Ellington Credit Co: Form 10-Q for the period ended Jun 30, 2022

In this Quarterly Report on Form 10-Q, except where the context suggests otherwise, "EARN," "we," "us," and "our" refer to Ellington Residential Mortgage REIT and its subsidiaries, our "Manager" refers to Ellington Residential Mortgage Management LLC, our external manager, and "Ellington" refers to Ellington Management Group, L.L.C. and its affiliated investment advisory firms.

Special Note Regarding Forward-Looking Statements

When used in this Quarterly Report on Form 10-Q, in future filings with the Securities and Exchange Commission, or the "SEC," or in press releases or other written or oral communications, statements which are not historical in nature, including those containing words such as "believe," "expect," "anticipate," "estimate," "project," "plan," "continue," "intend," "should," "would," "could," "goal," "objective," "will," "may," "seek," or similar expressions, are intended to identify "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, or the "Securities Act," and Section 21E of the Securities Exchange Act of 1934, as amended, or the "Exchange Act," and, as such, may involve known and unknown risks, uncertainties and assumptions.

Forward-looking statements are based on our beliefs, assumptions, and expectations of our future operations, business strategies, performance, financial condition, liquidity and prospects, taking into account all information currently available to us. These beliefs, assumptions, and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity, results of operations and strategies may vary materially from those expressed or implied in our forward-looking statements. The following factors are examples of those that could cause actual results to vary from our forward-looking statements: changes in interest rates and the market value of our securities; our use of and dependence on leverage; future changes with respect to the Federal National Mortgage Association, or "Fannie Mae," and Federal Home Loan Mortgage Corporation, or "Freddie Mac," and related events, including the lack of certainty as to the future roles of these entities and the U.S. Government in the mortgage market and changes to legislation and regulations affecting these entities; market volatility; changes in the prepayment rates on the mortgage loans underlying the securities we own and intend to acquire; changes in rates of default and/or recovery rates on our non-Agency assets; our ability to borrow to finance our assets; changes in government regulations affecting our business; our ability to maintain our exclusion from registration under the Investment Company Act of 1940, as amended, or the "Investment Company Act"; and risks associated with investing in real estate assets, including changes in business conditions and the general economy, such as those resulting from the economic effects related to the COVID-19 pandemic, and associated responses to the pandemic. These and other risks, uncertainties and factors, including the risk factors described under Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, could cause our actual results to differ materially from those projected or implied in any forward-looking statements we make. All forward-looking statements speak only as of the date on which they are made. New risks and uncertainties arise over time, and it is not possible to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Executive Summary

We are a Maryland real estate investment trust, or "REIT," formed in August 2012 that specializes in acquiring, investing in, and managing residential mortgage- and real estate-related assets. Our primary objective is to generate attractive current yields and risk-adjusted total returns for our shareholders by making investments that we believe compensate us appropriately for the risks associated with them. We seek to attain this objective by constructing and actively managing a portfolio consisting primarily of residential mortgage-backed securities, or "RMBS," for which the principal and interest payments are guaranteed by a U.S. government agency or a U.S. government-sponsored entity, or "Agency RMBS," and, to a lesser extent, RMBS that do not carry such guarantees, or "non-Agency RMBS," such as RMBS backed by prime jumbo, Alternative A-paper, mortgage loans that are not deemed "qualified mortgage," or "QM," loans under the rules of the Consumer Financial Protection Bureau, or "non-QM loans," mortgages on single-family-rental properties, manufactured housing, and subprime residential mortgage loans. We also may opportunistically acquire other types of mortgage- and real estate-related asset classes, such as commercial mortgage-backed securities, or "CMBS," residential mortgage loans, mortgage servicing rights, or "MSRs," and credit risk transfer securities, or "CRTs." We believe that being able to combine Agency RMBS with non-Agency RMBS and other mortgage- and real estate-related asset classes enables us to balance a range of mortgage-related risks.

We were initially formed through a strategic venture among affiliates of Ellington Management Group, L.L.C., an investment management firm and registered investment adviser with a 27-year history of investing in a broad spectrum of residential and commercial mortgage-backed securities, or "MBS," and related derivatives, with an emphasis on the RMBS market, and the Blackstone Tactical Opportunity Funds, or the "Blackstone Funds." We are externally managed and advised by our Manager, an affiliate of Ellington. Since our inception, the Blackstone Funds had held special non-voting membership interests in the holding company that owns our Manager. In August 2021, an Ellington affiliate purchased these special non-voting membership interests from the Blackstone Funds.

We use leverage in both our Agency and non-Agency RMBS strategies, although we expect leverage in our non-Agency strategy to be significantly lower. We have financed our RMBS exclusively through repurchase agreements, which we account for as collateralized borrowings. As of June 30, 2022, we had outstanding borrowings under repurchase agreements in the amount of $1.0 billion with 15 counterparties.

We have elected to be taxed as a REIT for U.S. federal income tax purposes. Accordingly, we generally will not be subject to U.S. federal income taxes on our taxable income that we distribute currently to our shareholders as long as we maintain our qualification as a REIT. We intend to conduct our operations so that neither we nor any of our subsidiaries is required to register as an investment company under the Investment Company Act of 1940, as amended, or the "Investment Company Act."

As of June 30, 2022, our book value per share was $9.07 as compared to $10.14 and $11.76 as of March 31, 2022 and December 31, 2021, respectively.

Trends and Recent Market Developments

Market Overview

• After increasing its target range for the federal funds rate by 0.25%, to 0.25%–0.50%, in March, the U.S. Federal Reserve, or the “Federal Reserve,” accelerated the pace of monetary policy tightening in the second quarter of 2022.

At its May meeting, the Federal Reserve raised the target range for the federal funds rate by 0.50%, to 0.75%–1.00%, citing elevated inflation that had been exacerbated by Russia’s invasion of Ukraine and by ongoing supply-chain disruptions. Additionally, the Federal Reserve announced plans for reducing the size of its balance sheet, whereby it would only reinvest principal payments that exceed monthly caps of $30.0 billion for Treasury securities and $17.5 billion for agency MBS, beginning in June. Those monthly caps would then increase in September to $60.0 billion and $35.0 billion, respectively.

At its June meeting, the Federal Reserve raised the target range for the federal funds rate by an additional 0.75%, to 1.50%–1.75%, which was its most aggressive interest rate hike since 1994, as inflation remained at historically high levels. The Federal Reserve stated that it “anticipates that ongoing increases in the target range will be appropriate,” and also reiterated the balance sheet reduction plan announced in May.

Similarly, other central banks globally also tightened their monetary policies during the second quarter.

• Interest rates continued to increase rapidly in the second quarter, reaching their highs for the quarter in mid-June before declining moderately going into quarter end. Overall, the 10-year U.S. Treasury yield rose by 67 basis points to 3.01%, quarter over quarter, while the 2-year U.S. Treasury yield increased by 62 basis points to 2.95%. Through the first half of 2022, the 10-year U.S. Treasury yield increased a cumulative 150 basis points, and the 2-year U.S. Treasury increased a cumulative 222 basis points. Meanwhile, interest rate volatility continued to surge, with the MOVE Index in mid-June reaching its highest point since the COVID-related market volatility of March 2020.
• Mortgage rates also continued to soar in the second quarter of 2022, in sympathy with the significant increase in interest rates. The Freddie Mac survey 30-year mortgage rate reached 5.81% on June 23rd, its highest level since November 2008, and ended the quarter at 5.70%, a quarter-over-quarter increase of 103 basis points. Through the first half of 2022, the Freddie Mac survey 30-year mortgage rate increased by 259 basis points, which was the largest 6-month increase since 1981. As a result, the Mortgage Bankers Association's Refinance Index continued to plummet, declining 42.5% between April 1st and July 1st, reaching its lowest level since December 2000. Fannie Mae 30-year MBS prepayments continued their sharp drop as well, declining from a CPR of 14.2 in March to 11.4 in April, 9.9 in May, and 9.3 in June, the lowest level since March 2019.

In addition to the sharp rise in mortgage rates, home prices continued to appreciate significantly in the first half of 2022. After increasing by 18.9% in 2021, the S&P CoreLogic Case-Shiller US National Home Price NSA Index rose an additional 9.8% during the first five months of 2022. As a result of higher mortgage rates and higher home prices, home affordability has declined significantly; the National Association of Realtors Housing Affordability Index declined 27.6% between January 1 and May 1 of 2022.

• LIBOR and SOFR rates also spiked in the second quarter. One-month LIBOR increased by 133 basis points to end the quarter at 1.79%, and three-month LIBOR increased by 132 basis points to 2.29%. In anticipation of additional interest rate increases by the Federal Reserve in the near term, the spread between one- and three-month LIBOR remained

wide, finishing the quarter at 50 basis points, virtually unchanged from the previous quarter but up 39 basis points since year-end. The Secured Overnight Financing Rate, or SOFR, which is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities, increased from 0.29% as of March 31st to 1.50% at June 30th. LIBOR and SOFR drive many of our financing costs.

• The U.S. likely entered a technical recession, as real GDP contracted at an estimated annualized rate of 0.9% in the second quarter, after shrinking at an estimated annualized rate of 1.6% in the prior quarter. Meanwhile, the unemployment rate remained low, at 3.6%, throughout the second quarter.
• Inflation continued to be elevated in the second quarter. According to the Bureau of Labor Statistics, the Consumer Price Index registered an annualized rate of 8.3% in April, 8.6% in May, and 9.1% in June, which was the highest reading since November 1981.
• For the second quarter, the Bloomberg Barclays U.S. MBS Index generated a negative return of (3.81%), as interest rates continued to rise and yield spreads widened further, and a negative excess return (on a duration-adjusted basis) of (0.91%) relative to the Bloomberg Barclays U.S. Treasury Index. The Bloomberg Barclays U.S. Corporate Bond Index generated a negative return of (6.70%) and a negative excess return of (2.00%), while the Bloomberg Barclays U.S. Corporate High Yield Bond Index generated a negative return of (9.35%) and a negative excess return of (7.52%).
• U.S. equity markets experienced significant losses in the second quarter with the S&P 500 down 16.4% and the Dow Jones Industrial Average down 11.3%, each index’s worst quarter since the COVID-related volatility of 2020. The tech-heavy NASDAQ fell 22.4% quarter over quarter, which was its worst quarter since the 2008-2009 financial crisis. The VIX volatility index spiked in late April and mid-May, and again in mid-June, before declining into quarter end. Meanwhile, London's FTSE 100 index decreased 4.6%, and the MSCI World global equity index fell 16.6% quarter over quarter.

Portfolio Overview and Outlook

As of June 30, 2022, our mortgage-backed securities portfolio consisted of $893.2 million of fixed-rate Agency "specified pools," $9.4 million of Agency RMBS backed by adjustable rate mortgages, or "Agency ARMs," $19.4 million of Agency reverse mortgage pools, $9.5 million of Agency interest-only securities, or "Agency IOs," $8.0 million of non-Agency RMBS, and $8.2 million of non-Agency interest-only securities, or "non-Agency IOs." Specified pools are fixed-rate Agency pools consisting of mortgages with special characteristics, such as mortgages with low loan balances, mortgages backed by investor properties, mortgages originated through the government-sponsored "Making Homes Affordable" refinancing programs, and mortgages with various other characteristics.

Our Agency RMBS holdings decreased by approximately 14% to $922.0 million as of June 30, 2022, as compared to $1.068 billion as of March 31, 2022. The decrease was driven by paydowns, net sales, and net losses. Over the same period, our interest-only holdings and non-Agency RMBS holdings were roughly unchanged.

Our debt-to-equity ratio, adjusted for unsettled purchases and sales, decreased to 7.9:1 as of June 30, 2022, as compared to 8.3:1 as of March 31, 2022. The decrease was primarily due to a decrease in borrowings on our smaller Agency RMBS portfolio, partially offset by lower shareholders’ equity. Our debt-to-equity ratio may fluctuate period over period based on portfolio management decisions, market conditions, capital markets activities, and the timing of security purchase and sale transactions. As of June 30, 2022, the vast majority of our borrowings were secured by specified pools.

As of June 30, 2022, we had cash and cash equivalents of $37.5 million. This compares to cash and cash equivalents and other liquidity of $29.9 million as of March 31, 2022; other liquidity at March 31, 2022 represented $13.7 million of unencumbered U.S. Treasury securities.

Agency RMBS continued to face headwinds in the second quarter as the Federal Reserve's aggressive response to persistently high inflation continued to roil markets. During the quarter, the Federal Reserve twice increased its target range for the federal funds rate, including a 75 basis-point hike in June that was its largest since 1994, and initiated the runoff of its balance sheet. Geopolitical uncertainty and concerns over economic growth further contributed to market volatility. In mid-June, the MOVE index, which measures interest rate volatility, reached its highest level since the 2020 COVID liquidity crisis, and interest rates rose significantly.

Agency RMBS durations extended in response to the higher interest rates, while the elevated volatility contributed to yield spread widening during the quarter. Agency RMBS prices declined sharply, with the largest declines on lower coupon RMBS, and Agency RMBS significantly underperformed U.S. Treasury securities and interest rate swaps. We experienced net losses on our Agency RMBS, concentrated in lower coupons, and these losses exceeded net interest income and net gains on our interest rate hedges. Our performance was also negatively impacted by costs associated with rebalancing certain of our interest rate hedges in response to the volatility. As a result, we had a significant net loss for the quarter.

In the current higher interest rate environment, the specified pool market has become less focused on prepayment protection, and more focused on extension protection. Many of our specified pools are considered to offer significant extension protection relative to their TBA counterparts. Thus despite the surge in mortgage rates, average pay-ups on our specified pool portfolio actually increased quarter over quarter, as the increase in the value of the extension protection provided by this portfolio, relative to TBA counterparts, more than offset the reduction in the value of its prepayment protection. Additionally, we net sold pools during the quarter, and these net sales generally consisted of pools with much lower pay-ups. Pay-ups on our specified pools increased modestly to 1.09% as of June 30, 2022, as compared to 0.94% as of March 31, 2022.

In our non-Agency RMBS portfolio, wider yield spreads drove negative results for the quarter. We expect to vary our allocation to non-Agency RMBS as market opportunities change over time.

Our net mortgage assets-to-equity ratio—which we define as the net aggregate market value of our mortgage-backed securities (including the underlying market values of our long and short TBA positions) divided by total shareholders' equity—decreased during the quarter. The decrease was due to lower Agency RMBS holdings, partially offset by a smaller net short TBA position and lower shareholders' equity. From time to time, in response to market opportunities and other factors, we increase or decrease our net mortgage assets-to-equity ratio by varying the sizes of our net short TBA position and/or our long RMBS portfolio. The following table summarizes our net mortgage assets-to-equity ratio and provides additional details, for the last five quarters, to illustrate this fluctuation.

($ In thousands)

(1) Market value represents the current market value of the underlying Agency RMBS (on a forward delivery basis) as of period end.

We expect to continue to target specified pools that, taking into account their particular composition and based on our prepayment projections, should: (1) generate attractive yields relative to other Agency RMBS and U.S. Treasury securities, (2) have less prepayment sensitivity to government policy shocks, and/or (3) create opportunities for trading gains once the market recognizes their value, which for newer pools may come only after several months, when actual prepayment experience can be observed. We believe that our research team, proprietary prepayment models, and extensive databases remain essential tools in our implementation of this strategy.

The following table summarizes prepayment rates for our portfolio of fixed-rate specified pools (excluding those backed by reverse mortgages) for the three-month periods ended June 30, 2022, March 31, 2022, December, 31, 2021, September 30, 2021, and June 30, 2021.

(1) Excludes recent purchases of fixed rate Agency specified pools with no prepayment history.

The following table provides details about the composition of our portfolio of fixed-rate specified pools (excluding those backed by reverse mortgages) as of June 30, 2022 and March 31, 2022.

(In thousands)

(In thousands)

For the three-month period ended June 30, 2022, we had total net realized and unrealized losses on our Agency securities of $(42.2) million, or $(3.22) per share. Our Agency portfolio turnover was approximately 24% for the quarter ended June 30, 2022, and we recognized net realized losses of $(14.9) million.

During the three-month period ended June 30, 2022, we continued to hedge interest rate risk through the use of interest rate swaps, and short positions in TBAs, U.S. Treasury securities, and futures. We had total net realized and unrealized gains of $28.2 million, or $2.15 per share, on our interest rate hedging portfolio, as interest rates increased significantly. These gains were partially offset by net realized and unrealized losses of $(1.9) million, or $(0.15) per share, on our long TBAs held for investment.

We ended the quarter with a net short TBA position, both on a notional basis and as measured by 10-year equivalents. Ten-year equivalents for a group of positions represent the amount of 10-year U.S. Treasury securities that would be expected to experience a similar change in market value under a standard parallel move in interest rates. The relative makeup of our interest rate hedging portfolio can change materially from period to period.

After giving effect to dividends declared during the three-month period ended June 30, 2022 of $0.26 per share, our book value per share decreased to $9.07 as of June 30, 2022, from $10.14 as of March 31, 2022, and we had a negative economic return of (8%) for the quarter ended June 30, 2022. Economic return for a period is computed by adding back dividends declared during the period to ending book value per share, and comparing that amount to book value per share as of the beginning of the period.

We believe that our adaptive and active style of portfolio management is well suited to the current MBS market environment, which, especially given the current effects and future uncertainties related to quantitative tightening, exhibits high levels of interest rate risk, prepayment risk (including extension risk), financing and liquidity risk, shifting central bank and government policies, regulatory changes, and disruptive technological developments.

Financing

For the three-month period ended June 30, 2022, our average repo borrowing cost increased to 0.68%, as compared to 0.29% for the three-month period ended March 31, 2022. This increase in average repo borrowing cost was the result of increases in short-term interest rates during the three-month period ended June 30, 2022. As of June 30, 2022 and March 31, 2022, the weighted average borrowing rate on our repurchase agreements was 1.03% and 0.39%, respectively.

While large banks still dominate the repo market, non-bank firms, not subject to the same regulations as banks, are active in providing repo financing. Most of our outstanding repo financing is still provided by banks and bank affiliates; however, we have also entered into repo agreements with non-bank dealers.

Our debt-to-equity ratio was 8.0:1 as of June 30, 2022, as compared to 9.1:1 as of March 31, 2022. Adjusted for unsettled purchases and sales, our debt-to equity ratio was 7.9:1 as of June 30, 2022, as compared to 8.3:1 as of March 31, 2022. The decrease was primarily due to a decrease in borrowings on the Company’s smaller Agency RMBS portfolio, partially offset by lower shareholders’ equity. Our debt-to-equity ratio may fluctuate period over period based on portfolio management decisions, market conditions, capital markets activities, and the timing of security purchase and sale transactions.

Critical Accounting Estimates

Our consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, or "U.S. GAAP," and Regulation S-X. Entities in which we have a controlling financial interest, through ownership of the majority of the entities' voting equity interests, or through other contractual rights that give us control, are consolidated by us. All inter-company balances and transactions have been eliminated.

The preparation of our consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Our critical accounting estimates are those which require assumptions to be made about matters that are highly uncertain. Actual results could differ from those estimates and such differences could have a material impact on our financial condition and/or results of operations. We believe that all of the decisions and assessments upon which our consolidated financial statements are based were reasonable at the time made based upon information available to us at that time. We rely on the experience of our Manager and Ellington and analysis of historical and current market data in order to arrive at what we believe to be reasonable estimates. See Note 2 of the notes to our consolidated financial statements for a complete discussion of our significant accounting policies. We have identified our most critical accounting estimates to be the following:

Valuation: We have elected the fair value option for the vast majority of our assets and liabilities for which such election is permitted, as provided for under ASC 825, Financial Instruments ("ASC 825"). Electing the fair value option allows us to record changes in fair value in our Consolidated Statement of Operations, which, in our view, more appropriately reflects the results of our operations for a particular reporting period as all securities activities will be recorded in a similar manner. As such, the mortgage-backed securities are recorded at fair value on our Consolidated Balance Sheet and the period change in fair value is recorded in current period earnings on our Consolidated Statement of Operations as a component of Change in net unrealized gains (losses) on securities. Purchase and sales transactions are generally recorded on trade date. Realized and unrealized gains and losses are calculated based on identified cost.

For financial instruments that are traded in an "active market," the best measure of fair value is the quoted market price. However, many of our financial instruments are not traded in an active market. Therefore, management generally uses third-party valuations when available. If third-party valuations are not available, management uses other valuation techniques, such as the discounted cash flow methodology.

Summary descriptions, for the various categories of financial instruments, of the valuation methodologies management uses in determining fair value of our financial instruments are detailed in Note 2 of the notes to our consolidated financial statements. Management utilizes such methodologies to assign a good faith fair value (the estimated price that, in an orderly transaction at the valuation date, would be received to sell an asset, or paid to transfer a liability, as the case may be) to each such financial instrument. See the notes to our consolidated financial statements for more information on valuation techniques used by management in the valuation of our assets and liabilities.

Because of the inherent uncertainty of valuation, the estimated fair value of our financial instruments may differ significantly from the values that would have been used had a ready market for the financial instruments existed, and the differences could be material to our consolidated financial statements.

The determination of estimated fair value of those of our financial instruments that are not traded in an active market requires the use of both macroeconomic and microeconomic assumptions and/or inputs, which are generally based on current market and economic conditions. Changes in market and/or economic conditions could have a significant adverse effect on the estimated fair value of our financial instruments. Changes to assumptions, including assumed market yields, may significantly impact the estimated fair value of our investments. Our valuations are sensitive to changes in interest rates; see the interest rate sensitivity analysis included in Item 3. Quantitative and Qualitative Disclosures about Market Risk in this Quarterly Report on Form 10-Q for further information.

Interest Income: Coupon interest income on investment securities is accrued based on the outstanding principal balance and the current coupon rate on each security. We generally amortize premiums and accrete discounts on our fixed-income investments using the effective interest method. For certain of our securities, for purposes of estimating future expected cash flows, management uses assumptions including, but not limited to, assumptions for future prepayment rates, default rates, and loss severities (each of which may in turn incorporate various macroeconomic assumptions, such as future housing prices, GDP growth rates, and unemployment rates). These assumptions require the use of a significant amount of judgment. Any resulting changes in effective yield are recognized prospectively based on the current amortized cost of the investment as adjusted for credit impairment, if any.

The effective yield on our debt securities that are deemed to be of high credit quality (including Agency RMBS, exclusive of interest only securities) can be significantly impacted by our estimate of future prepayments. Future prepayment rates are difficult to predict. We estimate prepayment rates over the remaining life of our securities using models that generally incorporate the forward yield curve, current mortgage rates, mortgage rates on the outstanding loans, age and size of the outstanding loans, and other factors. We compare estimated prepayments to actual prepayments on a quarterly basis, and effective yields are recalculated retroactive to the time of purchase. When differences arise between our previously calculated effective yields and our current calculated effective yields, a catch-up adjustment, or "Catch-up Premium Amortization Adjustment," is made to interest income to reflect the cumulative impact of the changes in effective yields. For the three-month periods ended June 30, 2022 and 2021, we recognized a Catch-up Premium Amortization Adjustment of $1.6 million and $2.6 million, respectively. For the six-month periods ended June 30, 2022 and 2021, we recognized a Catch-up Premium Amortization Adjustment of $1.1 million and $2.7 million, respectively. The Catch-up Premium Amortization Adjustment is reflected as an increase (decrease) to interest income on the Consolidated Statement of Operations.

Our accretion of discounts and amortization of premiums on securities for U.S. federal and other tax purposes is likely to differ from the accounting treatment under U.S. GAAP of these items as described above.

See the Note 2 of the notes to our consolidated financial statements for more information on the assumptions and methods that we use to amortize purchase premiums and accrete purchase discounts.

Income Taxes: We made an election to be taxed as a REIT for U.S. federal income tax purposes and are generally not subject to corporate-level federal and state income tax on net income we distribute to our shareholders within the prescribed timeframes. We may take positions with respect to certain tax issues which depend on legal interpretation of facts or applicable tax regulations. Should the relevant tax regulators successfully challenge any such positions, we might be found to have a tax liability that has not been recorded in the accompanying consolidated financial statements. Also, management's conclusions regarding the authoritative guidance may be subject to review and adjustment at a later date based on changing tax laws, regulations, and interpretations thereof. See Note 2 and Note 12 to our consolidated financial statements for additional details on income taxes.

Recent Accounting Pronouncements

Refer to the notes to our consolidated financial statements for a description of relevant recent accounting pronouncements.

Financial Condition

Investment portfolio

The following tables summarize our securities portfolio as of June 30, 2022 and December 31, 2021:

(In thousands)

(1) Represents the dollar amount (not shown in thousands) per $100 of current principal of the price or cost for the security.

(2) Excludes IOs.

The majority of our capital is allocated to our Agency RMBS strategy, which includes investments in Agency pools and Agency collateralized mortgage obligations, or "CMOs." As of both June 30, 2022 and December 31, 2021, investments in non-Agency RMBS constituted a relatively small portion of our total investments.

Our most prevalent method of financing RMBS is through short-term repos, which generally have maturities of 364 days or less. The weighted average lives of the RMBS that we own are generally much longer. Consequently, the weighted average term of our repurchase agreement financings will almost always be substantially shorter than the expected average maturity of our RMBS. This mismatch in maturities, together with the uncertainty of RMBS prepayments, and other potential changes in timing and/or amount of cash flows on our RMBS assets, creates the risk that changes in interest rates will cause our financing costs with respect to our RMBS to increase relative to the income on our RMBS over the term of our investments.

Financial Derivatives

The following table summarizes our portfolio of financial derivative holdings as of June 30, 2022 and December 31, 2021:

(In thousands)

Pursuant to our hedging program, we engage in a variety of interest rate hedging activities that are designed to reduce the interest rate risk with respect to the liabilities incurred to acquire or hold RMBS. These interest rate hedges generally seek to reduce the interest rate sensitivity of our liabilities or, in other words, reduce the volatility of our financing cost over time attributable to interest rate changes. Our interest rate hedging transactions may include:

• Interest rate swaps (a contract exchanging a variable rate for a fixed rate, or vice versa);
• Interest rate swaptions (options to enter into interest rate swaps at a future date);
• TBA forward contracts on Agency pass-through certificates;
• Short sales of U.S. Treasury securities;
• Eurodollar and U.S. Treasury futures; and
• Other derivatives.

We generally enter into these transactions to offset the potential adverse effects of rising interest rates on short-term repurchase agreements. Our repurchase agreements generally have maturities of up to 364 days and carry interest rates that are determined by reference to a benchmark rate such as LIBOR or SOFR for those same periods. As each then-existing fixed-rate repo borrowing matures, it will generally be replaced with a new fixed-rate repo borrowing based on market interest rates established at that future date.

In the case of interest rate swaps, most of our contracts are structured such that we receive payments based on a variable interest rate and make payments based on a fixed interest rate. The variable interest rate on which payments are received is generally calculated based on various reset mechanisms for a benchmark rate such as LIBOR or SOFR. To the extent that the benchmark rates used to calculate the payments we receive on our interest rate swaps continue to be highly correlated with our repo borrowing costs, our interest rate swap contracts should help to reduce the variability of our overall repo borrowing costs, thus reducing risk to the extent we hold fixed-rate assets that are financed with repo borrowings.

In the case of TBAs, many of our positions are short TBA positions with negative duration, meaning that should interest rates rise, the value of the short position would be expected to increase. This expected increase in value would then serve to offset corollary expected increases in our current and/or future borrowing costs under our repurchase agreements, and so in this manner our short TBA positions serve as a hedge against potential increases in interest rates. While we use TBAs to hedge interest rate risk and certain other risks, we also hold net long positions in certain TBA securities as a means of acquiring exposure to Agency RMBS.

The composition and relative mix of our hedging instruments may vary from period to period given the amount of our liabilities outstanding or anticipated to be entered into, the overall market environment and our view as to which instruments best enable us to execute our hedging goals.

Leverage

The following table summarizes our outstanding liabilities under repurchase agreements as of June 30, 2022 and December 31, 2021. We had no other borrowings outstanding.

(In thousands)

We finance our assets with what we believe to be a prudent amount of leverage, which will vary from time to time based upon the particular characteristics of our portfolio, availability of financing, and market conditions. As of June 30, 2022 and December 31, 2021, our total debt-to-equity ratio was 8.0:1 and 6.9:1, respectively. Collateral transferred with respect to our outstanding repo borrowings, including net cash collateral posted, as of June 30, 2022 and December 31, 2021 had an aggregate fair value of $1.0 billion and $1.1 billion. Our debt-to-equity ratio may fluctuate period over period based on portfolio management decisions, market conditions, capital markets conditions, and the timing of security purchase and sale transactions.

Shareholders' Equity

As of June 30, 2022, our shareholders' equity decreased to $118.6 million from $154.2 million as of December 31, 2021. This decrease principally consisted of a net loss of $(28.2) million and dividends declared of $7.3 million. As of June 30, 2022, our book value per share was $9.07, as compared to $11.76 as of December 31, 2021.

Results of Operations for the Three- and Six-Month Periods Ended June 30, 2022 and 2021

The following table summarizes our results of operations for the three- and six-month periods ended June 30, 2022 and 2021:

(In thousands except for per share amounts)

Adjusted Distributable Earnings

Beginning with the financial results for the quarter ended June 30, 2022, the supplemental non-GAAP financial measure that we previously referred to as "Core Earnings," we now refer to as "Adjusted Distributable Earnings." We calculate Adjusted Distributable Earnings (formerly referred to as Core Earnings) as net income (loss), excluding realized and change in net unrealized gains and (losses) on securities and financial derivatives, and excluding, if applicable, any non-recurring items of income or loss. Adjusted Distributable Earnings also excludes the effect of the Catch-up Premium Amortization Adjustment on interest income. The Catch-up Premium Amortization Adjustment is a quarterly adjustment to premium amortization triggered by changes in actual and projected prepayments on our Agency RMBS (accompanied by a corresponding offsetting adjustment to realized and unrealized gains and losses). The adjustment is calculated as of the beginning of each quarter based on our then-current assumptions about cashflows and prepayments, and can vary significantly from quarter to quarter. Adjusted Distributable Earnings includes net realized and change in net unrealized gains (losses) associated with periodic settlements on interest rate swaps.

Adjusted Distributable Earnings is a supplemental non-GAAP financial measure. We believe that the presentation of Adjusted Distributable Earnings provides information useful to investors, because: (i) we believe that it is a useful indicator of both current and projected long-term financial performance, in that it excludes the impact of certain current period earnings components that we believe are less useful in forecasting long-term performance and dividend-paying ability; (ii) we use it to evaluate the effective net yield provided by our portfolio, after the effects of financial leverage; and (iii) we believe that presenting Adjusted Distributable Earnings assists our investors in measuring and evaluating our operating performance, and comparing our operating performance to that of our residential mortgage REIT peers. Please note, however, that: (I) our calculation of Adjusted Distributable Earnings may differ from the calculation of similarly titled non-GAAP financial measures by our peers, with the result that these non-GAAP financial measures might not be directly comparable; and (II) Adjusted Distributable Earnings excludes certain items, such as most realized and unrealized gains and losses, that may impact the amount of cash that is actually available for distribution.

In addition, because Adjusted Distributable Earnings is an incomplete measure of our financial results and differs from net income (loss) computed in accordance with U.S. GAAP, it should be considered supplementary to, and not as a substitute for, net income (loss) computed in accordance with U.S. GAAP.

Furthermore, Adjusted Distributable Earnings is different from REIT taxable income. As a result, the determination of whether we have met the requirement to distribute at least 90% of our annual REIT taxable income (subject to certain adjustments) to its shareholders, in order to maintain qualification as a REIT, is not based on whether we have distributed 90% of our Adjusted Distributable Earnings.

In setting our dividend, our Board of Trustees considers our earnings, liquidity, financial condition, REIT distribution requirements, and financial covenants, along with other factors that the Board of Trustees may deem relevant from time to time.

The following table reconciles, for the three-month periods ended June 30, 2022 and 2021, Adjusted Distributable Earnings to the line on the Consolidated Statement of Operations entitled Net Income (Loss), which we believe is the most directly comparable GAAP measure:

(In thousands except for share amounts)

Results of Operations for the Three-Month Periods Ended June 30, 2022 and 2021

Net Income (Loss)

Net income (loss) for the three-month period ended June 30, 2022 was $(10.7) million, as compared to $(4.5) million for the three-month period ended June 30, 2021. The period-over-period decline in our results of operations was primarily due to an increase in total other loss as well as a decrease in net interest income.

Interest Income

Our portfolio as of both June 30, 2022 and 2021 consisted primarily of Agency RMBS, and to a lesser extent, non-Agency RMBS. Before interest expense, we earned approximately $8.9 million and $9.8 million in interest income on these securities for the three-month periods ended June 30, 2022 and 2021, respectively. The period-over-period decrease in interest income primarily resulted from lower average holdings and lower weighted average yields in our Agency RMBS portfolio, partially offset by higher average holdings and higher weighted average yields on our non-Agency RMBS portfolio. The Catch-up Premium Amortization Adjustment causes variability in our interest income and portfolio yields. For the three-month periods ended June 30, 2022 and 2021, we had a positive Catch-up Premium Amortization Adjustment of approximately $1.6 million and $2.6 million, respectively, which increased interest income. Excluding the Catch-up Premium Amortization Adjustments, the weighted average yield of our overall portfolio was 2.57% and 2.44% for the three-month periods ended June 30, 2022 and 2021, respectively.

The following table details our interest income, average holdings of yield-bearing assets, and weighted average yield based on amortized cost for the three-month periods ended June 30, 2022 and 2021:

(In thousands)

(1) Amounts exclude interest income on cash and cash equivalents (including when posted as margin) and long U.S. Treasury securities.

Interest Expense

For the three-month periods ended June 30, 2022 and 2021, the majority of interest expense that we incurred was related to our repo borrowings, which we use to finance our assets. We also incur interest expense in connection with our short positions in U.S. Treasury securities as well as on our counterparties' cash collateral held by us. Our total interest expense for the three-month period ended June 30, 2022 was $2.0 million, which primarily consisted of $1.8 million of interest expense on our repo borrowings, and $0.1 million of interest expense related to our short positions in U.S. Treasury securities. Our total interest expense for the three-month period ended June 30, 2021 was $0.7 million, which primarily consisted of $0.6 million of interest expense on our repo borrowings, and $0.1 million of interest expense related to our short positions in U.S. Treasury securities. The period-over-period increase in our total interest expense resulted mainly from higher rates on our repo borrowings stemming from the increase in short-term interest rates.

The following table shows information related to our average cost of funds(1) on repurchase agreements for the three-month periods ended June 30, 2022 and 2021:

(In thousands)

(1) This metric does not take into account other instruments that we use to hedge interest rate risk, such as TBAs, swaptions, and futures.

Among other instruments, we use interest rate swaps and short U.S. Treasury securities to hedge against the risk of rising interest rates. The following table shows information related to the components of our average cost of funds(1) including the amortization of upfront payments and the actual and accrued periodic payments on our interest rate swaps and interest expense on short U.S. Treasury securities for the three-month periods ended June 30, 2022 and 2021:

(In thousands)

(1) This metric does not take into account other instruments that we use to hedge interest rate risk, such as TBAs, swaptions, and futures.

(2) As an alternative cost of funds measure, we add to our repo borrowing cost the net periodic amounts paid or payable by us on our interest rate swaps and the interest expense we incur on our short positions in U.S. Treasury securities, and express the total as a percentage of our average outstanding repurchase agreement borrowings.

(3) Includes interest expense on reverse repurchase agreements with negative interest rates, which can occur when we borrow certain bonds that we have sold short.

For the three-month period ended June 30, 2022, the weighted average yield of our portfolio of Agency and non-Agency RMBS excluding the impact of the Catch-up Premium Amortization Adjustment was 2.57%, while our total adjusted average cost of funds, including interest rate swaps and short U.S. Treasury securities, was 0.91%, resulting in a net interest margin of 1.66%. By comparison, for the three-month period ended June 30, 2021, the weighted average yield of our portfolio of Agency and non-Agency RMBS excluding the impact of the Catch-up Premium Amortization Adjustment was 2.44%, while our total adjusted average cost of funds, including interest rate swaps and short U.S. Treasury securities, was 0.40%, resulting in a net interest margin of 2.04%.

Management Fees

For the three-month periods ended June 30, 2022 and 2021, our management fee expense was approximately $0.4 million and $0.6 million, respectively. Management fees are calculated based on our shareholders' equity at the end of each quarter. The decrease in management fee expense period over period was due to a smaller capital base as of June 30, 2022.

Other Operating Expenses

Other operating expenses, as presented above, include professional fees, compensation expense, insurance expense, and various other expenses incurred in connection with the operation of our business. For each of the three-month periods ended June 30, 2022 and 2021, our other operating expenses were approximately $0.9 million.

Other Income (Loss)

Other income (loss) consists of net realized and net change in unrealized gains (losses) on securities and financial derivatives. For the three-month period ended June 30, 2022, Other income (loss) was $(16.5) million, consisting primarily of net realized and unrealized losses of $(43.6) million on our securities, which were partially offset by net realized and unrealized gains of $27.0 million on our financial derivatives. Net realized and unrealized losses of $(43.6) million on our securities, consists primarily of losses on our Agency RMBS which were caused by significantly lower asset prices, as interest rates rose and Agency yield spreads widened. The net realized and unrealized gains on our financial derivatives of $27.0 million consisted of net realized and unrealized gains of $16.8 million on our interest rate swaps, $6.1 million on our TBAs, and $4.2 million on our U.S. Treasury futures, and were primarily the result of the significant increase in interest rates.

For the three-month period ended June 30, 2021, Other income (loss) was $(12.2) million, consisting primarily of net realized and unrealized losses of $(10.4) million on our Agency RMBS, and $(8.9) million on our interest rate swaps and futures, partially offset by net realized and unrealized gains of $6.9 million on our TBAs. Yield spreads on Agency RMBS widened, most significantly on higher coupons, amidst concerns that the Federal Reserve will commence tapering its asset purchases and with heightened prepayment risk related to lower mortgage rates. With the decrease in long-term interest rates, our interest-only securities, interest rate swaps, U.S. Treasury securities, and futures all had net losses. Our concentration of long TBA investments in lower coupons, and short TBA investments in higher coupons, benefited our results, resulting in net realized and unrealized gains on TBAs of $6.9 million.

Results of Operations for the Six-Month Periods Ended June 30, 2022 and 2021

Net Income (Loss)

Net income (loss) for the six-month period ended June 30, 2022 was $(28.2) million, as compared to $(4.4) million for the six-month period ended June 30, 2021. The period-over-period decline in our results of operations was primarily due to an increase in total other loss and a decrease in net interest income.

Interest Income

Our portfolio as of both June 30, 2022 and 2021 consisted primarily of Agency RMBS, and to a lesser extent, non-Agency RMBS. Before interest expense, we earned approximately $15.3 million and $16.4 million in interest income on these securities for the six-month periods ended June 30, 2022 and 2021, respectively. The period-over-period decrease in interest income was primarily the result of lower average asset yields on our Agency portfolio, partially offset by higher average holdings and higher asset yields in our non-Agency portfolio. The Catch-up Premium Amortization Adjustment causes variability in our interest income and portfolio yields. For the six-month periods ended June 30, 2022 and 2021, we had a positive Catch-up Premium Amortization Adjustment of approximately $1.1 million and $2.7 million, respectively, which increased interest income. Excluding the Catch-up Premium Amortization Adjustments, the weighted average yield of our overall portfolio was 2.47% and 2.42% for the six-month periods ended June 30, 2022 and 2021, respectively.

The following table details our interest income, average holdings of yield-bearing assets (on a settle date basis), and weighted average yield based on amortized cost for the six-month periods ended June 30, 2022 and 2021:

(In thousands)

(1) Amounts exclude interest income on cash and cash equivalents (including when posted as margin) and long U.S. Treasury securities.

Interest Expense

For the six-month periods ended June 30, 2022 and 2021, the majority of interest expense that we incurred was related to our repo borrowings, which we use to finance our assets. We also incur interest expense in connection with our short positions in U.S. Treasury securities as well as on our counterparties' cash collateral held by us. Our total interest expense for the six-month period ended June 30, 2022 was $3.1 million, which primarily consisted of $2.6 million of interest expense on our repo borrowings, and $0.4 million of interest expense related to our short positions in U.S. Treasury securities. Our total interest expense for the six-month period ended June 30, 2021 was $1.4 million, consisting primarily of $1.2 million of interest expense on our repo borrowings, and $0.3 million of interest expense related primarily to our short positions in U.S. Treasury securities. The period-over-period increase in our total interest expense resulted mainly from higher rates on our repo borrowings stemming from an increase in short-term interest rates.

The following table shows information related to our average cost of funds(1) on repurchase agreements for the six-month periods ended June 30, 2022 and 2021:

(In thousands)

(1) This metric does not take into account other instruments that we use to hedge interest rate risk, such as TBAs, swaptions, and futures.

Among other instruments, we use interest rate swaps and short U.S. Treasury securities to hedge against the risk of rising interest rates. The following table shows information related to the components of our average cost of funds(1) including the amortization of upfront payments and the actual and accrued periodic payments on our interest rate swaps and interest expense on short U.S. Treasury securities for the three-month periods ended June 30, 2022 and 2021:

(In thousands)

(1) This metric does not take into account other instruments that we use to hedge interest rate risk, such as TBAs, swaptions, and futures.

(2) As an alternative cost of funds measure, we add to our repo borrowing cost the net periodic amounts paid or payable by us on our interest rate swaps and the interest expense we incur on our short positions in U.S. Treasury securities, and express the total as a percentage of our average outstanding repurchase agreement borrowings.

(3) Includes interest expense on reverse repurchase agreements with negative interest rates, which can occur when we borrow certain bonds that we have sold short.

For the six-month period ended June 30, 2022, the weighted average yield of our portfolio of Agency and non-Agency RMBS excluding the impact of the Catch-up Premium Amortization Adjustment was 2.47%, while our total adjusted average cost of funds, including interest rate swaps and short U.S. Treasury securities, was 0.76%, resulting in a net interest margin of 1.71%. By comparison, for the six-month period ended June 30, 2021, the weighted average yield of our Agency and non-Agency RMBS excluding the impact of the Catch-up Premium Amortization Adjustment was 2.42%, while our total adjusted average cost of funds, including interest rate swaps and short U.S. Treasury securities, was 0.43%, resulting in a net interest margin of 1.99%.

Management Fees

For the six-month periods ended June 30, 2022 and 2021, our management fee expense was approximately $0.9 million and $1.2 million, respectively. Management fees are calculated based on our shareholders' equity at the end of each quarter. The decrease in management fee expense period over period was due to a smaller capital base at each quarter end in 2022, as compared to the respective quarter ends in 2021.

Other Operating Expenses

Other operating expenses, as presented above, include professional fees, compensation expense, insurance expense, and various other expenses incurred in connection with the operation of our business. For the six-month periods ended June 30, 2022 and 2021, our other operating expenses were approximately $1.7 million and $1.8 million, respectively. The decrease in other operating expenses for the six-month period ended June 30, 2022 was primarily due to a decrease in professional fees.

Other Income (Loss)

Other income (loss) consists of net realized and net change in unrealized gains (losses) on securities and financial derivatives. For the six-month period ended June 30, 2022, Other income (loss) was $(38.1) million, consisting primarily of net realized and unrealized losses of $(112.3) million on our Agency RMBS, which were partially offset by net realized and unrealized gains of $3.7 million on our short U.S. Treasury securities, and net realized and unrealized gains of $70.2 million on our financial derivatives. The losses on our Agency RMBS were caused by significantly lower asset prices, as interest rates rose and Agency yield spreads widened. For the six-month period ended June 30, 2022, the net realized and unrealized gains of $3.7 million on our short U.S. Treasury securities and net realized and unrealized gains of $70.2 on our financial derivatives were primarily the result of the significant increase in interest rates. The net realized and unrealized gains on our financial derivatives of $70.2 million consisted of net realized and unrealized gains of $34.2 million on our interest rate swaps, $21.2 million on our U.S. Treasury futures, and $14.7 million on our TBAs.

For the six-month period ended June 30, 2021, Other income (loss) was $(16.4) million, consisting primarily of net realized and unrealized losses of $(20.4) million on our Agency RMBS, which were partially offset by net realized gains of $2.7 million on our short U.S. Treasury securities and net realized and unrealized gains of $1.1 million on our financial derivatives. During the period, actual and implied interest rate volatility rose and long-term interest rates increased significantly. Yield spreads on our Agency RMBS holdings widened and prices declined, leading to net realized and unrealized losses. For the six month period ended June 30, 2021, net realized gains of $2.7 million on our short U.S. Treasury securities and net realized and unrealized gains of $1.1 million on our financial derivatives were primarily the result of the increase in long-term interest rates. The net realized and unrealized gains on our financial derivatives of $1.1 million consisted of net realized and unrealized gains of $1.2 million on our interest rate swaps and $1.7 million on our U.S. Treasury futures, partially offset by losses on our TBAs of $(1.8) million, where losses on our long lower-coupon holdings were partially offset by net gains on our short higher-coupon holdings.

Liquidity and Capital Resources

Liquidity refers to our ability to generate and obtain adequate amounts of cash to meet our requirements, including repaying our borrowings, funding and maintaining RMBS and other assets, paying dividends, and other general business needs. Our short-term (the 12 months following period end) and long-term (beyond 12 months from period end) liquidity requirements include acquisition costs for assets we acquire, payment of our management fee, compliance with margin requirements under our repurchase agreements, TBA and other financial derivative contracts, repayment of repurchase agreement borrowings to the extent we are unable or unwilling to extend our repurchase agreements, the payment of dividends, and payment of our general operating expenses. Our capital resources primarily include cash on hand, cash flow from our investments (including monthly principal and interest payments received on our RMBS and proceeds from the sale of RMBS), borrowings under repurchase agreements, and proceeds from equity offerings. We expect that these sources of funds will be sufficient to meet our short-term and long-term liquidity needs.

We borrow funds in the form of repurchase agreements. The terms of our repo borrowings are predominantly governed by Master Repurchase Agreements, or "MRAs," which generally conform to the terms in the standard master repurchase agreement as published by the Securities Industry and Financial Markets Association as to repayment and margin requirements. In addition, each lender may require that we include supplemental terms and conditions to the standard master repurchase agreement. Typical supplemental terms and conditions include the addition of or changes to provisions relating to margin calls, net asset value requirements, cross default provisions, certain key person events, changes in corporate structure, and requirements that all controversies related to the repurchase agreement be litigated in a particular jurisdiction. These provisions may differ for each of our lenders.

As of June 30, 2022 and December 31, 2021, we had $1.0 billion and $1.1 billion outstanding under our repurchase agreements, respectively. As of June 30, 2022, our outstanding repurchase agreements were with 15 counterparties.

The amounts borrowed under our repurchase agreements are generally subject to the application of "haircuts." A haircut is the percentage discount that a repo lender applies to the market value of an asset serving as collateral for a repo borrowing, for the purpose of determining whether such repo borrowing is adequately collateralized. As of June 30, 2022 and December 31, 2021, the weighted average contractual haircut applicable to the assets that serve as collateral for our outstanding repo borrowings was 5.4% and 5.2%, respectively.

The following table details total outstanding borrowings, average outstanding borrowings, and the maximum outstanding borrowings at any month end for each quarter under repurchase agreements for the past twelve quarters.

(In thousands)

(1) For the quarter ended March 31, 2020 in response to significant volatility and heightened risks in the financial markets as a result of the spread of COVID-19, we significantly reduced our outstanding borrowings to lower leverage and increase our liquidity.

As of June 30, 2022, we had an aggregate amount at risk under our repurchase agreements with 15 counterparties of $60.8 million. As of December 31, 2021, we had an aggregate amount at risk under our repurchase agreements with 15 counterparties of $52.7 million. Amounts at risk represent the excess, if any, for each counterparty of the fair value of collateral held by such counterparty over the amounts outstanding under repurchase agreements. If the amounts outstanding under repurchase agreements with a particular counterparty are greater than the collateral held by the counterparty, there is no amount at risk for the particular counterparty. Amounts at risk under our repurchase agreements as of June 30, 2022 and December 31, 2021 does not include $1.9 million and $2.6 million, respectively, of net accrued interest receivable, which is defined as accrued interest on securities held as collateral less interest payable on cash borrowed.

Our derivatives are predominantly subject to bilateral master trade agreements or clearing in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the "Dodd-Frank Act." We may be required to deliver or receive cash or securities as collateral upon entering into derivative transactions. Changes in the relative value of derivative transactions may require us or the counterparty to post or receive additional collateral. Entering into derivative contracts involves market risk in excess of amounts recorded on our balance sheet. In the case of cleared derivatives, the clearinghouse becomes our counterparty and the future commission merchant acts as an intermediary between us and the clearinghouse with respect to all facets of the related transaction, including the posting and receipt of required collateral.

As of June 30, 2022, we had an aggregate amount at risk under our derivative contracts, excluding TBAs, with three counterparties of approximately $16.4 million. As of December 31, 2021, we had an aggregate amount at risk under our derivatives contracts, excluding TBAs, with two counterparties of approximately $11.3 million. Amounts at risk under our derivatives contracts represent the excess, if any, for each counterparty of the fair value of our derivative contracts plus our collateral held directly by the counterparty less the counterparty's collateral held by us. If a particular counterparty's collateral held by us is greater than the aggregate fair value of the financial derivatives plus our collateral held directly by the counterparty, there is no amount at risk for the particular counterparty.

We purchase and sell TBAs and Agency pass-through certificates on a when-issued or delayed delivery basis. The delayed delivery for these securities means that these transactions are more prone to market fluctuations between the trade date and the ultimate settlement date, and therefore are more vulnerable, especially in the absence of margining arrangements with respect to these transactions, to increasing amounts at risk with the applicable counterparties. As of June 30, 2022, in connection with our forward settling TBA and Agency pass-through certificates, we had an aggregate amount at risk with seven counterparties of approximately $1.1 million. As of December 31, 2021, in connection with our forward settling TBA and Agency pass-through certificates, we had an aggregate amount at risk with four counterparties of approximately $4.1 million. Amounts at risk in connection with our forward settling TBA and Agency pass-through certificates represent the excess, if any, for each counterparty of the net fair value of the forward settling securities plus our collateral held directly by the counterparty less the counterparty's collateral held by us. If a particular counterparty's collateral held by us is greater than the aggregate fair value of the forward settling securities plus our collateral held directly by the counterparty, there is no amount at risk for the particular counterparty.

As of June 30, 2022, we had cash and cash equivalents of $37.5 million.

The timing and frequency of distributions will be determined by our Board of Trustees based upon a variety of factors deemed relevant by our trustees, including restrictions under applicable law, our capital requirements, and the REIT requirements of the Code. The declaration of dividends to our shareholders and the amount of such dividends are at the discretion of our Board of Trustees. The following table sets forth the dividend distributions authorized by the Board of Trustees for the periods indicated below:

Six-Month Period Ended June 30, 2022:

(In thousands)

Six-Month Period Ended June 30, 2021:

(In thousands)

On July 8, 2022, the Board of Trustees approved a monthly dividend in the amount of $0.08 per share payable on August 25, 2022 to shareholders of record as of July 29, 2022.

On August 4, 2022, the Board of Trustees approved a monthly dividend in the amount of $0.08 per share payable on September 26, 2022 to shareholders of record as of August 31, 2022.

For the six-month period ended June 30, 2022, our operating activities provided net cash of $14.0 million and our investing activities provided net cash of $39.2 million. Our repo activity used to finance our purchase of securities (including repayments, in conjunction with the sales of securities, of amounts borrowed under our repurchase agreements as well as collateral posted in connection with our repo activity) used net cash of $76.9 million. Thus our operating and investing activities, when combined with our net repo financing activities, used net cash of $23.7 million. We also used $7.6 million to pay dividends, and $0.2 million to repurchase common shares. As a result of these activities, there was a decrease in our cash holdings of $31.6 million, from $69.0 million as of December 31, 2021 to $37.5 million as of June 30, 2022.

For the six-month period ended June 30, 2021, our operating activities provided net cash of $14.5 million and our investing activities used net cash of $117.0 million. Our repo activity used to finance our purchase of securities (including repayments, in conjunction with the sales of securities, of amounts borrowed under our repurchase agreements as well as collateral posted in connection with our repo activity) provided net cash of $102.7 million. Thus our operating and investing activities, when combined with our net repo financing activities, provided net cash of $0.2 million. We also received net proceeds from the issuance of common shares of $7.4 million. We used $6.9 million to pay dividends and $0.1 million to pay various offering expenses. As a result of these activities, there was an increase in our cash holdings of $0.5 million, from $58.2 million as of December 31, 2020 to $58.7 million as of June 30, 2021.

On April 2, 2021, we commenced an "at-the-market" offering program, or "ATM program," by entering into equity distribution agreements with third party sales agents under which we are authorized to offer and sell up to $75.0 million of common shares from time to time. From commencement of the ATM program through August 5, 2022, we issued 163,269 common shares under the ATM program which provided $1.9 million of net proceeds after $29 thousand of agent commissions and offering costs. As of June 30, 2022, we had $73.0 million of common shares available to be issued remaining under the ATM program. We did not issue any shares under the ATM program during the three- or six-month periods ended June 30, 2022.

On June 13, 2018, our Board of Trustees approved the adoption of a share repurchase program under which we are authorized to repurchase up to 1.2 million common shares. The program, which is open-ended in duration, allows us to make repurchases from time to time on the open market or in negotiated transactions, including through Rule 10b5-1 plans. Repurchases are at our discretion, subject to applicable law, share availability, price and our financial performance, among other considerations. During the six-month period ended June 30, 2022, the Company repurchased 30,532 of its common shares at an aggregate cost of $0.2 million, and an average price per share of $6.57. Under the current repurchase program adopted on June 13, 2018, we have repurchased 464,703 common shares through August 5, 2022 at an average price per share of $9.26 and an aggregate cost of $4.3 million, and have authorization to repurchase an additional 735,297 common shares.

Based on our current portfolio, amount of free cash on hand, debt-to-equity ratio and current and anticipated availability of credit, we believe that our capital resources will be sufficient to enable us to meet anticipated short-term and long-term liquidity requirements.

We are not required by our investment guidelines to maintain any specific debt-to-equity ratio, and we believe that the appropriate leverage for the particular assets we hold depends on the credit quality and risk of those assets, as well as the general availability and terms of stable and reliable financing for those assets.

Contractual Obligations and Commitments

We are a party to a management agreement with our Manager. Pursuant to that agreement, our Manager is entitled to receive a management fee based on shareholders' equity, reimbursement of certain expenses and, in certain circumstances, a termination fee. Such fees and expenses do not have fixed and determinable payments. For a description of the management agreement provisions, see Note 9 to our consolidated financial statements.

We enter into repurchase agreements with third-party broker-dealers whereby we sell securities to such broker-dealers at agreed-upon purchase prices at the initiation of the repurchase agreements and agree to repurchase such securities at predetermined repurchase prices and termination dates, thus providing the broker-dealers with an implied interest rate on the funds initially transferred to us by the broker-dealers. We may enter into reverse repurchase agreements with third-party broker-dealers whereby we purchase securities under agreements to resell at an agreed-upon price and date. In general, we most often will enter into reverse repurchase agreement transactions in order to effectively borrow securities that we can then deliver to counterparties to whom we have made short sales of the same securities. The implied interest rates on the repurchase agreements and reverse repurchase agreements we enter into are based upon competitive market rates at the time of initiation. Repurchase agreements and reverse repurchase agreements that are conducted with the same counterparty may be reported on a net basis if they meet the requirements of ASC 210-20, Balance Sheet, Offsetting. As of both June 30, 2022 and December 31, 2021, there were no repurchase agreements and reverse repurchase agreements reported on a net basis on the Consolidated

Balance Sheet.

As of June 30, 2022, we had $1.0 billion of outstanding borrowings with 15 counterparties.

Off-Balance Sheet Arrangements

As of June 30, 2022, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitment or intent to provide funding to any such entities. As such, we are not materially exposed to any market, credit, liquidity, or financing risk that could arise if we had engaged in such relationships.

Inflation

Virtually all of our assets and liabilities are interest rate-sensitive in nature. As a result, interest rates and other factors generally influence our performance more than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.

The primary components of our market risk are related to interest rate risk, prepayment risk, and credit risk. We seek to actively manage these and other risks and to acquire and hold assets that we believe justify bearing those risks, and to maintain capital levels consistent with those risks.

Interest Rate Risk

Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control. We are subject to interest rate risk in connection with most of our assets and liabilities. For some securities in our portfolio, the coupon interest rates on, and therefore also the values of, such securities are highly sensitive to interest rate movements, such as inverse floating rate RMBS, which benefit from falling interest rates. Our repurchase agreements generally have maturities of up to 364 days and carry interest rates that are determined by reference to a benchmark rate such as LIBOR or SOFR for those same periods. Whenever one of our fixed-rate repo borrowings matures, it will generally be replaced with a new fixed-rate repo borrowing based on market interest rates prevailing at such time. Subject to maintaining our qualification as a REIT and our exclusion from registration under the Investment Company Act, we opportunistically hedge our interest rate risk by entering into interest rate swaps, TBAs, U.S. Treasury securities, Eurodollar and U.S. Treasury futures, and other instruments. In general, such hedging instruments are used to mitigate the interest rate risk arising from the mismatch between the duration of our financed Agency RMBS and the duration of the liabilities used to finance such assets.

In addition to measuring and mitigating the risk related to changes in interest rates with respect to the generally shorter-term liabilities we incur to acquire and hold generally longer-lived RMBS, we also monitor the effect of changes in interest rates on the discounted present value of our portfolio of assets and liabilities. The following sensitivity analysis table shows the estimated impact on the fair value of our portfolio segregated by certain identified categories as of June 30, 2022, assuming a static portfolio and immediate and parallel shifts in interest rates from current levels as indicated below.

(In thousands)

Our analysis of interest rate risk is derived from Ellington's proprietary models as well as third-party information and analytics. Many assumptions have been made in connection with the calculations set forth in the table above and, as such, there can be no assurance that assumed events will occur or that other events will not occur that would affect the outcomes. For example, for each hypothetical immediate shift in interest rates, assumptions have been made as to the response of mortgage prepayment rates, the shape of the yield curve, and market volatilities of interest rates; each of the foregoing factors can significantly and adversely affect the fair value of our interest rate sensitive instruments.

The above analysis utilizes assumptions and estimates based on management's judgment and experience, and relies on financial models, which are inherently imperfect; in fact, different models can produce different results for the same securities. While the table above reflects the estimated impacts of immediate parallel interest rate increases and decreases on specific categories of instruments in our portfolio, we intend to actively trade many of the instruments in our portfolio and intend to diversify our portfolio to reflect a portfolio comprised primarily of Agency RMBS, and, to a lesser extent, non-Agency RMBS and mortgage-related assets. Therefore, our current or future portfolios may have risks that differ significantly from those of our June 30, 2022 portfolio estimated above. Moreover, the impact of changing interest rates on fair value can change significantly when interest rates change by a greater amount than the hypothetical shifts assumed above. Furthermore, our portfolio is subject to many risks other than interest rate risks, and these additional risks may or may not be correlated with changes in interest rates. For all of the foregoing reasons and others, the table above is for illustrative purposes only and actual changes in interest rates would likely cause changes in the actual fair value of our portfolio that would differ from those presented above, and such differences might be significant and adverse. See "Business—Special Note Regarding Forward-Looking Statements."

Prepayment Risk

Prepayment risk is the risk of change, whether an increase or a decrease, in the rate at which principal is returned in respect to mortgage loans underlying RMBS, including both through voluntary prepayments and through liquidations due to defaults and foreclosures. Most significantly, our portfolio is exposed to the risk of changes in prepayment rates of the mortgage loans underlying our RMBS. This rate of prepayment is affected by a variety of factors, including the prevailing level of interest rates as well as economic, demographic, tax, social, legal, and other factors. Mortgage prepayment rates can be highly sensitive to changes in interest rates, but they are also affected by housing turnover, which can be driven by factors other than interest rates, including worker mobility and home price appreciation. Changes in prepayment rates will have varying effects on the different types of securities in our portfolio, and we attempt to take these effects into account in making asset management decisions. Increases in prepayment rates may cause us to experience both realized and unrealized losses on our interest-only securities, or "IOs," and inverse interest only securities, or "IIOs," as these securities are extremely sensitive to prepayment rates. Conversely, decreases in prepayment rates on our securities with below-market interest rates may cause the duration of such securities to extend, which may cause us to experience unrealized losses on such securities. Prepayment rates, besides being subject to interest rates and borrower behavior, are also substantially affected by government policy and regulation. For example, prepayment rates are generally lower in states with substantially higher mortgage recording taxes.

Credit Risk

We are subject to credit risk in connection with certain of our assets, especially our non-Agency RMBS. Credit losses on real estate loans underlying our non-Agency RMBS can occur for many reasons, including, but not limited to, poor origination practices, fraud, faulty appraisals, documentation errors, poor underwriting, legal errors, poor servicing practices, weak economic conditions, decline in the value of homes, special hazards, earthquakes and other natural events, over-leveraging of the borrower on the property, reduction in market rents and occupancy rates and poor property management services in the case of rented homes, changes in legal protections for lenders, reduction in personal income, job loss, and personal events such as divorce or health problems. Property values are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional, and local economic conditions (which may be adversely affected by industry slowdowns and other factors), local real estate conditions (such as an oversupply of housing), changes or continued weakness in specific industry segments, construction quality, age and design, demographic factors, and retroactive changes to building or similar codes. For mortgage-related instruments, the two primary components of credit risk are default risk and severity risk.

Default Risk

Default risk is the risk that borrowers will fail to make principal and interest payments on their mortgage loans. Subject to maintaining our qualification as a REIT and our exclusion from registration under the Investment Company Act, we may selectively attempt to mitigate our default risk by, among other things, opportunistically entering into credit default swaps and total return swaps. These instruments can reference various RMBS indices, corporate bond indices, or corporate entities, such as publicly traded REITs. We also rely on third-party mortgage servicers to mitigate our default risk, but such third-party mortgage servicers may have little or no economic incentive to mitigate loan default rates.

Severity Risk

Severity risk is the risk of loss upon a borrower default on a mortgage loan underlying our RMBS. Severity risk includes the risk of loss of value of the property underlying the mortgage loan as well as the risk of loss associated with taking over the property, including foreclosure costs. We rely on third-party mortgage servicers to mitigate our severity risk, but such third-party mortgage servicers may have little or no economic incentive to mitigate loan loss severities. Such mitigation efforts may include loan modification programs and prompt foreclosure and property liquidation following a default.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosures. An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2022. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2022.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

For information regarding factors that could affect our results of operations, financial condition, and liquidity, see the risk factors discussed under "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes from these previously disclosed risk factors. See also "Special Note Regarding Forward-Looking Statements," included in Part I, Item 2 of this Quarterly Report on Form 10-Q.