market – tied to their dual mandates of stable prices and maximum employment. With respect to inflation, the year-over-year consumer price index reading increased from the 4% increase reported in September of 2021 to 5.43% in December of 2021. Core personal consumption expenditures – the Fed’s preferred inflation measure – increased from 3.7% year-over-year to 4.85% between September and December of 2021. In the latter case, this was the highest reading since the early 1980s. The producer price index was also increasing rapidly – approaching 7% year over year in December of 2021. This led the Fed to formally declare that their assessment of inflation as “transitory” was no longer the case. Labor market indicators also reached new milestones. Initial claims for unemployment insurance breached the 200,000 level during the fourth quarter of 2021– the first time this happened since the late 1960s. Continuing claims for unemployment insurance reached levels even lower than the lows reached prior to the pandemic, and the unemployment rate reached 3.9% in December, still 0.4% above the lowest level reached prior to the pandemic but below the Fed’s long-term target level and their proxy for full employment. The final piece of information was gross domestic product growth of 6.9% for the fourth quarter, released in January of 2022. The Fed’s outlook for monetary policy pivoted materially beginning in November of 2021. The economic data has strengthened further in early 2022. In particular, measures of inflation have accelerated from the trend of late 2021 and are very broad based, as prices for essentially every category of goods and services are accelerating. The employment data has also been very strong, exhibiting little effect from the Omicron variant. The combination of accelerating inflation well above the Fed’s target level and a very tight labor market have led the market to anticipate the Fed will react aggressively soon. The Fed has signaled they are about to start an accelerated removal of the extreme monetary accommodation necessitated by the pandemic. In January of 2022 the FOMC announced they would end their asset purchases in March of 2022 and were likely to start decreasing the reinvestment of their U.S. Treasury and RMBS assets as they matured or were repaid starting shortly after their first rate hike. The first rate hike is likely to be in March as well. Current pricing in the futures market indicates the Fed will increase the Fed Funds rate at least six times by January of 2023 and by approximately 75 basis points more in 2023. There is a potentially significant geo-political development in the outlook as well. Russia appears to be threatening to take military action in the Ukraine. They have moved over 100,000 troops and significant other military assets such as tanks, combat aircraft, missile systems, naval forces and medical personnel into areas on the north, east and south of Ukraine. The situation has been developing since late 2021 and diplomatic efforts to ease tensions in the area do not appear to be working. The United States and several NATO allies have sent troops to the region and military supplies to Ukraine. There is also the possibility hostilities may not be limited to direct military confrontation. This may have begun already as reports of cyber attacks throughout Ukraine and other forms of non-military intervention have occurred. Should the situation deteriorate further and military action lead to a protracted war, there would likely be an economic impact on Europe and therefore indirectly in the U.S., potentially slowing economic activity at the margin and possibly lessening the need for the Fed to remove monetary policy as aggressively as expected otherwise. Legislative Response and the Federal Reserve Congress passed the CARES Act (described below) quickly in response to the pandemic’s emergence during the spring of 2020. As provisions of the CARES Act expired and the effects of the pandemic continued to adversely impact the country, the federal government passed an additional stimulus package in late December of 2020. Further, on March 11, 2021, President Biden signed into law an additional $1.9 trillion coronavirus aid package as part of the American Rescue Plan Act of 2021. This law provided for, among other things, direct payments to most Americans with a gross income of less than $75,000 a year, expansion of the child tax credit, extension of expanded unemployment benefits through September 6, 2021, funding for procurement of vaccines and health providers, loans to qualified businesses, funding for rental and mortgage assistance and funding for schools. The expanded federal unemployment benefits expired on September 6, 2021. In addition, the Fed provided as much support to the markets and the economy as it could within the constraints of its mandate. 67 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 stated they would 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. As mentioned above, this policy shift will not likely have an effect on current monetary policy as inflation is now running considerably higher than the Fed’s 2% target level and the Fed appears likely to move quickly to remove the extreme monetary accommodation they provided as the pandemic emerged in the U.S. in the spring of 2020. Interest Rates At the beginning of 2021, interest rates were still close to the lowest levels ever observed in 2020. As the country and economy emerged from the effects of the pandemic and the federal government and the Fed took unprecedented actions to buttress the economy from the effects of the pandemic, interest rates increased over the course of the year. Increases in interest rates were not uniform over the year as shorter maturity rates, typically more sensitive to anticipated increases in short term rates controlled by the Fed, increased more than longer term rates. As inflation accelerated in the fourth quarter of 2021, and even more so in early 2022, this trend intensified and currently the spread between certain intermediate rates – such as 5-year and 7-year maturities – trade at yields only marginally below longer-term rates such as 10-year U.S. Treasuries. This flattening of the rates curve is typical as the economy strengthens and the market anticipates increases in short-term rates by the Fed. As economic and/or inflation data strengthen and the market anticipates progressively more increases in short-term rates, this flattening effect intensifies as well. Eventually the rates curve could actually invert, whereby the intermediate rates mentioned above actually yield more than longer-term rates. This would occur when the market anticipates the increases to short-term rates by the Fed will actually slow the economy too much in the future and a possible recession is on the horizon. Given the unprecedented nature of the monetary and fiscal stimulus needed to combat the pandemic and the related supercharged effect on the economy, the current recovery and pending rate increase cycle will be difficult to manage by the Fed and we expect that such an outcome is more likely to occur than in past cycles. The Agency RMBS Market As was anticipated, the Fed announced a tapering of their U.S. Treasury and Agency RMBS asset purchases at their November 2021 meeting. As described above, the forthcoming data was likely to necessitate an accelerated pace of accommodation removal and in December of 2021, and again in January of 2022, the Fed announced revised schedules for tapering. This means a material source of demand for Agency RMBS is about to leave the market. Given Fed purchases are a source of reserves into the banking system, this also means banks, which have also been a material source for Agency RMBS, may also be buying fewer securities. However, the securities that were the focus of the Fed and bank buying, namely production coupon securities, performed relatively well during the fourth quarter of 2021. Total returns for Agency RMBS for the fourth quarter and full year of 2021 were -0.4% and -1.2%, respectively. Agency RMBS returns generally trailed other major domestic fixed income categories. High yield debt returned 0.7% and 5.4% for the fourth quarter and full year of 2021, respectively. Investment grade returns for the same two periods were 0.2% and -1.0%. Legacy non-Agency RMBS returns were equal to or exceeded high yield returns. Relative to comparable duration U.S. Treasuries Agency RMBS returns were -1.0% and -1.6%, respectively for the same two periods. Again, these returns trailed the same other major domestic fixed-income categories and by comparable amounts. Within the Agency RMBS 30-year coupons, production coupons – 2.0% and 2.5% - outperformed higher, liquid securities – 3.0% and 3.5%, both on an absolute and relative to comparable duration U.S. Treasury basis for the fourth quarter of 2021. Recent Legislative and Regulatory Developments 68 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. The Fed has taken a number of other actions to stabilize markets as a result of the impacts of the COVID-19 pandemic. On Sunday, March 15, 2020, the Fed announced a $700 billion asset purchase program to provide liquidity to the U.S. Treasury and Agency MBS markets. Specifically, the Fed announced that it would purchase at least $500 billion of U.S. Treasuries and at least $200 billion of Agency MBS. 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 on March 3, 2020. On June 30, 2020, Fed Chairman Powell announced expectations to maintain interest rates at this level until the Fed is confident that the economy has weathered recent events and is on track to achieve maximum employment and price stability goals. The Federal Open Market Committee (“FOMC”) continued to reaffirm this commitment at all subsequent meetings through December of 2021, as well as an intention to allow inflation to climb modestly above their 2% target and maintain that level for a period sufficient for inflation to average 2% long term. On January 26, 2022, the FOMC reiterated its goals of maximum employment and a 2% long-run inflation rate and stated that, with a strong labor market and inflation well above 2%, it expected it would soon be appropriate to raise the target federal funds rate. In response to the deterioration in the markets for U.S. Treasuries, Agency MBS and other mortgage and fixed income markets as investors liquidated investments in response to the economic crisis resulting from the actions to contain and minimize the impacts of the COVID-19 pandemic, on the morning of Monday, March 23, 2020, the Fed announced a program to acquire U.S. Treasuries and Agency MBS in the amounts needed to support smooth market functioning. With these purchases, market conditions improved substantially, and in early April, the Fed began to gradually reduce the pace of these purchases. Through November of 2021, the Fed was committed to purchasing $80 billion of U.S. Treasuries and $40 billion of Agency MBS each month. In November of 2021, it began tapering its net asset purchases each month, reducing them to $70 billion, $60 billion and $40 billion of U.S. Treasuries and $35 billion, $30 billion and $20 billion of Agency MBS in November of 2021, December of 2021 and January of 2022, respectively. On January 26, 2022, the FOMC announced that it would continue to increase its holdings of U.S. Treasuries by $20 billion per month and its holdings of Agency RMBS by $10 billion per month for February of 2022 and would end its net asset purchases entirely by early March of 2022. The CARES Act was passed by Congress and signed into law by President Trump on March 27, 2020. The CARES Act provided many forms of direct support to individuals and small businesses in order to stem the steep decline in economic activity. 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 provides 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 (July 25, 2020), expanded unemployment benefits (July 31, 2020), and a moratorium on foreclosures (August 31, 2020). 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, President Trump signed into law an additional $900 billion coronavirus aid package as part of the Consolidated Appropriations Act, 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. The FHFA subsequently extended 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 69 Fannie Mae and Freddie Mac until July 31, 2021 and September 30, 2021, respectively. The U.S. Housing and Urban Development Department subsequently extended the FHA foreclosure and eviction moratoria to July 31, 2021 and September 30, 2021, respectively. Despite the expirations of these foreclosure moratoria, a final rule adopted by the CFPB on June 28, 2021 effectively prohibited servicers from initiating a foreclosure before January 1, 2022 in most instances. On March 11, 2021, President Biden signed into law an additional $1.9 trillion coronavirus aid package as part of the American Rescue Plan Act of 2021. This law provided for, among other things, direct payments to most Americans with a gross income of less than $75,000 a year, expansion of the child tax credit, extension of expanded unemployment benefits through September 6, 2021, funding for procurement of vaccines and health providers, loans to qualified businesses, funding for rental and mortgage assistance and funding for schools. The expanded federal unemployment benefits expired on September 6, 2021. In January 2019, the Trump administration made statements of its plans to work with Congress to overhaul Fannie Mae and Freddie Mac and expectations to announce a framework for the development of a policy for comprehensive housing finance reform soon. 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 Fannie Mae and Freddie Mac being privatized and represents the first concrete step on the road to GSE reform. 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 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 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 September 15, 2021, the FHFA announced a notice of proposed rulemaking for the purpose of amending the December rule to, among other things, reduce the Tier 1 capital and risk-weight floor requirements. 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. However, the ICE Benchmark Administration, in its capacity as administrator of USD LIBOR, has announced that it intends to extend publication of USD LIBOR (other than one-week and two-month tenors) by 18 months to June 2023. Notwithstanding this possible extension, 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 ARRC, 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, despite the December 31, 2021 deadline. We will monitor the emergence of SOFR carefully as it appears likely to 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. On December 7, 2021, the CFPB released a final rule that amends Regulation Z, which implemented the Truth in Lending Act, aimed at addressing cessation of LIBOR for both closed-end (e.g., home mortgage) and open-end (e.g., home equity line of credit) products. The rule, which mostly becomes effective in April of 2022, establishes requirements for the selection of replacement indices for existing LIBOR-linked consumer loans. Although the rule does not mandate the use of SOFR as the alternative rate, it identifies SOFR as a comparable rate for closed-end products and states that for open-end products, the CFPB has determined that ARRC’s recommended spread-adjusted indices based on SOFR for consumer products to replace the one-month, three-month, or six-month 70 USD LIBOR index “have historical fluctuations that are substantially similar to those of the LIBOR indices that they are intended to replace.” The CFPB reserved judgment, however, on a SOFR-based spread-adjusted replacement index to replace the one-year USD LIBOR until it obtained additional information. On December 8, 2021, the House of Representatives passed the Adjustable Interest Rate (LIBOR) Act of 2021 (H.R. 4616) (the “LIBOR Act”), which provides for a statutory replacement benchmark rate for contracts that use LIBOR as a benchmark and do not contain any fallback mechanism independent of LIBOR. Pursuant to the LIBOR Act, SOFR becomes the new benchmark rate by operation of law for any such contract. The LIBOR Act establishes a safe harbor from litigation for claims arising out of or related to the use of SOFR as the recommended benchmark replacement. The LIBOR Act makes clear that it should not be construed to disfavor the use of any benchmark on a prospective basis. The LIBOR Act also attempts to forestall challenges that it is impairing contracts. It provides that the discontinuance of LIBOR and the automatic statutory transition to a replacement rate neither impairs or affects the rights of a party to receive payment under such contracts, nor allows a party to discharge their performance obligations or to declare a breach of contract. It amends the Trust Indenture Act of 1939 to state that the “the right of any holder of any indenture security to receive payment of the principal of and interest on such indenture security shall not be deemed to be impaired or affected” by application of the LIBOR Act to any indenture security. On December 9, 2021, the United States Senate referred the LIBOR Act to the Committee on Banking, Housing and Urban Affairs. One-week and two-month U.S. dollar LIBOR rates phased out on December 31, 2021, but other U.S. dollar tenors may continue until June 30, 2023. We will monitor the emergence of SOFR carefully as it appears likely to 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, extended 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 applied 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 anticipated, 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 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. 71 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. 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. 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 announced a tapering of these purchases in November 2021. The Fed’s reduction of these purchases could negatively impact our investment portfolio. Further, the moratoriums on foreclosures and evictions described 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 foreclosure or evictions, when and if it occurs, these loans may be removed from the pool into which they were 72 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 The country and economy currently appear to be on the verge of recovering from the COVID-19 pandemic. While the virus continues to infect people and often results in hospitalizations and deaths, the effect on economic activity has decreased materially. Coupled with unprecedented monetary and fiscal policy, the most significant combination of the two since the Second World War, the fading effect of the pandemic is clearly causing the economy to run at unsustainable levels, resulting in very tight labor markets and the highest levels of inflation in decades. The Fed has begun the rapid transformation from accommodation to constraint and will likely begin raising short-term rates at their meeting in March of 2022. Currently the market anticipates the Fed will continue to raise rates throughout the year and into 2023, possibly by as much as 200 basis points. Further, they are rapidly winding down their asset purchases and will likely stop asset purchases altogether – possibly by the end of the year – as they begin the process of “normalizing” the size of their balance sheet. Market experts estimate the Fed may have to shrink the size of their balance sheet by up to $4 trillion, and over a much shorter time frame than the last time they did so over the period from 2017 to 2019. The effect of these developments on the level of interest rates has been a material flattening of the U.S. Treasury curve, whereby short and intermediate term rates rise and more so relative to longer maturity U.S. Treasuries. For the Company, this means our funding costs are likely to rise materially over the course of 2022 and possibly into 2023. While longer-term maturities have not risen as much as short and intermediate term rates, they have risen and refinancing and purchase activity in the residential housing market is likely to slow. If this occurs, it would slow premium amortization on the Company’s Agency RMBS securities. The net effect of higher funding costs and slower premium amortization will depend on the extent and timing of both, but may reduce the Company’s net interest income, and perhaps meaningfully so, over this period. To the extent geo-political events unfold, such as the current crisis in Ukraine, the Fed may have to alter their monetary policy decisions over the course of 2022 and beyond. However, given the level of inflation and strength of the economy at present, such developments would likely have to be severe in order to meaningfully impact the path of monetary policy over the near-term. Critical Accounting Estimates 73 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 12 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, T-Note and Eurodollar futures contracts, interest rate swaps, interest rate swaptions and TBA securities, but we may enter into other derivatives in the future. 74 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 operations. 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 operations. 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, 2021, 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 $ 1.395 $ 4,662 2014 2.160 22,643 75 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 0.780 97,601 2022 YTD (1) 0.110 19,502 Totals $ 12.545 $ 459,066 (1) On January 13, 2022, the Company declared a dividend of $0.055 per share to be paid on February 24, 2022. On February 16, 2022, the Company declared a dividend of $0.055 per share to be paid on March 29, 2022. The dollar amount of the dividend declared in February 2022 is estimated based on the number of shares outstanding at February 25, 2022. 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, 2021.