orc10q20220630p1i0

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM

10-Q

☒

QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended

June 30, 2022
2023

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ___________

Commission File Number

:
001-35236

orclogo.jpg

Orchid Island Capital, Inc.

(Exact name of registrant as specified in its charter)

Maryland
27-3269228
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

Maryland

27-3269228

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

3305 Flamingo Drive,

,
Vero Beach,
,
Florida
32963

(Address of principal executive offices) (Zip Code)

(
772
)

(772) 231-1400

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
Trading Symbol:
Name of Each Exchange on Which
Registered
Common Stock, $0.01 par value
ORC
New York Stock Exchange

Title of Each Class

Trading Symbol:

Name of Each Exchange on Which Registered

Common Stock, $0.01 par value

ORC

New York Stock Exchange

Indicate by

check mark
whether the
registrant (1) has
filed all
reports required
to be
filed by
Section 13 or
15(d) of
the Securities
Exchange Act
of
1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such
reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes
☒
No
☐

Indicate by check

mark whether the registrant
has submitted electronically every
Interactive Data File required
to be submitted pursuant
to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was
required to submit such
files).
Yes
☒
No
☐

Indicate by check mark whether the registrant is

a large accelerated filer,
an accelerated filer, a non-accelerated filer,
a smaller reporting company,
or
an emerging growth company. See the definitions of "large accelerated filer,"
"accelerated "accelerated filer", "smaller reporting company", and "emerging growth
company" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company,

indicate by check mark if the registrant has
elected not to use the extended transition period
for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes
☐
No
☒

Number of shares outstanding at August 4, 2022:

July 28, 2023: 43,896,709

176,251,193
ORCHID ISLAND
CAPITAL, INC.
TABLE OF CONTENTS
PART I. FINANCIAL
INFORMATION
ITEM 1. Financial
Statements
1
Condensed
Balance Sheets
(unaudited)
1
Condensed
Statements
of Operations
(unaudited)
2
Condensed
Statements
of Stockholders’
Equity (unaudited)
3
Condensed
Statements
of Cash Flows
(unaudited)
4
Notes to
Condensed
Financial
Statements
(unaudited)
5
ITEM 2. Management’s
Discussion
and Analysis
of Financial
Condition
and Results
of Operations
26
ITEM 3. Quantitative
and Qualitative
Disclosures
about Market
Risk
50
ITEM 4. Controls
and Procedures
54
PART II. OTHER INFORMATION
ITEM 1. Legal
Proceedings
55
ITEM 1A.
Risk Factors
55
ITEM 2. Unregistered
Sales of Equity
Securities
and Use of
Proceeds
55
ITEM 3. Defaults
upon Senior
Securities
55
ITEM 4. Mine
Safety Disclosures
55
ITEM 5. Other
Information
55
ITEM 6. Exhibits
56
SIGNATURES
57
 
Table of Contents

 
1
PART I. FINANCIAL
INFORMATION
ITEM 1. FINANCIAL STATEMENTS

ORCHID ISLAND CAPITAL, INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

1

Condensed Balance Sheets (unaudited)

1

Condensed Statements of Operations (unaudited)

2

Condensed Statements of Stockholders’ Equity (unaudited)

3

Condensed Statements of Cash Flows (unaudited)

4

Notes to Condensed Financial Statements (unaudited)

5

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

44

ITEM 4. Controls and Procedures

48

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

49

ITEM 1A. Risk Factors

49

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

49

ITEM 3. Defaults upon Senior Securities

49

ITEM 4. Mine Safety Disclosures

49

ITEM 5. Other Information

49

ITEM 6. Exhibits

50

SIGNATURES

51

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM1. FINANCIAL STATEMENTS

ORCHID ISLAND CAPITAL, INC.

CONDENSED BALANCE SHEETS

($ in thousands, except per share data)

  

(Unaudited)

     
  

June 30,

  

December 31,

 
  

2023

  

2022

 

ASSETS:

        

Mortgage-backed securities, at fair value (includes pledged assets of $4,368,075 and $3,512,640, respectively)

 $4,373,972  $3,540,002 

U.S. Treasury Notes, at fair value (includes pledged assets of $37,195 and $36,382, respectively)

  37,195   36,382 

Cash and cash equivalents

  198,246   205,651 

Restricted cash

  51,091   31,568 

Accrued interest receivable

  15,266   11,519 

Derivative assets

  52,324   40,172 

Other assets

  2,836   442 

Total Assets

 $4,730,930  $3,865,736 
         

LIABILITIES AND STOCKHOLDERS' EQUITY

        
         

LIABILITIES:

        

Repurchase agreements

 $4,201,717  $3,378,445 

Dividends payable

  7,049   5,908 

Derivative liabilities

  12,875   7,161 

Accrued interest payable

  11,280   9,209 

Due to affiliates

  1,241   1,131 

Other liabilities

  6,683   25,119 

Total Liabilities

  4,240,845   3,426,973 
         

COMMITMENTS AND CONTINGENCIES

          
         

STOCKHOLDERS' EQUITY:

        

Preferred stock, $0.01 par value; 20,000,000 shares authorized; no shares issued and outstanding as of June 30, 2023 and December 31, 2022

  -   - 

Common Stock, $0.01 par value; 100,000,000 shares authorized, 43,896,709 shares issued and outstanding as of June 30, 2023 and 36,764,983 shares issued and outstanding as of December 31, 2022

  439   368 

Additional paid-in capital

  817,074   779,602 

Accumulated deficit

  (327,428)  (341,207)

Total Stockholders' Equity

  490,085   438,763 

Total Liabilities and Stockholders' Equity

 $4,730,930  $3,865,736 
(Unaudited)
June 30,
December 31,
2022
2021
ASSETS:
Mortgage-backed securities, at fair value (includes pledged assets
of $
3,926,165
and $
6,506,372
, respectively)
$
3,940,860
$
6,511,095
U.S. Treasury Notes, at fair value (includes pledged assets of $
36,302
and $
29,740
, respectively)
36,302
37,175
Cash and cash equivalents
218,975
385,143
Restricted cash
64,396
65,299
Accrued interest receivable
13,932
18,859
Derivative assets
198,484
50,786
Other assets
1,420
320
Total Assets
$
4,474,369
$
7,068,677
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements
$
3,758,980
$
6,244,106
Dividends payable
7,960
11,530
Derivative liabilities
43,591
7,589
Accrued interest payable
3,940
788
Due to affiliates
1,138
1,062
Other liabilities
152,398
35,505
Total Liabilities
3,968,007
6,300,580
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $
0.01
par value;
100,000,000
shares authorized; no shares issued
and outstanding as of June 30, 2022 and December 31, 2021
0
0
Common Stock, $
0.01
par value;
500,000,000
shares authorized,
176,251,193
shares issued and outstanding as of June 30, 2022 and
176,993,049
shares issued
and outstanding as of December 31, 2021
1,763
1,770
Additional paid-in capital
796,219
849,081
Accumulated deficit
(291,620)
(82,754)
Total Stockholders' Equity
506,362
768,097
Total Liabilities
and Stockholders' Equity
$
4,474,369
$
7,068,677

See Notes to Financial Statements

1
Table of Contents
 
2

ORCHID ISLAND CAPITAL, INC.

CONDENSED STATEMENTS

OF OPERATIONS

(Unaudited)

For the Three and Six Months Ended June 30, 20222023 and 2021

2022

($ in thousands, except per share data)

  

Six Months Ended June 30,

  

Three Months Ended June 30,

 
  

2023

  

2022

  

2023

  

2022

 

Interest income

 $77,923  $77,125  $39,911  $35,268 

Interest expense

  (90,888)  (10,835)  (48,671)  (8,180)

Net interest (expense) income

  (12,965)  66,290   (8,760)  27,088 

Realized losses on mortgage-backed securities

  -   (66,529)  -   (15,443)

Unrealized losses on mortgage-backed securities and U.S. Treasury Notes

  (15,644)  (480,560)  (69,539)  (170,598)

Gains on derivative and other hedging instruments

  52,211   280,865   93,367   103,367 

Net portfolio income (loss)

  23,602   (199,934)  15,068   (55,586)
                 

Expenses:

                

Management fees

  5,346   5,265   2,704   2,631 

Allocated overhead

  1,215   960   639   519 

Incentive compensation

  788   551   318   314 

Directors' fees and liability insurance

  641   621   318   310 

Audit, legal and other professional fees

  899   606   448   302 

Direct REIT operating expenses

  338   508   173   183 

Other administrative

  596   421   219   294 

Total expenses

  9,823   8,932   4,819   4,553 
                 

Net income (loss)

 $13,779  $(208,866) $10,249  $(60,139)
                 

Basic and diluted net income (loss) per share

 $0.35  $(5.90) $0.25  $(1.70)
                 

Weighted Average Shares Outstanding

  39,356,054   35,403,193   40,210,844   35,406,832 
                 

Dividends declared per common share

 $0.960  $1.450  $0.480  $0.675 
Six Months Ended June 30,
Three Months Ended June 30,
2022
2021
2022
2021
Interest income
$
77,125
$
56,110
$
35,268
$
29,254
Interest expense
(10,835)
(3,497)
(8,180)
(1,556)
Net interest income
66,290
52,613
27,088
27,698
Realized (losses) gains on mortgage-backed securities
(66,529)
(6,045)
(15,443)
1,352
Unrealized (losses) gains on mortgage-backed securities and
U.S. Treasury Notes
(480,560)
(96,147)
(170,598)
(7,281)
Gains (losses) on derivative and other hedging instruments
281,574
10,557
103,758
(34,915)
Net portfolio loss
(199,225)
(39,022)
(55,195)
(13,146)
Expenses:
Management fees
5,265
3,413
2,631
1,792
Allocated overhead
960
799
519
395
Incentive compensation
551
625
314
261
Directors' fees and liability insurance
621
595
310
323
Audit, legal and other professional fees
606
620
302
302
Direct REIT operating expenses
1,217
715
574
294
Other administrative
421
445
294
352
Total expenses
9,641
7,212
4,944
3,719
Net loss
$
(208,866)
$
(46,234)
$
(60,139)
$
(16,865)
Basic and diluted net loss per share
$
(1.18)
$
(0.50)
$
(0.34)
$
(0.17)
Weighted Average Shares Outstanding
177,015,963
92,456,082
177,034,159
99,489,065
Dividends declared per common share
$
0.290
$
0.390
$
0.135
$
0.195

See Notes to Financial Statements

2
Table of Contents
 
3

ORCHID ISLAND CAPITAL, INC.

CONDENSED STATEMENTS

OF STOCKHOLDERS' EQUITY

(Unaudited)

For the Six Months Ended June 30, 20222023 and 2021

2022

(in thousands)

          

Additional

  

Retained

     
  

Common Stock

  

Paid-in

  

Earnings

     
  

Shares

  

Par Value

  

Capital

  

(Deficit)

  

Total

 
                     

Balances, January 1, 2023

  36,765  $368  $779,602  $(341,207) $438,763 

Net income

  -   -   -   3,530   3,530 

Cash dividends declared

  -   -   (18,807)  -   (18,807)

Stock based awards and amortization

  4   -   181   -   181 

Issuance of common stock pursuant to public offerings, net

  2,690   26   31,631   -   31,657 

Shares repurchased and retired

  (373)  (3)  (3,960)  -   (3,963)

Balances, March 31, 2023

  39,086  $391  $788,647  $(337,677) $451,361 

Net income

  -   -   -   10,249   10,249 

Cash dividends declared

  -   -   (19,671)  -   (19,671)

Stock based awards and amortization

  53   1   790   -   791 

Issuance of common stock pursuant to public offerings, net

  4,758   47   47,308   -   47,355 

Shares repurchased and retired

  -   -   -   -   - 

Balances, June 30, 2023

  43,897  $439  $817,074  $(327,428) $490,085 
                     

Balances, January 1, 2022

  35,399  $354  $850,497  $(82,754) $768,097 

Net loss

  -   -   -   (148,727)  (148,727)

Cash dividends declared

  -   -   (27,492)  -   (27,492)

Stock based awards and amortization

  25   -   540   -   540 

Balances, March 31, 2022

  35,424  $354  $823,545  $(231,481) $592,418 

Net loss

  -   -   -   (60,139)  (60,139)

Cash dividends declared

  -   -   (23,936)  -   (23,936)

Stock based awards and amortization

  2   -   237   -   237 

Shares repurchased and retired

  (175)  (2)  (2,216)  -   (2,218)

Balances, June 30, 2022

  35,251  $352  $797,630  $(291,620) $506,362 
Additional
Retained
Common Stock
Paid-in
Earnings
Shares
Par Value
Capital
(Deficit)
Total
Balances, January 1, 2021
76,073
$
761
$
432,524
$
(17,994)
$
415,291
Net loss
-
0
0
(29,369)
(29,369)
Cash dividends declared
-
0
(17,226)
0
(17,226)
Issuance of common stock pursuant to public offerings, net
18,248
182
96,726
0
96,908
Stock based awards and amortization
90
1
571
0
572
Balances, March 31, 2021
94,411
$
944
$
512,595
$
(47,363)
$
466,176
Net income
-
0
0
(16,865)
(16,865)
Cash dividends declared
-
0
(20,416)
0
(20,416)
Issuance of common stock pursuant to public offerings, net
23,087
231
124,515
0
124,746
Stock based awards and amortization
2
0
180
0
180
Balances, June 30, 2021
117,500
$
1,175
$
616,874
$
(64,228)
$
553,821
Balances, January 1, 2022
176,993
$
1,770
$
849,081
$
(82,754)
$
768,097
Net loss
-
0
0
(148,727)
(148,727)
Cash dividends declared
-
0
(27,492)
0
(27,492)
Stock based awards and amortization
124
1
539
0
540
Balances, March 31, 2022
177,117
$
1,771
$
822,128
$
(231,481)
$
592,418
Net loss
-
0
0
(60,139)
(60,139)
Cash dividends declared
-
0
(23,936)
0
(23,936)
Stock based awards and amortization
10
0
237
0
237
Shares repurchased and retired
(876)
(8)
(2,210)
0
(2,218)
Balances, June 30, 2022
176,251
$
1,763
$
796,219
$
(291,620)
$
506,362

See Notes to Financial Statements

3
Table of Contents
 
4

ORCHID ISLAND CAPITAL, INC.

CONDENSED STATEMENTS

OF CASH FLOWS

(Unaudited)

For the Six Months Ended June 30, 20222023 and 2021

2022

($ in thousands)

  

2023

  

2022

 

CASH FLOWS FROM OPERATING ACTIVITIES:

        

Net income (loss)

 $13,779  $(208,866)

Adjustments to reconcile net loss to net cash provided by operating activities:

        

Stock based compensation

  652   404 

Realized losses on mortgage-backed securities

  -   66,529 

Unrealized losses on mortgage-backed securities and U.S. Treasury Notes

  15,644   480,560 

Realized and unrealized gains on derivative instruments

  (15,244)  (161,731)

Changes in operating assets and liabilities:

        

Accrued interest receivable

  (3,747)  4,927 

Other assets

  (339)  (583)

Accrued interest payable

  2,071   3,152 

Other liabilities

  410   198 

Due to affiliates

  110   76 

NET CASH PROVIDED BY OPERATING ACTIVITIES

  13,336   184,666 
         

CASH FLOWS FROM INVESTING ACTIVITIES:

        

From mortgage-backed securities investments:

        

Purchases

  (988,824)  (190,638)

Sales

  -   1,934,606 

Principal repayments

  138,391   279,534 

Net (payments on) proceeds from derivative instruments

  (11,484)  167,307 

NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES

  (861,917)  2,190,809 
         

CASH FLOWS FROM FINANCING ACTIVITIES:

        

Proceeds from repurchase agreements

  17,626,375   22,121,707 

Principal payments on repurchase agreements

  (16,803,103)  (24,606,833)

Cash dividends

  (37,307)  (54,979)

Proceeds from issuance of common stock, net of issuance costs

  79,012   - 

Common stock repurchases, including shares withheld from employee stock awards for payment of taxes

  (4,278)  (2,441)

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

  860,699   (2,542,546)
         

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

  12,118   (167,071)

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the period

  237,219   450,442 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the period

 $249,337  $283,371 
         

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

        

Cash paid during the period for:

        

Interest

 $88,817  $7,683 

See Notes to Financial Statements

2022
4
2021
Table of Contents
CASH FLOWS FROM OPERATING

ORCHID ISLAND CAPITAL,INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2023

 
ACTIVITIES:
Net loss
$
(208,866)
$
(46,234)
Adjustments to reconcile net loss to net cash provided by operating activities:
Stock based compensation
404
429
Realized losses

NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization and Business Description

Orchid Island Capital, Inc. (“Orchid” or the “Company”) was incorporated in Maryland on mortgage-backed securities

66,529
6,045
Unrealized losses onAugust 17, 2010 for the purpose of creating and managing a leveraged investment portfolio consisting of residential mortgage-backed securities and U.S. Treasury
Notes
480,560
96,147
Realized and unrealized gains(“RMBS”).  From incorporation to the completion of Orchid’s initial public offering of its common stock on derivative instruments
(161,731)
(13,483)
Changes in operating assets and liabilities:
Accrued interest receivable
4,927
(2,826)
Other assets
(583)
(172)
Accrued interest payable
3,152
(115)
Other liabilities
198
(1,305)
Due to affiliates
76
162
NET CASH PROVIDED BY OPERATING
ACTIVITIES
184,666
38,648
CASH FLOWS FROM INVESTING ACTIVITIES:
February 20, 2013, Orchid was a wholly owned subsidiary of Bimini Capital Management, Inc. (“Bimini”).  Orchid began operations on November 24, 2010 (the date of commencement of operations).  From mortgage-backed securities investments:
Purchases
(190,638)
(2,986,864)
Sales
1,934,606
1,680,903
Principal repayments
279,534
259,425
Net proceeds from (payments on) derivative instruments
167,307
(17,446)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
2,190,809
(1,063,982)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements
22,121,707
13,582,422
Principal payments on repurchase agreements
(24,606,833)
(12,663,304)
Cash dividends
(54,979)
(34,927)
Proceeds fromincorporation through November 24, 2010, Orchid’s only activity was the issuance of common stock net of issuance costs
0
221,654
Shares repurchased and retired
(2,218)
0
Shares withheld from employee stock awards for payment of taxes
(223)
(299)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
(2,542,546)
1,105,546
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS
AND RESTRICTED CASH
(167,071)
80,212
CASH, CASH EQUIVALENTS
AND RESTRICTED CASH, beginning of the period
450,442
299,506
CASH, CASH EQUIVALENTS
AND RESTRICTED CASH, end of the period
$
283,371
$
379,718
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest
$
7,683
$
3,611
SUPPLEMENTAL DISCLOSURE OF
NONCASH INVESTING ACTIVITIES:
Securities sold settled in later period
$
0
$
154,977
See Notes to Financial Statements
5
ORCHID ISLAND
CAPITAL, INC.
NOTES TO CONDENSED
FINANCIAL
STATEMENTS
(Unaudited)
JUNE 30,
2022
NOTE 1.
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
and Business
Description
Orchid Island
Capital,
Inc. (“Orchid”
or the “Company”),
was incorporated
in Maryland
on August
17, 2010
for the purpose
of creating
and managing
a leveraged
investment
portfolio
consisting
of residential
mortgage-backed
securities
(“RMBS”).
From incorporation
to
February
20, 2013,
Orchid was
a wholly
owned subsidiary
of Bimini
Capital Management,
Inc. (“Bimini”).
Orchid began
operations
on
November
24, 2010
(the date
of commencement
of operations).
From incorporation
through November
24, 2010,
Orchid’s only
activity
was the issuance
of common
stock to
Bimini.

On August 4, 2020, October 29, 2021, Orchid entered into an equity distribution agreement (the “August

2020 “October 2021 Equity Distribution Agreement”) with
four sales agents pursuant to which the Company could offer and sell, from time to time,
up to an aggregate amount of $
150,000,000
$250,000,000 of
shares of the Company’s common stock in transactions that were deemed to be “at the market” offerings and privately
negotiated
transactions.
The Company issued a total of
27,493,650
9,742,188 shares under the August 2020 October 2021 Equity Distribution Agreement for aggregate
gross proceeds of
approximately $
150.0
$151.8 million, and net proceeds of approximately $
147.4
$149.3 million, after commissions and fees, prior to
its termination in June 2021.
March 2023. 

On January 20, 2021, Orchid entered into an underwriting agreement (the “January

2021 Underwriting Agreement”) with J.P.
Morgan Securities LLC (“J.P. Morgan”), relating to the offer and sale of
7,600,000
shares of the Company’s common stock. J.P.
Morgan purchased the shares of the Company’s common stock from the Company pursuant
to the January 2021 Underwriting
Agreement at $
5.20
per share. In addition, the Company granted J.P. Morgan a 30-day option to purchase up to an additional
1,140,000
shares of the Company’s common stock on the same terms and conditions, which
J.P.
Morgan exercised in full on January
21, 2021. The closing of the offering of
8,740,000
shares of the Company’s common stock occurred on January 25, 2021, with
proceeds to the Company of approximately $
45.2
million, net of offering expenses.
On March 2, 2021, Orchid entered into an underwriting agreement (the “March 2021
Underwriting Agreement”) with J.P. Morgan,
relating to the offer and sale of
8,000,000
shares of the Company’s common stock. J.P. Morgan purchased the shares of the
Company’s common stock from the Company pursuant to the March 2021 Underwriting
Agreement at $
5.45
per share. In addition, the
Company granted J.P. Morgan a 30-day option to purchase up to an additional
1,200,000
shares of the Company’s common stock on
the same terms and conditions, which J.P. Morgan exercised in full on March 3, 2021. The closing of the offering of
9,200,000
shares
of the Company’s common stock occurred on March 5, 2021, with proceeds to the Company
of approximately $
50.0
million, net of
offering expenses.
On June 22, 2021, 7, 2023, Orchid entered into an equity distribution agreement
(the “June 2021 (the “March 2023 Equity Distribution Agreement”) with four
threesales agents pursuant to which the Company could may offer and sell, from time to time, up to
an aggregate amount of $
250,000,000
of
shares$250,000,000 of the Company’s common stock in transactions that were deemed to be “at the market” offerings and privately
negotiated
transactions. The Company issued a total of
49,407,336
shares under the June 2021 Equity Distribution Agreement for aggregate
gross proceeds of approximately $
250.0
million, and net proceeds of approximately $
246.0
million, after commissions and fees, prior to
its termination in October 2021.
6
On October 29, 2021, Orchid entered into an equity distribution agreement (the
“October 2021 Equity Distribution Agreement”) with
four sales agents pursuant to which the Company may offer and sell, from time to time,
up to an aggregate amount of $
250,000,000
of
shares of the Company’s common stock in transactions that are deemed to be “at the market”
offerings and privately negotiated
transactions.
Through June 30, 2022,2023, the Company issued a total of
15,835,700
4,757,953 shares under the October 2021 March 2023 Equity Distribution
Agreement for aggregate gross proceeds of approximately $
78.3
$48.1 million, and net proceeds of approximately $
77.0
$47.4 million, after
commissions and fees. No shares were issued under

Basis of Presentation and Use of Estimates

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the October 2021 Equity

Distribution AgreementUnited States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. Operating results for the six and three month periods ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

The balance sheet at December 31, 2022 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the six months ended

June 30, 2022.
Basis of
Presentation
and Use of
Estimates
The accompanying
unaudited
financial
statements
have been
prepared
in accordance
with accounting
principles
generally
accepted
in the United
States (“GAAP”)
for interim
financial
information
and with
the instructions
to Form 10-Q
and Article
8 of Regulation
S-X.
Accordingly, they
do not include
all of the
information
and footnotes
required
by GAAP for
complete financial
statements.
In the opinion
of
management,
all adjustments
(consisting
of normal
recurring
accruals)
considered
necessary
for a fair
presentation
have been
included.
Operating
results for
the six and
three month
period ended
June 30,
2022 are
not necessarily
indicative
of the results
that may
be
expected for
the year
ending December
31, 2022.
The balance
sheet at
December
31, 2021
has been
derived from
the audited
financial
statements
at that date
but does
not include
all
of the information
and footnotes
required
by GAAP for
complete financial
statements.
For further
information,
refer to
the financial
statements
and footnotes
thereto included
in the Company’s
Annual Report
on Form 10-K
for the year
ended December
31, 2021.
The preparation
of financial
statements
in conformity
with GAAP
requires
management
to make estimates
and assumptions
that affect
the reported
amounts of
assets and
liabilities
and disclosure
of contingent
assets and
liabilities
at the date
of the financial
statements
and
the reported
amounts of
revenues
and expenses
during the
reporting
period. Actual
results could
differ from
those estimates.
The
significant
estimates
affecting the
accompanying
financial
statements
are the fair
values of RMBS
and derivatives.
Management
believes
the estimates
and assumptions
underlying
the financial
statements
are reasonable
based on
the information
available
as of June
30, 2022.2023.

Reclassification of Comparative Period Information

The Company previously reported $0.7 million and $0.4 million of commissions, fees and other expenses associated with its derivative holdings for the six and three month periods ended June 30, 2022, respectively, in "Direct REIT operating expenses" in the statements of operations.  These expenses have been reclassified as part of "Gains (losses) on derivative and other hedging instruments" to conform with the presentation in the current period.

5
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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, per share, deferred stock unit (“DSU”) and performance unit (“PU”) information has been retroactively adjusted to reflect the reverse split. The shares of common stock retain a par value of $0.01 per share.

Variable Interest Entities (“VIEs”(“VIEs”)

The Company obtains interests in VIEs through its investments in mortgage-backed

securities.
The Company’s interests in these
VIEs are passive in nature and are not expected to result in the Company obtaining a
controlling financial interest in these VIEs in the
future.
As a result, the Company does not consolidate these VIEs and accounts
for these interests in these VIEs as mortgage-backed
securities.
See Note 2 for additional information regarding the Company’s investments in
mortgage-backed securities.
The maximum
exposure to loss for these VIEs is the carrying value of the mortgage-backed securities.

Cash and Cash Equivalents and Restricted Cash

Cash and
cash equivalents
include
cash on deposit
with financial
institutions
and highly
liquid investments
with original
maturities
of
three months
or less at
the time
of purchase.
Restricted
cash includes
cash pledged
as collateral
for repurchase
agreements
and other
borrowings,
and interest
rate swaps
and other
derivative
instruments.
7
The following
table provides
a reconciliation
of cash,
cash equivalents,
and restricted
cash reported
within the
statement
of financial
position that
sum to the
total of
the same
such amounts
shown in
the statement
of cash flows.
(in thousands)
June 30, 2022
December 31, 2021

Cash and cash equivalents

$
218,975
$
385,143
include cash on deposit with financial institutions and highly liquid investments with original maturities of three months or less at the time of purchase. Restricted cash
64,396
65,299
Total includes cash pledged as collateral for repurchase agreements and other borrowings, and interest rate swaps and other derivative instruments.

The following table provides a reconciliation of cash, cash equivalents,

and restricted cash
$
283,371
$
450,442
reported within the statement of financial position that sum to the total of the same such amounts shown in the statement of cash flows.

(in thousands)

        
  

June 30, 2023

  

December 31, 2022

 

Cash and cash equivalents

 $198,246  $205,651 

Restricted cash

  51,091   31,568 

Total cash, cash equivalents and restricted cash

 $249,337  $237,219 

The Company

maintains
cash balances
at three
banks, a government securities backed overnight sweep fund, and
excess margin
on account
with two
exchange clearing
members.
At times,
balances may
exceed federally
insured limits.
The Company
has not
experienced
any losses
related to
these balances.
The Federal
Deposit Insurance
Corporation
insures eligible
accounts
up to $250,000
$250,000per depositor
at each financial
institution.
Restricted
cash
balances are
uninsured,
but are held
in separate
customer accounts
that are
segregated
from the
general funds
of the counterparty.
The
Company limits
uninsured
balances
to only large,
well-known
banks and
exchange clearing
members and
believes that
it is not
exposed to
any significant
credit risk
on cash and
cash equivalents
or restricted
cash balances.

Mortgage-Backed

Securities
and U.S.
Treasury Notes

The Company

invests primarily
in mortgage
pass-through
(“PT”) residential
mortgage
backed securities
(“RMBS”)
and collateralized
mortgage
obligations
(“CMOs”)
issued by
Freddie Mac,
Fannie Mae
or Ginnie
Mae,
interest-only
(“IO”) securities
and inverse
interest-only
(“IIO”) securities
representing interest in or obligations backed by pools of RMBS. The Company
refers
to RMBS and CMOs as PT
RMBS. The Company refers to IO and IIO securities as structured RMBS. The Company
also invests in U.S. Treasury Notes, primarily
to satisfy collateral requirements of derivative counterparties. The Company has elected
to account for its investment in RMBS and
U.S. Treasury Notes under the fair value option. Electing the fair value option requires the Company to record
changes in fair value in
the statementstatements of operations, which, in management’s view, more appropriately reflects the results of the Company’s operations for a
particular reporting period and is consistent with the underlying economics and
how the portfolio is managed.

The Company

records securities
transactions
on the trade
date. Security
purchases
that have
not settled
as of the
balance sheet
date
are included
in the portfolio
balance with
an offsetting
liability
recorded,
whereas securities
sold that
have not
settled as
of the balance
sheet date
are
removed from
the portfolio
balance with
an offsetting receivable recorded.

6
receivable
Table of Contents
recorded.

Fair value

is defined
as the price
that would
be received
to sell the
asset or
paid to transfer
the liability
in an orderly
transaction
between market
participants
at the measurement
date.
The fair
value measurement
assumes
that the
transaction
to sell the
asset or
transfer
the liability
either occurs
in the principal
market for
the asset
or liability, or
in the absence
of a principal
market, occurs
in the most
advantageous
market for
the asset
or liability. Estimated
fair values
for RMBS
are based
on independent
pricing sources
and/or third
party
broker quotes,
when available.
Estimated
fair values
for U.S.
Treasury Notes
are based
on quoted
prices for
identical
assets in
active
markets.

Income on

PT RMBS
and U.S. Treasury
Notes is based
on the stated
interest
rate of the
security. Premiums
or discounts
present
at
the date
of purchase
are not amortized.
Premium lost
and discount
accretion
resulting
from monthly
principal
repayments
are reflected
in
unrealized
gains (losses)
on RMBS
in the statements
of operations.
For IO securities,
the income
is accrued
based on
the carrying
value
and the effective
yield. The
difference
between income
accrued
and the interest
received on
the security
is characterized
as a return
of
investment
and serves
to reduce
the asset’s
carrying value.
At each
reporting
date, the
effective yield
is adjusted
prospectively
for future
reporting
periods
based on
the new estimate
of prepayments
and the contractual
terms of
the security. For
IIO securities,
effective
yield
and income
recognition
calculations
also take
into account
the index
value applicable
to the security.
Changes in
fair value
of RMBS
during
each reporting
period are
recorded
in earnings
and reported
as unrealized
gains or
losses on
mortgage-backed
securities
in the
accompanying
statements
of operations.
8
Realized gains and losses on sales of RMBS and U.S. Treasury Notes, using the specific identification method, are reported as a separate component of net portfolio income on the statements of operations.

Derivative and Other Hedging Instruments

The Company

uses derivative
and other
hedging instruments
to manage
interest
rate risk,
facilitate
asset/liability
strategies
and
manage other
exposures,
and it may
continue to
do so in the
future. The
principal
instruments
that the
Company has
used to date
are
Treasury Note
(“T-Note”),
federal funds
(“ (“Fed Funds”)
and Eurodollar
futures contracts,
short positions
in U.S.
Treasury securities,
interest
rate swaps,
options to
enter in
interest
rate swaps
(“ (“interest
rate swaptions”)
and “to-be-announced”
(“TBA”)
securities
transactions,
but the
Company may
enter into
other derivative
and other
hedging instruments
in the future.

The Company

accounts for
TBA securities
as derivative
instruments.
Gains and
losses associated
with TBA
securities
transactions
are reported
in gain (loss)
on derivative
instruments
in the accompanying
statements
of operations.

Derivative

and other
hedging instruments
are carried
at fair value,
and changes
in fair value
are recorded
in earnings
for each
period.
The Company’s
derivative
financial
instruments
are not designated
as hedge
accounting
relationships,
but rather
are used
as economic
hedges of
its portfolio
assets and
liabilities.
Gains and
losses on
derivatives,
except those
that result
in cash receipts
or payments,
are
included in
operating
activities
on the statement
statements of cash flows.
Cash payments
and cash receipts
from settlements
of derivatives,
including
current period
net cash settlements
on interest
rates swaps,
are classified
as an investing
activity
on the statements
of cash flows.

Holding derivatives

creates exposure
to credit
risk related
to the potential
for failure
on the part
of counterparties
and exchanges
to
honor their
commitments.
In the event
of default
by a counterparty,
the Company
may have
difficulty recovering
its collateral
and may not
receive payments
provided
for under
the terms
of the agreement.
The Company’s
derivative
agreements
require it
to post or
receive
collateral
to mitigate
such risk.
In addition,
the Company
uses only
registered
central clearing
exchanges
and well-established
commercial
banks as counterparties,
monitors
positions
with individual
counterparties
and adjusts
posted collateral
as required.

Financial

Instruments

The fair

value of financial
instruments
for which
it is practicable
to estimate
that value
is disclosed
either in
the body
of the financial
statements
or in the
accompanying
notes. RMBS,
Eurodollar,
Fed Funds
and T-Note futures
contracts,
interest
rate swaps,
interest
rate
swaptions
and TBA
securities
are accounted
for at fair
value in the
balance sheets.
The methods
and assumptions
used to
estimate fair
value for
these instruments
are presented
in Note 12
of the financial
statements.

The estimated

fair value
of cash and
cash equivalents,
restricted
cash, accrued
interest
receivable,
receivable
for securities
sold,
other assets,
due to affiliates,
repurchase
agreements,
payable
for unsettled
securities
purchased,
accrued interest
payable and
other
liabilities
generally
approximates
their carrying
values as
Level 2 assets under the fair value hierarchy as of June
30, 2022
2023and December
31, 2021
2022due to the
short-term
nature of these financial instruments.

these
financial
instruments.7
Table of Contents

Repurchase

Agreements

The Company

finances the
acquisition
of the majority
of its RMBS
through the
use of repurchase
agreements
under master
repurchase
agreements.
Repurchase
agreements
are accounted
for as collateralized
financing
transactions,
which are
carried at
their
contractual
amounts,
including
accrued interest,
as specified
in the respective
agreements.

Manager Compensation

The Company

is externally
managed
by Bimini
Advisors,
LLC (the
“Manager”
“Manager” or “Bimini
Advisors”),
a Maryland
limited liability
company and
wholly-owned
subsidiary
of Bimini.
The Company’s
management
agreement
with the
Manager provides
for payment
to the
Manager of
a management
fee and reimbursement
of certain
operating
expenses,
which are
accrued and
expensed during
the period
for
which they
are earned
or incurred.
Refer to
Note 13 for
the terms
of the management
agreement.
9

Earnings

Per Share

Basic earnings

per share
(“EPS”)
is calculated
as net income
or loss attributable
to common
stockholders
divided by
the weighted
average number
of shares
of common
stock outstanding
during the
period. Diluted
EPS is calculated
using the
treasury
stock or two-class
two-class method, as
applicable,
for common
stock equivalents,
if any. However, the
common stock
equivalents
are not included
in computing
diluted EPS
if the result
is anti-dilutive.

Stock-Based

Compensation

The Company

may grant
equity-based
compensation
to non-employee
members of
its Board
of Directors
and to the
executive
officers
and employees
of the Manager.
Stock-based
awards issued
include performance
units, deferred
stock units
PUs, DSUs and immediately
vested
common stock
awards. Compensation
expense is
measured
and recognized
for all stock-based
payment awards
made to employees
and
non-employee
directors
based on
the fair
value of the
Company’s common
stock on
the date
of grant.
Compensation
expense is
recognized
over each
award’s respective
service period
using the
graded vesting
attribution
method. The
Company does
not estimate
forfeiture
rates; but
rather, adjusts
for forfeitures
in the periods
in which
they occur.

Income Taxes

Orchid has elected and is organized and operated 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”).
REITs are generally not subject to federal income tax on their REIT taxable
income provided that they distribute to their stockholders all of their REIT taxable income
on an annual basis. A REIT must distribute at
least 90% of its REIT taxable income, determined without regard to the
deductions for dividends paid and excluding net capital gain,
and meet other requirements of the Code to retain its tax status.

Orchid assesses the likelihood, based on their technical merit, that uncertain tax

positions will be sustained upon examination
based on the facts, circumstances and information available at the end of each period.
All of Orchid’s tax positions are categorized as
highly certain.
There is no accrual for any tax, interest or penalties related to Orchid’s tax position
assessment.
The measurement of
uncertain tax positions is adjusted when new information is available,
or when an event occurs that requires a change.

Recent Accounting

Pronouncements

In March 2020, the FASB issued ASU 2020-042020-04 “

Reference Rate Reform (Topic 848)848): Facilitation of the Effects of Reference Rate
Reform on Financial Reporting.
”
ASU 2020-042020-04 provides optional expedients and exceptions to GAAP requirements
for modifications
on debt instruments, leases, derivatives, and other contracts, related to the expected
market transition from the London Interbank
Offered Rate (“LIBOR”), and certain other floating rate benchmark indices, or collectively, IBORs, to alternative reference rates. ASU
2020-042020-04 generally considers contract modifications related to reference rate reform to
be an event that does not require contract
remeasurement at the modification date nor a reassessment of a previous accounting
determination. The guidance in ASU 2020-042020-04 is
optional and may be elected over time, through December 31, 2022, as reference
rate reform activities occur. In December 2022, the FASB issued ASU 2022-06 "Reference Rate Reform (Topic 848)," deferring the sunset date provided in ASU 2020-04 from December 31, 2022 to December 31, 2024. The Company does not
believeadopted this ASU during thesecond quarter of 2023 as the Secured Overnight Financing Rate ("SOFR") replaced LIBOR for certain derivative positions. The adoption of this ASU willdid not have a material impact on its financial statements.

8
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10

In January 2021, the FASB issued ASU 2021-012021-01 “

Reference Rate Reform (Topic 848
).” ASU 2021-012021-01 expands the scope of ASC
848 to include all affected derivatives and give market participants the ability to apply
certain aspects of the contract modification and
hedge accounting expedients to derivative contracts affected by the discounting transition. In addition,
ASU 2021-012021-01 adds
implementation guidance to permit a company to apply certain optional expedients
to modifications of interest rate indexes used for
margining, discounting or contract price alignment of certain derivatives as a result
of reference rate reform initiatives and extends
optional expedients to account for a derivative contract modified as a continuation
of the existing contract and to continue hedge
accounting when certain critical terms of a hedging relationship change to
modifications made as part of the discounting transition. The
guidance in ASU 2021-012021-01 is effective immediately and available generally through December
31, 2022, 2024, as reference rate reform
activities occur. The Company does not believeadopted this ASU during thesecond quarter of 2023 as SOFR replaced LIBOR for certain derivative positions. The adoption of this ASU willdid not have a material impact on its financial statements.
NOTE 2.

 

NOTE 2.MORTGAGE-BACKED SECURITIES AND U.S. TREASURY NOTES

The following

table presents
the Company’s
RMBS portfolio
as of June
30, 2022
and December
31, 2021:
(in thousands)
June 30, 2022
2023 and December 31, 2021
Pass-Through RMBS Certificates:
Fixed-rate Mortgages
$
3,766,151
$
6,298,189
Total Pass-Through
Certificates
3,766,151
6,298,189
Structured RMBS Certificates:
Interest-Only Securities
173,754
210,382
Inverse Interest-Only Securities
955
2,524
Total Structured
RMBS Certificates
174,709
212,906
Total
$
3,940,860
$
6,511,095
2022:

(in thousands)

        
  

June 30, 2023

  

December 31, 2022

 

Pass-Through RMBS Certificates:

        

Fixed-rate Mortgages

 $4,356,203  $3,519,906 

Total Pass-Through Certificates

  4,356,203   3,519,906 

Structured RMBS Certificates:

        

Interest-Only Securities

  17,448   19,669 

Inverse Interest-Only Securities

  321   427 

Total Structured RMBS Certificates

  17,769   20,096 

Total

 $4,373,972  $3,540,002 

As of June

30, 2022
2023and December
31, 2021,
2022, the Company
held U.S.
Treasury Notes
with a fair
value of approximately
$
36.3
$37.2 million
and $
37.2
$36.4 million, respectively,
primarily
to satisfy
collateral
requirements
of one of
its derivative
counterparties.

The following

table is a
summary of
the Company’s
net gain
(loss) from
the sale of RMBS for the six months ended June 30, 2023 and 2022.

  

Six Months Ended June 30,

 
  

2023

  

2022

 

Proceeds from sales of RMBS

 $-  $1,934,606 

Carrying value of RMBS sold

  -   (2,001,135)

Net loss on sales of RMBS

 $-  $(66,529)
         

Gross gain on sales of RMBS

 $-  $2,705 

Gross loss on sales of RMBS

  -   (69,234)

Net loss on sales of RMBS

 $-  $(66,529)
 
RMBS for

the
six months
ended June
30, 2022
and 2021.9
Six Months Ended June 30,
2022
2021
Proceeds from salesTable of Contents

NOTE 3. REPURCHASE AGREEMENTS

The Company pledges certain of its RMBS

$
1,934,606
$
1,680,903
Carrying as collateral under repurchase agreements with financial institutions. Interest rates are generally fixed based on prevailing rates corresponding to the terms of the borrowings, and interest is generally paid at the termination of a borrowing. If the fair value of RMBS sold
(2,001,135)
(1,686,948)
Net (loss) gain on sales of RMBS
$
(66,529)
$
(6,045)
Gross gain on sales of RMBS
$
2,705
$
4,890
Gross loss on sales of RMBS
(69,234)
(10,935)
Net (loss) gain on sales of RMBS
$
(66,529)
$
(6,045)
11
NOTE 3.
REPURCHASE AGREEMENTS
Thethe pledged securities declines, lenders will typically require the Company
pledges certain
of its RMBS
to post additional collateral or pay down borrowings to re-establish agreed upon collateral requirements, referred to as collateral
under repurchase
agreements
with financial
institutions.
Interest
rates are
generally
fixed based
on prevailing
rates corresponding
to the terms
of the borrowings,
and interest
is generally
paid at the
termination
of a
borrowing.
If"margin calls." Similarly, if the fair
value of the
pledged securities
declines,
increases, lenders
will typically
require the
Company to
post additional
collateral
or pay
down borrowings
to re-establish
agreed upon
collateral
requirements,
referred
to as "margin
calls." Similarly,
if the fair
value of
the pledged
securities
increases,
lenders
may release
collateral
back to the
Company. As of
June 30,
2022, 2023, the
Company had
met all margin
call
requirements.

As of June

30, 2022
and December
31, 2021,
the Company’s
repurchase
agreements
had remaining
maturities
as summarized
below:
($ in thousands)
OVERNIGHT
BETWEEN 2
BETWEEN 31
GREATER
(1 DAY OR
AND
AND
THAN
LESS)
30 DAYS
90 DAYS
90 DAYS
(1)
TOTAL
June 30, 2022
Fair market value of securities pledged, including
accrued interest receivable
$
0
$
2,990,637
$
887,951
$
60,809
$
3,939,397
Repurchase agreement liabilities associated with
these securities
$
0
$
2,866,787
$
843,343
$
48,850
$
3,758,980
Net weighted average borrowing rate
-
1.33%
1.48%
0.79%
1.36%
2023 and December 31, 2021
Fair market value of securities pledged, including
accrued interest receivable
$
0
$
4,624,396
$
1,848,080
$
52,699
$
6,525,175
Repurchase agreement liabilities associated2022, the Company’s repurchase agreements had remaining maturities as summarized below:

($ in thousands)

                    
  

OVERNIGHT

  

BETWEEN 2

  

BETWEEN 31

  

GREATER

     
  

(1 DAY OR

  

AND

  

AND

  

THAN

     
  

LESS)

  

30 DAYS

  

90 DAYS

  

90 DAYS

  

TOTAL

 

June 30, 2023

                    

Fair market value of securities pledged, including accrued interest receivable

 $-  $3,524,215  $592,188  $266,904  $4,383,307 

Repurchase agreement liabilities associated with these securities

 $-  $3,382,436  $565,230  $254,051  $4,201,717 

Net weighted average borrowing rate

  -   5.26%  5.24%  5.33%  5.26%

December 31, 2022

                    

Fair market value of securities pledged, including accrued interest receivable

 $-  $2,496,769  $884,632  $142,658  $3,524,059 

Repurchase agreement liabilities associated with these securities

 $-  $2,404,329  $837,299  $136,817  $3,378,445 

Net weighted average borrowing rate

  -   4.43%  4.51%  4.15%  4.44%

Included in the table above are repurchase agreements with

these securities
$
0
$
4,403,182
$
1,789,327
$
51,597
$
6,244,106
Net weighted average borrowing rate
-
0.15%
0.13%
0.15%
0.15%
1)
Includes a repurchase agreement with an outstanding principal balancebalances of
approximately $48.9$254.0 million and $190.3 million as of June 30, 2023 and December 31, 2022, respectively, with an interest rate
rates indexed to Secured Overnight Financing Rate (“SOFR”)SOFR that repricesreprice daily.

In addition, cash pledged to counterparties for repurchase agreements was approximately

$
51.1
$30.6 million and $
57.3
$13.3 million as of
June 30, 20222023 and December 31, 2021,2022, respectively.

If, during

the term
of a repurchase
agreement,
a lender
files for
bankruptcy, the
Company might
experience
difficulty recovering
its
pledged assets,
which could
result in
an unsecured
claim against
the lender
for the difference
between the
amount loaned
to the Company
plus interest
due to the
counterparty
and the fair
value of the
collateral
pledged to
such lender, including the accrued interest
receivable
and cash posted by the Company as collateral. At June
30, 2022,
2023, the Company
had an aggregate
amount at
risk (the
difference
between
the amount
loaned to
the Company, including
interest
payable and
securities
posted by
the counterparty
(if (if any),
and the fair
value of
securities
and cash pledged
(if (if any),
including
accrued interest
on such securities)
with all
counterparties
of approximately
$
227.6
$200.9 million.
The Company
did not have
an amount
at risk with any individual counterparty that was greater than 10% of the Company’s equity at June 30, 2023 and December 31, 2022.

10
Table of Contents
 
any individual
counterparty
that was
greater than
10% of the
Company’s equity
at June
30, 2022
and December
31, 2021.
12

NOTE 4. DERIVATIVE AND OTHER HEDGING INSTRUMENTS

The table

below summarizes
fair value
information
about the
Company’s derivative
and other
hedging instruments
assets and
liabilities
as of June
30, 2022
and December
31, 2021.
(in thousands)
Derivative and Other Hedging Instruments
Balance Sheet Location
June 30, 2022
2023 and December 31, 2021
Assets
Interest rate swaps
Derivative assets, at fair value
$
104,138
$
29,293
Payer swaptions (long positions)
Derivative assets, at fair value
88,852
21,493
Interest rate caps
Derivative assets, at fair value
3,837
0
TBA securities
Derivative assets, at fair value
1,657
0
Total derivative
assets, at fair value
$
198,484
$
50,786
Liabilities
Interest rate swaps
Derivative liabilities, at fair value
$
0
$
2,862
Payer swaptions (short positions)
Derivative liabilities, at fair value
43,296
4,423
TBA securities
Derivative liabilities, at fair value
295
304
Total derivative
liabilities, at fair value
$
43,591
$
7,589
Margin Balances Posted to (from) Counterparties
Futures contracts
Restricted cash
$
12,795
$
8,035
TBA securities
Restricted cash
471
0
TBA securities
Other liabilities
(1,772)
(856)
Interest rate swaption contracts
Other liabilities
(43,249)
(6,350)
Total margin
balances on derivative contracts
$
(31,755)
$
829
Eurodollar, 2022.

(in thousands)

         

Derivative and Other Hedging Instruments

Balance Sheet Location

 

June 30, 2023

  

December 31, 2022

 

Assets

         

Interest rate swaps

Derivative assets, at fair value

 $30,093  $4,983 

Payer swaptions (long positions)

Derivative assets, at fair value

  17,957   33,398 

Interest rate caps

Derivative assets, at fair value

  211   1,119 

Interest rate floors (long positions)

Derivative assets, at fair value

  3,844    

TBA securities

Derivative assets, at fair value

  219   672 

Total derivative assets, at fair value

 $52,324  $40,172 
          

Liabilities

         

Payer swaptions (short positions)

Derivative liabilities, at fair value

 $10,284  $5,982 

Interest rate floors (short positions)

Derivative liabilities, at fair value

 $2,573    

TBA securities

Derivative liabilities, at fair value

  18   1,179 

Total derivative liabilities, at fair value

 $12,875  $7,161 
          

Margin Balances Posted to (from) Counterparties

         

Futures contracts

Restricted cash

 $19,865  $16,493 

TBA securities

Restricted cash

  637   1,734 

TBA securities

Other liabilities

  (3,027)  (532)

Interest rate swaptions

Other liabilities

  (2,150)  (12,489)

Total margin balances on derivative contracts

 $15,325  $5,206 

Fed

Funds and
T-Note futures
are cash
settled futures
contracts
on an interest
rate, with
gains and
losses credited
or
charged to
the Company’s
cash accounts
on a daily
basis. A
minimum balance,
or “margin”,
is required
to be maintained
in the account
on
a daily basis.
The tables
below present
information
related to
the Company’s
T-Note futures
positions
at June 30,
2022 and
December
31,
2021.
($ in thousands)
June 30, 2022
Average
Weighted
Weighted
Contract
Average
Average
Notional
Entry
Effective
Open
Expiration Year
Amount
Rate
Rate
Equity
(1)
Treasury Note Futures Contracts (Short
Positions)
(2)
September 2022 5-year T-Note futures
(Sep 2022 - Sep 2027 Hedge Period)
$
1,200,500
3.13%
3.32%
$
4,138
September 2022 10-year Ultra futures
(Sep 2022 - Sep 2032 Hedge Period)
$
274,500
2.64%
2.84%
$
2,442
13
($ in thousands)
2023 and December 31, 2021
2022.

($ in thousands)

                
  

June 30, 2023

 
  

Average

  

Weighted

  

Weighted

     
  

Contract

  

Average

  

Average

     
  

Notional

  

Entry

  

Effective

  

Open

 

Expiration Year

 

Amount

  

Rate

  

Rate

  

Equity(1)

 

Treasury Note Futures Contracts (Short Positions)(2)

                

September 2023 5-year T-Note futures (Sep 2023 - Sep 2028 Hedge Period)

 $471,500   3.69%  4.40% $9,795 

September 2023 10-year T-Note futures (Sep 2023 - Sep 2033 Hedge Period)

 $285,000   3.76%  4.47% $3,793 

September 2023 10-year Ultra futures (Sep 2023 - Sep 2033 Hedge Period)

 $244,200   3.71%  3.77% $2,182 

Average
Weighted
Weighted
Contract
Average
Average
Notional
Entry
Effective
Open
Expiration Year
Amount
Rate
Rate
Equity
(1)
Treasury Note Futures Contracts (Short
Position)
(2)
March 2022 5-year T-Note futures
(Mar 2022 - Mar 2027 Hedge Period)
$
369,000
1.56%
1.62%
$
1,013
March 2022 10-year Ultra futures
(Mar 2022 - Mar 2032 Hedge Period)
$
220,000
1.22%
1.09%
$
(3,861)11
(1)
 

($ in thousands)

                
  

December 31, 2022

 
  

Average

  

Weighted

  

Weighted

     
  

Contract

  

Average

  

Average

     
  

Notional

  

Entry

  

Effective

  

Open

 

Expiration Year

 

Amount

  

Rate

  

Rate

  

Equity(1)

 

Treasury Note Futures Contracts (Short Position)(2)

                

March 2023 5-year T-Note futures (Mar 2023 - Mar 2028 Hedge Period)

 $750,500   4.20%  4.22% $(100)

March 2023 10-year Ultra futures (Mar 2023 - Mar 2033 Hedge Period)

 $174,500   3.66%  3.79% $965 

(1)

Open equity represents the cumulative gains (losses) recorded on open futures positions from inception.

(2)

5-Year T-Note futures contracts were valued at a price of $107.1 at June 30, 2023 and $107.9 at December 31, 2022. The contract values of the short positions were $504.9 million and $810.0 million at June 30, 2023 and December 31, 2022, respectively. 10-Year T-Note futures contracts were valued at a price of $112.3 at June 30, 2023. The contract values of the short positions were $320.0 million at June 30, 2023. 10-Year Ultra futures contracts were valued at a price of $118.4 at June 30, 2023 and $118.3 at December 31, 2022. The contract value of the short position was $289.2 million and $206.4 million at June 30, 2023 and December 31, 2022, respectively.

Under its interest rate swap agreements, the cumulative gains (losses) recorded on open

futures positions from inception.
(2)
5-Year T-Note
futures contracts were valued at a price of $
112.25
at June 30, 2022 and $
120.98
at December 31, 2021.
The contract values of
the short positions were $
1,347.6
million and $
446.4
million at June 30, 2022 and December 31, 2021, respectively.
10-Year Ultra
futures
contracts were valued at a price of $
127.38
at June 30, 2022 and $
146.44
at December 31, 2021. The contract value of the short position was
$
349.6
million and $
322.2
million at June 30, 2022 and December 31, 2021, respectively
Under its
interest
rate swap
agreements,
the Company
typically
pays
a fixed rate
and receive
receives a floating
rate ("payer swaps") based
on an index,
("payer swaps").
such as LIBOR and SOFR. The floating
rate the
Company receives
under its
swap agreements
has the effect
of offsetting
the repricing
characteristics
of ourits repurchase
agreements
and cash flows
on such liabilities.
The Company
is typically
required
to post collateral
on its
interest
rate swap
agreements.
The table
below presents
information
related to
the Company’s
interest
rate swap
positions
at June 30,
2022 and
December
31, 2021.
($ in thousands)
Average
Net
Fixed
Average
Estimated
Average
Notional
Pay
Receive
Fair
Maturity
Amount
Rate
Rate
Value
(Years)
June 30, 2022
Expiration > 3 to ≤ 5 years
$
500,000
0.84%
1.95%
$
43,221
4.2
Expiration > 5 years
900,000
1.70%
1.32%
60,917
7.1
$
1,400,000
1.39%
1.54%
$
104,138
6.1
2023 and December 31, 2021
Expiration > 32022.

($ in thousands)

                
      

Average

         
      

Fixed

  

Average

  

Average

 
  

Notional

  

Pay

  

Receive

  

Maturity

 
  

Amount

  

Rate

  

Rate

  

(Years)

 

June 30, 2023

                

Expiration > 1 to ≤ 5 years

 $500,000   0.84%  5.53%  3.2 

Expiration > 5 years

  1,651,500   2.53%  5.14%  6.9 
  $2,151,500   2.13%  5.23%  6.1 

December 31, 2022

                

Expiration > 1 to ≤ 5 years

 $500,000   0.84%  4.75%  3.7 

Expiration > 5 years

  900,000   1.70%  4.23%  6.6 
  $1,400,000   1.39%  4.41%  5.6 

As of June 30, 2023, the table above includes swaps with aggregate notional amounts of $274.0 million that begin accruing interest on February 24, 2024 with a weighted fixed pay rate of 3.43% and a receive rate indexed to ≤ 5 years

overnight SOFR. In accordance with procedures prescribed by the Chicago Mercantile Exchange ("CME"), all of the Company’s remaining LIBOR interest rate swaps cleared through the CME have been converted into SOFR interest rate swaps, effective September 10, 2023. 

Our interest rate swaps are centrally cleared through two registered commodities exchanges, the CME and the London Clearing House (“LCH”). The clearing exchanges require that we post an "initial margin" amount determined by the exchanges. The initial margin amount is intended to be set at a level sufficient to protect the exchange from the interest rate swap's maximum estimated single-day price movement and is subject to adjustment based on changes in market volatility and other factors. We also exchange daily settlements of "variation margin" based upon changes in fair value, as measured by the exchanges.

$
955,000
0.64%
0.16%
$
21,788
4.0
Expiration > 5 years
400,000
1.16%
0.21%
4,643
7.3
$
1,355,000
0.79%
0.18%
$
26,431
5.012

The table

below presents
information
related to
the Company’s
interest
rate cap positions
at June
30, 2022.
($ in thousands)
Net
Strike
Estimated
Notional
Swap
Curve
Fair
Expiration
Amount
Cost
Rate
Spread
Value
February 8, 2024
$
200,000
$
2,350
0.09%
10Y2Y
$
3,837
14
The table
below presents
information
related to
the Company’s
interest
rate swaption
positions
at June 30,
2022 and
December
31,
2021.
($ in thousands)
Option
Underlying Swap
Weighted
Average
Weighted
Average
Average
Adjustable
Average
Fair
Months to
Notional
Fixed
Rate
Term
Expiration
Cost
Value
Expiration
Amount
Rate
(LIBOR)
(Years)
June 30, 2022
Payer Swaptions - long
≤ 1 year
$
31,905
$
65,684
8.3
$
1,282,400
2.44%
3 Month
11.3
>1 year ≤ 2 years
24,050
23,168
15.8
728,400
3.00%
3 Month
10.0
$
55,955
$
88,852
11.0
$
2,010,800
2.65%
3 Month
10.8
Payer Swaptions - short
≤ 1 year
$
(22,250)
$
(43,296)
2.8
$
(1,433,000)
2.65%
3 Month
10.8
2023 and December 31, 2021
2022.

($ in thousands)

                 
               

Net

 
          

Strike

   

Estimated

 
  

Notional

      

Swap

 

Curve

 

Fair

 
  

Amount

  

Cost

  

Rate

 

Spread

 

Value

 

June 30, 2023

                 

February 8, 2024

 $200,000  $1,450   0.09%

2Y10Y

 $211 
              

December 31, 2022

                 

February 8, 2024

 $200,000  $1,450   0.09%

2Y10Y

 $1,119 

The table below presents information related to the Company’s interest rate floor positions at June 30, 2023.

($ in thousands)

                 
               

Net

 
          

Strike

   

Estimated

 
  

Notional

      

Swap

   

Fair

 
  

Amount

  

Cost

  

Rate

 

Terms

 

Value

 

June 30, 2023

                 

Long Position

 $1,000,000  $2,500   0.13%

2Y_2s30s

 $3,844 

Short Position

 $(1,000,000) $(1,358)  (0.37)%

2Y_2s30s

 $(2,573)

The table below presents information related to the Company’s interest rate swaption positions at June 30, 2023 and December 31, 2022.

($ in thousands)

                         
  

Option

  

Underlying Swap

 
          

Weighted

           

Weighted

 
          

Average

      

Average

 

Average

 

Average

 
      

Fair

  

Months to

  

Notional

  

Fixed

 

Adjustable

 

Term

 

Expiration

 

Cost

  

Value

  

Expiration

  

Amount

  

Rate

 

Rate

 

(Years)

 

June 30, 2023

                         

Payer Swaptions - long

                         

≤ 1 year

 $36,685  $5,698   3.6  $1,250,000   4.09%

SOFR

  10.0 

>1 year

  10,115   12,259   18.7   1,000,000   3.49%

SOFR

  2.0 
  $46,800  $17,957   10.3  $2,250,000   3.82%   6.4 

Payer Swaptions - short

                         

≤ 1 year

 $(3,819) $(68)  0.6  $(917,000)  4.09%

SOFR

  10.0 

>1 year

  (8,433)  (10,216)  18.7   (1,000,000)  3.74%

SOFR

  2.0 
  $(12,252) $(10,284)  10.0  $(1,917,000)  3.91%   5.8 

December 31, 2022

                         

Payer Swaptions (long positions)

                         

≤ 1 year

 $36,685  $21,253   9.6  $1,250,000   4.09%

SOFR

  10.0 

> 10 years

  11,021   12,145   239.5   120,000   2.05%

SOFR

  10.0 
  $47,706  $33,398   29.8  $1,370,000   3.91%   10.0 

Payer Swaptions (short positions)

                         

≤ 1 year

 $(17,800) $(5,982)  3.6  $(917,000)  4.09%

SOFR

  10.0 

Payer Swaptions - long
≤ 1 year
$
4,000
$
1,575
3.2
$
400,000
1.66%
3 Month
5.0
>1 year ≤ 2 years
32,690
19,918
18.4
1,258,500
2.46%
3 Month
14.1
$
36,690
$
21,493
14.7
$
1,658,500
2.27%
3 Month
11.9
Payer Swaptions - short
≤ 1 year
$
(16,185)
$
(4,423)
5.3
$
(1,331,500)
2.29%
3 Month
11.413

The following table summarizes

the Company’s contracts to
purchase and sell TBA
securities as of June
30, 2022 and December
31, 2021.
($ in thousands)
Notional
Net
Amount
Cost
Market
Carrying
Long (Short)
(1)
Basis
(2)
Value
(3)
Value
(4)
June 30, 2022
30-Year TBA securities:
2.0%
$
(175,000)
$
(153,907)
$
(152,250)
$
1,657
15-Year TBA securities:
3.5%
175,000
174,434
174,139
(295)
Total
$
0
$
20,527
$
21,889
$
1,362
December 31, 2021
30-Year TBA securities:
3.0%
$
(575,000)
$
(595,630)
$
(595,934)
$
(304)
Total
$
(575,000)
$
(595,630)
$
(595,934)
$
(304)
(1)
Notional amount represents the par value (or principal balance) of the underlying
Agency RMBS.
(2)
Cost basis represents the forward price to be paid (received) for the underlying
Agency RMBS.
(3)
Market value represents the current market value of the TBA securities
(or of the underlying Agency RMBS) as of period-end.
(4)
Net carrying value represents the difference between the market
value and the cost basis of the TBA securities as of period-endJune 30, 2023 and
is reported
in derivative assets (liabilities) at fair value in the balance sheets.
15
December 31, 2022.

($ in thousands)

                
  

Notional

          

Net

 
  

Amount

  

Cost

  

Market

  

Carrying

 
  

Long (Short)(1)

  

Basis(2)

  

Value(3)

  

Value(4)

 

June 30, 2023

                

15-Year TBA securities:

                

5.0%

 $100,000  $99,234  $99,351  $117 

30-Year TBA securities:

                

3.0%

  (350,000)  (308,494)  (308,410)  84 

Total

 $(250,000) $(209,260) $(209,059) $201 

December 31, 2022

                

30-Year TBA securities:

                

2.0%

 $(175,000) $(142,268) $(143,145) $(877)

3.0%

  (500,000)  (440,644)  (440,274)  370 

Total

 $(675,000) $(582,912) $(583,419) $(507)

(1)

Notional amount represents the par value (or principal balance) of the underlying Agency RMBS.

(2)

Cost basis represents the forward price to be paid (received) for the underlying Agency RMBS.

(3)

Market value represents the current market value of the TBA securities (or of the underlying Agency RMBS) as of period-end.

(4)

Net carrying value represents the difference between the market value and the cost basis of the TBA securities as of period-end and is reported in derivative assets (liabilities) at fair value in the balance sheets.

Gain (Loss) From Derivative and Other Hedging Instruments, Net

The table below presents the effect of the Company’s derivative and other hedging instruments on the statements of operations for

the six and three months ended June 30, 2022 2023 and 2021.
(in thousands)
Six Months Ended June 30,
Three Months Ended June 30,
2022
2021
2022
2021
T-Note futures contracts (short position)
$
122,968
$
285
$
43,073
$
(2,191)
Eurodollar futures contracts (short positions)
0
(7)
0
(19)
Interest rate swaps
106,103
9,446
39,819
(17,677)
Payer swaptions (short positions)
(44,944)
1,212
(34,036)
27,379
Payer swaptions (long positions)
91,314
3,710
50,339
(36,360)
Interest rate caps
1,487
0
2,483
0
Interest rate floors
0
1,300
0
(84)
TBA securities (short positions)
3,552
3,170
1,013
(5,963)
TBA securities (long positions)
1,094
(8,559)
1,067
0
Total
$
281,574
$
10,557
$
103,758
$
(34,915)
.

(in thousands)

                
  

Six Months Ended June 30,

  

Three Months Ended June 30,

 
  

2023

  

2022

  

2023

  

2022

 

T-Note futures contracts (short position)

 $24,002  $122,622  $28,040  $42,931 

Interest rate swaps

  22,940   105,740   49,084   39,570 

Payer swaptions (short positions)

  4,831   (44,944)  (1,754)  (34,036)

Payer swaptions (long positions)

  (9,002)  91,314   3,107   50,339 

Interest rate caps

  (908)  1,487   (263)  2,483 

Interest rate floors (short positions)

  (1,216)  -   (1,216)  - 

Interest rate floors (long positions)

  2,529   -   1,344    

TBA securities (short positions)

  9,609   3,552   15,599   1,013 

TBA securities (long positions)

  (574)  1,094   (574)  1,067 

Total

 $52,211  $280,865  $93,367  $103,367 

Credit Risk-Related Contingent Features

The

use
of
derivatives
and
other
hedging
instruments
creates
exposure
to
credit
risk
relating
to
potential
losses
that
could
be
recognized in the event
that the counterparties to these
instruments fail to perform their
obligations under the contracts. The
Company
attempts to minimize
this risk by
limiting its counterparties
for instruments which
are not centrally
cleared on a
registered exchange to
major financial institutions
with acceptable credit
ratings and
monitoring positions with
individual counterparties. In
addition, the Company
may be
required to
pledge assets
as collateral
for its
derivatives, whose
amounts vary over
time based
on the
market value, notional
amount and remaining
term of
the derivative contract.
In the event
of a default
by a counterparty, the
Company may
not receive payments
provided
for
under
the
terms
of
its
derivative
agreements,
and
may
have
difficulty
obtaining
its
assets
pledged
as
collateral
for
its
derivatives. The cash and cash equivalents pledged as collateral for the Company derivative instruments
are included in restricted cash
on its balance sheets.

14
Table of Contents

It is the Company's policy not

to offset assets and liabilities associated
with open derivative contracts. However, Chicago
Mercantile
CME, Intercontinental Exchange
(“CME” ("ICE")
, and
Intercontinental
Exchange
(“ICE”)
LCH rules
characterize
variation
margin
transfers
as
settlement
payments,
as
opposed to adjustments to collateral. As
a result, derivative assets and liabilities
associated with centrally cleared derivatives for
which
the CME, ICE, or ICELCH serves as the central clearing party are presented as if these derivatives
had been settled as of the reporting date.

 
16

NOTE 5. PLEDGED ASSETS

Assets Pledged
to Counterparties
The table
below summarizes
the Company’s
assets pledged
as collateral
under repurchase
agreements
and derivative
agreements
by type, including
securities
pledged
related to
securities
sold but
not yet settled,
as of June
30, 2022
and December
31, 2021.
(in thousands)
June 30, 2022
December 31, 2021
Repurchase
Derivative
Repurchase
Derivative

Assets Pledged to Counterparties

Agreements
Agreements
Total
Agreements
Agreements
Total
PT RMBS - fair value
$
3,752,295
$
0
$
3,752,295
$
6,294,102
$
0
$
6,294,102
Structured RMBS - fair value
173,870
0
173,870
212,270
0
212,270
U.S. Treasury Notes
0
36,302
36,302
0
29,740
29,740
Accrued interest on

The table below summarizes the Company’s assets pledged as collateral under repurchase agreements and derivative agreements by type, including securities

13,232
15
13,247
18,804
13
18,817
Restricted cash
51,130
13,266
64,396
57,264
8,035
65,299
Total
$
3,990,527
$
49,583
$
4,040,110
$
6,582,440
$
37,788
$
6,620,228
pledged related to securities sold but not yet settled, as of June 30, 2023 and December 31, 2022.

(in thousands)

                        
  

June 30, 2023

  

December 31, 2022

 
  

Repurchase

  

Derivative

      

Repurchase

  

Derivative

     

Assets Pledged to Counterparties

 

Agreements

  

Agreements

  

Total

  

Agreements

  

Agreements

  

Total

 

PT RMBS - fair value

 $4,350,306  $-  $4,350,306  $3,492,544  $-  $3,492,544 

Structured RMBS - fair value

  17,769   -   17,769   20,096   -   20,096 

U.S. Treasury Notes

  -   37,195   37,195   -   36,382   36,382 

Accrued interest on pledged securities

  15,232   16   15,248   11,419   16   11,435 

Restricted cash

  30,589   20,502   51,091   13,341   18,227   31,568 

Total

 $4,413,896  $57,713  $4,471,609  $3,537,400  $54,625  $3,592,025 

Assets Pledged

from Counterparties

The table

below summarizes
assets pledged
to the Company
from counterparties
under repurchase
agreements
and derivative
agreements
as of June
30, 2022
and December
31, 2021.
(in thousands)
June 30, 2022
2023 and December 31, 2021
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Orchid
Agreements
Agreements
Total
Agreements
Agreements
Total
Cash
$
7,670
$
45,021
$
52,691
$
4,339
$
7,206
$
11,545
Total
$
7,670
$
45,021
$
52,691
$
$
4,339
$
7,206
$
11,545
2022.

(in thousands)

                        
  

June 30, 2023

  

December 31, 2022

 
                         
  

Repurchase

  

Derivative

      

Repurchase

  

Derivative

     

Assets Pledged to Orchid

 

Agreements

  

Agreements

  

Total

  

Agreements

  

Agreements

  

Total

 

Cash

 $1,097  $5,177  $6,274  $3,075  $13,021  $16,096 

U.S. Treasury securities - fair value

  -   -  $-   197   -   197 

Total

 $1,097  $5,177  $6,274  $3,272  $13,021  $16,293 

Cash received

as margin
is recognized
as cash and
cash equivalents
with a corresponding
amount recognized
as an increase
in
repurchase
agreements
or other
liabilities
in the balance sheets.

 
sheets.

NOTE 6. OFFSETTING ASSETS AND LIABILITIES

The Company’s

derivative
agreements
and repurchase
agreements
and reverse
repurchase
agreements
are subject
to underlying
agreements
with master
netting or
similar arrangements,
which provide
for the right
of offset in
the event
of default
or in the
event of
bankruptcy
of either
party to
the transactions.
The Company
reports its
assets and
liabilities
subject to
these arrangements
on a gross
basis in the case of repurchase agreements and for certain derivative agreements. CME and LCH rules characterize variation margin transfers as settlement payments, as opposed to adjustments to collateral. As a result, derivative assets and liabilities associated with centrally cleared derivatives for which the CME or LCH serves as the central clearing party are presented as if these derivatives had been settled as of the reporting date.

basis.
15
Table of Contents
17

The following

table presents
information
regarding
those assets
and liabilities
subject to
such arrangements
as if the
Company had
presented
them on a
net basis
as of June
30, 2022
and December
31, 2021.
(in thousands)
Offsetting of Assets
Gross Amount Not
Net Amount
Offset in the Balance Sheet
of Assets
Financial
Gross Amount
Gross Amount
Presented
Instruments
Cash
of Recognized
Offset in the
in the
Received as
Received as
Net
Assets
Balance Sheet
Balance Sheet
Collateral
Collateral
Amount
June 30, 2022
Interest rate swaps
$
104,138
$
0
$
104,138
$
0
$
0
$
104,138
Interest rate swaptions
88,852
0
88,852
0
(43,249)
45,603
Interest rate caps
3,387
0
3,387
0
0
3,387
TBA securities
1,657
-
1,657
-
(1,772)
(115)
$
198,034
$
0
$
198,034
$
0
$
(45,021)
$
153,013
2023 and December 31, 2021
Interest rate swaps
$
29,293
$
0
$
29,293
$
0
$
0
$
29,293
Interest rate swaptions
21,493
0
21,493
0
(6,350)
15,143
$
50,786
$
0
$
50,786
$
0
$
(6,350)
$
44,436
(in thousands)
Offsetting of Liabilities
Gross Amount Not
Net Amount
Offset in the Balance Sheet
of Liabilities
Financial
Gross Amount
Gross Amount
Presented
Instruments
of Recognized
Offset in the
in the
Posted as
Cash Posted
Net
Liabilities
Balance Sheet
Balance Sheet
Collateral
as Collateral
Amount
June 30, 2022
Repurchase Agreements
$
3,758,980
$
0
$
3,758,980
$
(3,707,850)
$
(51,130)
$
0
Interest rate swaptions
43,296
0
43,296
0
0
43,296
TBA securities
1,772
0
1,772
0
(471)
1,301
$
3,804,048
$
0
$
3,804,048
$
(3,707,850)
$
(51,601)
$
44,597
December 31, 2021
Repurchase Agreements
$
6,244,106
$
0
$
6,244,106
$
(6,186,842)
$
(57,264)
$
0
Interest rate swaps
2,862
0
2,862
(2,862)
0
0
Interest rate swaptions
4,423
0
4,423
0
0
4,423
TBA securities
304
0
304
0
0
304
$
6,251,695
$
0
$
6,251,695
$
(6,189,704)
$
(57,264)
$
4,727
.

(in thousands)

                        

Offsetting of Assets

 
              

Gross Amount Not

     
          

Net Amount

  

Offset in the Balance Sheet

     
          

of Assets

  

Financial

         
  

Gross Amount

  

Gross Amount

  

Presented

  

Instruments

  

Cash

     
  

of Recognized

  

Offset in the

  

in the

  

Received as

  

Received as

  

Net

 
  

Assets

  

Balance Sheet

  

Balance Sheet

  

Collateral

  

Collateral

  

Amount

 

June 30, 2023

                        

Interest rate swaps

 $30,093  $-  $30,093  $-  $-  $30,093 

Interest rate swaptions

  17,957   -   17,957   -   (2,150)  15,807 

Interest rate caps

  211   -   211   -   -   211 

Interest rate floors

  3,844   -   3,844   -   -   3,844 

TBA securities

  219   -   219   -   (219)  - 
  $52,324  $-  $52,324  $-  $(2,369) $49,955 

December 31, 2022

                        

Interest rate swaps

 $4,983  $-  $4,983  $-  $-  $4,983 

Interest rate swaptions

  33,398   -   33,398   -   (12,489)  20,909 

Interest rate caps

  1,119   -   1,119   -   -   1,119 

TBA securities

  672   -   672   -   (532)  140 
  $40,172  $-  $40,172  $-  $(13,021) $27,151 

(in thousands)

                        

Offsetting of Liabilities

 
              

Gross Amount Not

     
          

Net Amount

  

Offset in the Balance Sheet

     
          

of Liabilities

  

Financial

         
  

Gross Amount

  

Gross Amount

  

Presented

  

Instruments

         
  

of Recognized

  

Offset in the

  

in the

  

Posted as

  

Cash Posted

  

Net

 
  

Liabilities

  

Balance Sheet

  

Balance Sheet

  

Collateral

  

as Collateral

  

Amount

 

June 30, 2023

                        

Repurchase Agreements

 $4,201,717  $-  $4,201,717  $(4,171,128) $(30,589) $- 

Interest rate swaptions

  10,284   -   10,284   -   -   10,284 

Interest rate floors

  2,573   -   2,573   -   -   2,573 

TBA securities

  18   -   18   -   (18)  - 
  $4,214,592  $-  $4,214,592  $(4,171,128) $(30,607) $12,857 

December 31, 2022

                        

Repurchase Agreements

 $3,378,445  $-  $3,378,445  $(3,365,104) $(13,341) $- 

Interest rate swaps

  -   -   -   -   -   - 

Interest rate swaptions

  5,982   -   5,982   -   -   5,982 

TBA securities

  1,179   -   1,179   -   (1,179)  - 
  $3,385,606  $-  $3,385,606  $(3,365,104) $(14,520) $5,982 

The amounts

disclosed
for collateral
received by
or posted
to the same
counterparty
up to and
not exceeding
the net amount
of the
asset or
liability
presented
in the balance
sheets.
The fair
value of
the actual
collateral
received
by or posted
to the same
counterparty
typically
exceeds the
amounts
presented.
See Note
5 for a discussion
of collateral
posted or
received
against or
for repurchase
obligations
and derivative
and other hedging instruments.

hedging
instruments.
16
Table of Contents
 
18

NOTE 7.

CAPITAL STOCK
Common

Reverse Stock

Issuances
The Company
did not complete
any public
offerings of
its common
stock during
the six months
ended June
Split

On August 30, 2022.

During the
year
ended December
31, 2021,
2022, the Company
completed
the following
public offerings
of shares
effected a 1-for-5 reverse stock split of its common
stock and proportionately decreased the number of authorized shares of common stock.
($ in thousands, except All share, per share, amounts)
Weighted
Average
Price
Received
Net
TypeDSU and PU information has been retroactively adjusted to reflect the reverse split. The shares of Offering
Period
Per Share
(1)
Shares
Proceeds
(2)
Atcommon stock retain a par value of $0.01 per share.

Common Stock Issuances

During the Market Offering Program

(3)
First Quarter
$
5.10
308,048
$
1,572
Follow-on Offerings
First Quarter
5.31
17,940,000
95,336
Atsix months ended June 30, 2023 and the Market Offering Program
(3)
Second Quarter
5.40
23,087,089
124,746
Atyear ended December 31, 2022, the Market Offering Program
(3)
Third Quarter
4.94
35,818,338
177,007
AtCompany completed the Market Offering Program
(3)
Fourth Quarter
4.87
23,674,698
115,398
100,828,173
$
514,059
(1)
Weighted average price received per share is after deducting the underwriters’
discount, if applicable, and other offering costs.
(2)
Net proceeds are netfollowing public offerings of the underwriters’ discount, if applicable, and other
offering costs.
(3)
The Company has entered into ten equity distribution agreements, nineshares of which have
either been terminated because all shares were sold or
were replaced with a subsequent agreement.
its common stock.

($ in thousands, except per share amounts)

             
   

Weighted

         
   

Average

         
   

Price

         
   

Received

      

Net

 

Type of Offering

Period

 

Per Share(1)

  

Shares

  

Proceeds(2)

 

2023

             

At the Market Offering Program(3)

First Quarter

 $11.77   2,690,000  $31,657 

At the Market Offering Program(3)

Second Quarter

  9.95   4,757,953   47,355 
        7,447,953  $79,012 

2022

             

At the Market Offering Program(3)

First Quarter

 $-   -  $- 

At the Market Offering Program(3)

Second Quarter

  -   -   - 

At the Market Offering Program(3)

Third Quarter

  -   -   - 

At the Market Offering Program(3)

Fourth Quarter

  10.45   3,885,048   40,580 
        3,885,048  $40,580 

(1)

Weighted average price received per share is after deducting the underwriters’ discount, if applicable, and other offering costs.

(2)

Net proceeds are net of the underwriters’ discount, if applicable, and other offering costs.

(3)

The Company has entered into eleven equity distribution agreements, ten of which have either been terminated because all shares were sold or were replaced with a subsequent agreement.

Stock Repurchase Program

On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to

2,000,000
400,000 shares of the Company’s
common stock. On February 8, 2018, the Board of Directors approved an increase
in the stock repurchase program for up to an
additional
4,522,822
904,564 shares of the Company's common stock. Coupled with the
783,757
156,751 shares remaining from the original
2,000,000
400,000 share authorization, the increased authorization brought the total authorization
to
5,306,579
1,061,316 shares, representing 10% of the
Company’s then outstanding share count.

On December 9, 2021, the Board of Directors approved an increase in the number

of shares of the Company’s common stock
available in the stock repurchase program for up to an additional
16,861,994
3,372,399 shares, bringing the remaining authorization under the
stock repurchase program to
17,699,305
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.

17
Table of Contents

As part of the stock repurchase program, shares may be purchased in open market

transactions, block purchases, through
privately negotiated transactions, or pursuant to any trading plan that may be adopted
in accordance with Rule 10b5-110b5-1 of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”).
Open market repurchases will be made in accordance with Exchange Act
Rule 10b-18,10b-18, which sets certain restrictions on the method, timing, price and volume
of open market stock repurchases. The timing,
manner, price and amount of any repurchases will be determined by the Company in its discretion and will
be 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.
19
The stock repurchase program has no termination date.

From the inception of the stock repurchase program through June 30, 2022,2023, the Company

repurchased a total of
6,561,810
4,048,613shares
at an aggregate cost of approximately $
42.6
68.8 million, including commissions and fees, for a weighted average price of $16.99 per share. During the six months ended June 30, 2023, the Company repurchased a total of 373,041 shares at an aggregate cost of approximately $4.0 million, including commissions and fees, for a weighted average price of $10.62 per share.  During the year ended December 31, 2022, the Company repurchased a total of 2,538,470 shares at an aggregate cost of approximately $24.5 million, including commissions and fees, for a weighted average price of $
6.49
per share.
During the six months ended June 30, 2022, the Company repurchased a total of
876,299
shares at an aggregate cost of
approximately $
2.2
million, including commissions and fees, for a weighted average price
of $
2.53
$9.63 per share. No shares were
repurchased during the year ended December 31, 2021. The remaining authorization
under the stock repurchase program as of June
30, 2022July 28, 2023 was
16,823,006
4,928,350shares.

Cash Dividends

The table below presents the cash dividends declared on the Company’s common stock.

(in thousands, except per share amounts)

 

Year

 

Per Share Amount

  

Total

 

2013

 $6.975  $4,662 

2014

  10.800   22,643 

2015

  9.600   38,748 

2016

  8.400   41,388 

2017

  8.400   70,717 

2018

  5.350   55,814 

2019

  4.800   54,421 

2020

  3.950   53,570 

2021

  3.900   97,601 

2022

  2.475   87,906 

2023 - YTD(1)

  1.120   45,531 

Totals

 $65.770  $573,001 

(1)

On July 12, 2023, the Company declared a dividend of $0.16 per share to be paid on August 29, 2023. The effect of this dividend is included in the table above but is not reflected in the Company’s financial statements as of June 30, 2023.

 
stock.
(in thousands,

NOTE 8. STOCK INCENTIVE PLAN

In 2021, the Company’s Board of Directors adopted, and the stockholders approved, the Orchid Island Capital, Inc. 2021 Equity Incentive Plan (the “2021 Incentive Plan”) to replace the Orchid Island Capital, Inc. 2012 Equity Incentive Plan (the “2012 Incentive Plan” and together with the 2021 Incentive Plan, the “Incentive Plans”). The 2021 Incentive Plan provides for the award of stock options, stock appreciation rights, stock awards, PUs, other equity-based awards (and dividend equivalents with respect to awards of PUs and other equity-based awards) and incentive awards. The 2021 Incentive Plan is administered by the Compensation Committee of the Company’s Board of Directors except per share amounts)

Year
Per Share
Amount
Total
2013
$
1.395
$
4,662
2014
2.160
22,643
2015
1.920
38,748
2016
1.680
41,388
2017
1.680
70,717
2018
1.070
55,814
2019
0.960
54,421
2020
0.790
53,570
2021
0.780
97,601
2022 - YTD
(1)
0.335
59,383
Totals
$
12.770
$
498,947
(1)
On
July 13, 2022
,that the Company’s full Board of Directors will administer awards made to directors who are not employees of the Company declared a dividendor its affiliates. The 2021 Incentive Plan provides for awards of $
0.045
per shareup to be paid on
August 29, 2022
.
The effectan aggregate of this dividend is included
in10% of the table above but is not reflected in the Company’s financial statements
as of June 30, 2022.
NOTE 8.
STOCK INCENTIVE PLAN
In 2021,
the Company’s
Board of
Directors
adopted,
issued and the stockholders
approved,
the Orchid
Island Capital,
Inc. 2021
Equity
Incentive
Plan (the
“2021 Incentive
Plan”) to
replace the
Orchid Island
Capital,
Inc. 2012
Equity Incentive
Plan (the
“2012 Incentive
Plan”
and together
with the
2021 Incentive
Plan, the
“Incentive
Plans”).
The 2021
Incentive
Plan provides
for the award
of stock options,
stock
appreciation
rights, stock
award, performance
units, other
equity-based
awards (and
dividend equivalents
with respect
to awards
of
performance
units and
other equity-based
awards) and
incentive
awards.
The 2021
Incentive
Plan is administered
by the Compensation
Committee
outstanding shares of the Company’s
Board common stock (on a fully diluted basis) at the time of
Directors
except that
the awards, subject to a maximum aggregate 1,473,324 shares of the Company’s
full Board
common stock that may be issued under the 2021 Incentive Plan. The 2021 Incentive Plan replaces the 2012 Incentive Plan, and no further grants will be made under the 2012 Incentive Plan. However, any outstanding awards under the 2012 Incentive Plan will continue in accordance with the terms of Directorsthe 2012 Incentive Plan and any award agreement executed in connection with such outstanding awards.

18
Table of Contents

Performance Units

The Company has issued, and may in the future issue additional, PUs under the Incentive Plans to certain executive officers and employees of its Manager. PUs vest after the end of a defined performance period, based on satisfaction of the performance conditions set forth in the PU agreement. When earned, each PU will administer

awards made
be settled by the issuance of one share of the Company’s common stock, at which time the PU will be cancelled. The PUs contain dividend equivalent rights, which entitle the Participants to directors
whoreceive distributions declared by the Company on common stock, but do not include the right to vote the underlying shares of common stock. PUs are
not employees
subject to forfeiture should the participant no longer serve as an executive officer or employee of the Company
or its affiliates.
the Manager. Compensation expense for the PUs, included in incentive compensation on the statements of operations, is recognized over the remaining vesting period once it becomes probable that the performance conditions will be achieved.

The 2021

Incentive
Plan provides
for awards
of upfollowing table presents information related to
an aggregate
of
10
% of PUs outstanding during the
six months ended June 30, 2023 and 2022.

($ in thousands, except per share data)

                
  

Six Months Ended June 30,

 
  

2023

  

2022

 
      

Weighted

      

Weighted

 
      

Average

      

Average

 
      

Grant Date

      

Grant Date

 
  

Shares

  

Fair Value

  

Shares

  

Fair Value

 

Unvested, beginning of period

  36,921  $20.57   26,645  $29.40 

Granted

  76,696   10.82   35,114   16.55 

Vested and issued

  (8,924)  22.09   (5,329)  29.40 

Unvested, end of period

  104,693  $13.30   56,430  $21.40 
                 

Compensation expense during period

     $258      $270 

Unrecognized compensation expense, end of period

     $929      $778 

Intrinsic value, end of period

     $1,084      $804 

Weighted-average remaining vesting term (in years)

      1.6       1.6 

Stock Awards

The Company has issued, and

outstanding
shares of
the Company’s
common stock
(on a fully
diluted basis)
at the time
of the awards,
subject to
a maximum
aggregate
7,366,623
shares of
the Company’s
common stock
that may
be issued
under the
2021 Incentive
Plan. The
2021 Incentive
Plan
replaces the
2012 Incentive
Plan, and
no further
grants will
be made under
the 2012
Incentive
Plan.
However, any
outstanding
awards
under the
2012 Incentive
Plan will
continue in
accordance
with the
terms of
the 2012
Incentive
Plan and
any award
agreement
executed in
connection
with such
outstanding
awards.
20
Performance
Units
The Company
has issued,
and may
in the future
issue additional,
performance
units immediately vested common stock under
the Incentive
Plans to
certain executive
officers and
employees
of its Manager.
“Performance
Units” vest
after the
end of a
defined performance
period, based
on satisfaction
of
the performance
conditions
set forth
in the performance
unit agreement.
When earned,
each Performance
Unit will
be settled
by the
issuance of
one share
of the Company’s
The following table presents information related to fully vested common stock
at which
time the
Performance
Unit will
be cancelled.
The Performance
Units
contain dividend
equivalent
rights, which
entitle the
Participants
to receive
distributions
declared
by the Company
on common
stock, but
do
not include
the right
to vote the
underlying
shares of
common stock.
Performance
Units are
subject to
forfeiture
should the
participant
no
longer serve
as an executive
officer or
employee of
the Company
or the Manager.
Compensation
expense for
the Performance
Units,
included in
incentive
compensation
on the statements
of operations,
is recognized
over the remaining
vesting period
once it becomes
probable
that the
performance
conditions
will be achieved.
The following
table presents
information
related to
Performance
Units outstanding
issued during the
six months
ended June
30, 2022
and
2021.
($ in thousands, except per share data)
Six Months Ended June 30,
2022
2021
Weighted
Weighted
Average
Average
Grant Date
Grant Date
Shares
Fair Value
Shares
Fair Value
Unvested, beginning of period
133,223
$
5.88
4,554
$
7.45
Granted
175,572
3.31
137,897
5.88
Vested 2023 and issued
(26,645)
5.88
(4,554)
7.45
Unvested, end of period
282,150
$
4.28
137,897
$
5.88
Compensation expense during period
$
270
$
113
Unrecognized compensation expense, end of period
$
778
$
702
Intrinsic value, end of period
$
804
$
716
Weighted-average remaining vesting term (in years)
1.6
1.9
Stock Awards
The Company
has issued,
and may
in the future
issue additional,
immediately
vested common
stock under
the Incentive
Plans to
certain executive
officers and
employees
of its Manager.
The following
table presents
information
related to
fully vested
common stock
issued during
the six months
ended June
30, 2022
and 2021.
. All of the
fully vested
shares of
common stock
issued during
the six months
ended June
30, 2022
and 2021,
and the related
compensation
expense, were
granted with
respect to
service performed
during the
fiscal
years ended
December
31, 2021
and 2020,
respectively.
($ in thousands, except per share data)
Six Months Ended June 30,
2022
2021
Fully vested shares granted
175,572
137,897
Weighted average grant date price per share
$
3.31
$
5.88
Compensation expense related to fully vested shares of common stock awards
$
581
$
811
21
issued during the six months ended June 30, 2023 and 2022, and the related compensation expense, were granted with respect to service performed during the fiscal years ended December 31, 2022 and 2021, respectively. 

($ in thousands, except per share data)

        
  

Six Months Ended June 30,

 
  

2023

  

2022

 

Fully vested shares granted

  76,696   35,114 

Weighted average grant date price per share

 $10.82  $16.55 

Compensation expense related to fully vested shares of common stock awards

 $830  $581 

Deferred

Stock Units

Non-employee

directors
receive a
portion of
their compensation
in the form
of deferred
stock unit
DSU awards (“DSUs”)
pursuant to
the
Incentive
Plans.
Each DSU
represents
a right to
receive one
share of
the Company’s
common stock.
Beginning
in 2022,
each non-
employeenon-employee director
can could elect
to receive
all of his
or her compensation
in the form
of DSUs.
The DSUs
are immediately
vested and
are
settled at
a future
date based
on the election
of the individual
participant.
Compensation
expense for
the DSUs
is included
in directors’
fees and
liability
insurance
in the statements
of operations.
The DSUs
contain dividend
equivalent
rights, which
entitle the
participant
to
receive distributions
declared
by the Company
on common
stock.
These dividend
equivalent
rights are
settled in
cash or additional
DSUs
at the participant’s
election.
The DSUs
do not include
the right
to vote the underlying shares of common stock.

19
Table of Contents

The following table presents information related to the DSUs outstanding during the six months ended June 30, 2023 and 2022.

($ in thousands, except per share data)

                
  

Six Months Ended June 30,

 
  

2023

  

2022

 
      

Weighted

      

Weighted

 
      

Average

      

Average

 
      

Grant Date

      

Grant Date

 
  

Shares

  

Fair Value

  

Shares

  

Fair Value

 

Outstanding, beginning of period

  54,197  $20.29   28,595  $26.92 

Granted and vested

  18,713   10.64   8,176   18.30 

Outstanding, end of period

  72,910  $17.82   36,771  $25.00 
                 

Compensation expense during period

     $164      $153 

Intrinsic value, end of period

     $755      $524 
 
underlying
shares of
common stock.
The following
table presents
information
related to
the DSUs
outstanding
during the
six months
ended June
30, 2022
and 2021.
($ in thousands, except per share data)
Six Months Ended June 30,
2022
2021
Weighted
Weighted
Average
Average
Grant Date
Grant Date
Shares
Fair Value
Shares
Fair Value
Outstanding, beginning of period
142,976
$
5.38
90,946
$
5.44
Granted and vested
40,881
3.66
22,528
5.64
Outstanding, end of period
183,857
$
5.00
113,474
$
5.48
Compensation expense during period
$
153
$
120
Intrinsic value, end of period
$
524
$
589

NOTE 9.

COMMITMENTS AND CONTINGENCIES

From time to time, the Company may become involved in various claims and

legal actions arising in the ordinary course of
business. Management is not aware of any reported or unreported contingencies
at June 30, 2022.2023.

NOTE 10. INCOME TAXES

The Company will generally not be subject to U.S. federal income tax on

its REIT taxable income to the extent that it distributes its
REIT taxable income to its stockholders and satisfies the ongoing REIT requirements,
including meeting certain asset, income and
stock ownership tests.
A REIT must generally distribute at least 90% of its REIT taxable income,
determined without regard to the
deductions for dividends paid and excluding net capital gain, to its stockholders,
annually to maintain REIT status.
An amount equal to
the sum of which 85% of its REIT ordinary income and 95% of its REIT
capital gain net income, plus certain undistributed income from
prior taxable years, must be distributed within the taxable year, in order to avoid the imposition of an excise tax.
The remaining
balance may be distributed up to the end of the following taxable year, provided the REIT elects to treat such amount
as a prior year
distribution and meets certain other requirements.

 
22

NOTE 11.

EARNINGS PER SHARE (EPS)

The Company

had dividend
eligible
Performance
Units PUs and
Deferred
Stock Units
DSUs that were
outstanding
during the
six and three
months ended
June 30,
2023 and 2022 and
2021.. The
basic and
diluted per
share computations
include these
unvested Performance
UnitsPUs and
Deferred
Stock Units
DSUs if there
is income available
to common
stock, as
they have
dividend
participation
rights. The
unvested Performance
UnitsPUs and
Deferred
Stock Units
DSUs have no contractual
obligation
to share
in losses.
Because there
is no such
obligation,
the unvested
Performance
Units PUs and
Deferred Stock
Units DSUs are
not included
in the basic
and diluted
EPS computations
when no income
is available
to
common stock
even though
they are
considered
participating
securities.
The table
below reconciles
the numerator
and denominator
of EPS for
the six and
three months
ended June
30, 2022
and 2021.
(in thousands, except per share information)
Six Months Ended June 30,
Three Months Ended June 30,
2022
2021
2022
2021
Basic and diluted EPS per common share:
Numerator for basic and diluted EPS per share of common stock:
Net loss - Basic and diluted
$
(208,866)
$
(46,234)
$
(60,139)
$
(16,865)
Weighted average shares of common stock:
Shares ofcomputations when no income is available to common stock outstanding ateven though they are considered participating securities.

The table below reconciles the numerator and denominator of EPS for the six and three months ended June 30, 2023 and 2022.

(in thousands, except per share information)

                
  

Six Months Ended June 30,

  

Three Months Ended June 30,

 
  

2023

  

2022

  

2023

  

2022

 

Basic and diluted EPS per common share:

                

Numerator for basic and diluted EPS per share of common stock:

                

Net income (loss) - Basic and diluted

 $13,779  $(208,866) $10,249  $(60,139)

Weighted average shares of common stock:

                

Shares of common stock outstanding at the balance sheet date

  43,897   35,250   43,897   35,250 

Unvested dividend eligible share based compensation outstanding at the balance sheet date

  178   -   178   - 

Effect of weighting

  (4,719)  153   (3,864)  157 

Weighted average shares-basic and diluted

  39,356   35,403   40,211   35,407 

Net income (loss) per common share:

                

Basic and diluted

 $0.35  $(5.90) $0.25  $(1.70)

Anti-dilutive incentive shares not included in calculation

  -   93   -   93 

20
Table of Contents

NOTE 12. FAIR VALUE

The framework for using fair value to measure assets and liabilities defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price). A fair value measure should reflect the assumptions that market participants would use in pricing the asset or liability, including the assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of non-performance. Required disclosures include stratification of balance sheet date

176,251
117,500
176,251
117,500
Effect of weighting
765
(25,044)
783
(18,011)
Weighted average shares-basic and diluted
177,016
92,456
177,034
99,489
Net loss per common share:
Basic and diluted
$
(1.18)
$
(0.50)
$
(0.34)
$
(0.17)
Anti-dilutive incentive shares not included in calculation
466
251
466
251
NOTE 12.
FAIR VALUE
The framework
for using
fair value
to measure
assets and
liabilities
defines fair
value as the
price that
would be
received to
sell an
asset or
paid to transfer
a liability
(an exit
price). A
fair value
measure should
reflect the
assumptions
that market
participants
would use
in
pricing the
asset or
liability, including
the assumptions
about the
risk inherent
in a particular
valuation
technique,
the effect of
a restriction
on the sale
or use of
an asset and
the risk of
non-performance.
Required
disclosures
include stratification
of balance
sheet amounts
measured
at fair value
based on
inputs the
Company uses
to derive
fair value
measurements.
These stratifications
are:
●

●

Level 1 valuations, where the valuation is based on quoted market prices for identical assets or liabilities traded in active markets (which include exchanges and over-the-counter markets with sufficient volume),

●

Level 2 valuations, where the valuation is based on quoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market, and

●

Level 3 valuations, where the valuation is generated from model-based techniques that use significant assumptions not observable in the market, but observable based on Company-specific data. These unobservable assumptions reflect the Company’s own estimates for assumptions that market participants would use in pricing the asset or liability. Valuation techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability.

The Company's RMBS and TBA securities are Level 12 valuations,

where and such valuations currently are determined by the
Company based on independent pricing sources and/or third party broker quotes. Because the price estimates may vary, the Company must make certain judgments and assumptions about the appropriate price to use to calculate the fair values. The Company and the independent pricing sources use various valuation
techniques to determine the price of the Company’s securities. These techniques include observing the most recent market for like or identical assets (including security coupon, maturity, yield, and prepayment speeds), spread pricing techniques to determine market credit spreads (option adjusted spread, zero volatility spread, spread to the U.S. Treasury curve or spread to a benchmark such as a TBA), and model driven approaches (the discounted cash flow method, Black Scholes and SABR models which rely upon observable market rates such as the term structure of interest rates and volatility). The appropriate spread pricing method used is based on
quoted market
prices for
identical
assets or
liabilities
traded in
active markets
(which include
exchanges
and over-the-counter
markets with
sufficient
volume),
●
Level 2 valuations,
where the
valuation
is based on
quoted market
prices for
similar instruments
traded in
active markets,
quoted
prices for
identical
or similar
instruments
in markets
that are
not active
and model-based
valuation
techniques
for which
all
significant
assumptions
are observable
in the market,
and
●
Level 3 valuations,
where the
valuation
is generated
from model-based
techniques
that use
significant
assumptions
not
observable
in the market,
but observable
based on
Company-specific
data. These
unobservable
assumptions
reflect the
Company’s own
estimates
for assumptions
that market
participants
would use
in pricing
the asset
or liability. Valuation
techniques
typically
include option
pricing models,
discounted
cash flow
models and
similar techniques,
but may also
include the
use of market
prices of
assets or
liabilities
that are
not directly
comparable
to the subject
asset or
liability.
23
The Company's
RMBS and
TBA securities
are Level
2 valuations,
and such valuations
currently
are determined
by the Company
based on
independent
pricing sources
and/or third
party broker
quotes. Because
the price
estimates
may vary, the Company
must make
certain judgments
and assumptions
about the
appropriate
price to
use to calculate
the fair
values. The
Company and
the independent
pricing sources
use various
valuation
techniques
to determine
the price
of the Company’s
securities.
These techniques
include observing
the most
recent market
for like
or identical
assets (including
security
coupon, maturity,
yield, and
prepayment
speeds), spread
pricing
techniques
to determine
market credit
spreads (option
adjusted
spread, zero
volatility
spread,
spread to
the U.S.
Treasury curve
or spread
to a benchmark
such as a
TBA), and
model driven
approaches
(the discounted
cash flow
method,
Black Scholes
and SABR
models which
rely upon
observable
market rates
such as the
term structure
of interest
rates and
volatility).
The appropriate
spread pricing
method used
is based on
market convention.
The pricing
source determines
the spread
of recently
observed
trade activity
or observable
markets for
assets similar
to those being
priced. The
spread is
then adjusted
based on
variances
in certain
characteristics
between the
market
observation
and the asset
being priced.
Those characteristics
include: type
of asset,
the expected
life of the
asset, the
stability
and
predictability
of the expected
future cash
flows of
the asset,
whether
the coupon
of the asset,
whether the coupon of the asset is fixed
or adjustable,
the guarantor
of the
security if
applicable,
the coupon,
the maturity, the
issuer, size of
the underlying
loans, year
in which
the underlying
loans were
originated,
loan to value
ratio, state
in which
the underlying
loans reside,
credit score
of the underlying
borrowers
and other
variables if
appropriate.
The fair
value of the
security is
determined
by using the
adjusted
spread.

The Company’s

U.S. Treasury
Notes are
based on
quoted prices
for identical
instruments
in active
markets and
are classified
as
Level 1 assets.

The Company’s

futures contracts
are Level
1 valuations,
as they are
exchange-traded
instruments
and quoted
market prices
are
readily available.
Futures contracts
are settled
daily. The Company’s
interest
rate swaps
and interest
rate swaptions
are Level
2
valuations.
The fair
value of interest
rate swaps
is determined
using a discounted
cash flow
approach
using forward
market interest
rates
and discount
rates, which
are observable
inputs. The
fair value
of interest
rate swaptions
is determined
using an option
pricing model.

RMBS (based

on the fair
value option),
derivatives
and TBA securities
were recorded
at fair value
on a recurring
basis during
the six
and three
months ended
June 30,
2023 and 2022 and
2021.. When
determining
fair value
measurements,
the Company
considers
the principal
or
most advantageous
market in
which it
would transact
and considers
assumptions
that market
participants
would use
when pricing
the
asset. When
possible,
the Company
looks to active
and observable
markets to
price identical
assets.
When identical
assets are
not traded
in active
markets, the
Company
looks to market
observable
data for
similar assets.

21
Table of Contents

The following

table presents
financial
assets (liabilities)
measured
at fair value
on a recurring
basis as of
June 30,
2022 2023 and
December
31, 2021.
2022. Derivative
contracts
are reported
as a net
position by
contract
type, and
not based
on master
netting arrangements.
24
(in thousands)
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
Assets
Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)

(in thousands)

            
  

Quoted Prices

         
  

in Active

  

Significant

     
  

Markets for

  

Other

  

Significant

 
  

Identical

  

Observable

  

Unobservable

 
  

Assets

  

Inputs

  

Inputs

 
  

(Level 1)

  

(Level 2)

  

(Level 3)

 

June 30, 2023

            

Mortgage-backed securities

 $-  $4,373,972  $- 

U.S. Treasury Notes

  37,195   -   - 

Interest rate swaps

  -   30,093   - 

Payer swaptions

  -   7,673   - 

Interest rate caps

  -   211   - 

Interest rate floors

     1,271    

TBA securities

  -   201   - 

December 31, 2022

            

Mortgage-backed securities

 $-  $3,540,002  $- 

U.S. Treasury Notes

  36,382   -   - 

Interest rate swaps

  -   4,983   - 

Payer swaptions

  -   27,416   - 

Interest rate caps

  -   1,119   - 

TBA securities

  -   (507)  - 

During the six and three months ended June 30, 2022

Mortgage-backed securities
$
0
$
3,940,860
$
0
U.S. Treasury Notes
36,302
0
0
Interest rate swaps
0
104,137
0
Interest rate swaptions
0
45,556
0
Interest rate caps
0
3,837
0
TBA securities
0
1,362
0
December 31, 2021
Mortgage-backed securities
$
0
$
6,511,095
$
0
U.S. Treasury Notes
37,175
0
0
Interest rate swaps
0
26,431
0
Interest rate swaptions
0
17,070
0
TBA securities
0
(304)
0
During the six 2023 and three months ended June 30, 2022 and 2021,, there were
no transfers of financial assets or liabilities between
levels 1,2 or 3.

NOTE 13. RELATED PARTY TRANSACTIONS

Management Agreement

The Company is externally managed and advised by Bimini Advisors, LLC

(the (the “Manager”) pursuant to the terms of a
management agreement. The management agreement has been renewed
through
February 20, 2023
2024 and provides for automatic one-
yearone-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.

●

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.

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.
25

●

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.

The Company is obligated to reimburse the Manager for any direct expenses

incurred on its behalf and to pay the Manager the
Company’s pro rata portion of certain overhead costs set forth in the management
agreement.
Should the Company terminate the
management agreement without cause, it will pay the Manager a termination
fee equal to three times the average annual management
fee, as defined in the management agreement, before or on the last day of the
term of the agreement.

22
Table of Contents

Total

expenses recorded for the management fee, and allocated overhead incurred
and repurchase agreement trading, clearing and administrative services were approximately $
6.2
$6.9 million and $
3.2
$3.5 million for the six and three months ended June 30, 2022,2023, respectively, and  $
4.2
$6.4 million and $
2.2
$3.3 million for the six and three months
ended June 30, 2021, respectively. At June 30, 2022, respectively. At June 30, 2023 and December 31, 2021,2022, the net amount due to affiliates was approximately
$
1.1
1.2 million and $
1.1
million, respectively.

Other Relationships with Bimini

Robert Cauley, the Company’s Chief Executive Officer and Chairman of the Board of Directors, also serves as Chief Executive

Officer and Chairman of the Board of Directors of Bimini and owns shares of common
stock of Bimini. George H. Haas, IV, the
Company’s Chief Financial Officer, Chief Investment Officer, Secretary and a member of the Board of Directors, also serves as the
Chief Financial Officer, Chief Investment Officer and Treasurer of Bimini and owns shares of common stock of Bimini. In addition, as of
June 30, 2022,2023, Bimini owned
2,595,357
569,071 shares, or
1.5
% 1.3%, of the Company’s common stock.

23
26Table of Contents

ITEM 2. MANAGEMENT’S

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 the Federal National Mortgage Association ("Fannie Mae"), the Federal Home Loan Mortgage Corporation ("Freddie Mac" and together with Fannie Mae, Freddie Macthe "Enterprises") or the Government National Mortgage Association ("Ginnie Mae (theMae" and, together with the Enterprises the “GSEs”) and collateralized
mortgage obligations (“CMOs”) issued by the GSEs
(“ (“PT RMBS”) and (ii) structured Agency RMBS, such as interest-only securities (“IOs”),
inverse interest-only securities (“IIOs”) and
principal only securities (“POs”), among other types of structured Agency RMBS.
We were formed by Bimini 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”)REIT under the

Internal Revenue Code of 1986, as
amended (the “Code”).
Code. We generally will not be subject to U.S. federal income tax to the extent that we currently
distribute all of our
REIT taxable income (as defined in the Code) to our stockholders and maintain
our REIT qualification.

The Company’s common stock trades on the New York Stock Exchange under the symbol “ORC”.

Capital Raising Activities

On August 4, 2020,October 29, 2021, we entered into an equity distribution agreement (the “August

2020“October 2021 Equity Distribution Agreement”) with four
sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate
amount of $150,000,000$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 27,493,6509,742,188 shares under the August 2020October 2021 Equity Distribution Agreement for
aggregate gross proceeds of approximately $150.0
$151.8 million, and net proceeds of approximately $147.4$149.3 million, after commissions
and fees,
prior to its termination in June 2021.March 2023.

24
27
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 saleTable of 7,600,000 shares of our common stock. J.P.Contents

Morgan purchased the
shares of our common stock from
the Company pursuant to the January 2021 Underwriting Agreement
at $5.20 per share. In addition,
we granted J.P.
Morgan a 30-day option to purchase up to an additional 1,140,000 shares
of our common stock on the same terms and
conditions, which J.P. Morgan exercised in full on January 21, 2021. The closing of the offering of 8,740,000 shares of our common
stock occurred on January 25, 2021, with proceeds to us of approximately $45.2
million, net of offering expenses.
On March 2, 2021, we entered into an underwriting agreement (the “March 2021 Underwriting
Agreement”) with J.P. Morgan,
relating to the offer and sale of 8,000,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from
the Company pursuant to the March 2021 Underwriting Agreement at $5.45 per share.
In addition, we granted J.P. Morgan a 30-day
option to purchase up to an additional 1,200,000 shares of our common stock
on the same terms and conditions, which J.P. Morgan
exercised in full on March 3, 2021. The closing of the offering of 9,200,000 shares of our common
stock occurred on March 5, 2021,
with proceeds to us of approximately $50.0 million, net of offering expenses.
On June 22, 2021,7, 2023, we entered into an equity distribution agreement (the “June 2021
“March 2023 Equity Distribution Agreement”) with four
sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate
amount of $250,000,000 of shares of our
common stock in transactions that were deemed to be “at the market” offerings and privately
negotiated transactions. We issued a total
of 49,407,336 shares under the June 2021 Equity Distribution Agreement for aggregate
gross proceeds of approximately $250.0
million, and net proceeds of approximately $246.2 million, after commissions
and fees, prior to its termination in October 2021.
On October 29, 2021,
we entered into an equity distribution agreement (the “October 2021
Equity Distribution Agreement”) with
fourthree 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 June
30, 2022,2023 , we issued a total of 15,835,7004,757,953 shares under the October 2021March 2023 Equity
Distribution Agreement for aggregate gross proceeds
of approximately $78.3$48.1 million, and net proceedsproceed of approximately $77.0$47.4 million,
after commissions and fees.
 

Stock Repurchase Agreement

On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to 2,000,000

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 4,522,822904,564 shares of the Company’s common stock. Coupled with the 783,757156,751 shares
remaining from the original 2,000,000
400,000 share authorization, the increased authorization brought the total authorization
to 5,306,5791,061,316 shares, representing 10% of the
Company’s then outstanding share count.

On December 9, 2021, the Board of Directors

approved an increase in the number of shares
of the Company’s common stock available in the stock repurchase program for up
to an additional 16,861,9943,372,399 shares, bringing the
remaining authorization under the stock repurchase program to 17,699,3053,539,861 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 June 30, 2022,2023, the Company

repurchased a total of 6,561,8104,048,613 shares
at an aggregate cost of approximately $42.6$68.8 million, including commissions and fees,
for a weighted average price of $6.49$16.99 per share.
During the six months ended June 30, 2022,2023, the Company repurchased a total of 876,299
373,041shares of its common stock at an aggregate
cost of approximately $2.2$4.0 million, including commissions and fees, for a weighted average
price of $2.53$10.62 per share.
28

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.

●

interest rate trends;

●increases in our cost of funds resulting from increases in the Federal Funds rate that are controlled by the Federal Reserve (the "Fed") that occurred in 2022 and the first two quarters of 2023, and may continue to occur;

●

the difference between Agency RMBS yields and our funding and hedging costs;

●

competition for, and supply of, investments in Agency RMBS;

●

actions taken by the U.S. government, including the presidential administration, the Fed, the Federal Housing Financing Agency (the “FHFA”), The Federal Deposit Insurance Corporation ("FDIC"), Federal Housing Administration (the “FHA”), the Federal Open Market Committee (the “FOMC”) and the U.S. Treasury;

●

prepayment rates on mortgages underlying our Agency RMBS and credit trends insofar as they affect prepayment rates; and

●

other market developments, including bank failures.

In addition, a variety of factors relating to our business may also impact our results

of operations and financial condition. These
factors include:
●

●

our degree of leverage;

●

our access to funding and borrowing capacity;

●

our borrowing costs;

●

our hedging activities;

●

the market value of our investments; and

●

the requirements to qualify as a REIT and the requirements to qualify for a registration exemption under the Investment Company Act.

25
Table of leverage;Contents
●
our access

Results of Operations

Described below are the Company’s results of operations for the six and three months ended June 30, 2023, as compared to fundingthe Company’s results of operations for the six and borrowing capacity;

●
our borrowing costs;
●
our hedging activities;
●
three months ended June 30, 2022.

Net Income (Loss) Summary

Net income for the market valuesix months ended June 30, 2023 was $13.8 million or $0.35 per share. Net loss for the six months ended June 30, 2022 was $208.9 million, or $5.90 per share. Net income for the three months ended June 30, 2023 was  $10.2 million, or $0.25 per share. Net loss for the three months ended June 30, 2022 was $60.1 million, or $1.70 per share. The components of our investments

●
increasesnet income (loss) for the six and three months ended June 30, 2023 and 2022, along with the changes in our cost of funds resulting from increasesthose components are presented in the Fed Funds rate that
are controlled by the Fed which have
occurred,table below:

(in thousands)

                        
  

Six Months Ended June 30,

  

Three Months Ended June 30,

 
  

2023

  

2022

  

Change

  

2023

  

2022

  

Change

 

Interest income

 $77,923  $77,125  $798  $39,911  $35,268  $4,643 

Interest expense

  (90,888)  (10,835)  (80,053)  (48,671)  (8,180)  (40,491)

Net interest (expense) income

  (12,965)  66,290   (79,255)  (8,760)  27,088   (35,848)

Gains (losses) on RMBS and derivative contracts

  36,567   (266,224)  302,791   23,828   (82,674)  106,502 

Net portfolio income (loss)

  23,602   (199,934)  223,536   15,068   (55,586)  70,654 

Expenses

  (9,823)  (8,932)  (891)  (4,819)  (4,553)  (266)

Net income (loss)

 $13,779  $(208,866) $222,645  $10,249  $(60,139) $70,388 

GAAP 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
six and three
months ended
June 30,
2022, as
compared
to the
Company’s results
of operations
for the six
and three
months ended
June 30,
2021.
Net (Loss)
Income Summary
Net loss
for the six
months ended
June 30,
2022 was
$208.9 million,
or $1.18
per share.
Net loss
for the six
months ended
June 30,
2021 was
$46.2 million,
or $0.50
per share.
Net loss
for the three
months ended
June 30,
2022 was
$60.1 million,
or $0.34 per
share. Net
loss for the
three months
ended June
30, 2021
was $16.9
million,
or $0.17
per share.
The components
of net loss
for the six
and three
months ended
June 30,
2022 and
2021, along
with the
changes in
those components
are presented
in the table
below:
(in thousands)
Six Months Ended June 30,
Three Months Ended, June 30,
2022
2021
Change
2022
2021
Change
Interest income
$
77,125
$
56,110
$
21,015
$
35,268
$
29,254
$
6,014
Interest expense
(10,835)
(3,497)
(7,338)
(8,180)
(1,556)
(6,624)
Net interest income
66,290
52,613
13,677
27,088
27,698
(610)
Losses on RMBS and derivative contracts
(265,515)
(91,635)
(173,880)
(82,283)
(40,844)
(41,439)
Net portfolio loss
(199,225)
(39,022)
(160,203)
(55,195)
(13,146)
(42,049)
Expenses
(9,641)
(7,212)
(2,429)
(4,944)
(3,719)
(1,225)
Net (loss) income
$
(208,866)
$
(46,234)
$
(162,632)
$
(60,139)
$
(16,865)
$
(43,274)
29
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 “Net Earnings
Excluding
Realized
and Unrealized
Gains and
Losses”, “Economic
Interest
Expense”
and
“Economic
“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
six months
ended June
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
June 30, 2022
$
(60,139)
$
(82,284)
$
22,145
$
(0.34)
$
(0.46)
0.12
March 31, 2022
(148,727)
(183,232)
34,505
(0.84)
(1.04)
0.20
December 31, 2021
(44,564)
(82,597)
38,033
(0.27)
(0.49)
0.22
September 30, 2021
26,038
(2,887)
28,925
0.20
(0.02)
0.22
June 30, 2021
(16,865)
(40,844)
23,979
(0.17)
(0.41)
0.24
March 31, 2021
(29,369)
(50,791)
21,422
(0.34)
(0.60)
0.26
Six Months Ended
June 30, 2022
$
(208,866)
$
(265,516)
$
56,650
$
(1.18)
$
(1.50)
$
0.32
June 30, 2021
(46,234)
(91,635)
45,401
(0.50)
(0.99)
0.49
(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
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

holdings financial instruments used for
hedge hedging purposes as hedges for accounting
treatment.
purposes, but rather hold them for economic hedging purposes. Changes in
fair value
of these
instruments
are presented
in a separate
line item
in ourthe 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.
For

Presenting net earnings excluding realized and unrealized gains and losses allows management to: (i) isolate 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
other expenses of the instrument
caused by
changes in
underlying
interest
rates applicable
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 term
covered by
management of our portfolio. We believe that the instrument,
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 just
elected the currentsame 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.

26
period. For
Table of Contents
each period
presented,
we have combined

Described below are the effects

Company’s results 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
operations 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
may invest
in TBAs,
which are
forward contracts
for the purchase
or sale of
Agency RMBS
at a predetermined
price,
face amount,
issuer, coupon
six months ended June 30, 2023 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
2022, 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
quarter in 2023 to date and 2022.

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

                        

June 30, 2023

 $10,250  $23,828  $(13,578) $0.25  $0.59  $(0.34)

March 31, 2023

  3,530   12,739   (9,209)  0.09   0.33   (0.24)

December 31, 2022

  34,926   36,727   (1,801)  0.95   1.00   (0.05)

September 30, 2022

  (84,513)  (94,433)  9,920   (2.40)  (2.68)  0.28 

June 30, 2022

  (60,139)  (82,673)  22,534   (1.70)  (2.33)  0.63 

March 31, 2022

  (148,727)  (183,550)  34,823   (4.20)  (5.19)  0.99 

Six Months Ended

                        

June 30, 2023

 $13,780  $36,567  $(22,787) $0.35  $0.93  $(0.58)

June 30, 2022

  (208,866)  (266,223)  57,357   (5.90)  (7.52)  1.62 

(1)

Includes realized and unrealized gains (losses) on RMBS and derivative financial instruments, including net interest income or expense on interest rate swaps.

Prior to 2023, we included certain expenses related to our derivative

instruments
and in "Direct REIT operating expenses" in the income
statement
line item,
gainsstatements of operations.  Beginning in 2023, we have included these expenses in "Gains (losses)
on derivative
instruments,
calculated
in accordance
and hedging instruments."  Prior period amounts have been reclassified to conform with GAAP
the current presentation.  The table below presents the effect of this reclassification 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
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
Six Months Ended
June 30, 2022
$
281,574
$
3,552
$
1,094
$
709
$
276,219
June 30, 2021
10,557
3,170
(8,559)
(9,148)
25,094
32
2022.

Realized and Unrealized Gains and Losses - Reclassification of Derivative Transaction Expenses

 

(in thousands, except per share data)

                        
              

Net Earnings Excluding

 
  

Realized and Unrealized

  

Realized and Unrealized

 
  

Gains and Losses

  

Gains and Losses

 
  

Prior

  

Reclassified

  

Current

  

Prior

  

Reclassified

  

Current

 
  

Presentation

  

Expenses

  

Presentation

  

Presentation

  

Expenses

  

Presentation

 

Three Months Ended

                        

December 31, 2022

 $38,389  $(1,662) $36,727  $(3,463) $(1,662) $(1,801)

September 30, 2022

  (93,544)  (889)  (94,433)  9,031   (889)  9,920 

June 30, 2022

  (82,282)  (391)  (82,673)  22,143   (391)  22,534 

March 31, 2022

  (183,232)  (318)  (183,550)  34,505   (318)  34,823 
  

Per Share

 

Three Months Ended

                        

December 31, 2022

 $1.04  $(0.04) $1.00  $(0.09) $(0.04) $(0.05)

September 30, 2022

  (2.66)  (0.02)  (2.68)  0.26   (0.02)  0.28 

June 30, 2022

  (2.32)  (0.01)  (2.33)  0.62   (0.01)  0.63 

March 31, 2022

  (5.18)  (0.01)  (5.19)  0.98   (0.01)  0.99 

Economic Interest Expense and Economic Net Interest Income

(

We use derivative and other hedging instruments, specifically Fed Funds and T-Note futures contracts, short positions in thousands)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.

27
Table of Contents

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 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
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
Six Months Ended
June 30, 2022
$
77,125
$
10,835
$
709
$
10,126
$
66,290
$
66,999
June 30, 2021
56,110
3,497
(9,148)
12,645
52,613
43,465
(1)
Reflectsexpense, including the effect of derivative instrument hedgesinstruments for only the period,
presented.
(2)
Calculated by adding is referred to as economic interest expense. Net interest income, when calculated to include the effect of derivative instrument hedges attributed
toinstruments for the period, presentedis referred to GAAP interest expense.
(3)
Calculated by adding the effect of derivative instrument hedges attributed
to the period presented to GAAPas economic net interest income.
Net Interest Income
During This presentation includes gains or losses on all contracts in effect during the
six months
ended June
30, 2022,
we generated
$66.3 million
of net interest
income, consisting
of $77.1
million of
interest
income from
RMBS assets
offset by $10.8
million of
interest
expense on
borrowings.
For reporting period, covering the comparable
current period ended
June 30,
2021, we
generated
$52.6 million
of net interest
income, consisting
of $56.1
million of
interest
income from
RMBS assets
offset by $3.5
million of
interest
expense on
borrowings.
The $21.0
million increase
in interest
income was
due to a
$634.5 million
increase in
average
RMBS,
combined with
a 52 basis
point ("bps")
increase in
the yield
on average
RMBS. The
$7.3 million
increase in
interest
expense was
due to a
29 bps increase
as well as periods in the average
cost of funds,
combined with
a $614.4
million increase
future.

From time to time, we invest in average

outstanding
borrowings.
On an economic
basis, our
interest
expense on
borrowings
TBAs, which are forward contracts for the six
months ended
June 30,
2022purchase or sale of Agency RMBS at a predetermined price, face amount, issuer, coupon and
2021 was
$10.1 million
and
$12.6 million,
respectively, resulting
in $67.0
million and
$43.5 million
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 economic
net interest
income, respectively.
During the
three months
ended June
30, 2022,
we generated
$27.1 million
of net interest
income, consisting
of $35.3
million
of
interest
income from
RMBS assets
offset by $8.2
million of
interest
expense on
borrowings.
For the three
months ended
June 30,
2021,
we generated
$27.7 million
of net interest
income, consisting
of $29.3
million of
interest
income from
RMBS assets
offset by $1.6
million of
interest
expense on
borrowings.
The $6.0
million increase
in interest
income was
duethese securities out to a
71 bps increase
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 yield
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 average
RMBS,
partially
offset by a
$244.2 million
decrease
in average
RMBS.
The $6.6
million increase
TBAs are included with gains or losses on other derivative contracts and are not included in interest
expense was
due to a
66 bps increase
in the average
cost of funds,
partially
offset by a
$236.6 million
decrease in
average outstanding
borrowings.
On an economic
basis, our
interest
expense on
borrowings
income for the three
months ended
June 30,
2022 and
2021 was
$6.2 million
and
$6.7 million,
respectively, resulting
in $29.1 million
and $22.6
million of
economic
net interest
income, respectively.
The tables
below provide
information
on our portfolio
average balances,
interest
income, yield
on assets,
average borrowings,
interest
expense, cost
of funds,
net interest
income and
net interest
spread for
the six months
ended June
30, 2022
and 2021
and each
quarter of
2022 to date
and 2021
on both a
GAAP and
economic basis.
33
($ 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
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%
Six Months Ended
June 30, 2022
$
4,903,286
$
77,125
3.15%
$
4,732,826
$
10,835
$
10,126
0.46%
0.43%
June 30, 2021
4,268,801
56,110
2.63%
4,118,413
3,497
12,645
0.17%
0.61%
($ in thousands)
Net Interest Income
Net Interest Spread
GAAP
Economic
GAAP
Economic
Basis
Basis
(2)
Basis
Basis
(4)
Three Months Ended
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%
Six Months Ended
June 30, 2022
$
66,290
$
66,999
2.69%
2.72%
June 30, 2021
52,613
43,465
2.46%
2.02%
(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 balancespurposes 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)
Economicdiscussions 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 tabletotal 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 tablesincome statement line item, gains (losses) on page 35 includesderivative instruments, calculated in accordance with GAAP for the effect

six months ended June 30, 2023 and 2022, and for each quarter of our derivative instrument hedges for only the periods presented.2023 to date and 2022.

Gains (Losses) on Derivative Instruments

 

(in thousands)

                    
              

Funding Hedges

 
  

Recognized in

  

TBA Securities

  

Attributed to

  

Attributed to

 
  

Income

  

Gain (Loss)

  

Current

  

Future

 
  Statement  (Short  (Long  Period  Periods 
  

(GAAP)

  

Positions)

  

Positions)

  

(Non-GAAP)

  

(Non-GAAP)

 

Three Months Ended

                    

June 30, 2023

 $93,367  $15,599  $(574) $23,482  $54,860 

March 31, 2023

  (41,156)  (5,990)  -   19,211   (54,377)

December 31, 2022

  (12,319)  (9,700)  -   9,414   (12,033)

September 30, 2022

  183,930   10,642   106   4,154   169,028 

June 30, 2022

  103,367   1,013   1,067   1,605   99,682 

March 31, 2022

  177,498   2,539   27   (1,605)  176,537 

Six Months Ended

                    

June 30, 2023

 $52,211  $9,609  $(574) $42,693  $483 

June 30, 2022

  280,865   3,552   1,094   -   276,219 

28
(3)
Represents interest cost
Table of our borrowings andContents

The table below presents the effect of the reclassification of derivative

expenses discussed above for each quarter in 2022.

Gains (Losses) on Derivative Instruments - Reclassification of Derivative Transaction Expenses

 

(in thousands)

                        
  

Recognized in Income Statement

  

Attributed to Current Period

 
  

Prior

  

Reclassified

  

Current

  

Prior

  

Reclassified

  

Current

 
  

Presentation

  

Expenses

  

Presentation

  

Presentation

  

Expenses

  

Presentation

 

Three Months Ended

                        

December 31, 2022

 $(10,657) $1,662  $(12,319) $11,076  $1,662  $9,414 

September 30, 2022

  184,819   889   183,930   5,043   889   4,154 

June 30, 2022

  103,758   391   103,367   1,996   391   1,605 

March 31, 2022

  177,816   318   177,498   (1,287)  318   (1,605)

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

                        

June 30, 2023

 $39,911  $48,671  $23,482  $25,189  $(8,760) $14,722 

March 31, 2023

  38,012   42,217   19,211   23,006   (4,205)  15,006 

December 31, 2022

  31,897   29,512   9,414   20,098   2,385   11,799 

September 30, 2022

  35,611   21,361   4,154   17,207   14,250   18,404 

June 30, 2022

  35,268   8,180   1,605   6,575   27,088   28,693 

March 31, 2022

  41,857   2,655   (1,605)  4,260   39,202   37,597 

Six Months Ended

                        

June 30, 2023

 $77,923  $90,888  $42,693  $48,195  $(12,965) $29,728 

June 30, 2022

  77,125   10,835   -   10,835   66,290   66,290 

(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 six months ended June 30, 2023, we generated net interest expense of $13.0 million consisting of $77.9 million of interest income from RMBS assets offset by $90.9 million of interest expense on borrowings. For the comparable period ended June 30, 2022, we generated $66.3 million of net interest income, consisting of $77.1 million of interest income from RMBS assets offset by $10.8 million of interest expense on borrowings. The $0.8 million  increase in interest income was due to a 77 basis point ("bps") increase in the yield on average RMBS, partially offset by a $924.9 million  decrease in average RMBS. The $80.1 million increase in interest expense was due to a 435 bps increase in the average cost of funds, partially offset by a $953.0 million  decrease in average outstanding borrowings.

On an economic basis, our interest expense on borrowings for the six months ended June 30, 2023 and 2022 was $48.2 million and $10.8 million, respectively, resulting in $29.7 million and $66.3 million of economic net interest income, respectively.

During the three months ended June 30, 2023, we generated net interest expense of $8.8 million consisting of $39.9 million of interest income from RMBS assets offset by $48.7 million of interest expense on borrowings. For the comparable period dividedended June 30, 2022, we generated $27.1 million of net interest income, consisting of $35.3 million of interest income from RMBS assets offset by $8.2 million of interest expense on borrowings. The $4.6 millionincrease in interest income was due to a 50 bps increase in the yield on average RMBS, which was partially offset by a $73.8 milliondecrease in average RMBS. The $40.5 millionincrease in interest expense was due to a 408 bps increase in the average cost of funds, partially offset by a $125.9 milliondecrease in average outstanding borrowings.

29
RMBS.
Table of Contents
(4)
Economic

On an economic basis, our interest expense on borrowings for the three months ended June 30, 2023 and 2022 was $25.2 million and $6.6 million, respectively, resulting in $14.7 million and $28.7 million of economic net interest income, respectively.

The tables below provide information on our portfolio average balances, interest income, yield on assets, average borrowings, interest expense, cost of funds, net interest income and net interest spread is calculated by subtracting averagefor the six months ended June 30, 2023 and 2022, and each quarter of 2023 to date and 2022 on both a GAAP and economic

cost of funds from realized yield on average RMBS.
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

                                

June 30, 2023

 $4,186,939  $39,911   3.81% $3,985,577  $48,671  $25,189   4.88%  2.53%

March 31, 2023

  3,769,954   38,012   4.03%  3,573,941   42,217   23,006   4.72%  2.57%

December 31, 2022

  3,370,608   31,897   3.79%  3,256,153   29,512   20,098   3.63%  2.47%

September 30, 2022

  3,571,037   35,611   3.99%  3,446,420   21,361   17,207   2.48%  2.00%

June 30, 2022

  4,260,727   35,268   3.31%  4,111,544   8,180   6,575   0.80%  0.64%

March 31, 2022

  5,545,844   41,857   3.02%  5,354,107   2,655   4,260   0.20%  0.32%

Six Months Ended

                                

June 30, 2023

 $3,978,447  $77,923   3.92% $3,779,759  $90,888  $48,195   4.81%  2.55%

June 30, 2022

  4,903,286   77,125   3.15%  4,732,826   10,835   10,835   0.46%  0.46%

($ in thousands)

                
  

Net Interest Income

  

Net Interest Spread

 
  

GAAP

  

Economic

  

GAAP

  

Economic

 
  

Basis

  

Basis(2)

  

Basis

  

Basis(4)

 

Three Months Ended

                

June 30, 2023

 $(8,760) $14,722   (1.07)%  1.28%

March 31, 2023

  (4,205)  15,006   (0.69)%  1.46%

December 31, 2022

  2,385   11,799   0.16%  1.32%

September 30, 2022

  14,250   18,404   1.51%  1.99%

June 30, 2022

  27,088   28,693   2.51%  2.67%

March 31, 2022

  39,202   37,597   2.82%  2.70%

Six Months Ended

                

June 30, 2023

 $(12,965) $29,728   (0.89)%  1.37%

June 30, 2022

  66,290   66,290   2.69%  2.69%

(1)

Portfolio yields and costs of borrowings presented in the tables above and the tables on pages 31-32 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 32 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 six months
ended June
30, 2022
2023 and 2021
2022 was $77.9 million and  $77.1
million, respectively. We had average RMBS holdings of $3,978.4 million and
$56.1 million,
respectively.
We had
average RMBS
holdings of
$4,903.3
million and
$4,268.8
 $4,903.3 million for
the six months
ended June
30, 2022
2023 and 2021,
2022, respectively.
The
yield on our
portfolio
was 3.15%
3.92% and 2.63%
3.15% for the six
months ended
June 30,
2023 and 2022, and
2021, respectively.
For the six
months ended
June 30,
2022 2023, as compared
to the six
months ended
June 30,
2021, 2022, there
was a $21.0
$0.8 million  increase
in interest
income due
to the
$634.5 million
a 77 bps increase in
average
RMBS,
combined with
the 52 bps
increase in
the yield
on average
RMBS.
RMBS, partially offset by a $924.9 million  decrease  in average RMBS.

Our interest

income for
the three
months ended
June 30,
2023 and 2022 and
2021 was
$35.3 $39.9 million
and $29.3
$35.3 million, respectively.
We had
average RMBS
holdings of
$4,260.7
$4,186.9 million and
$4,504.9
$4,260.7 million for
the three
months ended
June 30,
2023 and 2022, and
2021, respectively.
The
yield on our
portfolio
was 3.31%
3.81% and 2.60%
3.31% for the three
months ended
June 30,
2023 and 2022, and
2021, respectively.
For the three
months ended
June 30,
2022 2023, as compared
to the three
months ended
June 30,
2021, 2022, there
was a $6.0
$4.6 million increase
in interest
income due
to
a 50 bps increase in the
$244.2 yield on average RMBS that was partially offset by the $73.8 million
decrease
in average RMBS.

RMBS,
combined with
the 71 bps
increase in
the yield
on average
RMBS.30
Table of Contents
34

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 six
months ended
June 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
June 30, 2023 and 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%
Six Months Ended
June 30, 2022
$
4,702,343
$
200,943
$
4,903,286
$
71,960
$
5,165
$
77,125
3.06%
5.14%
3.15%
June 30, 2021
4,217,050
51,751
4,268,801
56,155
(45)
56,110
2.66%
(0.17)%
2.63%
and for each quarter of 2023 to date and 2022.

($ 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

                                    

June 30, 2023

 $4,168,333  $18,606  $4,186,939  $39,495  $416  $39,911   3.79%  8.95%  3.81%

March 31, 2023

  3,750,184   19,770   3,769,954   37,594   418   38,012   4.01%  8.44%  4.03%

December 31, 2022

  3,335,154   35,454   3,370,608   31,204   693   31,897   3.74%  7.83%  3.79%

September 30, 2022

  3,458,277   112,760   3,571,037   32,297   3,314   35,611   3.74%  11.75%  3.99%

June 30, 2022

  4,069,334   191,393   4,260,727   31,894   3,374   35,268   3.14%  7.05%  3.31%

March 31, 2022

  5,335,353   210,491   5,545,844   40,066   1,791   41,857   3.00%  3.40%  3.02%

Six Months Ended

                                    

June 30, 2023

 $3,959,258  $19,189  $3,978,447  $77,089  $834  $77,923   3.89%  8.69%  3.92%

June 30, 2022

  4,702,343   200,943   4,903,286   71,960   5,165   77,125   3.06%  5.14%  3.15%

Interest Expense and the Cost of Funds

We had average

outstanding
borrowings
of $4,732.8
$3,779.8 million and
$4,118.4 $4,732.8 million
and total
interest
expense of
$10.8 $90.9 million
and $3.5
$10.8 million for
the six months
ended June
30, 2022
2023 and 2021,
2022, respectively. Our
average cost
of funds
was 0.46%
4.81% for the six
months ended
June 30,
2022,
2023, compared
to 0.17%
0.46% for the comparable
period in
2021.
2022. The $7.3
$80.1 million increase
in interest
expense was
due to the
29 435 bps
increase in
the average
cost of funds,
combined with
partially offset by the $614.4
$953.0 million increase
decrease in average
outstanding
borrowings
during the
six months
ended June
30, 2022
2023, as compared
to the six
months ended
June 30,
2021.
2022.

Our economic

interest
expense
was $10.1
$48.2 million and
$12.6 $10.8 million
for the six
months ended
June 30,
2023 and 2022, and
2021, respectively.
There was
a 18209 bps
decrease
 increase in the average
economic cost
of funds
to 0.43%
2.55% for the six
months ended
June 30,
2022 2023, from
0.61% 0.46% for
the
six months
ended June
30, 2021.
2022.

We had average

outstanding
borrowings
of $3,985.6 million and $4,111.5 million and
$4,348.2
total interest expense of $48.7 million and
total interest
expense of
$8.2 million
and $1.6
$8.2 million for
the three
months ended
June 30,
2023 and 2022, and
2021, respectively.
Our average
cost of funds
was 0.80%
and 0.14%
4.88% for the three
months ended
June 30,
2022 and
2021, respectively.
There was
a 66 bps
2023, compared to 0.80% for the comparable period in 2022. The $40.5 million increase in
interest expense was due to the 408 bps increase in the average
cost of funds,
and a $236.6
partially offset by the $125.9 million
decrease in
average outstanding
borrowings
during the
three months
ended June
30, 2022,
2023, as compared
to the three
months ended
June 30,
2021.
comparable period in 2022.

Our economic

interest
expense
was $6.2
$25.2 million and
$6.7 $6.6 million
for the three
months ended
June 30,
2023 and 2022, and
2021, respectively.
There was
a 1189 bps decrease
increase in the average
economic cost
of funds
to 0.60%
2.53% for the three
months ended
June 30,
2022 2023, from
0.61% 0.64% for
the three
months ended
June 30,
2021.
2022.

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
13 bps below
the average
one-month
LIBOR and
110 19 bps below the
one-month average SOFR and 10 bps above the six-month
LIBOR
average SOFR for the quarter
ended June
30, 2022.
2023. Our average
economic
cost of funds
was 33254 bps
below the
average one-month
LIBOR SOFR and
130 225 bps
below the
average six-month
LIBOR SOFR for
the quarter
ended June
30, 2022.
2023. The average
term to maturity
of the outstanding
repurchase
agreements
was 25 days at June 30, 2023 and 27 days
at both June
30, 2022
and December
31, 2021.
2022.

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 SOFR rates
for the six
months ended
June 30,
2023 and 2022, and
2021, and
for each quarter
in 20222023 to
date and 2021
2022, on both a
GAAP and
economic basis.

31
Table of Contents

($ in thousands)

                    
  

Average

  

Interest Expense

  

Average Cost of Funds

 
  

Balance of

  

GAAP

  

Economic

  

GAAP

  

Economic

 
  

Borrowings

  

Basis

  

Basis

  

Basis

  

Basis

 

Three Months Ended

                    

June 30, 2023

 $3,985,577  $48,671  $25,189   4.88%  2.53%

March 31, 2023

  3,573,941   42,217   23,006   4.72%  2.57%

December 31, 2022

  3,256,153   29,512   20,098   3.63%  2.47%

September 30, 2022

  3,446,420   21,361   17,207   2.48%  2.00%

June 30, 2022

  4,111,544   8,180   6,575   0.80%  0.64%

March 31, 2022

  5,354,107   2,655   4,260   0.20%  0.32%

Six Months Ended

                    

June 30, 2023

 $3,779,759  $90,888  $48,195   4.81%  2.55%

June 30, 2022

  4,732,826   10,835   10,835   0.46%  0.46%

          

Average GAAP Cost of Funds

  

Average Economic Cost of Funds

 
          

Relative to Average

  

Relative to Average

 
  

Average SOFR

  

One-Month

  

Six-Month

  

One-Month

  

Six-Month

 
  

One-Month

  

Six-Month

  

SOFR

  

SOFR

  

SOFR

  

SOFR

 

Three Months Ended

                        

June 30, 2023

  5.07%  4.78%  (0.19)%  0.10%  (2.54)%  (2.25)%

March 31, 2023

  4.63%  4.09%  0.09%  0.63%  (2.06)%  (1.52)%

December 31, 2022

  4.06%  2.89%  (0.43)%  0.74%  (1.59)%  (0.42)%

September 30, 2022

  2.47%  1.43%  0.01%  1.05%  (0.47)%  0.57%

June 30, 2022

  1.09%  0.39%  (0.29)%  0.41%  (0.45)%  0.25%

March 31, 2022

  0.16%  0.07%  0.04%  0.13%  0.16%  0.25%

Six Months Ended

                        

June 30, 2023

  4.85%  4.44%  (0.04)%  0.37%  (2.30)%  (1.89)%

June 30, 2022

  0.62%  0.23%  (0.16)%  0.23%  (0.16)%  0.23%

Gains or Losses

The table below presents our gains or losses for the six and three months ended June 30, 2023 and 2022.

(in thousands)

                        
  

Six Months Ended June 30,

  

Three Months Ended June 30,

 
  

2023

  

2022

  

Change

  

2023

  

2022

  

Change

 

Realized losses on sales of RMBS

 $-  $(66,529) $66,529  $-  $(15,443) $15,443 

Unrealized losses on RMBS and U.S. Treasury Notes

  (15,644)  (480,560)  464,916   (69,539)  (170,598)  101,059 

Total losses on RMBS and U.S. Treasury Notes

  (15,644)  (547,089)  531,445   (69,539)  (186,041)  116,502 

Gains on interest rate futures

  24,002   122,622   (98,620)  28,040   42,931   (14,891)

Gains on interest rate swaps

  22,940   105,740   (82,800)  49,084   39,570   9,514 

Gains (losses) on payer swaptions (short positions)

  4,831   (44,944)  49,775   (1,754)  (34,036)  32,282 

(Losses) gains on payer swaptions (long positions)

  (9,002)  91,314   (100,316)  3,107   50,339   (47,232)

(Losses) gains on interest rate caps

  (908)  1,487   (2,395)  (263)  2,483   (2,746)

(Losses) gains on interest rate floors (short positions)

  (1,216)  -   (1,216)  (1,216)  -   (1,216)

Gains on interest rate floors (long positions)

  2,529   -   2,529   1,344   -   1,344 

Gains on TBA securities (short positions)

  9,609   3,552   6,057   15,599   1,013   14,586 

(Losses) gains on TBA securities (long positions)

  (574)  1,094   (1,668)  (574)  1,067   (1,641)

Total gains from derivative instruments

 $52,211  $280,865  $(228,654) $93,367  $103,367  $(10,000)

32
Table of Contents
35
($

We invest in thousands)

Average
Interest Expense
Average CostRMBS 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 Funds
Balancemaking 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
GAAP
Economic
GAAP
Economic
Borrowings
Basis
Basis
Basis
Basis
Three Months Ended
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 six months and three months ended 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%
we received proceeds of $1,934.6 million and $521.6 million, respectively, from the sales of RMBS.  We did not sell any RMBS during the six and three months ended 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%
Six Months Ended
June 30, 2022
$
4,732,826
$
10,835
$
10,126
0.46%
0.43%
June 30, 2021
4,118,413
3,497
12,645
0.17%
0.61%
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
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%
Six Months Ended
June 30, 2022
0.59%
1.33%
(0.13)%
(0.87)%
(0.16)%
(0.90)%
June 30, 2021
0.11%
0.20%
0.06%
(0.03)%
0.50%
0.41%
Gains or Losses
The table
below presents
our2023. 

Realized and unrealized gains

or losses
for the six
and three
months ended
June 30,
2022 and
2021.
(in thousands)
Six Months Ended June 30,
Three Months Ended June 30,
2022
2021
Change
2022
2021
Change
Realized (losses) gains on sales of RMBS
$
(66,529)
$
(6,045)
$
(60,484)
$
(15,443)
$
1,352
$
(16,795)
Unrealized losses on RMBS
(480,560)
(96,147)
(384,413)
(170,598)
(7,282)
(163,316)
Total 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
(547,089)
(102,192)
(444,897)
(186,041)
(5,930)
(180,111)
may also include the premium lost as a result of prepayments on the underlying mortgages, decreasing unrealized gains or increasing unrealized losses as prepayment speeds or premiums increase. To the extent RMBS are carried at a discount to par, unrealized gains or losses on RMBS would also include discount accreted as a result of prepayments on the underlying mortgages, increasing unrealized gains or decreasing unrealized losses as speeds on discounts increase. Gains (losses)and losses on interest rate futures
122,968
278
122,690
43,073
(2,210)
45,283
Gains (losses) on contracts are affected by changes in implied forward rates during the reporting period. The table below presents historical interest rate swaps
106,103
9,446
96,657
39,819
(17,677)
57,496
(Losses) gains on payer swaptions (short positions)
(44,944)
1,212
(46,156)
(34,036)
27,379
(61,415)
Gains (losses) on payer swaptions (long positions)
91,314
3,710
87,604
50,339
(36,360)
86,699
Gains on interest rate caps
1,487
-
1,487
2,483
-
2,483
Gains (losses) on interest rate floors
-
1,300
(1,300)
-
(84)
84
Gains (losses) on TBA securities (short positions)
3,552
3,170
382
1,013
(5,963)
6,976
Gains (losses) on TBA securities (long positions)
1,094
(8,559)
9,653
1,067
-
1,067
Total gains
(losses) from derivative instruments
281,574
10,557
271,017
103,758
(34,915)
138,673
36
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
notdata 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 six months
ended June
30, 2022
and 2021,
we received
proceeds
of $1,934.6
million and
$1,680.9
million,
respectively, from
the sales
of RMBS.
During
the three
months ended
June 30,
2022 and
2021, we
received proceeds
of $521.6
million
and $692.4
million, respectively,
from the
sales of RMBS.
Realized
and unrealized
gains and
losses on
RMBS are
driven in
part by changes
in yields
and interest
rates, which
affect the
pricing
of the securities
in our portfolio.
The unrealized
gains and
losses on
RMBS 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
2023 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)
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.
2022.

  

5 Year

  

10 Year

  

15 Year

  

30 Year

  

90 Day

 
  

U.S. Treasury

  

U.S. Treasury

  

Fixed-Rate

  

Fixed-Rate

  

Average

 
  

Rate(1)

  

Rate(1)

  

Mortgage Rate(2)

  

Mortgage Rate(2)

  

SOFR(3)

 

June 30, 2023

  4.13%  3.82%  6.06%  6.71%  5.00%

March 31, 2023

  3.61%  3.49%  5.56%  6.32%  4.51%

December 31, 2022

  4.00%  3.88%  5.68%  6.42%  3.62%

September 30, 2022

  4.04%  3.80%  5.35%  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%

(1)

Historical 5 and 10 Year U.S. Treasury Rates are obtained from quoted end of day prices on the Chicago Board Options Exchange.

(2)

Historical 30 Year and 15 Year Fixed Rate Mortgage Rates are obtained from Freddie Mac’s Primary Mortgage Market Survey.

(3)

Historical SOFR is obtained from the Federal Reserve Bank of New York.

Expenses

For the six

and three
months ended
June 30,
2022, 2023, the
Company’s total
operating
expenses
were approximately
$9.6 $9.8 million
and $4.9
$4.8 million, respectively,
compared
to approximately
$7.2 $8.9 million
and $3.7
$4.5 million respectively,
for the six
and three
months ended
June 30,
2021.
2022. The table
below presents
a breakdown
of operating
expenses for
the six and
three months
ended June
30, 2022
and
2021.
(in thousands)
Six Months Ended June 30,
Three Months Ended June 30,
2022
2021
Change
2022
2021
Change
Management fees
$
5,265
$
3,413
$
1,852
$
2,631
$
1,792
$
839
Overhead allocation
960
799
161
519
395
124
Accrued incentive compensation
551
625
(74)
314
261
53
Directors fees2023 and liability insurance
2022.

(in thousands)

                        
  

Six Months Ended June 30,

  

Three Months Ended June 30,

 
  

2023

  

2022

  

Change

  

2023

  

2022

  

Change

 

Management fees

 $5,346  $5,265  $81  $2,704  $2,631  $73 

Overhead allocation

  1,215   960   255   639   519   120 

Accrued incentive compensation

  788   551   237   318   314   4 

Directors fees and liability insurance

  641   621   20   318   310   8 

Audit, legal and other professional fees

  899   606   293   448   302   146 

Direct REIT operating expenses

  338   508   (170)  173   183   (10)

Other administrative

  596   421   175   219   294   (75)

Total expenses

 $9,823  $8,932  $891  $4,819  $4,553  $266 

621
595
26
310
323
(13)
Audit, legal and other professional fees
606
620
(14)
302
302
-
Direct REIT operating expenses
1,217
715
502
574
294
280
Other administrative
421
445
(24)
294
352
(58)
Total expenses
$
9,641
$
7,212
$
2,429
$
4,944
$
3,719
$
1,22533
Table of Contents
37

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, 20232024 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.

●

One-twelfth of 1.5% of the first $250 million of the Company’s month end equity, as defined in the management agreement,

●

One-twelfth of 1.25% of the Company’s month end equity that is greater than $250 million and less than or equal to $500 million, and

●

One-twelfth of 1.00% of the Company’s month end equity that is greater than $500 million.

The Company is obligated to reimburse the Manager for any direct expenses

incurred on its behalf and to pay the Manager the
Company’s pro rata portion of certain overhead costs set forth in the management agreement.

On April 1, 2022, pursuant to the third amendment to the management agreement entered into on November 16, 2021,

the Manager began providing certain repurchase agreement trading, clearing and administrative services to the Company
that had been previously provided by AVM, L.P.
under an agreement terminated on March 31, 2022.
In consideration for
such services, the Company will pay the following fees to the Manager:
●

●

A daily fee equal to the outstanding principal balance of repurchase agreement funding in place as of the end of such day multiplied by 1.5 basis points for the amount of aggregate outstanding principal balance less than or equal to $5 billion, and multiplied by 1.0 basis point for any amount of aggregate outstanding principal balance in excess of $5 billion, and

●

A fee for the clearing and operational services provided by personnel of the Manager equal to $10,000 per month.

Should the Company terminate the management agreement without cause, it will pay the Manager a termination fee equal to three times the outstanding principal balance of repurchaseaverage annual management fee, as defined in the management agreement, funding

in place asbefore or on the last day 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
term of the Manager equal to $10,000 per month.
agreement.

The following table summarizes the management fee and overhead allocation

expenses for the six months ended June 30, 2022
2023 and 2021,2022 and for each quarter in 20222023 to date and 2021.
($ in thousands)
Average
Average
Advisory Services
Orchid
Orchid
Management
Overhead
Three Months Ended
MBS
Equity
Fee
Allocation
Total
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
Six Months Ended
June 30, 2022
$
4,903,286
$
860,058
$
5,265
$
960
$
6,225
June 30, 2021
4,268,801
499,683
3,413
799
4,212
38
2022.

($ in thousands)

                    
  

Average

  

Average

  

Advisory Services

 
  

Orchid

  

Orchid

  

Management

  

Overhead

     

Three Months Ended

 

MBS

  

Equity

  

Fee

  

Allocation

  

Total

 

June 30, 2023

 $4,186,939  $899,109  $2,704  $639  $3,343 

March 31, 2023

  3,769,954   865,722   2,642   576   3,218 

December 31, 2022

  3,370,608   823,516   2,566   560   3,126 

September 30, 2022

  3,571,037   839,935   2,616   522   3,138 

June 30, 2022

  4,260,727   866,539   2,631   519   3,150 

March 31, 2022

  5,545,844   853,576   2,634   441   3,075 

Six Months Ended

                    

June 30, 2023

 $3,978,447  $882,415  $5,346  $1,215  $6,561 

June 30, 2022

  4,903,286   860,058   5,265   960   6,225 

Financial

Condition:

Mortgage-Backed Securities

As of June

30, 2022,
2023, our RMBS
portfolio
consisted
of $3,940.9
$4,374.0 million of
Agency RMBS
at fair value
and had a
weighted
average
coupon on
assets of
3.16% 3.78%.
During the
six months
ended June
30, 2022,
2023, we received
principal
repayments
of $279.5
$138.4 million compared
to
$259.4 $279.5 million
for the six
months ended
June 30,
2021.
2022. The average
three month
prepayment
speeds for
the quarters
ended June
30,
2023 and 2022 and
2021 were
9.4% 5.3% and 12.9%9.4%, respectively.

34
respectively.
Table of Contents

The following

table presents
the 3-month
constant prepayment
rate (“CPR”)
experienced
on our structured
and PT RMBS
sub-
portfolios,
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 (%)
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

     

Structured

    
  

PT RMBS

  

RMBS

  

Total

 

Three Months Ended

 

Portfolio (%)

  

Portfolio (%)

  

Portfolio (%)

 

June 30, 2023

 5.3  7.0  5.3 

March 31, 2023

 3.9  5.7  4.0 

December 31, 2022

 4.9  6.0  5.0 

September 30, 2022

 6.1  10.4  6.5 

June 30, 2022

 8.3  13.7  9.4 

March 31, 2022

 8.1  19.5  10.7 

The following

tables summarize
certain characteristics
of the Company’s
PT RMBS
and structured
RMBS as of
June 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
June 30, 2022
Fixed Rate RMBS
$
3,766,151
95.6%
3.10%
342
1-Jun-52
Interest-Only Securities
173,754
4.4%
3.41%
249
25-Jan-52
Inverse Interest-Only Securities
955
0.0%
3.02%
293
15-Jun-42
Total Mortgage Assets
$
3,940,860
100.0%
3.16%
322
1-Jun-52
2023 and December 31, 2021
2022:

($ in thousands)

                 
              

Weighted

  
      

Percentage

      

Average

  
      

of

  

Weighted

  

Maturity

  
  

Fair

  

Entire

  

Average

  

in

 

Longest

Asset Category

 

Value

  

Portfolio

  

Coupon

  

Months

 

Maturity

June 30, 2023

                 

Fixed Rate RMBS

 $4,356,203   99.6%  3.80%  337 

1-Jun-53

Interest-Only Securities

  17,448   0.4%  4.01%  228 

25-Jul-48

Inverse Interest-Only Securities

  321   0.0%  0.00%  280 

15-Jun-42

Total Mortgage Assets

 $4,373,972   100.0%  3.78%  334 

1-Jun-53

December 31, 2022

                 

Fixed Rate RMBS

 $3,519,906   99.4%  3.47%  339 

1-Nov-52

Interest-Only Securities

  19,669   0.6%  4.01%  234 

25-Jul-48

Inverse Interest-Only Securities

  427   0.0%  0.00%  286 

15-Jun-42

Total Mortgage Assets

 $3,540,002   100.0%  3.46%  336 

1-Nov-52

($ in thousands)

                
  

June 30, 2023

  

December 31, 2022

 
      

Percentage of

      

Percentage of

 

Agency

 

Fair Value

  

Entire Portfolio

  

Fair Value

  

Entire Portfolio

 

Fannie Mae

 $2,897,583   66.2% $2,320,960   65.6%

Freddie Mac

  1,476,389   33.8%  1,219,042   34.4%

Total Portfolio

 $4,373,972   100.0% $3,540,002   100.0%

  

June 30, 2023

  

December 31, 2022

 

Weighted Average Pass-through Purchase Price

 $105.06  $106.41 

Weighted Average Structured Purchase Price

 $18.74  $18.74 

Weighted Average Pass-through Current Price

 $92.75  $91.46 

Weighted Average Structured Current Price

 $13.25  $14.05 

Effective Duration (1)

  5.220   5.580 

(1)

Effective duration is the approximate percentage change in price for a 100 bps change in rates. An effective duration of 5.220 indicates that an interest rate increase of 1.0% would be expected to cause a 5.220% decrease in the value of the RMBS in the Company’s investment portfolio at June 30, 2023. An effective duration of 5.580 indicates that an interest rate increase of 1.0% would be expected to cause a 5.580% decrease in the value of the RMBS in the Company’s investment portfolio at December 31, 2022. These figures include the structured securities in the portfolio, but do not include the effect of the Company’s funding cost hedges. Effective duration quotes for individual investments are obtained from The Yield Book, Inc.

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-5235
Table of Contents
39
($ in thousands)

The following table presents a summary of portfolio assets acquired during the six months ended June 30, 2023 and 2022,

December 31, 2021
Percentage including securities purchased during the period that settled after the end of
Percentage the period, if any.

($ in thousands)

                        
  

2023

  

2022

 
  

Total Cost

  

Average Price

  

Weighted Average Yield

  

Total Cost

  

Average Price

  

Weighted Average Yield

 

Pass-through RMBS

 $988,824  $99.65   4.97% $190,638  $99.72   4.04%

Structured RMBS

  -   -   -   -   -   - 

Borrowings

As of

Agency
Fair Value
Entire Portfolio
Fair Value
Entire Portfolio
Fannie Mae
$
2,591,682
65.8%
$
4,719,349
72.5%
Freddie Mac
1,349,178
34.2%
1,791,746
27.5%
Total Portfolio
$
3,940,860
100.0%
$
6,511,095
100.0%
June 30, 2022
December 31, 2021
Weighted Average Pass-through Purchase Price
$
107.77
$
107.19
Weighted Average Structured Purchase Price
$
15.35
$
15.21
Weighted Average Pass-through Current Price
$
94.61
$
105.31
Weighted Average Structured Current Price
$
16.21
$
14.08
Effective Duration
(1)
5.900
3.390
(1)
Effective duration is the approximate percentage change in price
for a 100 bps change in rates.
An effective duration of 5.900 indicates that an
interest rate increase of 1.0% would be expected to cause a 5.900% decrease2023, we had established borrowing facilities in the value
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 RMBS inCompany. These borrowings are secured by the Company’s investment portfolio
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 June 30, 2023, we had obligations outstanding under the repurchase agreements of approximately $4,201.7 million with a net weighted average borrowing cost of 5.26%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 5 to 175 days, with a weighted average remaining maturity of 25 days. Securing the repurchase agreement obligations as of June 30, 2023 are RMBS with an estimated fair value, including accrued interest, of approximately $4,383.3 million and a weighted average maturity of 342 months, and cash pledged to counterparties of approximately $30.6 million. Through July 28, 2023, we have been able to maintain our repurchase facilities with comparable terms to those that existed at June 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
at2023, with maturities through 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
three months
ended June
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
$
190,638
$
99.72
4.04%
$
2,910,318
$
107.05
1.54%
Structured RMBS
-
-
-
76,546
15.42
3.98%
Borrowings
As of June
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
22, 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 June
30, 2022,
we had obligations
outstanding
under the
repurchase
agreements
of approximately
$3,759.0
million with
a net
weighted
average borrowing
cost of 1.36%.
The remaining
maturity of
our outstanding
repurchase
agreement
obligations
ranged from
6 to
141 days,
with a weighted
average remaining
maturity of
27 days.
Securing
the repurchase
agreement
obligations
as of June
30, 2022
are RMBS
with an estimated
fair value,
including
accrued interest,
of approximately
$3,939.4
million and
a weighted
average
maturity of
345 months,
and cash pledged
to counterparties
of approximately
$51.1 million.
Through August
4, 2022,
we have been
able to maintain
our repurchase
facilities
with comparable
terms to
those that
existed at
June 30,
2022 with
maturities
through November
18, 2022.
40
2023.

The table below presents information about our period end,

maximum and average balances of borrowings for each quarter in
2022 2023 to date and 2021.
($ in thousands)
Difference Between Ending
Ending
Maximum
Average
Borrowings2022.

($ 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

  

June 30, 2023

 $4,201,717  $4,201,717  $3,985,577  $216,140   5.42% 

March 31, 2023

  3,769,437   3,849,137   3,573,941   195,496   5.47% 

December 31, 2022

  3,378,445   3,414,950   3,256,153   122,292   3.76% 

September 30, 2022

  3,133,861   4,047,606   3,446,420   (312,559)  (9.07)% 

June 30, 2022

  3,758,980   4,464,544   4,111,544   (352,564)  (8.57)% 

March 31, 2022

  4,464,109   6,244,106   5,354,107   (889,998)  (16.62)%

(1)

(1)

The lower ending balance relative to the average balance during the quarter ended March 31, 2022 reflects the disposal of RMBS pledged as collateral. During the quarter ended March 31, 2022, the Company’s investment in RMBS decreased $510.4 million.

Leverage

We use two primary measures of leverage. Economic leverage is calculated by dividing the sum of total liabilities and

Balance of
Balance of
Balance of
Average Borrowings
Three Months Ended
Borrowings
Borrowings
Borrowings
Amount
Percent
our net notional TBA position, divided by stockholders' equity. Adjusted leverage is calculated by dividing our repurchase agreements by stockholders' equity. Our economic leverage at 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)
2023 was 8.1 to 1, compared to 6.3 to 1 as of 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%
2022.  Our adjusted leverage at June 30, 2021
4,514,704
4,517,953
4,348,192
166,512
3.83%
March2023 was 8.6 to 1, compared to 7.7 to 1 as of December 31, 2021
4,181,680
4,204,935
3,888,633
293,047
7.54%
(1)
2022.  The lower ending balance relativefollowing table presents information related to the average balance during the quarterour historical leverage.

36
ended March 31, 2022 reflects the disposal
Table of RMBS pledged asContents
collateral. During the quarter ended March 31, 2022, the Company’s investment
in RMBS decreased $510.4 million.

($ in thousands)

                  
                   
  

Ending

  

Ending

  

Ending

  

Ending

   
  

Repurchase

  

Total

  

Net TBA

  

Stockholders'

 

Adjusted

Economic

  

Agreements

  

Liabilities

  

Positions

  

Equity

 

Leverage

Leverage

June 30, 2023

 $4,201,717  $4,240,845  $(250,000) $490,086 

8.6:1

8.1:1

March 31, 2023

  3,769,437   3,814,651   (875,000)  451,361 

8.4:1

6.5:1

December 31, 2022

  3,378,445   3,426,973   (675,000)  438,763 

7.7:1

6.3:1

September 30, 2022

  3,133,861   3,405,463   (475,000)  400,377 

7.8:1

7.3:1

June 30, 2022

  3,758,980   3,968,007   -   506,362 

7.4:1

7.8:1

March 31, 2022

  4,464,109   4,595,014   -   592,418 

7.5:1

7.8:1

Liquidity and Capital Resources

Liquidity

is our ability
to turn non-cash
assets into
cash, purchase
additional
investments,
repay principal
and interest
on borrowings,
fund overhead,
fulfill margin
calls and
pay dividends.
We have both
internal
and external
sources of
liquidity. However,
our material
unused sources
of liquidity
include cash
balances,
unencumbered
assets and
our ability
to sell encumbered
assets to
raise cash.
Our
balance sheet
also generates
liquidity
on an on-going
basis through
payments of
principal
and interest
we receive
on our RMBS
portfolio.
Management
believes that
we currently
have sufficient
liquidity
and capital
resources
available
for (a) the
acquisition
of additional
investments
consistent
with the
size and nature
of our existing
RMBS portfolio,
(b) the repayments
on borrowings
and (c) the
payment of
dividends
to the extent
required
for our continued
qualification
as a REIT.
We may also
generate
liquidity
from time
to time by
selling our
equity or
debt securities
in public
offerings or
private placements.

Internal

Sources of
Liquidity

Our internal

sources of
liquidity
include our
cash balances,
unencumbered
assets and
our ability
to liquidate
our encumbered
security
holdings.
Our balance
sheet also
generates
liquidity
on an on-going
basis through
payments
of principal
and interest
we receive
on our
RMBS portfolio.
Because our
PT RMBS portfolio
consists entirely
of government
and agency
securities,
we do not
anticipate
having
difficulty converting
our assets
to cash should
our liquidity
needs ever
exceed our
immediately
available
sources of
cash.
Our structured
RMBS portfolio
also consists
entirely of
governmental
agency securities,
although
they typically
do not trade
with comparable
bid / ask
spreads as
PT RMBS.
However, we anticipate
that we would
be able to
liquidate
such securities
readily, even in
distressed
markets,
although
we would
likely do
so at prices
below where
such securities
could be sold
in a more
stable market.
To enhance our liquidity
even
further, we may
pledge a
portion of
our structured
RMBS as
part of a
repurchase
agreement
funding,
but retain
the cash in
lieu of acquiring
additional
assets.
In this way
we can, at
a modest
cost, retain
higher levels
of cash on
hand and
decrease
the likelihood
we will
have to
sell assets
in a distressed
market in
order to
raise cash.

Our strategy

for hedging
our funding
costs typically
involves
taking short
positions in
interest
rate futures,
treasury
futures,
interest
rate
swaps, interest
rate swaptions
or other
instruments.
When the
market causes
these short
positions
to decline
in value we
are required
to
meet margin
calls with
cash.
This can
reduce our
liquidity position
to the extent
other securities
in our portfolio
move in price
in such a
way
that we do
not receive
enough cash
via margin
calls to
offset the derivative
related margin
calls. If
this were
to occur
in sufficient
magnitude,
the loss of
liquidity
might force
us to reduce
the size
of the levered
portfolio,
pledge additional
structured
securities
to raise
funds or
risk operating
the portfolio
with less
liquidity.
41

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.

37
agreement
Table of Contents
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
repo transaction
basis. Throughout
the six months
ended
June 30,
2022,
2023, haircuts on
our pledged
collateral
remained
stable and
as of June
30, 2022,
2023, our weighted
average haircut
was
approximately
4.9% 4.6% of the
value of
our collateral.
collateral compared to 4.5% as of December 31, 2022.

TBAs represent

a form of
off-balance
sheet financing
and are
accounted
for as derivative
instruments.
(See (See Note
4 to our
Financial
Statements
in this Form
10-Q for additional
details on
our TBAs).
Under certain
market conditions,
it may be
uneconomical
for us to
roll our
TBAs into
future months
and we may
need to take
or make physical
delivery
of the underlying
securities.
If we were
required to
take
physical delivery
to settle
a long TBA,
we would
have to fund
our total
purchase
commitment
with cash
or other
financing
sources and
our
liquidity
position could
be negatively
impacted.

Our TBAs

are also
subject to
margin requirements
governed
by the Mortgage-Backed
Securities
Division ("MBSD")
of the FICC
and
by our Master
Securities
Forward
Transaction
Agreements
(“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.
As discussed
earlier, we

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 June
30, 2022,
2023, we had cash
and cash equivalents
of $219.0
$198.2 million.
We generated
cash flows
of $361.2
$209.0 million from
principal
and interest
payments on
our RMBS
and had average
repurchase
agreements
outstanding
of $4,732.8
$3,779.8 million during
the six months
ended June
30, 2022.
42
2023.

As described

more fully
below, we may
also access
liquidity
by selling
our equity
or debt securities
in public
offerings or
private
placements.
Stockholders’

Stockholders’Equity

On August 4, 2020,October 29, 2021, we entered into the August 2020an equity distribution agreement (the “October 2021 Equity Distribution AgreementAgreement”) 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$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 27,493,6509,742,188 shares under the
August 2020 Equity Distribution Agreement for aggregate gross proceeds of approximately
$150.0 million, and net proceeds of
approximately $147.4 million, after commissions and fees,
prior to its termination in June 2021.
On January 20, 2021, we entered into the January 2021 Underwriting Agreement
with J.P. Morgan Securities LLC (“J.P.
Morgan”),
relating to the offer and sale of 7,600,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from
the Company pursuant to the January 2021 Underwriting Agreement at $5.20 per
share. In addition, we granted J.P. Morgan a 30-day
option to purchase up to an additional 1,140,000 shares of our common stock
on the same terms and conditions, which J.P. Morgan
exercised in full on January 21, 2021. The closing of the offering of 8,740,000 shares of our
common stock occurred on January 25,
2021, with proceeds to us of approximately $45.2 million, net of offering expenses.
On March 2, 2021, we entered into the March 2021 Underwriting Agreement with
J.P.
Morgan, relating to the offer and sale of
8,000,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from the Company pursuant to the
March 2021 Underwriting Agreement at $5.45 per share. In addition, we granted
J.P.
Morgan a 30-day option to purchase up to an
additional 1,200,000 shares of our common stock on the same terms and
conditions, which J.P. Morgan exercised in full on March 3,
2021. The closing of the offering of 9,200,000 shares of our common stock occurred on March
5, 2021, with proceeds to us of
approximately $50.0
million, net of offering expenses payable.
On June 22, 2021, we entered into 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 49,407,336 shares under the
June October 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately
$250.0 $151.8 million, and net proceeds of
approximately $246.2$149.3 million, after commissions and fees, prior to its termination in OctoberMarch 2023. 

 
2021.
On October 29, 2021,March 7, 2023, we entered into the October 2021an equity distribution agreement (the “March 2023 Equity Distribution
Agreement Agreement”) with fourthree 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
June 30, 2022, 2023 ,we issued a total of
15,835,700 4,757,953 shares under the October 2021March 2023 Equity Distribution Agreement for aggregate
gross proceeds of approximately  $78.3$48.1 million,
and net proceeds of approximately $77.0$47.4 million, after commissions and fees.
43
38
Table of Contents

Outlook

Economic Summary

The second

quarterregional banking crisis that emerged in March of
2022 2023 seems to have been contained by the various macro-prudential measures implemented by the Fed and U. S. Treasury.  As the perceived risk that the numerous rate increases by the Fed would not cause any problems that could not be contained, the market was
another transitional
period as
left to focus on the economic fundamentals. As a result, the outlook
for the economy
inflation
and monetary
policy changed
materially.
Inflationary
dataquickly reverted to where they were in early March before there were any signs of stress in the banking system.  The key elements of the outlook were persistently high core inflation, particularly what the Fed referred to as core services inflation excluding shelter costs, or “super core” inflation, likely driven by a strong and tight labor market.  Measures of super core inflation were persistently high and not falling in the second quarter, and most measures of the labor market implied wage pressures and strong employment would continue to buttress service-related inflation.  Inflation was
persistently high in Canada, the driver
United Kingdom and Europe, among other countries, in the second quarter. Because these economies are intertwined, central bank policy amongst these countries was working in parallel and their bond markets were highly correlated.  The breadth of these
developments.
Inflation
inflationary pressures across the globe and persistent efforts by the various central banks to contain inflation have impacted bond markets and the outlook for interest rates.

Risk sentiment across the U.S. and most of the globe was weak and precarious in the second quarter as markets expected tight financial conditions and elevated levels of interest rates for an extended period.  Exacerbating conditions further in the U.S.

began was a prolonged impasse over the debt ceiling between the Republican-controlled House of Representatives and the administration of President Biden.  The Secretary of the Treasury, Janet Yellen, anticipated the government would be unable to accelerate
during the
second quarter
function without an increase in its borrowing capacity by mid-June of
2021.
For several
months market
participants,
and especially
the Fed,
assumed that
inflation
would prove
transitory
as it was
assumed
temporary
supply chain
constraints
caused by
COVID-19
were the cause
and that
these constraints
would fade
2023.  The tension mounted as the effects
two sides slowly worked towards a compromise and peaked in late May before a settlement was reached. In the late stages of COVID-19
itself declined
over time.
the stand-off, risk sentiment across all markets deteriorated, including the Agency RMBS market, the market the Company invests in exclusively.

Once a settlement was reached between the Republican leadership in the House of Representatives and the Biden administration, risk sentiment in the markets quickly improved.  However, while the risk of a government shutdown, or worse, was averted, the economic data did not change.  Public comments by Fed officials as well as other central bankers remained very hawkish as inflation measures remained persistently high, labor markets remained very strong and economic activity appeared very resilient to Fed rate increases.  The sub-components

of inflation
exhibiting
Fed increased the largest
increases
were items
likelyFed Funds rate by 25 bps in early May and, while they did not do so again at their June meeting, they strongly signaled to
be affected
the market that they anticipated hiking again two more times by the effects
end of
COVID-19
the year.

Economic data released the first few days of July was very strong, especially labor market data, and public comments by Fed officials were extremely hawkish, leading the markets to react accordingly.  More recent data seems to indicate inflation and labor market tightness are showing early signs of softening and the cumulative rate increases by the Fed may be finally impacting the economy.

While the regional banking crisis was contained by effective macro-prudential policies implemented by the Fed and U.S. Treasury, banks that failed were taken over by the FDIC and their assets were liquidated.  The banks had substantial Agency RMBS portfolios.  The process of liquidating approximately $113 billion of various securities began on April 18, 2023, and continued throughout the second quarter of 2023 and into the third quarter. 

Interest Rates

The Fed continues to raise interest rates in an effort to slow persistently high core inflation.  As the market senses the Fed will have to increase overnight rates more, and potentially leave them high for an extended period, yields on U.S. Treasuries have increased as well.  Specifically, yields of shorter maturity U.S. Treasuries increased more than longer maturity U.S. Treasuries, reflecting the need for higher overnight rates in the near term and the likelihood the Fed would ultimately be successful in containing inflation, such that longer maturity U.S. Treasury yields increased far less.  This process led the U.S. Treasury curve to continue to invert. The yield spread between the 2-year U.S. Treasury and the 10-year U.S. Treasury reached a cycle peak of -1.084% in early July.  Yields on the supply

2-year U.S. Treasury peaked at just under 5% in early July after dropping to less than 3.80% in April.  The 2-year U.S. Treasury yield reached 5.073% in early March of labor,2023, just before the regional banking crisis emerged.

Prior to the developments described above, futures markets were pricing terminal Fed Funds rates slightly above then current levels with several rate decreases throughout the balance of 2023 and beyond.  As of June 30, 2023, the futures markets were pricing a terminal rate peaking at 5.41% in late 2023 and no rate decreases in 2023.

39
Table of Contents

Mortgage rates available to borrowers for Agency RMBS were once again more stable during the second quarter than U.S. Treasury yields.  The Mortgage Bankers Association 30-year survey rate averaged 6.62% for the second quarter, with a high of 6.91% and a low of 6.30% for the quarter.  The second quarter is typically the seasonal peak for housing activity and, with rates still generally far above levels available to borrowers a year or lack

thereofmore ago, refinancing activity during the second quarter remained very low versus historical norms and remains close to the lowest level observed since the year 2000.

The Agency RMBS Market 

The Agency RMBS market generated a total return of -0.5% for the second quarter of 2023.  However, the sector outperformed comparable duration SOFR swaps by 1.0% for the second quarter.  Performance for the quarter benefited from reduced rate volatility.  Performance across the 30-year Agency RMBS sector, where essentially all of the Company’s capital is invested, versus comparable duration SOFR swaps was even better than the Agency RMBS market as a whole, and lower coupon securities outperformed intermediate and higher coupon securities. 

The Agency RMBS sector underperformed investment grade and sub-investment grade corporates both on an absolute and relative basis (to comparable duration swaps) for the second quarter.  Performance versus most other sectors of the domestic fixed income markets varied, outperforming higher credit sectors and underperforming lower credit sectors. 

The FDIC liquidated the assets of two failed banks commencing on April 18, 2023, including approximately $61 billion of Agency RMBS assets, in

this case.
By early
many cases securities very similar to the securities held by the Company.  As of July 27, 2023, the FDIC has liquidated approximately 80% of the Agency RMBS holdings seized from these banks.  The liquidations had a far more muted impact on the performance of the Agency RMBS market than feared when the auction process was announced, as evidenced by the return figures described above.  Agency RMBS performance was particularly strong once the debt ceiling impasse was settled in late May, as the sector generated excess returns over comparable duration SOFR swaps of 0.6%.

Recent Legislative and Regulatory Developments

In response to the deterioration in the fourth

quarter of
2021markets for U.S. Treasuries, Agency RMBS and other mortgage and fixed income markets resulting from the
Fed formally
dropped their
contention
that inflation
was “transitory.”
The Fed quickly
pivoted from
providing
monetary
policy accommodation
to constraining
inflation
and reducing
their balance
sheet.
The war
in the Ukraine,
which started
in late February
of 2022,
exacerbated
the inflationary
forces.
At
the beginning
impacts of the second
quarter
market participants
expected
year-over-year
inflation
readings
COVID-19 pandemic, the Fed implemented a program of quantitative easing. Through November of 2021, the Fed was committed to moderate
as baseline
effects would
kickpurchasing $80 billion of U.S. Treasuries and $40 billion of Agency RMBS each month. In November of 2021, it began tapering its net asset purchases each month, ended net asset purchases by early March of 2022, and ended asset purchases entirely in since
inflation
had surged
starting
inSeptember of 2022. On May 4, 2022, the second
quarter of
2021.
This did not
happen,
andFOMC announced a plan for reducing the monthly
core consumer
price index
(“CPI”) readings
for May and
Fed’s balance sheet. In June of 2022,
were quite
high – 0.6%
and 0.7%
respectively
– after
a 0.6% increase
for April
of 2022.
Inflation
was accelerating
during the
second quarter,
not moderating,
and becoming
broader based.
Further, survey-based
measures of
inflation
expectations
were rising
rapidly. The most
recent measures
of inflation
are the highest
in four decades.
While several
important
metrics of
economic activity
remain very
strong, particularly
hiring in
the labor
market and
the unemployment
rate, other
measures have
softened.
In particular,
interest rate
sensitive
sectors of
the economy, such
as the housing
market and
large
consumer goods
such as sales
of cars and
light trucks,
have declined
from peak
levels seen
earlier in
the year. The
stock markets
in the
U.S. and
abroad have
declined materially
so far in
2022 and
most broad
equity indices
are down
between 10%
and 30% year
to date in
U.S. dollar
terms.
With the
Fed in the
midst of an
accelerated
tightening
cycle the
dollar has
strengthened
against most
major currencies,
such as the
Euro, Yen, Yuan and most
emerging
market currencies.
Interest
Rates
With inflation
accelerating
to the highest
level since
the early
1980s and
accordance with this plan, the Fed intent
on taking
the Fed Funds
rate to levels
well
above their
presumptive
“neutral”
rate of 2.50%
to 2.75%,
interest rates
increased
further during
the second
quarter.
The yield
on the 10-
year U.S.
Treasury Note
came within
a few basis
points of
3.50% on
June 14,
2022,
a few days
after the
May CPI was
released.
That
same day,
the yield
on the 2-year
U.S. Treasury
Note reached
3.43%.
Yields on both
benchmark
treasuries
declined modestly
over the
balance of
the quarter
and into
the third
quarter of
2022.
The Fed reacted
quickly as
these developments
unfolded
and raised
the Fed
Funds rate
by 50 basis
points on
May 4, 2022,
and 75
basis points
on June 15,
2022.
The Fed raised
the Fed Funds
rate by another
75 basis points
on July 27,
2022.
The market
expects the
Fed to continue
to raise
rates at
each remaining
meeting in
2022 and
for the Fed
Funds rate
to end the
year with
a target
range of 3.5%
-
3.75%.
This range
is clearly
above the
Fed’s long-term
neutral rate
– deemed
to be between
2.50% and
2.75%.
The Fed has
also
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.
44
This rapid
transition
from accommodation
to the extreme
removal of
policy accommodation
– to the
point of
a restrictive
policy stance
– has materially
changed the
outlook for
the economy.
The Fed’s policy
actions have
also been
matched by
most central
banks across
the globe,
and most
market participants
expect a global
recession
within a
year or so.
In the U.S.,
market participants
feel the
Fed will
succeed in
reducing
inflation,
albeit at
the cost of
a recession,
and as a
result the
U.S. Treasury
yield curve
has inverted.
Current
market
pricing in
the Fed Funds
futures market
indicate the
market expects
the Fed to
be cutting
rates as
early as the
first quarter
of 2023.
Accordingly, the
yield on the
2-year U.S.
Treasury Note
now exceeds
the yield
on the 10-year
U.S. Treasury
Note.
Incoming economic
data during
the second
quarter and
early third
quarter has
exacerbated
the yield
curve inversion.
It appears
the economy
is slowing
even
quicker than
feared, but
with inflation
so high it
does not
appear that
the Fed will
stop tightening.
Such conditions,
should they
persist, are
likely to
keep shorter
maturity
U.S. Treasuries
high – reflecting
increases
to the Fed
Funds rate
over the
near term
– relative
to longer
rates, which
reflect market
expectations
for inflation
to ultimately
be contained,
the economy
to slow and
the Fed to
eventually
lower the
Fed Funds
rate.
The Agency
RMBS Market
The Agency
RMBS market
generated
a negative
return of
3.9 % during
the second
quarter of
2022.
As interest
rates rose,
the
prospect
of the Fed
raising the
Fed Funds
rate well
above 3%
by year end
and the largest
RMBS investors
selling or
decreasing
their
exposure to
the sector, Agency
RMBS spreads
relative to
benchmark
interest
rates increased
to levels
just below
those observed
in March
of 2020.
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
are experiencing
declines
in
reserves/deposits)
and large
money managers
(which see
other sectors
of the fixed
income markets
as more attractive
or are experiencing
out-flows
in their
assets under
management
and selling
assets across
all of their
holdings),
are collectively
causing demand
for Agency
RMBS to
decline materially
and driving
the spread
widening.
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,
though this
trend has
reversed
in the
third quarter.
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 further
weaken if
the economies
do indeed
contract.
As a result,
the relative
performance
of
Agency RMBS,
while negative
in absolute
terms, has
been better
than most
sectors of
the fixed
income markets.
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.
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
as
investors
liquidated
investments
in response
to the economic
crisis resulting
from the
actions to
contain and
minimize the
impacts of
the
COVID-19
pandemic,
on the morning
of Monday, March
23, 2020,
the Fed announced
a program
to acquire
U.S. Treasuries
and Agency
RMBS in
the amounts
needed to
support smooth
market functioning.
With these
purchases,
market conditions
improved
substantially.
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 $17.5 billion
of Agency
RMBS each
month,
with those
numbers expected
month. On September 21, 2022, the FOMC announced the Fed’s decision to double
in September
of 2022 to
continue reducing the balance sheet by a maximum
of $60 billion
of U.S.
Treasuries and
$35 $35 billion
of
Agency RMBS
each per month.
45

On December

27, 2020,
former President
Trump signed
into law
an additional
$900 billion
coronavirus
aid package
as part of
January 29, 2021, the
Consolidated
Appropriations
Act, 2021,
providing
Center for extensions
of many of
Disease Control and Prevention issued guidance extending eviction moratoriums for covered persons put in place by the CARES
Act policies
and programs
as well as
additional
relief. On
January 29,
2021, the
CDC issued
guidance extending
eviction moratoriums
for covered
persons through
March 31,
2021. The
FHFA subsequently
extended
the foreclosure
moratorium
begun under
the CARES
Act for loans
backed by
Fannie Mae
and Freddie
Mac
the Enterprisesand the eviction
moratorium
for real
estate owned
by Fannie
Mae and Freddie
Mac the Enterprisesuntil
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.
Following
Foreclosure activity has risen since the end of
this limitation,
U.S. the moratorium, with foreclosure
starts for
in the first
half of 2022
were2023 up
153% 13% and
down 1% 185% from
the comparable
periods in
2021
2022 and 2020,
2021, respectively, and
at 41%106% and 54% of
the 10-year
historic average
for the comparable period 5-year and 10-year historic averages, respectively.

40
period.
In January
2019, the
Trump administration
made statements
Table of its plans
Contents
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 the Enterpriseswere
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 the Enterprisesbeing
privatized
and represents
the first
concrete
step on the
road to GSE
Enterprise reform.
On June 30,
  In December 2020, the
FHFA released
a proposed
final rule on a
new regulatory
framework
for the GSEs
Enterpriseswhich seeks
to implement
both a risk-based
capital framework
and minimum
leverage
capital
requirements.
The final
rule on the
new capital
framework
for On January 14, 2021, 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
Enterprisesto 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
Enterprise has common
equity Tier
1 capital
of at least
3% of its
assets, (ii)
the GSEs
Enterpriseswill comply
with the
FHFA’s regulatory capital
framework,
(iii) higher-risk
single-family
mortgage
acquisitions
will be
restricted
to
then current levels,
and (iv)
the U.S.
Treasury and
the FHFA will
establish
a timeline
and process
for future
GSE Enterprise reform.
However, no definitive
proposals or
legislation
have been
released
or enacted
with respect
to ending
the conservatorship,
unwinding
the GSEs,
Enterprises, or materially
reducing
the roles
of the GSEs
Enterprises in the U.S.
mortgage
market. On
September
14, 2021,
the U.S.
Treasury and
the FHFA suspended
certain
policy provisions
in the January
agreement,
including
limits on
loans acquired
for cash
consideration,
multifamily
loans, loans
with higher
risk characteristics
and second
homes and
investment
properties.
On February
25, 2022,
the FHFA published
a final rule,
effective as
of
April 26,
2022, amending
the GSEEnterprise capital
framework
established
in December
2020 by, among
other things,
replacing
the fixed
leverage
buffer equal
to 1.5% of
a GSE’s an Enterprise’s adjusted
total assets
with a dynamic
leverage
buffer equal
to 50% of
a GSE’s an Enterprise’s stability
capital buffer,
reducing
the risk weight
floor from
10% to 5%,
and removing
the requirement
that the
GSEs Enterprises must
apply an overall
effectiveness
adjustment
to their
credit risk
transfer
exposures.
On June 14,
2022, the
GSEs Enterprises announced
that they
will would each
charge a
50 bps fee
for
commingled
securities
issued on
or after
July 1, 2022
to cover
the additional
capital required
for such
securities
under the
GSE Enterprise capital
framework.
Industry
groups have
expressed
framework, which was subsequently reduced on January 19, 2023 to 9.375 bps for commingled securities issued on or after April 1, 2023 to address industry concern that
this poses
the fee posed a risk to the
fungibility
of the Uniform
Mortgage-Backed
Security
(“UMBS”),
which could
and negatively
impact impacted liquidity
and pricing
in the market
for
TBA securities.

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, which was adopted on December 16, 2022.  The final rule, which went into effect on February 27, 2023, sets benchmark SOFR rates to replace overnight, one-month, three-month, six-month and 12-month LIBOR contracts and provides mechanisms for converting most existing LIBOR contracts, including Agency RMBS, to SOFR no later than June 30, 2023. The last remaining LIBOR bank panel ended June 30, 2023.  Overnight and 12-month U.S. dollar LIBOR settings have permanently ceased, and 1-, 3- and 6-month U.S. dollar LIBOR will continue to be calculated using a synthetic methodology through September 2024.

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:

41
Table of Contents

Effects on our Assets

A change in or elimination of the guarantee structure of Agency RMBS may increase our costs (if, for example, guarantee fees increase) or require us to change our investment strategy altogether. For example, the elimination of the guarantee structure of Agency RMBS may cause us to change our investment strategy to focus on non-Agency RMBS, which in turn would require us to significantly increase our monitoring of the credit risks of our investments in addition to interest rate and prepayment risks.

If prepayment rates are relatively low (due, in part, to the refinancing problems described above), lower long-term interest rates can increase the value of our Agency RMBS. This is because investors typically place a premium on assets with coupon/yields that are higher than coupon/yields available in the market. To the extent such securities pre-pay slower than would otherwise be the case, we benefit from an above market coupon/yield for longer, enhancing the return from the security. Although lower long-term interest rates may increase asset values in our portfolio, we may not be able to invest new funds in similarly yielding assets.

If prepayment levels increase, the value of any of our Agency RMBS that are carried at a premium to par that are affected by such prepayments may decline. This is because a principal prepayment accelerates the effective term of an Agency RMBS, which would shorten the period during which an investor would receive above-market returns (assuming the yield on the prepaid asset is higher than market yields). Also, prepayment proceeds may not be able to be reinvested in similar-yielding assets. Agency RMBS backed by mortgages with high interest rates are more susceptible to prepayment risk because holders of those mortgages are most likely to refinance to a lower rate. If prepayment levels decrease, the value of any of our Agency RMBS that are carried at a discount to par that are affected by such prepayments may increase. This is because a principal prepayment accelerates the effective term of an Agency RMBS, which would shorten the timeframe over which an investor would receive the principal of the underlying loans. Agency RMBS backed by mortgages with low interest rates are less susceptible to prepayment risk because holders of those mortgages are less likely to refinance to a higher rate. IOs and IIOs, however, may be the types of Agency RMBS most sensitive to increased prepayment rates. Because the holder of an IO or IIO receives no principal payments, the values of IOs and IIOs are entirely dependent on the existence of a principal balance on the underlying mortgages. If the principal balance is eliminated due to prepayment, IOs and IIOs essentially become worthless. Although increased prepayment rates can negatively affect the value of our IOs and IIOs, they have the opposite effect on POs. Because POs act like zero-coupon bonds, meaning they are purchased at a discount to their par value and have an effective interest rate based on the discount and the term of the underlying loan, an increase in prepayment rates would reduce the effective term of our POs and accelerate the yields earned on those assets, which would increase our net income.

Higher long-term rates can also affect the value of our Agency RMBS.  As long-term rates rise, rates available to borrowers also rise.  This tends to cause prepayment activity to slow and extend the expected average life of mortgage cash flows.  As the expected average life of the mortgage cash flows increases, coupled with higher discount rates, the value of Agency RMBS declines.  Some of the instruments we use to hedge our Agency RMBS assets, such as interest rate futures, swaps and swaptions, are stable average life instruments.  This means that to the extent we use such instruments to hedge our Agency RMBS assets, our hedges may not adequately protect us from price declines, and therefore may negatively impact our book value.  It is for this reason we use interest only securities in our portfolio. As interest rates rise, the expected average life of these securities increases, causing generally positive price movements as the number and size of the cash flows increase the longer the underlying mortgages remain outstanding. This makes interest only securities desirable hedge instruments for pass-through Agency RMBS. 

The Agency RMBS market began to experience severe dislocations in mid-March 2020 as a result of the economic, health and market turmoil brought about by COVID-19. On March 23, 2020, the Fed announced that it would purchase Agency RMBS and U.S. Treasuries in the amounts needed to support smooth market functioning, which largely stabilized the Agency RMBS market, but ended these purchases in March 2022 and announced plans to reduce its balance sheet. The Fed’s continued reduction of its balance sheet could negatively impact our investment portfolio.

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.

42
Table of Contents

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 2017,

policymakers
announced
order to protect our net interest margin against increases in short-term interest rates, we may enter into interest rate swaps, which economically convert our floating-rate repurchase agreement debt to fixed-rate debt or utilize other hedging instruments such as Fed Funds and T-Note futures contracts or interest rate swaptions.

Summary

The regional banking crisis that LIBOR

willemerged in March of 2023 elicited a severe reaction in the financial markets as fear that accelerated rates increases by the Fed over the past year were beginning to have very adverse effects on some sectors of the economy.  The Fed and U.S. Treasury were very responsive to these developments and the damage was quickly contained by effective macro-prudential policy.  By late April, market focus began to shift away from the prospects of contagion from a couple of high-profile bank failures to persistently high inflation and an economy that appeared to be replaced
by December
31, 2021.
The directive
far more resilient to rate increases than anticipated.  Market sentiment was spurred
also influenced by the fact
that
essentially all of the world’s major central banks are
uncomfortable
contributing
were also combatting persistently high inflation and in most cases were likely to continue with rate hikes as well.

As the LIBOR

panel given
regional banking crisis ebbed, the shortage
of underlying
transactions
on which
to base levels
market was faced with an impasse between congressional Republicans and the
liability
associated
Biden administration over the debt ceiling that hurt market sentiment in May before the impasse was resolved late in the month.  The Agency RMBS market in particular was negatively impacted as the spread between the Agency RMBS current coupon and the 5-year U.S. Treasury reached approximately 187.5 bps on May 26, 2023.

While the debt ceiling impasse was resolved before the government ran out of borrowing capacity and risk sentiment improved modestly, the economic data, particularly with submitting

an unfounded
level. However,
respect to core inflation and the ICE Benchmark
Administration,
labor market, did not improve at all.  The U.S. Treasury curve inversion peaked in its capacity
early July, interest rates continued to rise as administrator
of
USD LIBOR,
has announced
that it intends
to extend
publication
the 2-year U.S. Treasury approached 5% and the futures market priced in nearly two additional rate increases by the Fed with no rate decreases at all in 2023.

The Agency RMBS market generated a total return 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.
46
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
-0.5% for the selection
second quarter of replacement
indices2023.  However, the sector outperformed comparable duration SOFR swaps by 1.0% for
existing
LIBOR-
linked consumer
loans. Although
the rule
does not
mandatesecond quarter.  Performance for the
use of SOFR
as quarter benefited from reduced rate volatility.  Performance across 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.
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.
One-week and
two-month
U.S. dollar
LIBOR rates
phased out
on December
31, 2021,
but other
U.S. dollar
tenors may
continue until
June 30,
2023. We will
monitor the
emergence
of SOFR
carefully
as it appears
likely to
become the
new benchmark
for hedges
and a
range of
interest
rate investments.
Effective January
1, 2021,
Fannie Mae,
in alignment
with Freddie
Mac, extended
the timeframe
for its delinquent
loan buyout
policy
for Single-Family
Uniform Mortgage-Backed
Securities
(UMBS) and
Mortgage-Backed
Securities
(MBS) from
four consecutively
missed
monthly payments
to twenty-four
consecutively
missed monthly
payments (i.e.,
24 months
past due).
This new
timeframe
applied to
outstanding
single-family
pools and
newly issued
single-family
pools and
was first
reflected
when January
2021 factors
were released
on
the fourth
business day
in February
2021.
For Agency
RMBS investors,
when a delinquent
loan is bought
out of a
pool of mortgage
loans, the
removal of
the loan
from the pool
is the same
as a total
prepayment
of the loan.
The respective
GSEs anticipated,
however, that
delinquent
loans will
be repurchased
in
most cases
before the
24-month
deadline under
one of the
following
exceptions
listed below.
•
a loan that
is paid in
full, or
where the
related lien
is released
and/or the
note debt
is satisfied
or forgiven;
•
a loan repurchased
by a seller/servicer
under applicable
selling
and servicing
requirements;
•
a loan entering
a permanent
modification,
which generally
requires
it to be
removed from
the MBS.
During any
modification
trial
period, the
loan will
remain in
the MBS until
the trial
period ends;
•
a loan subject
to a short
sale or
deed-in-lieu
of foreclosure;
or
•
a loan referred
to foreclosure.
47
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
30-year 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
sector, where 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. As
the majority
all of the Company’s
capital is invested, versus comparable duration SOFR swaps was even better than the Agency RMBS
assets were
acquired
at market as a premium
to par, this will
tend to increase
whole, and lower coupon securities outperformed intermediate and higher coupon securities. 

As 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
During the
latter part
of the second
third quarter of
2022 inflation
data drove
a material
change in
Fed policy, interest
rates and
the outlook
for the economy.
Specifically, the
CPI for
May, released in
June, was
far above
market expectations.
Survey measures
of inflation
expectations,
released
on the same
day, surged to
multi-decade
highs. In
July,
the June
CPI reading
was released
and was again
well
above market
expectations.
Equally
troubling,
elevated inflation
readings
were very
broad based,
implying inflationary
pressures
have
clearly spread
from just
those sectors
most exposed
to COVID-19
related supply
constraints.
This was
the catalyst
for the Fed
to pivot
even more
forcefully
than they
did during
late 2021/early
2022,
unfolds, markets and the Fed
raised the
Fed Funds
rate by 200
basis points
collectively
at
the May, June and
July meetings.
The market
expects the
Fed are closely focused on incoming economic data as it pertains to continuing
raising the
Fed Funds
rate by another
100 basis
points by
year-end.
Increases
in the Fed
Funds rate
are likely
to affect economic
activity,
inflation and the Fed
has acknowledged
their actions
may lead to
a
recession.
Sectorslabor markets.  To the extent incoming data supports the notion that the effects of
the economy
most sensitive
to interest
rates – such
as housing
– have already
started to
slow and
other economic
indicators
have shown
evidence
500 plus bps of slowing,
such as new
orders and
production
levels for
rate increases are having the manufacturing
sector as
reported by
the
Institute
for Supply
Management.
Initial claims
for unemployment
in July of
2022 have
risen by
approximately
94,000 above
desired effect, the low
reading reported
in March of
2022.
49
The market
appears to
anticipate
the Fed will
be able to
contain inflation
and that
the result
will be a
contraction
in economic
growth.
This is reflected
in yields
for longer-term
U.S. Treasuries.
With the
Fed expected
to increase
the Fed
Fundslikely anticipate eventual rate
by another
100 basis
points or
more,
shorter maturity
U.S. Treasuries
remain elevated,
with the
yield on the
2-year U.S.
Treasury Note
yielding approximately
3.07% on August
3, 2022.
The combined
effect – more
increases
to the Fed
Funds rate,
inflation
to be ultimately
contained
decreases by the Fed
albeit potentially
at and the expense
U.S. Treasury curve should steepen, with yields on the front of a recession,
has
caused the
curve coming down.  This would likely be very supportive of Agency RMBS performance and the financial results of the Company.  To the extent the data is not supportive, the yield curve
to invert
whereby shorter
maturity U.S.
Treasuries yield
more
than long-term
U.S. Treasuries.
This condition
may persist
for the
balance of
2022 will likely remain very inverted and
into 2023.
The Agency
RMBS market
generated
negative returns
for the second
quarter (-3.9%)
and year-to-date
(-8.8%),
and such returns
were lower
than comparable
duration U.S.
Treasuries by
1.20% and
2.3%, respectively.
During June
of 2022,
spreads to
comparable
duration U.S.
Treasuries were
near the
extreme levels
observed
in March of
2020 when
the markets
experienced
the extreme
turbulence
in the early
days of the
COVID-19 pandemic
that triggered
unprecedented
intervention
in the market
by the Fed.
In spite of
this poor
performance,
Agency RMBS
actually delivered
better returns
than most
sectors of
the fixed
income markets
during the
second quarter
and
first six
months of
2022.
For this
reason, returns
to the sector
may remain
low as the
largest participants
in the sector
– the Fed
via
quantitative
easing, now
quantitative
tightening,
and large
banks and
money managers
– refrain
from increasing
their investments
in the
sector.
However, if the
economy does
enter into
a recession
the sector
could outperform
other sectors
owing to
its lack of
credit risk
and
the prospects
for lower
funding rates
and declining
longer-term
rates. Through
the early
days of the
third quarter
of 2022,
Agency RMBS
have performed
well and
most of the
widening
in spreads
that occurred
in June of
2022 has
reversed.
performance will be muted.

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, 2021.2022.

43
Table of Contents

Capital

Expenditures

At June 30,

2022,
2023, we had no
material commitments
for capital
expenditures.
Off-Balance
Sheet Arrangements
At June 30,
2022, we
did not have
any off-balance
sheet arrangements.

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.

We intend

to pay regular
monthly dividends
to our stockholders
and have
declared
the following
dividends
since the
completion
of our
IPO.

(in thousands, except per share amounts)

 

Year

 

Per Share Amount

  

Total

 

2013

 $6.975  $4,662 

2014

  10.800   22,643 

2015

  9.600   38,748 

2016

  8.400   41,388 

2017

  8.400   70,717 

2018

  5.350   55,814 

2019

  4.800   54,421 

2020

  3.950   53,570 

2021

  3.900   97,601 

2022

  2.475   87,906 

2023 - YTD(1)

  1.120   45,531 

Totals

 $65.770  $573,001 

(1)

On July 12, 2023, the Company declared a dividend of $0.16 per share to be paid on August 29, 2023. The effect of this dividend is included in the table above but is not reflected in the Company’s financial statements as of June 30, 2023.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the exposure to loss resulting from changes in market factors such as interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risks that we are exposed to are interest rate risk, prepayment risk, spread risk, liquidity risk, extension risk and counterparty credit risk.

Interest Rate Risk

Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.

Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income earned on interest-earning assets and the interest expense incurred in connection with our interest-bearing liabilities, by affecting the spread between our interest-earning assets and interest-bearing liabilities. Changes in the level of interest rates can also affect the rate of prepayments of our securities and the value of the RMBS that constitute our investment portfolio, which affects our net income, ability to realize gains from the sale of these assets and ability to borrow, and the amount that we can borrow against these securities.

IPO.
44
Table of Contents
50
(

We may utilize a variety of financial instruments in thousands, except per share amounts)

Year
Per Share
Amount
Total
2013
$
1.395
$
4,662
2014
2.160
22,643
2015
1.920
38,748
2016
1.680
41,388
2017
1.680
70,717
2018
1.070
55,814
2019
0.960
54,421
2020
0.790
53,570
2021
0.780
97,601
2022 - YTD
(1)
0.335
59,383
Totals
$
12.770
$
498,947
(1)
On July 13, 2022,order to limit the Company declaredeffects of changes in interest rates on our operations. The principal instruments that we use are futures contracts, interest rate swaps and swaptions. These instruments are intended to serve as an economic hedge against future interest rate increases on our repurchase agreement borrowings. Hedging techniques are partly based on assumed levels of prepayments of our Agency RMBS. If prepayments are slower or faster than assumed, the life of the Agency RMBS will be longer or shorter, which would reduce the effectiveness of any hedging strategies we may use and may cause losses on such transactions. Hedging strategies involving the use of derivative securities are highly complex and may produce volatile returns. Hedging techniques are also limited by the rules relating to REIT qualification. In order to preserve our REIT status, we may be forced to terminate a dividendhedging transaction at a time when the transaction is most needed.

Our profitability and the value of $0.045 per share

our investment portfolio (including derivatives used for hedging purposes) may be adversely affected during any period as a result of changing interest rates, including changes in the forward yield curve.

Our portfolio of PT RMBS is typically comprised of adjustable-rate RMBS (“ARMs”), fixed-rate RMBS and hybrid adjustable-rate RMBS. We generally seek to acquire low duration assets that offer high levels of protection from mortgage prepayments provided that they are reasonably priced by the market. Although the duration of an individual asset can change as a result of changes in interest rates, we strive to maintain a hedged PT RMBS portfolio with an effective duration of less than 2.0. The stated contractual final maturity of the mortgage loans underlying our portfolio of PT RMBS generally ranges up to 30 years. However, the effect of prepayments of the underlying mortgage loans tends to shorten the resulting cash flows from our investments substantially. Prepayments occur for various reasons, including refinancing of underlying mortgages and loan payoffs in connection with home sales, and borrowers paying more than their scheduled loan payments, which accelerates the amortization of the loans.

The duration of our IO and IIO portfolios will vary greatly depending on the structural features of the securities. While prepayment activity will always affect the cash flows associated with the securities, the interest only nature of IOs may cause their durations to become extremely negative when prepayments are high, and less negative when prepayments are low. Prepayments affect the durations of IIOs similarly, but the floating rate nature of the coupon of IIOs (which is inversely related to the level of one month LIBOR) causes their price movements, and model duration, to be paidaffected by changes in both prepayments and one month LIBOR, both current and anticipated levels. As a result, the duration of IIO securities will also vary greatly.

Prepayments on August 29, 2022.

The effectthe loans underlying our RMBS can alter the timing of this dividendthe cash flows from the underlying loans to us. As a result, we gauge the interest rate sensitivity of our assets by measuring their effective duration. While modified duration measures the price sensitivity of a bond to movements in interest rates, effective duration captures both the movement in interest rates and the fact that cash flows to a mortgage related security are altered when interest rates move. Accordingly, when the contract interest rate on a mortgage loan is included
substantially above prevailing interest rates in the table above, but is not reflected inmarket, the Company’s financial statements
effective duration of securities collateralized by such loans can be quite low because of expected prepayments.

We face the risk that the market value of our PT RMBS assets will increase or decrease at different rates than that of our structured RMBS or liabilities, including our hedging instruments. Accordingly, we assess our interest rate risk by estimating the duration of our assets and the duration of our liabilities. We generally calculate duration using various third party models. However, empirical results and various third party models may produce different duration numbers for the same securities.

The following sensitivity analysis shows the estimated impact on the fair value of our interest rate-sensitive investments and hedge positions as of June 30, 2022.

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET
RISK
Market risk
2023 and December 31, 2022, assuming rates instantaneously fall 200 bps, fall 100 bps, fall 50 bps, rise 50 bps, rise 100 bps and rise 200 bps, adjusted to reflect the impact of convexity, which is the exposure
to loss resulting
from changes
in market
factors such
as interest
rates, foreign
currency exchange
rates,
commodity
prices and
equity prices.
The primary
market risks
that we
are exposed
to are interest
rate risk,
prepayment
risk, spread
risk,
liquidity
risk, extension
risk and
counterparty
credit risk.
Interest
Rate Risk
Interest
rate risk
is highly
sensitive
to many factors,
including
governmental
monetary
and tax
policies,
domestic
and international
economic and
political
considerations
and other
factors beyond
our control.
Changes in
measure of the general
level of interest
rates can
affect our
net interest
income, which
is the difference
between the
interest income
earned on
interest-earning
assets and
the interest
expense incurred
in connection
with our
interest-bearing
liabilities,
by affecting
the
spread between
our interest-earning
assets and
interest-bearing
liabilities.
Changes in
the level
of interest
rates can
also affect
the rate
of
prepayments
sensitivity of our securities
hedge positions and Agency RMBS’ effective duration to movements in interest rates. We have a negatively convex asset profile and a linear to slightly positively convex hedge portfolio (short positions). It is not uncommon for us to have losses in both directions.

All changes in value in the value

of the RMBS
that constitute
our investment
portfolio,
which affects
our net income,
ability to
realize gains
table below are measured as percentage changes from the
sale of these
assets investment portfolio value and
ability to
borrow, and
net asset value at the amount
that we can
borrow against
these securities.
We may utilize
a variety
of financial
instruments
in order
to limit
the effects
of changes
inbase interest
rates on
our operations.
rate scenario. The principal
instruments
that we use
are futures
contracts,
base interest
rate swaps
and swaptions.
These instruments
are intended
to serve
as an economic
hedge against
futurescenario assumes interest
rate increases
on our repurchase
agreement
borrowings.
Hedging techniques
are partly
based on
assumed
levels of
prepayments
of our Agency
RMBS.
If prepayments
are slower
or faster
than assumed,
the life of
the Agency
RMBS will
be
longer or
shorter, which
would reduce
the effectiveness
of any hedging
strategies
we may use
and may cause
losses on
such
transactions.
Hedging strategies
involving
the use of
derivative
securities
are highly
complex
and may produce
volatile returns.
Hedging
techniques
are also
limited by
the rules
relating
to REIT
qualification.
In order
to preserve
our REIT
status, we
may be forced
to terminate
a hedging
transaction
at a time
when the
transaction
is most needed.
Our profitability
and the value
of our investment
portfolio
(including
derivatives
used for
hedging
purposes)
may be adversely
affected
during any
period as
a result
of changing
interest
rates, including
changes in
the forward
yield curve.
51
Our portfolio
of PT RMBS
is typically
comprised
of adjustable-rate
RMBS (“ARMs”),
fixed-rate
RMBS and
hybrid adjustable-rate
RMBS. We
generally
seek to acquire
low duration
assets that
offer high
levels of
protection
from mortgage
prepayments
provided
that they
are reasonably
priced by
the market.
Although
the duration
of an individual
asset can
change as
a result
of changes
in interest
rates, we
strive to
maintain a
hedged PT
RMBS portfolio
with an effective
duration
of less than
2.0. The
stated contractual
final maturity
of the
mortgage
loans underlying
our portfolio
of PT RMBS
generally ranges
up to 30
years. However,
the effect
of prepayments
of the
underlying
mortgage
loans tends
to shorten
the resulting
cash flows
from our
investments
substantially.
Prepayments
occur for
various
reasons,
including
refinancing
of underlying
mortgages
and loan
payoffs in
connection
with home
sales, and
borrowers
paying more
than
their scheduled
loan payments,
which accelerates
the amortization
of the loans.
The duration
of our IO
and IIO portfolios
will vary
greatly depending
on the structural
features
of the securities.
While prepayment
activity will
always affect
the cash
flows associated
with the
securities,
the interest
only nature
of IOs may
cause their
durations
to become
extremely
negative when
prepayments
are high,
and less negative
when prepayments
are low.
Prepayments
affect the
durations
of IIOs
similarly, but the
floating rate
nature of
the coupon
of IIOs (which
is inversely
related to
the level
of one month
LIBOR) causes
their price
movements,
and model
duration,
to be affected
by changes
in both
prepayments
and one month
LIBOR, both
current and
anticipated
levels.
As a result,
the duration
of IIO securities
will also
vary greatly.
Prepayments
on the loans
underlying
our RMBS
can alter
the timing
of the cash
flows from
the underlying
loans to us.
As a result,
we
gauge the
interest
rate sensitivity
of our assets
by measuring
their effective
duration.
While modified
duration
measures the
price sensitivity
of a bond
to movements
in interest
rates, effective
duration
captures
both the
movement in
interest
rates and
the fact
that cash
flows to
a
mortgage
related security
are altered
when interest
rates move.
Accordingly, when
the contract
interest
rate on a
mortgage
loan is
substantially
above prevailing
interest
rates in
the market,
the effective
duration
of securities
collateralized
by such loans
can be quite
low
because of
expected prepayments.
We face the
risk that
the market
value of our
PT RMBS
assets will
increase or
decrease
at different
rates than
that of our
structured
RMBS or
liabilities,
including
our hedging
instruments.
Accordingly, we
assess our
interest
rate risk
by estimating
the duration
of our assets
and the duration
of our liabilities.
We generally
calculate
duration
using various
third party
models.
However, empirical
results and
various
third party
models may
produce
different duration
numbers for
the same
securities.
The following
sensitivity
analysis
shows the
estimated
impact on
the fair
value of our
interest
rate-sensitive
investments
and hedge

Actual results

could differ
materially
from estimates,
especially
in the current
market environment.
To the extent that
these estimates
or other
assumptions
do not hold
true, which
is likely in
a period
of high price
volatility, actual
results will
likely differ
materially
from
projections
and could
be larger
or smaller
than the
estimates
in the table
below. Moreover,
if different
models were
employed in
the
analysis,
materially
different projections
could result.
Lastly, while
the table
below reflects
the estimated
impact of
interest rate
increases
and decreases
on a static
portfolio,
we may from
time to time
sell any of
our agency
securities
as a part
of the overall
management
of our
investment portfolio.

Interest Rate Sensitivity(1)

 
  

Portfolio

     
  

Market

  

Book

 

Change in Interest Rate

 

Value(2)(3)

  

Value(2)(4)

 

As of June 30, 2023

        

-200 Basis Points

  0.05%  0.43%

-100 Basis Points

  0.44%  3.94%

-50 Basis Points

  0.30%  2.67%

+50 Basis Points

  (0.41)%  (3.68)%

+100 Basis Points

  (1.11)%  (9.87)%

+200 Basis Points

  (2.75)%  (24.51)%

As of December 31, 2022

        

-200 Basis Points

  0.52%  4.18%

-100 Basis Points

  0.61%  4.92%

-50 Basis Points

  0.40%  3.25%

+50 Basis Points

  (0.43)%  (3.47)%

+100 Basis Points

  (1.04)%  (8.38)%

+200 Basis Points

  (2.51)%  (20.27)%

(1)

Interest rate sensitivity is derived from models that are dependent on inputs and assumptions provided by third parties as well as by our Manager, and assumes there are no changes in mortgage spreads and assumes a static portfolio. Actual results could differ materially from these estimates.

(2)

Includes the effect of derivatives and other securities used for hedging purposes.

(3)

Estimated dollar change in investment portfolio value expressed as a percent of the total fair value of our investment portfolio as of such date.

(4)

Estimated dollar change in portfolio value expressed as a percent of stockholders' equity as of such date.

In addition to changes in interest rates, other factors impact the fair value of our interest rate-sensitive investments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, in the event of changes in actual interest rates, the change in the fair value of our assets would likely differ from that shown above and such difference might be material and adverse to our stockholders.

Prepayment Risk

Because residential borrowers have the option to prepay their mortgage loans at par at any time, we face the risk that we will experience a return of principal on our investments faster than anticipated. Various factors affect the rate at which mortgage prepayments occur, including changes in the level of and directional trends in housing prices, interest rates, general economic conditions, loan age and size, loan-to-value ratio, the location of the property and social and demographic conditions. Additionally, changes to government sponsored entity underwriting practices or other governmental programs could also significantly impact prepayment rates or expectations. Generally, prepayments on Agency RMBS increase during periods of falling mortgage interest rates and decrease during periods of rising mortgage interest rates. However, this may not always be the case. We may reinvest principal repayments at a yield that is lower or higher than the yield on the repaid investment, thus affecting our net interest income by altering the average yield on our assets.

investment
portfolio.
46
Table of Contents
52
Interest Rate Sensitivity
(1)
Portfolio
Market
Book
Change

Spread Risk

When the market spread widens between the yield on our Agency RMBS and benchmark interest rates, our net book value could decline if the value of our Agency RMBS falls by more than the offsetting fair value increases on our hedging instruments tied to the underlying benchmark interest rates. We refer to this as "spread risk" or "basis risk." The spread risk associated with our mortgage assets and the resulting fluctuations in Interest Rate

Value
(2)(3)
Value
(2)(4)
fair value of these securities can occur independent of changes in benchmark interest rates and may relate to other factors impacting the mortgage and fixed income markets, such as actual or anticipated monetary policy actions by the Fed, market liquidity, or changes in required rates of return on different assets. Consequently, while we use futures contracts and interest rate swaps and swaptions to attempt to protect against moves in interest rates, such instruments typically will not protect our net book value against spread risk.

Liquidity Risk

The primary liquidity risk for us arises from financing long-term assets with shorter-term borrowings through repurchase agreements. Our assets that are pledged to secure repurchase agreements are Agency RMBS and cash. As of June 30, 2022

-200 Basis Points
(0.05)%
(0.41)%
-100 Basis Points
0.53%
4.10%
-50 Basis Points
0.37%
2.89%
+50 Basis Points
(0.89)%
(6.95)%
+100 Basis Points
(1.79)%
(13.92)%
+200 Basis Points
(8.83)%
(68.68)%
As2023, we had unrestricted cash and cash equivalents of December 31, 2021
-200 Basis Points
(2.01)%
(17.00)%
-100 Basis Points
(0.33)%
(2.76)%
-50 Basis Points
0.19%
1.59%
+50 Basis Points
(0.48)%
(4.04)%
+100 Basis Points
(1.64)%
(13.91)%
+200 Basis Points
(4.79)%
(40.64)%
(1)
Interest$198.3 million and unpledged securities of approximately $5.9 million (not including unsettled securities purchases or securities pledged to us) available to meet margin calls on our repurchase agreements and derivative contracts, and for other corporate purposes. However, should the value of our Agency RMBS pledged as collateral or the value of our derivative instruments suddenly decrease, margin calls relating to our repurchase and derivative agreements could increase, causing an adverse change in our liquidity position. Further, there is no assurance that we will always be able to renew (or roll) our repurchase agreements. In addition, our counterparties have the option to increase our haircuts (margin requirements) on the assets we pledge against repurchase agreements, thereby reducing the amount that can be borrowed against an asset even if they agree to renew or roll the repurchase agreement. Significantly higher haircuts can reduce our ability to leverage our portfolio or even force us to sell assets, especially if correlated with asset price declines or faster prepayment rates on our assets.

Extension Risk

The projected weighted average life and the duration (or interest rate

sensitivity sensitivity) of our investments is
derived based on our Manager's assumptions regarding the rate at which the borrowers will prepay the underlying mortgage loans. In general, we use futures contracts and interest rate swaps and swaptions to help manage our funding cost on our investments in the event that interest rates rise. These hedging instruments allow us to reduce our funding exposure on the notional amount of the instrument for a specified period of time.

However, if prepayment rates decrease in a rising interest rate environment, the average life or duration of our fixed-rate assets or the fixed-rate portion of the ARMs or other assets generally extends. This could have a negative impact on our results from models

operations, as our hedging instrument expirations are fixed and will, therefore, cover a smaller percentage of our funding exposure on our mortgage assets to the extent that their average lives increase due to slower prepayments. This situation may also cause the market value of our Agency RMBS and CMOs collateralized by fixed rate mortgages or hybrid ARMs to decline by more than otherwise would be the case while most of our hedging instruments would not receive any incremental offsetting gains. In extreme situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur realized losses.

Counterparty Credit Risk

We are dependent

exposed to counterparty credit risk relating to potential losses that could be recognized in the event that the counterparties to our repurchase agreements and derivative contracts fail to perform their obligations under such agreements. The amount of assets we pledge as collateral in accordance with our agreements varies over time based on inputsthe market value and
assumptions provided
by third parties
notional amount of such assets as well as by
our Manager,
and assumes
there are no
changes in
mortgage spreads
and assumes a
static portfolio.
Actual results
could differ
materially from
these estimates.
(2)
Includes the
effect of derivatives
and other securities
used for hedging
purposes.
(3)
Estimated dollar
change in investment
portfolio value
expressed as a
percent of
the total fair
value of our
investment portfolio
as of such date.
(4)
Estimated dollar
change in portfolio
value expressed
as a percent
of stockholders'
equity as of
such date.
In addition
to changes
in interest
rates, other
factors impact
the fair
value of our
interest
rate-sensitive
investments,
such as the
shape
of the yield
curve, market
expectations
as to future
interest
rate changes
and other
market conditions.
Accordingly, in
the event
of changes
in actual
interest
rates, the
change in
the fair
value of our
assets would
likely differ
from that
shown above
and such difference
might be
material and
adverse to
our stockholders.
Prepayment
Risk
Because residential
borrowers
have the
option to
prepay their
mortgage
loans at par
at any time,
we face the
risk that
we will
experience
a return
of principal
on our investments
faster than
anticipated.
Various factors
affect the
rate at which
mortgage
prepayments
occur, including
changes in
the level
of and directional
trends in
housing prices,
interest
rates, general
economic conditions,
loan age
and
size, loan-to-value
ratio, the
location
of the property
and social
and demographic
conditions.
Additionally, changes
to government
sponsored
entity underwriting
practices
or other
governmental
programs
could also
significantly
impact prepayment
rates or
expectations.
Generally, prepayments
on Agency
RMBS increase
during periods
of falling
mortgage
interest
rates and
decrease
during periods
of rising
mortgage
interest
rates. However,
this may not
always be
the case.
We may reinvest
principal
repayments
at a yield
that is lower
or
higher than
the yield
on the repaid
investment,
thus affecting
our net
interest
income by
altering
the average
yield on our
assets.
Spread Risk
When the
market spread
widens between
the yield
on our Agency
RMBS and
benchmark
interest rates,
our net book
value could
decline if
the value
of our Agency
RMBS falls
by more than
the offsetting
fair value
increases
on our hedging
instruments
tied to the
underlying
benchmark
interest
rates. We
refer to
this as "spread
risk" or "basis
risk." The
spread risk
associated
with our
mortgage
assets
and the resulting
fluctuations
in fair
value of these
securities
can occur
independent
of changes
in benchmark
interest
rates and
may relate
to other
factors impacting
the mortgage
and fixed
income markets,
such as actual
or anticipated
monetary
policy actions
by the Fed,
market liquidity,
or changes
in required
rates of
return on
different assets.
Consequently, while
we use futures
contracts
and interest
rate
swaps and
swaptions
to attempt
to protect
against moves
in interest
rates, such
instruments
typically
will not
protect our
net book
value
against spread
risk.
53
Liquidity
Risk
The primary
liquidity
risk for
us arises
from financing
long-term
assets with
shorter-term
borrowings
through repurchase
agreements.
Our assets
that are
pledged to
secure repurchase
agreements
are Agency
RMBS and
cash. As of
June 30,
2022, we
had unrestricted
cash and cash
equivalents
of $219.0
million and
unpledged
securities
of approximately
$14.7 million
(not including
unsettled
securities
purchases
or securities
pledged
to us) available
to meet margin
calls on our
repurchase
agreements
and derivative
contracts,
and for other
corporate
purposes.
However, should
the value
of our Agency
RMBS pledged
as collateral
or the value
of our derivative
instruments
suddenly decrease,
margin calls
relating
to our repurchase
and derivative
agreements
could increase,
causing an
adverse change
in our
liquidity
position.
Further, there
is no assurance
that we will
always be
able to renew
(or roll)
our repurchase
agreements.
In addition,
our
counterparties
have the
option to
increase our
haircuts (margin
requirements)
on the assets
we pledge
against repurchase
agreements,
thereby reducing
the amount
that can
be borrowed
against an
asset even
if they agree
to renew
or roll the
repurchase
agreement.
Significantly
higher haircuts
can reduce
our ability
to leverage
our portfolio
or even force
us to sell
assets, especially
if correlated
with asset
price declines
or faster
prepayment
rates on our
assets.
Extension
Risk
The projected
weighted
average life
and the duration
(or interest
rate sensitivity)
of our investments
is based on
our Manager's
assumptions
regarding
the rate
at which
the borrowers
will prepay
the underlying
mortgage
loans. In
general,
we use futures
contracts
and
interest
rate swaps
and swaptions
to help manage
our funding
cost on our
investments
in the event
that interest
rates rise.
These hedging
instruments
allow us
to reduce
our funding
exposure
on the notional
amount of
the instrument
for a specified
period of
time.
However, if prepayment
rates decrease
in a rising
interest
rate environment,
the average
life or
duration
of our fixed-rate
assets or
the
fixed-rate
portion of
the ARMs or
other assets
generally
extends.
This could
have a negative
impact on
our results
from operations,
as our
hedging instrument
expirations
are fixed
and will,
therefore,
cover a smaller
percentage
of our funding
exposure
on our mortgage
assets to
the extent
that their
average lives
increase due
to slower
prepayments.
This situation
may also
cause the
market value
of our Agency
RMBS and
CMOs collateralized
by fixed rate
mortgages
or hybrid
ARMs to decline
by more than
otherwise
would be
the case while
most
of our hedging
instruments
would not
receive any
incremental
offsetting
gains. In
extreme situations,
we may be
forced to
sell assets
to
maintain adequate
liquidity, which
could cause
us to incur
realized losses.
Counterparty
Credit Risk
We are exposed
to counterparty
credit risk
relating
to potential
losses that
could be recognized
in the event
that the
counterparties
to
our repurchase
agreements
and derivative
contracts
fail to perform
their obligations
under such
agreements.
The amount
of assets we
pledge as
collateral
in accordance
with our
agreements
varies over
time based
on the market
value and
notional amount
of such assets
as
well as the
value of our
derivative
contracts.
In the event
of a default
by a counterparty,
we may not
receive payments
provided
for under
the terms
of our agreements
and may have
difficulty obtaining
our assets
pledged as
collateral
under such
agreements.
Our credit
risk
related to
certain derivative
transactions
is largely
mitigated
through
daily adjustments
to collateral
pledged based
on changes
in market
value and
we limit
our counterparties
to registered
central clearing
exchanges
and major
financial
institutions
with acceptable
credit ratings,
monitoring
positions
with individual
counterparties
and adjusting
collateral
posted as
required.
However, there
is no guarantee
our efforts
to manage
counterparty
credit risk
will be successful
and we could
suffer significant
losses if unsuccessful.

unsuccessful.
47
54Table of Contents

ITEM 4. CONTROLS

AND PROCEDURES

Evaluation

of Disclosure
Controls
and Procedures

As of the

end of the
period covered
by this report
(the (the “evaluation
date”), we
carried out
an evaluation,
under the
supervision
and with
the participation
of our management,
including
our Chief
Executive
Officer (the
“CEO” “CEO”) and
Chief Financial
Officer (the
“CFO” “CFO”),
of the
effectiveness
of the design
and operation
of our disclosure
controls
and procedures,
as defined
in Rule 13a-15(e)
under the
Exchange
Act.
Based on
this evaluation,
the CEO and
CFO concluded
our disclosure
controls and
procedures,
as designed
and implemented,
were
effective as
of the evaluation
date (1)
in ensuring
that information
regarding
the Company
is accumulated
and communicated
to our
management,
including
our CEO
and CFO,
by our Manager's employees,
as appropriate
to allow
timely decisions
regarding
required
disclosure
and
(2) in providing
reasonable
assurance
that information
we must disclose
in our periodic
reports
under the
Exchange
Act is recorded,
processed,
summarized
and reported
within the
time periods
prescribed
by the SEC’s
rules and
forms.

Changes

in Internal
Control over
Financial
Reporting

There were

no significant
changes in
the Company’s
internal
control
over financial
reporting
that occurred
during the
Company’s most
recent fiscal
quarter that
have materially
affected, or
are reasonably
likely to
materially
affect, the
Company’s internal
control over financial reporting.

financial
reporting.
48
Table of Contents
55

PART II.OTHER

INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

We are not party to any material pending legal proceedings as described in Item 103

of Regulation S-K.

ITEM 1A.

RISK FACTORS

A description of certain factors that may affect our future results and risk factors

is set forth in our Annual Report on Form 10-K for
the year ended December 31, 2021. As of June 30, 2022, there have been no material
changes in our risk factors from those set forth
in our Annual Report on Form 10-K for the year ended December 31, 2021.
2022. As of June 30, 2023, there have been no material changes in our risk factors from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2022.

ITEM 2. UNREGISTERED

SALES OF
EQUITY SECURITIES
AND USE
OF PROCEEDS

The Company did not have any unregistered sales of its equity securities during the

three months ended June 30, 2022.
2023.

The table below presents the Company’s share repurchase activity for the three months

ended June 30, 2022.
Shares Purchased
Maximum Number
Total Number
Weighted-Average
as Part of Publicly
of Shares That May Yet
of Shares
Price Paid
Announced
Be Repurchased Under
Repurchased
(1)
Per Share
Programs
the Authorization
April 1, 2022 - April 30, 2022
-
$
-
-
17,699,305
May 1, 2022 - May 31, 2022
-
-
-
17,699,305
June 1, 2022 - June 30, 2022
879,311
2.53
876,299
16,823,006
Totals / Weighted Average
879,311
$
2.53
876,299
16,823,006
(1)
Includes shares
of the Company’s
common stock
acquired by
the Company
in connection
with the satisfaction
of tax withholding
obligations on
vested employment
related awards
under equity
incentive plans.
These repurchases
do not reduce
the number of
shares available
under the stock
repurchase
program authorization.
2023.

          

Shares Purchased

  

Maximum Number

 
  

Total Number

  

Weighted-Average

  

as Part of Publicly

  

of Shares That May Yet

 
  

of Shares

  

Price Paid

  

Announced

  

Be Repurchased Under

 
  

Repurchased(1)

  

Per Share

  

Programs

  

the Authorization

 

April 1, 2023 - April 30, 2023

  27,551  $10.99   -   4,928,350 

May 1, 2023 - May 31, 2023

  -   -   -   4,928,350 

June 1, 2023 - June 30, 2023

  604   10.07   -   4,928,350 

Totals / Weighted Average

  28,155  $10.97   -   4,928,350 

(1)

Includes 28,115 shares of the Company’s common stock acquired by the Company in connection with the satisfaction of tax withholding obligations on vested employment related awards under equity incentive plans. These repurchases do not reduce the number of shares available under the stock repurchase program authorization.

ITEM 3.

DEFAULTS UPON SENIOR
SECURITIES

None.

ITEM 4.

MINE SAFETY
DISCLOSURES

Not Applicable.

ITEM 5.

OTHER INFORMATION

None.

49
None.
Table of Contents
56

ITEM 6. EXHIBITS

Exhibit No.

3.1

Articles of Amendment and Restatement of Orchid Island Capital, Inc. (filed as Exhibit 3.1 to the Company’s Registration Statement on Amendment No. 1 to Form S-11 (File No. 333-184538) filed on November 28, 2012 and incorporated herein by reference).

3.2

Certificate of Correction of Orchid Island Capital, Inc. (filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K filed on February 22, 2019 and incorporated herein by reference).

3.3Articles of Amendment to the Articles of Amendment and Restatement of the Company (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on August 30, 2022 and incorporated herein by reference).

3.4

Amended and Restated Bylaws of Orchid Island Capital, Inc. (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on December 13, 2022 and incorporated herein by reference).

4.1

Specimen Certificate of common stock of Orchid Island Capital, Inc. (filed as Exhibit 4.1 to the Company’s Registration Statement on Amendment No. 1 to Form S-11 (File No. 333-184538) filed on November 28, 2012 and incorporated herein by reference).

31.1

Certification of Robert E. Cauley, Chief Executive Officer and President of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2

Certification of George H. Haas, IV, Chief Financial Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1

Certification of Robert E. Cauley, Chief Executive Officer and President of the Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

32.2

Certification of George H. Haas, IV, Chief Financial Officer of the Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

Exhibit 101.INS

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.***

Exhibit 101.SCH

Inline XBRL Taxonomy Extension Schema Document ***

Exhibit 101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document***

Exhibit 101.DEF

Inline XBRL Additional Taxonomy Extension Definition Linkbase Document Created***

Exhibit 101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document ***

Exhibit 101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document ***

Exhibit 104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*

Filed herewith.

**

Furnished herewith.

***

Submitted electronically herewith.

†

Management contract or compensatory plan.

50
3.1
ArticlesTable ofAmendmentand Restatementof OrchidIsland Capital,Inc. (filedas Exhibit3.1 to theCompany’s Contents
3.2
3.3
4.1
31.1
31.2
32.1
32.2
Exhibit 101.INS XBRL
Inline XBRL Instance Document – the instance document does not appear
in the
Interactive Data File because its XBRL tags are embedded within the Inline XBRL
document.***
Exhibit 101.SCH XBRL
Taxonomy Extension Schema Document ***
Exhibit 101.CAL XBRL
Taxonomy Extension Calculation Linkbase Document***
Exhibit 101.DEF XBRL
Additional Taxonomy Extension Definition Linkbase Document Created***
Exhibit 101.LAB XBRL
Taxonomy Extension Label Linkbase Document ***
Exhibit 101.PRE XBRL
Taxonomy Extension Presentation Linkbase Document ***
Exhibit 104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
*
Filed herewith.
**
Furnished
herewith.
***
Submitted
electronically
herewith.
†
Management
contract
or compensatory
plan.
57

Signatures

Pursuant

to the requirements
of Section
13 or 15(d)
of the Securities
Exchange
Act of 1934,
as amended,
the registrant
has duly caused
this report
to be signed
on its behalf
by the undersigned,
thereunto
duly authorized.
Orchid Island Capital, Inc
.
Registrant
Date:
August 5, 2022
By:
/s/ Robert E. Cauley
Robert E. Cauley
Chief Executive Officer, President and Chairman of the Board
(Principal Executive Officer)
Date:
August 5, 2022
By:
/s/ George H. Haas, IV
George H. Haas, IV
Secretary, Chief Financial Officer, Chief Investment Officer and

Orchid Island Capital, Inc.

Registrant

Date:          July 28, 2023

By:

/s/ Robert E. Cauley

Robert E. Cauley

Chief Executive Officer, President and Chairman of the Board

(Principal Executive Officer)

Date:           July 28, 2023

By:

/s/ George H. Haas, IV

George H. Haas, IV

Secretary, Chief Financial Officer, Chief Investment Officer and

Director (Principal Financial and Accounting Officer)

51