Orchid Island Capital, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes to those statements included in Item 1 of this Form 10-Q. The discussion may contain certain forward-looking statements that involve risks and uncertainties. Forward-looking statements are those that are not historical in nature. As a result of many factors, such as those set forth under “Risk Factors” in our most recent Annual Report on Form 10-K, our actual results may differ materially from those anticipated in such forward-looking statements. Common Stock Reverse Split On August 30, 2022, the Company effected a 1-for-5 reverse stock split of its common stock and proportionately decreased the number of authorized shares of common stock. All share and per share information has been retroactively adjusted to reflect the reverse split. Overview We are a specialty finance company that invests in residential mortgage-backed securities (“RMBS”) which are issued and guaranteed by a federally chartered corporation or agency (“Agency RMBS”). Our investment strategy focuses on, and our portfolio consists of, two categories of Agency RMBS: (i) traditional pass-through Agency RMBS, such as mortgage pass-through certificates issued by 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”. 27 Capital Raising Activities On August 4, 2020, we entered into an equity distribution agreement (the “August 2020 Equity Distribution Agreement”) with four sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $150,000,000 of shares of our common stock in transactions that were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total of 5,538,730 shares under the August 2020 Equity Distribution Agreement for aggregate gross proceeds of approximately $150.0 million, and net proceeds of approximately $147.4 million, after commissions and fees, prior to its termination in June 2021. On January 20, 2021, we entered into an underwriting agreement (the “January 2021 Underwriting Agreement”) with J.P. Morgan Securities LLC (“J.P. Morgan”), relating to the offer and sale of 1,520,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from the Company pursuant to the January 2021 Underwriting Agreement at $26.00 per share. In addition, we granted J.P. Morgan a 30-day option to purchase up to an additional 228,000 shares of our common stock on the same terms and conditions, which J.P. Morgan exercised in full on January 21, 2021. The closing of the offering of 1,748,000 shares of our common stock occurred on January 25, 2021, with proceeds to us of approximately $45.2 million, net of offering expenses. On March 2, 2021, we entered into an underwriting agreement (the “March 2021 Underwriting Agreement”) with J.P. Morgan, relating to the offer and sale of 1,600,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from the Company pursuant to the March 2021 Underwriting Agreement at $27.25 per share. In addition, we granted J.P. Morgan a 30-day option to purchase up to an additional 240,000 shares of our common stock on the same terms and conditions, which J.P. Morgan exercised in full on March 3, 2021. The closing of the offering of 1,840,000 shares of our common stock occurred on March 5, 2021, with proceeds to us of approximately $50.0 million, net of offering expenses. On June 22, 2021, we entered into an equity distribution agreement (the “June 2021 Equity Distribution Agreement”) with four sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $250,000,000 of shares of our common stock in transactions that were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total of 9,881,467 shares under the June 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately $250.0 million, and net proceeds of approximately $246.2 million, after commissions and fees, prior to its termination in October 2021. On October 29, 2021, we entered into an equity distribution agreement (the “October 2021 Equity Distribution Agreement”) with four sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate amount of $250,000,000 of shares of our common stock in transactions that are deemed to be “at the market” offerings and privately negotiated transactions. Through September 30, 2022, we issued a total of 3,167,140 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 Agreement On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to 400,000 shares of our common stock. The timing, manner, price and amount of any repurchases is determined by the Company in its discretion and is subject to economic and market conditions, stock price, applicable legal requirements and other factors. The authorization does not obligate the Company to acquire any particular amount of common stock and the program may be suspended or discontinued at the Company’s discretion without prior notice. On February 8, 2018, the Board of Directors approved an increase in the stock repurchase program for up to an additional 904,564 shares of the Company’s common stock. Coupled with the 156,751 shares remaining from the original 400,000 share authorization, the increased authorization brought the total authorization to 1,061,316 shares, representing 10% of the Company’s then outstanding share count. 28 On December 9, 2021, the Board of Directors approved an increase in the number of shares of the Company’s common stock available in the stock repurchase program for up to an additional 3,372,399 shares, bringing the remaining authorization under the stock repurchase program to 3,539,861 shares, representing approximately 10% of the Company’s then outstanding shares of common stock. On October 12, 2022, the Board of Directors approved an increase in the number of shares of the Company’s common stock available in the stock repurchase program for up to an additional 4,300,000 shares, bringing the remaining authorization under the stock repurchase program to 6,183,601 shares, representing approximately 18% of the Company’s then outstanding shares of common stock. This stock repurchase program has no termination date. From the inception of the stock repurchase program through September 30, 2022, the Company repurchased a total of 1,487,362 shares at an aggregate cost of approximately $44.8 million, including commissions and fees, for a weighted average price of $30.12 per share. During the nine months ended September 30, 2022, the Company repurchased a total of 350,260 shares of its common stock at an aggregate cost of approximately $4.4 million, including commissions and fees, for a weighted average price of $12.68 per share. Subsequent to September 30, 2022, and through October 27, 2022, the Company repurchased a total of 1,644,044 shares at an aggregate cost of approximately $14.2 million, including commissions and fees, for a weighted average price of $8.64 per share. Factors that Affect our Results of Operations and Financial Condition A variety of industry and economic factors may impact our results of operations and financial condition. These factors include: ● interest rate trends; ● 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 Federal Reserve (the “Fed”), the Federal Housing Financing Agency (the “FHFA”), Federal Housing Administration (the “FHA”), the Federal Open Market Committee (the “FOMC”) and the U.S. Treasury; ● prepayment rates on mortgages underlying our Agency RMBS and credit trends insofar as they affect prepayment rates; and ● other market developments. In addition, a variety of factors relating to our business may also impact our results of operations and financial condition. These factors include: ● our degree of leverage; ● our access to funding and borrowing capacity; ● our borrowing costs; ● our hedging activities; ● the market value of our investments ● increases in our cost of funds resulting from increases in the Fed Funds rate that are controlled by the Fed which have occurred, and are likely to continue to occur, in 2022; and ● the requirements to qualify as a REIT and the requirements to qualify for a registration exemption under the Investment Company Act. Results of Operations Described below are the Company’s results of operations for the nine and three months ended September 30, 2022, as compared to the Company’s results of operations for the nine and three months ended September 30, 2021. 29 Net (Loss) Income Summary Net loss for the nine months ended September 30, 2022 was $293.4 million, or $8.31 per share. Net loss for the nine months ended September 30, 2021 was $20.2 million, or $0.95 per share. Net loss for the three months ended September 30, 2022 was $84.5 million, or $2.40 per share. Net income for the three months ended September 30, 2021 was $26.0 million, or $1.00 per share. The components of net (loss) income for the nine and three months ended September 30, 2022 and 2021, along with the changes in those components are presented in the table below: (in thousands) Nine Months Ended September 30, Three Months Ended, September 30, 2022 2021 Change 2022 2021 Change Interest income $ 112,735 $ 90,279 $ 22,456 $ 35,610 $ 34,169 $ 1,441 Interest expense (32,196) (5,067) (27,129) (21,361) (1,570) (19,791) Net interest income 80,539 85,212 (4,673) 14,249 32,599 (18,350) Losses on RMBS and derivative contracts (359,059) (94,522) (264,537) (93,544) (2,887) (90,657) Net portfolio (loss) income (278,520) (9,310) (269,210) (79,295) 29,712 (109,007) Expenses (14,859) (10,886) (3,973) (5,218) (3,674) (1,544) Net (loss) income $ (293,379) $ (20,196) $ (273,183) $ (84,513) $ 26,038 $ (110,551) 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. Described below are the Company’s results of operations for the nine months ended September 30, 2022 and 2021, and for each quarter in 2022 to date and 2021. 30 Net Earnings Excluding Realized and Unrealized Gains and Losses (in thousands, except per share data) Per Share Net Earnings Net Earnings Excluding Excluding Realized and Realized and Realized and Realized and Net Unrealized Unrealized Net Unrealized Unrealized Income Gains and Gains and Income Gains and Gains and (GAAP) Losses (1) Losses (GAAP) Losses Losses Three Months Ended September 30, 2022 $ (84,513) $ (93,544) $ 9,031 $ (2.40) $ (2.66) $ 0.26 June 30, 2022 (60,139) (82,283) 22,144 (1.70) (2.32) 0.62 March 31, 2022 (148,727) (183,232) 34,505 (4.20) (5.18) 0.98 December 31, 2021 (44,564) (82,597) 38,033 (1.33) (2.46) 1.13 September 30, 2021 26,038 (2,887) 28,925 1.01 (0.11) 1.12 June 30, 2021 (16,865) (40,844) 23,979 (0.85) (2.05) 1.20 March 31, 2021 (29,369) (50,791) 21,422 (1.72) (2.98) 1.26 Nine Months Ended September 30, 2022 $ (293,379) $ (359,059) $ 65,680 $ (8.31) $ (10.16) $ 1.85 September 30, 2021 (20,196) (94,522) 74,326 (0.96) (4.49) 3.53 (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 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. 31 The Company from time to time invests in TBAs, which are forward contracts for the purchase or sale of Agency RMBS at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific Agency RMBS to be delivered into the contract are not known until shortly before the settlement date. We may choose, prior to settlement, to move the settlement of these securities out to a later date by entering into a dollar roll transaction. The Agency RMBS purchased or sold for a forward settlement date are typically priced at a discount to equivalent securities settling in the current month. Consequently, forward purchases of Agency RMBS and dollar roll transactions represent a form of off-balance sheet financing. These TBAs are accounted for as derivatives and marked to market through the income statement. Gains or losses on TBAs are included with gains or losses on other derivative contracts and are not included in interest income for purposes of the discussions below. We believe that economic interest expense and economic net interest income provide meaningful information to consider, in addition to the respective amounts prepared in accordance with GAAP. The non-GAAP measures help management to evaluate its financial position and performance without the effects of certain transactions and GAAP adjustments that are not necessarily indicative of our current investment portfolio or operations. The unrealized gains or losses on derivative instruments presented in our statements of operations are not necessarily representative of the total interest rate expense that we will ultimately realize. This is because as interest rates move up or down in the future, the gains or losses we ultimately realize, and which will affect our total interest rate expense in future periods, may differ from the unrealized gains or losses recognized as of the reporting date. Our presentation of the economic value of our hedging strategy has important limitations. First, other market participants may calculate economic interest expense and economic net interest income differently than the way we calculate them. Second, while we believe that the calculation of the economic value of our hedging strategy described above helps to present our financial position and performance, it may be of limited usefulness as an analytical tool. Therefore, the economic value of our investment strategy should not be viewed in isolation and is not a substitute for interest expense and net interest income computed in accordance with GAAP. The tables below present a reconciliation of the adjustments to interest expense shown for each period relative to our derivative instruments, and the income statement line item, gains (losses) on derivative instruments, calculated in accordance with GAAP for each quarter of 2022 to date and 2021. Gains (Losses) on Derivative Instruments (in thousands) Funding Hedges Recognized in Attributed to Attributed to Income U.S. Treasury and TBA Current Future Statement Securities Gain (Loss) Period Periods (GAAP) (Short Positions) (Long Positions) (Non-GAAP) (Non-GAAP) Three Months Ended September 30, 2022 $ 184,819 $ 10,642 $ 106 $ 5,043 $ 169,028 June 30, 2022 103,758 1,013 1,067 1,996 99,682 March 31, 2022 177,816 2,539 27 (1,287) 176,537 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 Nine Months Ended September 30, 2022 $ 466,393 $ 14,194 $ 1,200 $ 5,752 $ 445,247 September 30, 2021 15,932 864 (8,559) (10,396) 34,023 32 Economic Interest Expense and Economic Net Interest Income (in thousands) Interest Expense on Borrowings Gains (Losses) on Derivative Instruments Net Interest Income GAAP Attributed Economic GAAP Economic Interest Interest to Current Interest Net Interest Net Interest Income Expense Period (1) Expense (2) Income Income (3) Three Months Ended September 30, 2022 $ 35,610 $ 21,361 $ 5,043 $ 16,318 $ 14,249 $ 19,292 June 30, 2022 35,268 8,180 1,996 6,184 27,088 $ 29,084 March 31, 2022 41,857 2,655 (1,287) 3,942 39,202 37,915 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 Nine Months Ended September 30, 2022 $ 112,735 $ 32,196 $ 5,752 $ 26,444 $ 80,539 $ 86,291 September 30, 2021 90,279 5,067 (10,396) 15,463 85,212 74,816 (1) Reflects the effect of derivative instrument hedges for only the period presented. (2) Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP interest expense. (3) Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP net interest income. Net Interest Income During the nine months ended September 30, 2022, we generated $80.5 million of net interest income, consisting of $112.7 million of interest income from RMBS assets offset by $32.2 million of interest expense on borrowings. For the comparable period ended September 30, 2021, we generated $85.2 million of net interest income, consisting of $90.3 million of interest income from RMBS assets offset by $5.1 million of interest expense on borrowings. The $22.5 million increase in interest income was due to a 73 basis point ("bps") increase in the yield on average RMBS, which was partially offset by a $98.8 million decrease in average RMBS. The $27.1 million increase in interest expense was due to a 85 bps increase in the average cost of funds, partially offset by a $63.0 million decrease in average outstanding borrowings. On an economic basis, our interest expense on borrowings for the nine months ended September 30, 2022 and 2021 was $26.4 million and $15.5 million, respectively, resulting in $86.3 million and $74.8 million of economic net interest income, respectively. During the three months ended September 30, 2022, we generated $14.2 million of net interest income, consisting of $35.6 million of interest income from RMBS assets offset by $21.4 million of interest expense on borrowings. For the three months ended September 30, 2021, we generated $32.6 million of net interest income, consisting of $34.2 million of interest income from RMBS assets offset by $1.6 million of interest expense on borrowings. The $1.4 million increase in interest income was due to a 133 bps increase in the yield on average RMBS, partially offset by a $1,565.3 million decrease in average RMBS. The $19.8 million increase in interest expense was due to a 235 bps increase in the average cost of funds, partially offset by a $1,417.9 million decrease in average outstanding borrowings. On an economic basis, our interest expense on borrowings for the three months ended September 30, 2022 and 2021 was $16.3 million and $2.8 million, respectively, resulting in $19.3 million and $31.4 million of economic net interest income, respectively. 33 The tables below provide information on our portfolio average balances, interest income, yield on assets, average borrowings, interest expense, cost of funds, net interest income and net interest spread for the nine months ended September 30, 2022 and 2021 and each quarter of 2022 to date and 2021 on both a GAAP and economic basis. ($ in thousands) Average Yield on Interest Expense Average Cost of Funds RMBS Interest Average Average GAAP Economic GAAP Economic Held (1) Income RMBS Borrowings (1) Basis Basis (2) Basis Basis (3) Three Months Ended September 30, 2022 $ 3,571,037 $ 35,610 3.99% $ 3,446,420 $ 21,361 $ 16,318 2.48% 1.89% June 30, 2022 4,260,727 35,268 3.31% 4,111,544 8,180 6,184 0.80% 0.60% March 31, 2022 5,545,844 41,857 3.02% 5,354,107 2,655 3,942 0.20% 0.29% 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% Nine Months Ended September 30, 2022 $ 4,459,203 $ 112,735 3.37% $ 4,304,024 $ 32,196 $ 26,444 1.00% 0.82% September 30, 2021 4,557,978 90,279 2.64% 4,367,037 5,067 15,463 0.15% 0.47% ($ in thousands) Net Interest Income Net Interest Spread GAAP Economic GAAP Economic Basis Basis (2) Basis Basis (4) Three Months Ended September 30, 2022 $ 14,249 $ 19,292 1.51% 2.10% June 30, 2022 27,088 29,084 2.51% 2.71% March 31, 2022 39,202 37,915 2.82% 2.73% 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% Nine Months Ended September 30, 2022 $ 80,539 $ 86,291 2.37% 2.55% September 30, 2021 85,212 74,816 2.49% 2.17% (1) Portfolio yields and costs of borrowings presented in the tables above and the tables on pages 34 and 35 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 35 includes the effect of our derivative instrument hedges for only the periods presented. (3) Represents interest cost of our borrowings and the effect of derivative instrument hedges attributed to the period divided by average RMBS. (4) Economic net interest spread is calculated by subtracting average economic cost of funds from realized yield on average RMBS. Interest Income and Average Asset Yield Our interest income for the nine months ended September 30, 2022 and 2021 was $112.7 million and $90.3 million, respectively. We had average RMBS holdings of $4,459.2 million and $4,558.0 million for the nine months ended September 30, 2022 and 2021, respectively. The yield on our portfolio was 3.37% and 2.64% for the nine months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021, there was a $22.5 million increase in interest income due to the 73 bps increase in the yield on average RMBS, partially offset by the $98.8 million decrease in average RMBS. 34 Our interest income for the three months ended September 30, 2022 and 2021 was $35.6 million and $34.2 million, respectively. We had average RMBS holdings of $3,571.0 million and $5,136.3 million for the three months ended September 30, 2022 and 2021, respectively. The yield on our portfolio was 3.99% and 2.66% for the three months ended September 30, 2022 and 2021, respectively. For the three months ended September 30, 2022, as compared to the three months ended September 30, 2021, there was a $1.4 million increase in interest income due to the 133 bps increase in the yield on average RMBS, partially offset by the $1,565.3 million decrease in average RMBS. The table below presents the average portfolio size, income and yields of our respective sub-portfolios, consisting of structured RMBS and PT RMBS, for the nine months ended September 30, 2022 and 2021, and for each quarter of 2022 to date and 2021. ($ in thousands) Average RMBS Held Interest Income Realized Yield on Average RMBS PT Structured PT Structured PT Structured RMBS RMBS Total RMBS RMBS Total RMBS RMBS Total Three Months Ended September 30, 2022 $ 3,458,277 $ 112,760 $ 3,571,037 $ 32,297 $ 3,313 $ 35,610 3.74% 11.75% 3.99% June 30, 2022 4,069,334 191,393 4,260,727 31,894 3,374 35,268 3.14% 7.05% 3.31% March 31, 2022 5,335,353 210,491 5,545,844 40,066 1,791 41,857 3.00% 3.40% 3.02% December 31, 2021 5,878,376 177,883 6,056,259 42,673 1,748 44,421 2.90% 3.93% 2.93% September 30, 2021 5,016,550 119,781 5,136,331 33,111 1,058 34,169 2.64% 3.53% 2.66% June 30, 2021 4,436,135 68,752 4,504,887 29,286 (32) 29,254 2.64% (0.18)% 2.60% March 31, 2021 3,997,965 34,751 4,032,716 26,869 (13) 26,856 2.69% (0.15)% 2.66% Nine Months Ended September 30, 2022 $ 4,287,655 $ 171,548 $ 4,459,203 $ 104,257 $ 8,478 $ 112,735 3.24% 6.59% 3.37% September 30, 2021 4,483,550 74,428 4,557,978 89,266 1,013 90,279 2.65% 1.81% 2.64% Interest Expense and the Cost of Funds We had average outstanding borrowings of $4,304.0 million and $4,367.0 million and total interest expense of $32.2 million and $5.1 million for the nine months ended September 30, 2022 and 2021, respectively. Our average cost of funds was 1.00% for the nine months ended September 30, 2022, compared to 0.15% for the comparable period in 2021. The $27.1 million increase in interest expense was due to the 85 bps increase in the average cost of funds, partially offset by the $63.0 million decrease in average outstanding borrowings during the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021. Our economic interest expense was $26.4 million and $15.5 million for the nine months ended September 30, 2022 and 2021, respectively. There was a 35 bps increase in the average economic cost of funds to 0.82% for the nine months ended September 30, 2022, from 0.47% for the nine months ended September 30, 2021. We had average outstanding borrowings of $3,446.4 million and $4,864.3 million and total interest expense of $21.4 million and $1.6 million for the three months ended September 30, 2022 and 2021, respectively. Our average cost of funds was 2.48% and 0.13% for three months ended September 30, 2022 and 2021, respectively. There was a 235 bps increase in the average cost of funds and a $1,417.9 million decrease in average outstanding borrowings during the three months ended September 30, 2022, compared to the three months ended September 30, 2021. Our economic interest expense was $16.3 million and $2.8 million for the three months ended September 30, 2022 and 2021, respectively. There was a 166 bps increase in the average economic cost of funds to 1.89% for the three months ended September 30, 2022 from 0.23% for the three months ended September 30, 2021. 35 Since all of our repurchase agreements are short-term, changes in market rates directly affect our interest expense. Our average cost of funds calculated on a GAAP basis was 29 bps above the average one-month LIBOR and 81 bps below the average six-month LIBOR for the quarter ended September 30, 2022. Our average economic cost of funds was 30 bps below the average one-month LIBOR and 140 bps below the average six-month LIBOR for the quarter ended September 30, 2022. The average term to maturity of the outstanding repurchase agreements was 29 days at September 30, 2022 and 27 days at December 31, 2021. The tables below present the average balance of borrowings outstanding, interest expense and average cost of funds, and average one-month and six-month LIBOR rates for the nine months ended September 30, 2022 and 2021, and for each quarter in 2022 to date and 2021 on both a GAAP and economic basis. ($ in thousands) Average Interest Expense Average Cost of Funds Balance of GAAP Economic GAAP Economic Borrowings Basis Basis Basis Basis Three Months Ended September 30, 2022 $ 3,446,420 $ 21,361 $ 16,318 2.48% 1.89% June 30, 2022 4,111,544 8,180 6,184 0.80% 0.60% March 31, 2022 5,354,107 2,655 3,942 0.20% 0.29% 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% Nine Months Ended September 30, 2022 $ 4,304,024 $ 32,196 $ 26,444 1.00% 0.82% September 30, 2021 4,367,037 5,067 15,463 0.15% 0.47% Average GAAP Cost of Funds Average Economic Cost of Funds Relative to Average Relative to Average Average LIBOR One-Month Six-Month One-Month Six-Month One-Month Six-Month LIBOR LIBOR LIBOR LIBOR Three Months Ended September 30, 2022 2.19% 3.29% 0.29% (0.81)% (0.30)% (1.40)% June 30, 2022 0.93% 1.90% (0.13)% (1.10)% (0.33)% (1.30)% March 31, 2022 0.25% 0.76% (0.05)% (0.56)% 0.04% (0.47)% 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% Nine Months Ended September 30, 2022 1.12% 1.98% (0.12)% (0.98)% (0.30)% (1.16)% September 30, 2021 0.10% 0.19% 0.05% (0.04)% 0.37% 0.28% 36 Gains or Losses The table below presents our gains or losses for the nine and three months ended September 30, 2022 and 2021. (in thousands) Nine Months Ended September 30, Three Months Ended September 30, 2022 2021 Change 2022 2021 Change Realized (losses) gains on sales of RMBS $ (132,672) $ (3,068) $ (129,604) $ (66,143) $ 2,977 $ (69,120) Unrealized losses on RMBS (692,781) (107,386) (585,395) (212,221) (11,239) (200,982) Total losses on RMBS (825,453) (110,454) (714,999) (278,364) (8,262) (270,102) Gains on interest rate futures 207,681 852 206,829 84,713 574 84,139 Gains on interest rate swaps 172,069 12,446 159,623 65,966 3,000 62,966 (Losses) gains on payer swaptions (short positions) (80,183) 3,507 (83,690) (35,239) 2,295 (37,534) Gains on payer swaptions (long positions) 150,445 5,477 144,968 59,131 1,767 57,364 Gains (losses) on interest rate caps 988 - 988 (499) - (499) Gains (losses) on interest rate floors - 1,345 (1,345) - 45 (45) Gains (losses) on TBA securities (short positions) 14,194 864 13,330 10,642 (2,306) 12,948 Gains (losses) on TBA securities (long positions) 1,200 (8,559) 9,759 106 - 106 Total gains from derivative instruments 466,394 15,932 450,462 184,820 5,375 179,445 We invest in RMBS with the intent to earn net income from the realized yield on those assets over their related funding and hedging costs, and not for the purpose of making short term gains from sales. However, we have sold, and may continue to sell, existing assets to acquire new assets, which our management believes might have higher risk-adjusted returns in light of current or anticipated interest rates, federal government programs or general economic conditions or to manage our balance sheet as part of our asset/liability management strategy. During the nine months ended September 30, 2022 and 2021, we received proceeds of $2,731.5 million and $2,598.9 million, respectively, from the sales of RMBS. During the three months ended September 30, 2022 and 2021, we received proceeds of $796.9 million and $918.0 million, respectively, from the sales of RMBS. Realized and unrealized gains and losses on RMBS are driven in part by changes in yields and interest rates, the spreads that Agency RMBS trade relative to comparable duration U.S. Treasuries or swaps, as well as varying levels of demand for RMBS, which affect the pricing of the securities in our portfolio. The unrealized gains and losses on RMBS may also include the premium lost as a result of prepayments on the underlying mortgages, decreasing unrealized gains or increasing unrealized losses as speeds or premiums increase. To the extent RMBS are carried at a discount to par, unrealized gains or losses on RMBS would also include discount accreted as a result of prepayments on the underlying mortgages, increasing unrealized gains or decreasing unrealized losses as speeds on discounts increase. Gains and losses on interest rate futures contracts are affected by changes in implied forward rates during the reporting period. The table below presents historical interest rate data for each quarter end during 2022 to date and 2021. 5 Year 10 Year 15 Year 30 Year Three U.S. Treasury U.S. Treasury Fixed-Rate Fixed-Rate Month Rate (1) Rate (1) Mortgage Rate (2) Mortgage Rate (2) LIBOR (3) September 30, 2022 4.04% 3.80% 5.35% 6.11% 3.45% June 30, 2022 3.00% 2.97% 4.65% 5.52% 1.97% March 31, 2022 2.42% 2.33% 3.39% 4.17% 0.84% 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% (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. 37 Expenses For the nine and three months ended September 30, 2022, the Company’s total operating expenses were approximately $14.9 million and $5.2 million, respectively, compared to approximately $10.9 million and $3.7 million, respectively, for the nine and three months ended September 30, 2021. The table below presents a breakdown of operating expenses for the nine and three months ended September 30, 2022 and 2021. (in thousands) Nine Months Ended September 30, Three Months Ended September 30, 2022 2021 Change 2022 2021 Change Management fees $ 7,881 $ 5,569 $ 2,312 $ 2,616 $ 2,156 $ 460 Overhead allocation 1,482 1,189 293 522 390 132 Accrued incentive compensation 763 884 (121) 212 259 (47) Directors fees and liability insurance 929 874 55 308 279 29 Audit, legal and other professional fees 899 832 67 293 212 81 Direct REIT operating expenses 2,281 1,024 1,257 1,064 309 755 Other administrative 624 514 110 203 69 134 Total expenses $ 14,859 $ 10,886 $ 3,973 $ 5,218 $ 3,674 $ 1,544 Direct REIT operating expenses were higher in both the nine and three month periods ended September 30, 2022, as compared to the same periods in 2021 primarily due to increased commissions and fees related to the Company’s interest rate derivative positions. 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. 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 Company is obligated to reimburse the Manager for any direct expenses incurred on its behalf and to pay the Manager the Company’s pro rata portion of certain overhead costs set forth in the management agreement. On April 1, 2022, pursuant to the third amendment to the management agreement entered into on November 16, 2021, the Manager began providing certain repurchase agreement trading, clearing and administrative services to the Company that had been previously provided by AVM, L.P. under an agreement terminated on March 31, 2022. In consideration for such services, the Company will pay the following fees to the Manager: ● A daily fee equal to the outstanding principal balance of repurchase agreement funding in place as of the end of such day multiplied by 1.5 basis points for the amount of aggregate outstanding principal balance less than or equal to $5 billion, and multiplied by 1.0 basis point for any amount of aggregate outstanding principal balance in excess of $5 billion, and ● A fee for the clearing and operational services provided by personnel of the Manager equal to $10,000 per month. 38 The following table summarizes the management fee and overhead allocation expenses for the nine months ended September 30, 2022 and 2021, and for each quarter in 2022 to date and 2021. ($ in thousands) Average Average Advisory Services Orchid Orchid Management Overhead Three Months Ended MBS Equity Fee Allocation Total September 30, 2022 $ 3,571,037 $ 839,935 $ 2,616 $ 522 $ 3,138 June 30, 2022 4,260,727 866,539 2,631 519 3,150 March 31, 2022 5,545,844 853,576 2,634 441 3,075 December 31, 2021 6,056,259 806,382 2,587 443 3,030 September 30, 2021 5,136,331 672,384 2,156 390 2,546 June 30, 2021 4,504,887 542,679 1,792 395 2,187 March 31, 2021 4,032,716 456,687 1,621 404 2,025 Nine Months Ended September 30, 2022 $ 4,459,203 $ 853,350 $ 7,881 $ 1,482 $ 9,363 September 30, 2021 4,557,978 557,250 5,569 1,189 6,758 Financial Condition: Mortgage-Backed Securities As of September 30, 2022, our RMBS portfolio consisted of $3,201.2 million of Agency RMBS at fair value and had a weighted average coupon on assets of 3.31%. During the nine months ended September 30, 2022, we received principal repayments of $376.2 million compared to $413.0 million for the nine months ended September 30, 2021. The average three month prepayment speeds for the quarters ended September 30, 2022 and 2021 were 6.5% and 12.4%, respectively. The following table presents the 3-month constant prepayment rate (“CPR”) experienced on our structured and PT RMBS sub- portfolios, on an annualized basis, for the quarterly periods presented. CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. Specifically, the CPR in the chart below represents the three month prepayment rate of the securities in the respective asset category. Structured PT RMBS RMBS Total Three Months Ended Portfolio (%) Portfolio (%) Portfolio (%) September 30, 2022 6.1 10.4 6.5 June 30, 2022 8.3 13.7 9.4 March 31, 2022 8.1 19.5 10.7 December 31, 2021 9.0 24.6 11.4 September 30, 2021 9.8 25.1 12.4 June 30, 2021 10.9 29.9 12.9 March 31, 2021 9.9 40.3 12.0 39 The following tables summarize certain characteristics of the Company’s PT RMBS and structured RMBS as of September 30, 2022 and December 31, 2021: ($ in thousands) Weighted Percentage Average of Weighted Maturity Fair Entire Average in Longest Asset Category Value Portfolio Coupon Months Maturity September 30, 2022 Fixed Rate RMBS $ 3,150,403 98.4% 3.30% 341 1-Aug-52 Interest-Only Securities 50,274 1.6% 3.72% 278 25-Nov-51 Inverse Interest-Only Securities 537 0.0% 1.51% 289 15-Jun-42 Total Mortgage Assets $ 3,201,214 100.0% 3.31% 336 1-Aug-52 December 31, 2021 Fixed Rate RMBS $ 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 Mortgage Assets $ 6,511,095 100.0% 3.03% 325 25-Jan-52 ($ in thousands) September 30, 2022 December 31, 2021 Percentage of Percentage of Agency Fair Value Entire Portfolio Fair Value Entire Portfolio Fannie Mae $ 2,231,699 69.7% $ 4,719,349 72.5% Freddie Mac 969,515 30.3% 1,791,746 27.5% Total Portfolio $ 3,201,214 100.0% $ 6,511,095 100.0% September 30, 2022 December 31, 2021 Weighted Average Pass-through Purchase Price $ 107.06 $ 107.19 Weighted Average Structured Purchase Price $ 18.08 $ 15.21 Weighted Average Pass-through Current Price $ 89.44 $ 105.31 Weighted Average Structured Current Price $ 17.32 $ 14.08 Effective Duration (1) 5.800 3.390 (1) Effective duration is the approximate percentage change in price for a 100 bps change in rates. An effective duration of 5.800 indicates that an interest rate increase of 1.0% would be expected to cause a 5.800% decrease in the value of the RMBS in the Company’s investment portfolio at September 30, 2022. 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. These figures include the structured securities in the portfolio, but do not include the effect of the Company’s funding cost hedges. Effective duration quotes for individual investments are obtained from The Yield Book, Inc. The following table presents a summary of portfolio assets acquired during the nine months ended September 30, 2022 and 2021, including securities purchased during the period that settled after the end of the period, if any. ($ in thousands) 2022 2021 Total Cost Average Price Weighted Average Yield Total Cost Average Price Weighted Average Yield Pass-through RMBS $ 622,535 $ 100.66 4.24% $ 4,871,121 $ 106.96 1.56% Structured RMBS - - - 125,728 13.04 3.80% 40 Borrowings As of September 30, 2022, 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 20 of these counterparties. None of these lenders are affiliated with the Company. These borrowings are secured by the Company’s RMBS and cash, and bear interest at prevailing market rates. We believe our established repurchase agreement borrowing facilities provide borrowing capacity in excess of our needs. As of September 30, 2022, we had obligations outstanding under the repurchase agreements of approximately $3,133.9 million with a net weighted average borrowing cost of 3.00%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 3 to 122 days, with a weighted average remaining maturity of 29 days. Securing the repurchase agreement obligations as of September 30, 2022 are RMBS with an estimated fair value, including accrued interest, of approximately $3,206.4 million and a weighted average maturity of 345 months, and cash pledged to counterparties of approximately $49.4 million. Through October 27, 2022, we have been able to maintain our repurchase facilities with comparable terms to those that existed at September 30, 2022, with maturities through January 30, 2023. The table below presents information about our period end, maximum and average balances of borrowings for each quarter in 2022 to date and 2021. ($ in thousands) Difference Between Ending Ending Maximum Average Borrowings and Balance of Balance of Balance of Average Borrowings Three Months Ended Borrowings Borrowings Borrowings Amount Percent September 30, 2022 $ 3,133,861 $ 4,047,606 $ 3,446,420 $ (312,559) (9.07)% June 30, 2022 3,758,980 4,464,544 4,111,544 (352,564) (8.57)% March 31, 2022 4,464,109 6,244,106 5,354,107 (889,998) (16.62)% (1) 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% (1) The lower ending balance relative to the average balance during the quarter ended March 31, 2022 reflects the disposal of RMBS pledged as collateral. During the quarter ended March 31, 2022, the Company’s investment in RMBS decreased $510.4 million. Liquidity and Capital Resources Liquidity is our ability to turn non-cash assets into cash, purchase additional investments, repay principal and interest on borrowings, fund overhead, fulfill margin calls and pay dividends. We have both internal and external sources of liquidity. However, our material unused sources of liquidity include cash balances, unencumbered assets and our ability to sell encumbered assets to raise cash. Our balance sheet also generates liquidity on an on-going basis through payments of principal and interest we receive on our RMBS portfolio. Management believes that we currently have sufficient liquidity and capital resources available for (a) the acquisition of additional investments consistent with the size and nature of our existing RMBS portfolio, (b) the repayments on borrowings and (c) the payment of dividends to the extent required for our continued qualification as a REIT. We may also generate liquidity from time to time by selling our equity or debt securities in public offerings or private placements. 41 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 nine months ended September 30, 2022, haircuts on our pledged collateral remained stable and as of September 30, 2022, our weighted average haircut was approximately 4.6% 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 Statements in this Form 10-Q for additional details on our TBAs). Under certain market conditions, it may be uneconomical for us to roll our TBAs into future months and we may need to take or make physical delivery of the underlying securities. If we were required to take physical delivery to settle a long TBA, we would have to fund our total purchase commitment with cash or other financing sources and our liquidity position could be negatively impacted. 42 Our TBAs are also subject to margin requirements governed by the Mortgage-Backed Securities Division ("MBSD") of the FICC and by our Master Securities Forward Transaction Agreements (“MSFTAs”), which may establish margin levels in excess of the MBSD. Such provisions require that we establish an initial margin based on the notional value of the TBA, which is subject to increase if the estimated fair value of our TBAs or the estimated fair value of our pledged collateral declines. The MBSD has the sole discretion to determine the value of our TBAs and of the pledged collateral securing such contracts. In the event of a margin call, we must generally provide additional collateral on the same business day. Settlement of our TBA obligations by taking delivery of the underlying securities as well as satisfying margin requirements could negatively impact our liquidity position. However, since we do not use TBA dollar roll transactions as our primary source of financing, we believe that we will have adequate sources of liquidity to meet such obligations. We invest a portion of our capital in structured Agency RMBS. We generally do not apply leverage to this portion of our portfolio. The leverage inherent in structured securities replaces the leverage obtained by acquiring PT securities and funding them in the 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 September 30, 2022, we had cash and cash equivalents of $214.2 million. We generated cash flows of $496.2 million from principal and interest payments on our RMBS and had average repurchase agreements outstanding of $4,304.0 million during the nine months ended September 30, 2022. 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 4, 2020, we entered into the August 2020 Equity Distribution Agreement with four sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $150,000,000 of shares of our common stock in transactions that were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total of 5,538,730 shares under the August 2020 Equity Distribution Agreement for aggregate gross proceeds of approximately $150.0 million, and net proceeds of approximately $147.4 million, after commissions and fees, prior to its termination in June 2021. On January 20, 2021, we entered into the January 2021 Underwriting Agreement with J.P. Morgan Securities LLC (“J.P. Morgan”), relating to the offer and sale of 1,520,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from the Company pursuant to the January 2021 Underwriting Agreement at $26.00 per share. In addition, we granted J.P. Morgan a 30-day option to purchase up to an additional 228,000 shares of our common stock on the same terms and conditions, which J.P. Morgan exercised in full on January 21, 2021. The closing of the offering of 1,748,000 shares of our common stock occurred on January 25, 2021, with proceeds to us of approximately $45.2 million, net of offering expenses. On March 2, 2021, we entered into the March 2021 Underwriting Agreement with J.P. Morgan, relating to the offer and sale of 1,600,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from the Company pursuant to the March 2021 Underwriting Agreement at $27.25 per share. In addition, we granted J.P. Morgan a 30-day option to purchase up to an additional 240,000 shares of our common stock on the same terms and conditions, which J.P. Morgan exercised in full on March 3, 2021. The closing of the offering of 1,840,000 shares of our common stock occurred on March 5, 2021, with proceeds to us of approximately $50.0 million, net of offering expenses payable. 43 On June 22, 2021, we entered into the June 2021 Equity Distribution Agreement with four sales agents pursuant to which we may could offer and sell, from time to time, up to an aggregate amount of $250,000,000 of shares of our common stock in transactions that were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total of 9,881,467 shares under the June 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately $250.0 million, and net proceeds of approximately $246.2 million, after commissions and fees, prior to its termination in October 2021. On October 29, 2021, we entered into 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 September 30, 2022, we issued a total of 3,167,140 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 The evolution of economic and market developments pivoted in the third quarter of 2022. Trends in place since late 2021 have changed in the third quarter. The outlook for the domestic economy of the United States, particularly with respect to inflation, the level of interest rates and expectations for monetary policy from the Fed changed during the quarter. As the second quarter of 2022 ended, the market expected that the monetary tightening policies implemented by the Fed to control inflation would soon succeed, and that by early in 2023 the Fed would likely start to unwind their rate increases in order to avert an economic slowdown resulting from these policies. The catalyst for the changes that occurred during the third quarter of 2022 was clear evidence that not only was inflation persisting, but that it was becoming more broad based and entrenched. As the Fed and the various members of the FOMC became aware of this, their public comments consistently sought to dispel the notion that they would be easing monetary policy in early 2023 as the futures markets were pricing. As the quarter unfolded and the inflation data continued to reflect this trend, the market grew to accept that the Fed would have to raise the Fed Funds target further into restrictive territory. The inflation data for September of 2022, released in early October of 2022, was again very strong and broad based. The market now expects the terminal rate to approach 5% and the Fed to raise the Fed Funds rate by at least 125 basis points during the fourth quarter of 2022 alone. The incoming economic data – other than inflationary data – has generally been very strong as well, implying the Fed rate increases have yet to have an impact on the economy other than the most rate sensitive sectors. Contributing to the change in economic and interest rate trends were developments abroad, particularly in Europe and the United Kingdom. While inflation has proven to be more robust and challenging to control in the U.S., it has been even more so in Europe and most of the world outside of China, which is grappling with persistent COVID-19 cases that have forced the government to intermittently lock down various population centers. The war in Ukraine has contributed significantly to food and energy price pressures globally, more so than in the U.S. The result is essentially all central banks across the globe – outside of China and Japan – are raising rates. Like the Fed, the central banks’ efforts have yet to slow inflation and more rate hikes are very likely. Food and energy inflation poses additional pressure on governments who are eager to ease the burden of elevated prices for essentials like food and energy, but are constrained because their efforts themselves might increase inflationary pressures and run counter to central bank actions that are attempting to constrain economic activity and demand. A further complicating factor has been the U.S. dollar. As the Fed is forced to continue to raise rates in the U.S., the dollar has appreciated against all other currencies. This in turn forces other central banks to raise rates to protect their own currencies, often above and beyond what their domestic economic circumstances might warrant. Risk sentiment is at extremely depressed levels and all asset classes across the financial markets have generated negative year-to- date returns for 2022, outside of energy and certain food commodities. Economic growth is expected to continue to slow over the balance of the year, both in the U.S. and globally, and likely contract in 2023. 44 Interest Rates As the market incorporated inflation data and the Fed’s response through the second quarter of 2022, interest rates began to rise materially. On August 1, 2022, the 10-year U.S. Treasury Note closed with a yield of 2.5759%, shortly before the FOMC began to temper market expectations that the Fed would pivot away from their tightening and begin to lower the Fed Funds rate in early 2023. The yield on the 10-year U.S. Treasury Note closed just above 3.83% on September 30, 2022, and surpassed 4% in October of 2022. This increase was much less than the increase in short-term rates. Interest rates on U.S. Treasury Note maturities inside one year increased by well over 100 basis points and by more than 160 basis points for maturities of three months or less – in each case by the end of the third quarter of 2022. In the case of U.S. Treasury Note maturities of three or fewer months, such increases are over 230 basis points as of October 26, 2022. As of September 30, 2022, market pricing implied the terminal rate for the current cycle would be approximately 4.53%, which would be reached late in the first quarter of 2023. As of October 26, 2022, pricing is for a terminal rate of approximately 4.85% sometime late in the second quarter of 2023 and with the Fed Funds rate still approximately 4.40% in early 2024. The Fed has repeatedly acknowledged their efforts to bring inflation under control and taking the Fed Funds rate above neutral may cause the economy to enter a recession. They deem these steps as necessary to prevent inflation from remaining higher than the Fed’s target rate of inflation. However, as it appears the Fed will have to increase the Fed Funds rate considerably higher than was believed to be the case even a few months ago, and central banks across the globe are doing likewise, financial conditions have begun to deteriorate and liquidity in many financial markets has declined. If such trends persist and evidence appears that certain financial markets are not operating smoothly, or financial conditions are prohibiting economic activity from operating smoothly, central banks may face a dilemma of continuing to increase the Fed Funds rate or implementing accommodations to permit the smooth operation of financial markets and the economy – assuming this were to occur before inflation could be brought under control. The outcome in such a scenario cannot be predicted with any confidence. The Agency RMBS Market Returns for the Agency RMBS market for the third quarter of 2022 were (5.4)% and these returns were 1.7% lower than comparable duration LIBOR swaps. The largest RMBS investors have generally been selling or decreasing their exposure to the sector. Agency RMBS spreads relative to benchmark interest rates increased to levels observed in March of 2020 by the end of the third quarter of 2022 and have exceeded those levels in October of 2022. The largest investors of Agency RMBS, the Fed via quantitative easing (which is now quantitative tightening as the Fed allows their holdings of Agency RMBS to run-off), large domestic banks (which due to quantitative tightening by the Fed are experiencing declines in reserves/deposits) and large money managers (which have experienced significant outflows as investors leave fixed income investments), are collectively causing demand for Agency RMBS to decline materially and driving the spread widening. As the U.S. dollar has strengthened against most other currencies across the globe, there is the chance certain central banks – namely the Bank of Japan – may be forced to intervene in the currency markets to support their local currency, in this case the Yen. They would do so by selling U.S. dollar-denominated assets and buying Yen. The only U.S. dollar-denominated assets they own are U.S. Treasuries and Agency RMBS, and selling these would represent another source of downward pressure on Agency RMBS. The relative performance across the Agency RMBS universe was skewed in favor of higher coupon, 30-year securities that are currently in production by originators. Lower coupon securities, especially those held in large amounts by the Fed, and which may eventually be sold by the Fed, have performed the worst. These results are consistent with the relative duration of the securities, as higher coupons have shorter durations, or less sensitivity to movements in interest rates. As both the domestic and the global economies appear to be slowing, the more credit sensitive sectors of the fixed income markets have come under pressure and are likely to weaken further if the economies do indeed contract. Actions by the Fed as described above may prevent the sector from performing well in the near term but, if the economy does contract and enter a recession, the sector could do well on a relative performance basis owing to the lack of credit exposure of Agency RMBS. This is consistent with the sector’s history of performance in a counter-cyclical manner – doing well when the economy is soft and relatively poorly when the economy is strong. 45 Recent Legislative and Regulatory Developments In response to the deterioration in the markets for U.S. Treasuries, Agency RMBS and other mortgage and fixed income markets resulting from the impacts of the COVID-19 pandemic, the Fed implemented a program of quantitative easing. Through November of 2021, the Fed was committed to purchasing $80 billion of U.S. Treasuries and $40 billion of Agency RMBS each month. In November of 2021, it began tapering its net asset purchases each month and ended net asset purchases entirely by early March of 2022. On May 4, 2022, the FOMC announced a plan for reducing the Fed’s balance sheet. In June of 2022, in accordance with this plan, the Fed began reducing its balance sheet by a maximum of $30 billion of U.S. Treasuries and $17.5 billion of Agency RMBS each month. On September 21, 2022, the FOMC announced the Fed’s decision to continue reducing the balance sheet by a maximum of $60 billion of U.S Treasuries and $35 billion of Agency RMBS per month. On January 29, 2021, the CDC issued guidance extending eviction moratoriums for covered persons put in place by the CARES Act through March 31, 2021. The FHFA subsequently extended the foreclosure moratorium for loans backed by Fannie Mae and Freddie Mac and the eviction moratorium for real estate owned by 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. Foreclosure activity has risen since the end of the moratorium, with foreclosure starts in the third quarter of 2022 up 167% from the comparable period in 2021, but still remaining slightly below pre-pandemic levels. 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 February 25, 2022, the FHFA published a final rule, effective as of April 26, 2022, amending the GSE capital framework established in December 2020 by, among other things, replacing the fixed leverage buffer equal to 1.5% of a GSE’s adjusted total assets with a dynamic leverage buffer equal to 50% of a GSE’s stability capital buffer, reducing the risk weight floor from 10% to 5%, and removing the requirement that the GSEs must apply an overall effectiveness adjustment to their credit risk transfer exposures. On June 14, 2022, the GSEs announced that they will each charge a 50 bps fee for commingled securities issued on or after July 1, 2022 to cover the additional capital required for such securities under the GSE capital framework. Industry groups have expressed concern that this poses a risk to the fungibility of the Uniform Mortgage-Backed Security (“UMBS”), which could negatively impact liquidity and pricing in the market for TBA securities. 46 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 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. 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 became 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 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 March 15, 2022, the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”) was signed into law as part of the Consolidated Appropriations Act, 2022 (H.R. 2471). The LIBOR Act 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. On July 28, 2022, the Fed published a proposed rule to implement the LIBOR Act. Since the GSEs have generally been using 30-day average SOFR in their newly issued multifamily loans and other structured products, the Fed proposed that the benchmark replacement for Agency RMBS be the 30-day average SOFR plus the applicable tenor spread adjustment specified in the LIBOR Act. Comments for the proposed rule closed August 29, 2022, and any final rule will go into effect 30 days after publication in the Federal Register. 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. 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); 47 • 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 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. 48 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 ended these purchases in March 2022 and announced plans to reduce its balance sheet. The Fed’s planned reduction of its balance sheet 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 RMBS 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 securitized. If this were to occur, it would have the effect of delaying a prepayment on the Company’s securities until such time. To the extent 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. To the extent they were acquired at a discount, this will tend to decrease 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. Increases in the Fed Funds rate, SOFR or LIBOR typically increase our borrowing costs, which could affect our interest rate spread if there is no corresponding increase in the interest we earn on our assets. 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 In a continuation of the extremely turbulent and volatile market conditions that have existed since the onset of the COVID-19 pandemic, during the third quarter of 2022 the state of the markets and the outlook changed materially. The perception of inflation on the part of the Fed has shaped the rates markets, currency markets and the outlook for the economy since the spring of 2021. This is when inflation first began to accelerate in the U.S. During the third quarter the Fed’s outlook, or more accurately, the market’s perception of how the Fed saw inflation, changed significantly. Through early August of 2022 the markets perceived that, while inflation was not transitory, the Fed would be able to dampen demand by raising rates and cause inflation to decrease back towards the Fed’s long-term target of 2%. Further, the market anticipated this would happen by early in 2023 and that the Fed would then start to loosen monetary policy shortly thereafter. The Fed, through repeated public comments by various Fed officials and ultimately by the Chairman at the Fed’s annual central banker symposium in Jackson Hole, Wyoming in late August, stressed that this was not going to be the case. Incoming economic data over the period was persistently strong, indicating the rate increases to date had yet to slow demand. More importantly, incoming inflation data showed no evidence of slowing at all and was in fact becoming more widespread, possibly even well entrenched. This reinforced the notion the Fed will have to take rates higher and for longer. 49 The result of these developments were significant and widespread. Germane to Orchid Island and levered Agency RMBS investors were increases in market interest rates and a widening in the spreads that Agency RMBS securities trade relative to comparable duration U.S. Treasuries or swaps. The yield on the 10-year U.S. Treasury closed just above 3.83% on September 30, 2022, and surpassed 4% in October of 2022. This increase was much less than short-term rates increased. Interest rates on maturities inside one year increased by well over 100 basis points and by more than 160 basis points for maturities of three months or less – in each case by the end of the quarter. Yields of maturities of three or fewer months have increased by over 230 basis points since the end of the second quarter of 2022 through October 26, 2022. As of September 30, 2022, market pricing implied the terminal rate for the current cycle would be approximately 4.53% - achieved late in the first quarter of 2023. As of October 26, 2022, the market is pricing in a terminal rate of approximately 4.85% sometime late in the second quarter of 2023 and with the Fed Funds rate still approximately 4.40% in early 2024. Agency RMBS spreads relative to benchmark interest rates increased to levels observed in March of 2020 by the end of the third quarter of 2022 and have exceeded those levels in October of 2022. Returns for the Agency RMBS market for the third quarter of 2022 were (5.40)% and these returns were 1.7% lower than comparable duration LIBOR swaps. The relative performance across the Agency RMBS universe is skewed in favor of higher coupon, 30-year securities that are currently in production by originators. Lower coupon securities, especially those held in large amounts by the Fed, and which may eventually be sold by the Fed, have performed the worst. These results are consistent with the relative duration of the securities, as higher coupons have shorter durations, or less sensitivity to movements in interest rates. Actions by the Fed may prevent the sector from performing well in the near term but, if the economy does contract and enter a recession, the sector could do well on a relative performance basis owing to the lack of credit exposure of Agency RMBS. This is consistent with the sector’s history of performance in a counter-cyclical manner – doing well when the economy is soft and relatively poorly when the economy is strong. Critical Accounting Estimates Our condensed financial statements are prepared in accordance with GAAP. GAAP requires our management to make some complex and subjective decisions and assessments. Our most critical accounting estimates involve decisions and assessments which could significantly affect reported assets, liabilities, revenues and expenses. There have been no changes to our critical accounting estimates as discussed in our annual report on Form 10-K for the year ended December 31, 2021. Capital Expenditures At September 30, 2022, 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 deduction for dividends paid and excluding any net capital gains. REIT taxable income (loss) is computed in accordance with the Code, and can be greater than or less than our financial statement net income (loss) computed in accordance with GAAP. These book to tax differences primarily relate to the recognition of interest income on RMBS, unrealized gains and losses on RMBS, and the amortization of losses on derivative instruments that are treated as funding hedges for tax purposes. 50 We intend to pay regular monthly dividends to our stockholders and have declared the following dividends since the completion of our IPO. (in thousands, except per share amounts) Year Per Share Amount Total 2013 $ 6.975 $ 4,662 2014 10.800 22,643 2015 9.600 38,748 2016 8.400 41,388 2017 8.400 70,717 2018 5.350 55,814 2019 4.800 54,421 2020 3.950 53,570 2021 3.900 97,601 2022 - YTD (1) 2.155 76,024 Totals $ 64.330 $ 515,588 (1) On October 12, 2022, the Company declared a dividend of $0.16 per share to be paid on November 28, 2022. The effect of this dividend is included in the table above, but is not reflected in the Company’s financial statements as of September 30, 2022.