[ad_1]
Except where the context suggests otherwise, references in this Quarterly Report on Form 10-Q to "EFC," "we," "us," and "our" refer toEllington Financial Inc. and its consolidated subsidiaries, includingEllington Financial Operating Partnership LLC , our operating partnership subsidiary, which we refer to as our "Operating Partnership." We conduct all of our operations and business activities through ourOperating Partnership . Our "Manager" refers toEllington Financial Management LLC , our external manager, "Ellington" refers toEllington Management Group, L.L.C. and its affiliated investment advisory firms, including our Manager, and "Manager Group " refers collectively to officers and directors of EFC, and partners and affiliates of Ellington (including families and family trusts of the foregoing). In certain instances, references to our Manager and services to be provided to us by our Manager may also include services provided by Ellington and its other affiliates from time to time. Special Note Regarding Forward-Looking Statements When used in this Quarterly Report on Form 10-Q, in future filings with theSecurities 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 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 investments; market volatility; changes in the prepayment rates on the mortgage loans underlying the securities owned by us for which the principal and interest payments are guaranteed by aU.S. government agency or aU.S. government-sponsored entity; increased rates of default and/or decreased recovery rates on our 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"; our ability to maintain our qualification as a real estate investment trust, or "REIT"; 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, 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 invest in a diverse array of real-estate-related and other financial assets, including residential and commercial mortgage loans, residential mortgage-backed securities, or "RMBS," commercial mortgage-backed securities, or "CMBS," consumer loans and asset-backed securities, or "ABS," including ABS backed by consumer loans, collateralized loan obligations, or "CLOs," non-mortgage- and mortgage-related derivatives, equity investments in loan origination companies, and other strategic investments. We are externally managed and advised by our Manager, an affiliate of Ellington. Ellington is a registered investment adviser with a 26-year history of investing in the Agency and credit markets. We conduct all of our operations and business activities through theOperating Partnership . As ofSeptember 30, 2021 , we have an ownership interest of approximately 98.8% in theOperating Partnership . The remaining ownership interest of approximately 1.2% in theOperating Partnership represents the interests in theOperating Partnership that are owned by an affiliate of our Manager, our directors, and certain current and former Ellington employees and their related parties, and is reflected in our financial statements as a non-controlling interest. Our primary objective is to generate attractive, risk-adjusted total returns for our stockholders. We seek to attain this objective by utilizing an opportunistic strategy to make investments, without restriction as to ratings, structure, or position in the capital structure, that we believe compensate us appropriately for the risks associated with them rather than targeting a specific yield. Our evaluation of the potential risk-adjusted return of any potential investment typically involves weighing the potential returns of such investment under a variety of economic scenarios against the perceived likelihood of the various 75 -------------------------------------------------------------------------------- Table of Contents scenarios. Potential investments subject to greater risk (such as those with lower credit ratings and/or those with a lower position in the capital structure) will generally require a higher potential return to be attractive in comparison to investment alternatives with lower potential return and a lower degree of risk. However, at any particular point in time, depending on how we perceive the market's pricing of risk both generally and across sectors, we may favor higher-risk assets or we may favor lower-risk assets, or a combination of the two, in the interests of portfolio diversification or other considerations. ThroughSeptember 30, 2021 , our credit portfolio, which includes all of our investments other than RMBS for which the principal and interest payments are guaranteed by aU.S. government agency or aU.S. government-sponsored entity, or "Agency RMBS," has been the primary driver of our risk and return, and we expect that this will continue in the near- to medium-term. For more information on our targeted assets, see "-Our Targeted Asset Classes" below. We believe that Ellington's capabilities allow our Manager to identify attractive assets in these classes, value these assets, monitor and forecast the performance of these assets, and opportunistically hedge our risk with respect to these assets. We continue to maintain a highly leveraged portfolio of Agency RMBS to take advantage of opportunities in that market sector, to help maintain our exclusion from registration as an investment company under the Investment Company Act, and to help maintain our qualification as a REIT. Unless we acquire very substantial amounts of whole mortgage loans or there are changes to the rules and regulations applicable to us under the Investment Company Act and/or to our qualification as a REIT, we expect that we will continue to maintain some amount of Agency RMBS. The strategies that we employ are intended to capitalize on opportunities in the current market environment. Subject to maintaining our qualification as a REIT, we intend to adjust our strategies to changing market conditions by shifting our asset allocations across various asset classes as credit and liquidity trends evolve over time. We believe that this flexibility, combined with Ellington's experience, will help us generate more consistent returns on our capital throughout changing market cycles. Subject to maintaining our qualification as a REIT, we opportunistically hedge our credit risk, interest rate risk, and foreign currency risk; however, at any point in time we may choose not to hedge all or a portion of these risks, and we will generally not hedge those risks that we believe are appropriate for us to take at such time, or that we believe would be impractical or prohibitively expensive to hedge. We also use leverage in our credit strategy, albeit significantly less leverage than that used in our Agency RMBS strategy. ThroughSeptember 30, 2021 , we financed the vast majority of our Agency RMBS assets, and a portion of our credit assets, through repurchase agreements, which we sometimes refer to as "repos," which we account for as collateralized borrowings. We expect to continue to finance the vast majority of our Agency RMBS through the use of repos. In addition to financing assets through repos, we also enter into other secured borrowing transactions, which are accounted for as collateralized borrowings, to finance certain of our loan assets. We have also obtained, through the securitization markets, term financing for certain of our non-qualified mortgage, or "non-QM," loans, certain of our consumer loans, and certain of our leveraged corporate loans. Additionally, we have issued unsecured long-term debt. As ofSeptember 30, 2021 , outstanding borrowings under repos and Total other secured borrowings (which include Other secured borrowings and Other secured borrowings, at fair value, as presented on our Condensed Consolidated Balance Sheet) were$3.1 billion , of which approximately 47%, or$1.4 billion , relates to our Agency RMBS holdings. The remaining outstanding borrowings relate to our credit portfolio. As ofSeptember 30, 2021 , we also had$86.0 million outstanding of unsecured long-term debt, maturing in September of 2022, or the "Senior Notes." The Senior Notes bear interest at a rate of 5.50%, subject to adjustment based on changes, if any, in the ratings of the Senior Notes. The indenture governing the Senior Notes contains a number of covenants, including several financial covenants. The Senior Notes are rated A by Egan-Jones Rating Company1. See Note 11 of the notes to our condensed consolidated financial statements for further detail on the Senior Notes. 1A rating is not a recommendation to buy, sell or hold securities. Ratings may be subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating. 76 -------------------------------------------------------------------------------- Table of Contents As ofSeptember 30, 2021 , our book value per share of common stock, calculated using Total Stockholders' Equity less the aggregate liquidation preference of outstanding preferred stock, was$18.35 . Our debt-to-equity ratio was 2.9:1 as ofSeptember 30, 2021 . Our debt-to-equity ratio does not account for liabilities other than debt financings and does not include debt associated with securitization transactions accounted for as sales. Our recourse debt-to-equity ratio was 1.8:1 as ofSeptember 30, 2021 . Adjusted for unsettled purchases and sales, our debt-to-equity ratio and recourse debt-to-equity ratio were 2.9:1 and 1.9:1, respectively, as ofSeptember 30, 2021 . OnJuly 9, 2021 , we completed a follow-on offering of 6,000,000 shares of our common stock. OnJuly 29, 2021 , we issued an additional 303,000 shares of common stock pursuant to the exercise of the underwriters' option. The issuance and sale of the 6,303,000 shares of common stock generated net proceeds, after underwriters' discounts and commissions and offering costs, of$113.1 million . OnAugust 6, 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 10.0 million shares of common stock from time to time. Through commencement of the ATM program throughSeptember 30, 2021 , we issued 1,549,900 shares of common stock under the ATM program which provided$28.2 million of net proceeds after$0.4 million of agent commissions and offering costs. OnOctober 15, 2021 , we completed a follow-on offering of 5,750,000 shares of our common stock, including 750,000 shares of common stock issued pursuant to the exercise of the underwriters' option. The issuance and sale of the 5,750,000 shares of common stock generated net proceeds, after underwriters' discounts and commissions and offering costs, of$103.5 million . We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, or "the Code," commencing with our taxable year endedDecember 31, 2019 . Provided that we maintain our qualification as a REIT, we generally will not be subject toU.S. federal, state, and local income tax on our REIT taxable income that is currently distributed to our stockholders. Any taxes paid by a domestic taxable REIT subsidiary, or "TRS," will reduce the cash available for distribution to our stockholders. REITs are subject to a number of organizational and operational requirements, including a requirement that they currently distribute at least 90% of their annual REIT taxable income excluding net capital gains. Our Targeted Asset Classes Our targeted asset classes currently include investments in theU.S. andEurope (as applicable) in the categories listed below. Subject to maintaining our qualification as a REIT, we expect to continue to invest in these targeted asset classes. Also, we expect to continue to hold certain of our targeted assets through one or more TRSs. As a result, a portion of the income from such assets will be subject toU.S. federal and certain state corporate income taxes, as applicable. 77 --------------------------------------------------------------------------------
Table of Contents
Asset Class Principal Assets
Agency RMBS . Whole pool pass-through certificates;
. Partial pool pass-through certificates;
. Agency collateralized mortgage
bonds or “CMO”, including
interest only securities, or "IOs," principal only securities, or
"POs," inverse interest only securities, or "IIOs"; and
CLOs . Retained tranches from CLO securitizations, including
participating in the accumulation of the underlying assets for
such securitization by providing capital to the vehicle
accumulating assets; and
. Other CLO debt and equity tranches.
CMBS and Commercial Mortgage . CMBS; and
Loans . Commercial mortgage loans and other commercial real estate debt.
Consumer Loans and ABS . Consumer loans;
. ABS, including ABS backed by consumer loans; and
. Retained tranches from
securitizations to which we have
contributed assets.
Mortgage derivatives. Mortgage transmission certificates to be announced, or “TBAâ€;
. Credit default swaps, or "CDS," on
Individual RMBS, on the ABX,
CMBX and PrimeX indices and on other
mortgage loan indices; and
. Other mortgage-related derivatives. Non-Agency RMBS . RMBS backed by prime jumbo, Alt-A,
non-QM prefabricated housing,
and subprime mortgages;
. RMBS backed by fixed rate mortgages,
Variable rate mortgages, or
"ARMs," Option-ARMs, and Hybrid
Arms;
. RMBS backed by mortgages on
single-family rental properties;
. RMBS backed by first lien and second lien mortgages;
. Investment grade and non-investment grade securities;
. Senior and subordinated securities;
. IOs, POs, IIOs, and inverse floaters;
. Collateralized debt obligations, or "CDOs";
. RMBS backed by European residential
mortgage loans, or “European RMBSâ€;
and
. Retained tranches from
securitizations in which we have
participated.
Residential Mortgage Loans . Residential non-performing mortgage loans, or "NPLs";
. Re-performing loans, or "RPLs,"
which are generally loans that
were modified and/or formerly NPLs
where the borrower took over
making payments in some form or amount;
. Residential "transition loans," such as residential bridge loans
and residential "fix-and-flip" loans;
. Non-QM loans; and
. Retained tranches from
securitizations to which we have
contributed assets.
Strategic Loan Investments. Strategic investments in equity and / or debt in loan originators and originators
mortgage-related entities; Other . Real estate, including commercial
and residential real estate;
. Corporate debt and equity securities and corporate loans;
. Mortgage servicing rights, or "MSRs";
. Credit risk transfer securities, or "CRTs"; and
. Other non-mortgage-related derivatives.
78
-------------------------------------------------------------------------------- Table of Contents Agency RMBS Our Agency RMBS assets consist primarily of whole pool (and to a lesser extent, partial pool) pass-through certificates, the principal and interest of which are guaranteed by a federally chartered corporation, such as the Federal National Mortgage Association, or "Fannie Mae," the Federal Home Loan Mortgage Corporation, or "Freddie Mac," or theGovernment National Mortgage Association , within theU.S. Department of Housing and Urban Development , or "Ginnie Mae ," and which are backed by ARMs, Hybrid ARMs, or fixed-rate mortgages. In addition to investing in pass-through certificates which are backed by traditional mortgages, we have also invested in Agency RMBS backed by reverse mortgages. Reverse mortgages are mortgage loans for which neither principal nor interest is due until the borrower dies, the home is sold, or other trigger events occur. Mortgage pass-through certificates are securities representing undivided interests in pools of mortgage loans secured by real property where payments of both interest and principal, plus prepaid principal, on the securities are made monthly to holders of the security, in effect "passing through" monthly payments made by the individual borrowers on the mortgage loans that underlie the securities, net of fees paid to the issuer/guarantor and servicers of the securities. Whole pool pass-through certificates are mortgage pass-through certificates that represent the entire ownership of (as opposed to merely a partial undivided interest in) a pool of mortgage loans. Our Agency RMBS assets are typically concentrated in specified pools. 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 strategy also includes RMBS that are backed by ARMs or Hybrid ARMs and reverse mortgages, and CMOs, including IOs, POs, and IIOs. CLOs CLOs are a form of asset-backed security collateralized by syndicated corporate loans. We have retained, and may retain in the future, tranches from CLO securitizations for which we have participated in the accumulation of the underlying assets, typically by providing capital to a vehicle accumulating assets for such CLO securitization. Such vehicles may enter into warehouse financing facilities in order to facilitate such accumulation. Securitizations can effectively provide us with long-term, locked-in financing on the related collateral pool, with an effective cost of funds well below the expected yield on the collateral pool. Our CLO holdings may include both debt and equity interests. CMBS We acquire CMBS, which are securities collateralized by mortgage loans on commercial properties. The majority of CMBS issued are fixed rate securities backed by fixed rate loans made to multiple borrowers on a variety of property types, though single-borrower CMBS and floating rate CMBS have also been issued. The majority of CMBS utilize senior/subordinate structures, similar to those found in non-Agency RMBS. Subordination levels vary so as to provide for one or moreAAA credit ratings on the most senior classes, with less senior securities rated investment grade and non-investment grade, including a first loss component which is typically unrated. This first loss component is commonly referred to as the "B-piece," which is the most subordinated (and therefore highest yielding and riskiest) tranche of a CMBS securitization. Much of our focus within the CMBS sector has been on B-pieces, but we also acquire other CMBS with more senior credit priority. Commercial Mortgage Loans and Other Commercial Real Estate Debt We acquire commercial mortgage loans, which are loans secured by liens on commercial properties, including hotel, industrial, multi-family, office and retail properties. Loans may be fixed or floating rate and will generally have maturities ranging from one to ten years. We typically acquire first lien loans but may also acquire subordinated loans. As ofSeptember 30, 2021 , all of our commercial mortgage loans were first lien loans. Commercial real estate debt typically limits the borrower's right to freely prepay for a period of time through provisions such as prepayment fees, lockout, yield maintenance, or defeasance provisions. Some of the commercial mortgage loans that we acquire may be non-performing, underperforming, or otherwise distressed; these loans are typically acquired at a discount both to their unpaid principal balances and to the value of the underlying real estate. We also participate in the origination of "bridge" loans, which have shorter terms and higher interest rates than more traditional commercial mortgage loans. Bridge loans are typically secured by properties in transition, where the borrower is in the process of either re-developing or stabilizing operations at the property. Properties securing these loans may include multi-family, retail, office, industrial, and other commercial property types. Within both our loan acquisition and loan origination strategies, we generally focus on smaller balance loans and/or loan packages that are less-competitively-bid. These loans typically have balances that are less than$20 million , and are secured by 79 -------------------------------------------------------------------------------- Table of Contents real estate and, in some cases, a personal guarantee from the borrower. Consumer Loans and ABS We acquireU.S. consumer whole loans and ABS, including ABS backed byU.S. consumer loans. OurU.S. consumer loan portfolio consists of unsecured loans and secured auto loans. We are currently purchasing newly originated consumer loans under flow agreements with originators, as well as seasoned consumer loans in the secondary market, and we continue to evaluate new opportunities. TBAs and Other Mortgage-Related Derivatives In addition to investing in specified pools of Agency RMBS, we utilize TBA transactions, whereby we agree to purchase or sell, for future delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date. TBAs are liquid, have quoted market prices, and represent the most actively traded class of mortgage-backed securities, or "MBS." TBA trading is based on the assumption that mortgage pools that are eligible to be delivered at TBA settlement are fungible and thus the specific mortgage pools to be delivered do not need to be explicitly identified at the time a trade is initiated. We generally engage in TBA transactions for purposes of managing certain risks associated with our investment strategies. Other than with respect to TBA transactions entered into by our TRSs, most of our TBA transactions are treated for tax purposes as hedging transactions used to hedge indebtedness incurred to acquire or carry real estate assets, or "qualifying liability hedges." The principal risks that we use TBAs to mitigate are interest rate and yield spread risks. For example, we may hedge the interest rate and/or yield spread risk inherent in our long Agency RMBS by taking short positions in TBAs that are similar in character. Alternatively, we may opportunistically engage in TBA transactions because we find them attractive in their own right, from a relative value perspective or otherwise. For accounting purposes, in accordance with generally accepted accounting principles inthe United States of America , or "U.S. GAAP," we classify TBA transactions as derivatives. We also take long and short positions in various other mortgage-related derivative instruments, including mortgage-related credit default swaps. A credit default swap is a credit derivative contract in which one party (the protection buyer) pays an ongoing periodic premium (and often an upfront payment as well) to another party (the protection seller) in return for compensation for default (or similar credit event) by a reference entity. In this case, the reference entity can be an individual MBS or an index of several MBS, such as an ABX, PrimeX, or CMBX index. Payments from the protection seller to the protection buyer typically occur if a credit event takes place. A credit event can be triggered by, among other things, the reference entity's failure to pay its principal obligations or a severe ratings downgrade of the reference entity. Non-Agency RMBS We acquire non-Agency RMBS backed by prime jumbo, Alt-A, non-QM, manufactured housing, subprime residential, and single-family-rental mortgage loans. Our non-Agency RMBS holdings can include investment-grade and non-investment grade classes, including non-rated classes. Non-Agency RMBS are generally debt obligations issued by private originators of, or investors in, residential mortgage loans. Non-Agency RMBS generally are issued as CMOs and are backed by pools of whole mortgage loans or by mortgage pass-through certificates. Non-Agency RMBS generally are securitized in senior/subordinated structures, or in excess spread/over-collateralization structures. In senior/subordinated structures, the subordinated tranches generally absorb all losses on the underlying mortgage loans before any losses are borne by the senior tranches. In excess spread/over-collateralization structures, losses are first absorbed by any existing over-collateralization, then borne by subordinated tranches and excess spread, which represents the difference between the interest payments received on the mortgage loans backing the RMBS and the interest due on the RMBS debt tranches, and finally by senior tranches and any remaining excess spread. We also have acquired, and may acquire in the future, European RMBS, including retained tranches from European RMBS securitizations in which we have participated. Residential Mortgage Loans Our residential mortgage loans include newly originated non-QM loans, residential transition loans, as well as legacy residential NPLs and RPLs. A non-QM loan is not necessarily high-risk, or subprime, but is instead a loan that does not conform to the complex Qualified Mortgage, or "QM," rules of theConsumer Financial Protection Bureau . For example, many non-QM loans are made to creditworthy borrowers who cannot provide traditional documentation for income, such as borrowers who are self-employed. There is also demand from certain creditworthy borrowers for loans above the QM 43% debt-to-income ratio limit that still meet all ability-to-repay standards. We hold an equity investment in a non-QM originator, 80 -------------------------------------------------------------------------------- Table of Contents and to date we have purchased the vast majority of our non-QM loans from this originator, although we could potentially purchase a greater share of non-QM loans from other sources in the future. The residential transition loans that we originate or purchase include: (i) "fix and flip" loans, which are made to real estate investors for the purpose of acquiring residential homes, making value-add improvements to such homes, and reselling the newly rehabilitated homes for a potential profit, and (ii) loans made to real estate investors for a "business purpose," such as purchasing a rental investment property, financing or refinancing a fully rehabilitated home awaiting sale, or securing short-term financing pending qualification for longer-term lower-rate financing. Our residential transition loans are secured by non-owner occupied properties, and are typically structured as fixed-rate, interest-only loans with terms to maturity between 6 and 24 months. Our underwriting guidelines focus on both the "as is" and "as repaired" property values, borrower experience as a real estate investor, and asset verification. We remain active in the market for residential NPLs and RPLs. The market for large residential NPL and RPL pools has remained highly concentrated, with the great majority having traded to only a handful of large players who typically securitize the residential NPLs and RPLs that they purchase. As a result, we have continued to focus our acquisitions on less-competitively-bid, and more attractively-priced mixed legacy pools sourced from motivated sellers. Strategic Equity Investments in Loan Originators We have made, and in the future may make additional, equity investments in loan originators and other related entities; to date, our investments have represented non-controlling interests, although we are not restricted from holding controlling interests in such entities. We have also acquired debt investments and/or warrants in certain of these loan originators. We have also entered into various other arrangements, such as entering into flow agreements or providing guarantees or financing lines, with certain of the loan originators in which we have invested. Other Investment Assets Our other investment assets include real estate, including residential and commercial real property, corporate debt and equity securities, corporate loans, which can include litigation finance loans, CRTs, and other non-mortgage-related derivatives. We do not typically purchase real property directly; rather, our real estate ownership usually results from foreclosure activity with respect to our acquired residential and commercial loans. We have not yet acquired mortgage servicing rights directly, but we may do so in the future. Hedging Instruments Interest Rate Hedging We opportunistically hedge our interest rate risk by using various hedging strategies, subject to maintaining our qualification as a REIT. The interest rate hedging instruments that we use and may use in the future include, without limitation: •TBAs; •interest rate swaps (including floating-to-fixed, fixed-to-floating, floating-to-floating, or more complex swaps such as floating-to-inverse floating, callable or non-callable); •CMOs; •U.S.Treasury securities; •swaptions, caps, floors, and other derivatives on interest rates; •futures and forward contracts; and •options on any of the foregoing. Because fluctuations in short-term interest rates may expose us to fluctuations in the spread between the interest we earn on our investments and the interest we pay on our borrowings, we may seek to manage such exposure by entering into short positions in interest rate swaps. An interest rate swap is an agreement to exchange interest rate cash flows, calculated on a notional principal amount, at specified payment dates during the life of the agreement. Typically, one party pays a fixed interest rate and receives a floating interest rate and the other party pays a floating interest rate and receives a fixed interest rate. Each party's payment obligation is computed using a different interest rate. In an interest rate swap, the notional principal is generally not exchanged. 81 -------------------------------------------------------------------------------- Table of Contents Credit Risk Hedging We enter into credit-hedging positions in order to protect against adverse credit events with respect to our credit investments, subject to maintaining our qualification as a REIT. Our credit hedging portfolio can vary significantly from period to period, and can encompass a wide variety of financial instruments, including corporate debt or equity-related instruments, RMBS- or CMBS-related instruments, or instruments involving other markets. Our hedging instruments can include both "single-name" instruments (i.e., instruments referencing one underlying entity or security) and hedging instruments referencing indices. Currently, our credit hedges consist primarily of financial instruments tied to corporate credit, such as CDS on corporate bond indices, short positions in and CDS on corporate bonds; and positions involving exchange traded funds, or "ETFs," of corporate bonds. Our credit hedges also currently include CDS tied to individual MBS or an index of several MBS, such as CDS on CMBS indices, or "CMBX." Foreign Currency Hedging To the extent that we hold instruments denominated in currencies other thanU.S. dollars, we may enter into transactions to offset the potential adverse effects of changes in currency exchange rates, subject to maintaining our qualification as a REIT. In particular, we may use currency forward contracts and other currency-related derivatives to mitigate this risk. 82 -------------------------------------------------------------------------------- Table of Contents Trends and Recent Market Developments Market Overview •TheU.S. Federal Reserve , or the "Federal Reserve ," continued its accommodative monetary policy in the third quarter of 2021. At both its July and September meetings, theFederal Reserve maintained its target range of 0.00%-0.25% for the federal funds rate, and also maintained its directions to the Open Market Desk to increase its holdings ofU.S. Treasury securities by$80 billion per month, and of Agency RMBS by$40 billion per month. In addition, in July, theFederal Reserve announced the establishment of a standing repurchase agreement facility to support financing markets. Finally, minutes from the September meeting noted that "no decision to proceed with a moderation of asset purchases was made at the meeting, but participants generally assessed that, provided that the economic recovery remained broadly on track, a gradual tapering process that concluded around the middle of next year would likely be appropriate. Participants noted that if a decision to begin tapering purchases occurred at the next meeting, the process of tapering could commence with the monthly purchase calendars beginning in either mid-November or mid-December." •Interest rates declined in July before reversing course and rising in August and September. For the quarter, the 10-yearU.S. Treasury yield rose 2 basis points to 1.49%, while the 2-yearU.S. Treasury yield increased 3 basis points to 0.28%, and the yield spread between the 2-year and 10-yearU.S. Treasury was essentially unchanged. Interest rate volatility remained relatively elevated for much of the third quarter, as measured by the MOVE Index. •Mortgage rates also declined in July before reversing course and rising in August and September, in sympathy with long-term interest rates. For the quarter, the Freddie Mac survey 30-year mortgage rate increased by 3 basis points to 3.01%. Refinancing applications rose modestly during the quarter-after declining over the first half of 2021-with theMortgage Bankers Association's Refinance Index increasing by 9%between July 2nd and October 1st . Overall Fannie Mae 30-year MBS prepayments decreased from a CPR of 24.6 inJune 2021 to 22.2 in July, before returning to 24.6 in August and declining slightly to 24.1 in September. •LIBOR rates, which drive many of our financing costs, remained very low in the third quarter of 2021. One-month and three-month LIBOR both declined by 2 basis points during the quarter, to 0.08% and 0.13%, respectively. •Real GDP grew for the fifth-consecutive quarter, increasing at an estimated annualized rate of 2.0% in the third quarter of 2021. Meanwhile, the unemployment rate declined to 4.8% as ofSeptember 30th , from 5.9% at the end of the previous quarter. •Forbearance rates on residential mortgages continued to decline in the third quarter of 2021. According to theMortgage Bankers Association , the total forbearance rate decreased to 2.9% atSeptember 26th , from 3.9% atJune 27th . •For the third quarter of 2021, the Bloomberg BarclaysU.S. MBS Index generated a positive return of 0.10%, and an excess return (on a duration-adjusted basis) of 0.03% relative to the Bloomberg BarclaysU.S. Treasury Index. The Bloomberg BarclaysU.S. Corporate Bond Index was unchanged during the quarter, but generated a negative excess return of (0.15%); while the Bloomberg BarclaysU.S. Corporate High Yield Bond Index generated a gain of 0.92% and an excess return of 0.89%. •The strong performance ofU.S. equities continued in July and August, with the S&P 500, Dow Jones Industrial Average, and NASDAQ hitting new highs in each month. However, the market retreated in September amidst concerns over rising interest rates, softening economic data, inflation, and continued supply-chain challenges, among other factors. In September, the S&P 500 posted its worst month sinceMarch 2020 . For the third quarter, the S&P 500 rose 0.23%, the Dow Jones Industrial Average decreased 1.91%, and the NASDAQ fell 0.38%. The VIX volatility index was relatively stable throughout the third quarter, with occasional spikes. Meanwhile,London's FTSE 100 index increased 0.70% and theMSCI World global equity index fell 0.35% quarter over quarter. 83 -------------------------------------------------------------------------------- Table of Contents Portfolio Overview and Outlook The following tables summarize our investment portfolio as ofSeptember 30, 2021 andJune 30, 2021 . Credit Portfolio(1) September 30, 2021 June 30, 2021 % of Total Long % of Total Long ($ in thousands) Fair Value Credit Portfolio Fair Value Credit Portfolio Dollar Denominated: CLOs(2) $ 65,678 2.6 %$ 69,053 2.9 % CMBS 13,604 0.5 % 45,872 2.0 % Commercial mortgage loans and REO(3)(4) 325,733 12.9 % 316,010 13.5 % Consumer loans and ABS backed by consumer loans(2) 138,568 5.5 % 138,471 5.9 % Corporate debt and equity and corporate loans 26,373 1.0 % 27,939 1.2 % Debt and equity investments in loan origination entities 106,406 4.2 % 106,159 4.5 % Non-Agency RMBS 168,044 6.6 % 158,798 6.8 % Residential mortgage loans and REO(3) 1,658,879 65.5 % 1,447,202 61.8 % Non-Dollar Denominated: CLOs(2) 3,746 0.1 % 3,804 0.2 % Consumer loans and ABS backed by consumer loans 101 - % 166 - % Corporate debt and equity 14 - % 26 - % RMBS(5) 26,960 1.1 % 28,717 1.2 % Total Long Credit Portfolio$ 2,534,106 100.0 %$ 2,342,217 100.0 % Less: Non-retained tranches of consolidated securitization trusts 845,754 982,984 Total Long Credit Portfolio excluding non-retained tranches of consolidated securitization trusts$ 1,688,352 $ 1,359,233 (1)This information does not includeU.S. Treasury securities, interest rate swaps, TBA positions, or other hedge positions. (2)Includes equity investments in securitization-related vehicles. (3)REO is not considered a financial instrument and, as a result, is included at the lower of cost or fair value, as discussed in Note 2 of the notes to condensed consolidated financial statements. (4)Includes investments in unconsolidated entities holding small balance commercial mortgage loans and REO. (5)Includes an investment in an unconsolidated entity holding European RMBS. Agency RMBS Portfolio September 30, 2021 June 30, 2021 % of Long Agency % of Long Agency ($ in thousands) Fair Value Portfolio Fair Value Portfolio Long Agency RMBS: Fixed Rate$ 1,424,516 92.7 %$ 1,333,676 90.4 % Floating Rate 10,880 0.7 % 27,093 1.8 % Reverse Mortgages 63,534 4.1 % 75,934 5.1 % IOs 38,077 2.5 % 39,045 2.7 % Total Long Agency RMBS$ 1,537,007 100.0 %$ 1,475,748 100.0 % Our total long credit portfolio grew by 24% in the third quarter, to$1.688 billion as ofSeptember 30, 2021 , from$1.359 billion as ofJune 30, 2021 , as we deployed proceeds from our July equity offering. The majority of the growth occurred in the non-QM and residential transition loan strategies, while our portfolio of small balance commercial mortgage loans and non-Agency RMBS also expanded. These increases were partially offset by loan payoffs and opportunistic sales of CMBS and CLOs during the quarter Our long Agency RMBS portfolio also increased during the quarter, by 4% to$1.537 billion as ofSeptember 30, 2021 , from$1.476 billion as ofJune 30, 2021 . As ofSeptember 30, 2021 , we had cash and cash equivalents of$103.6 million , along with unencumbered assets of approximately$648.9 million . 84 -------------------------------------------------------------------------------- Table of Contents Credit Portfolio Performance Summary We had strong performance from most of our primary credit strategies in the third quarter, and similar to the prior quarter, strong net interest income and substantial net realized and unrealized gains drove results. Our loan strategies-including non-QM, residential transition, small balance commercial mortgage, and consumer loans-generated high returns on equity driven primarily by net interest income, while performance in the CMBS, CLO, and non-Agency RMBS strategies was also excellent, driven primarily by net realized and unrealized gains. Finally, despite a record quarter of originations,Longbridge Financial, LLC , a reverse mortgage originator in which we have an equity investment, had a net loss for the quarter. The loss at Longbridge Financial was driven by mark-to-market losses on its MSR portfolio due to yield spread widening and elevated prepayment speeds in the reverse mortgage sector, and this loss detracted from our results. Supplemental Credit Portfolio Information The table below details certain information regarding our investments in commercial mortgage loans as ofSeptember 30, 2021 : Gross Unrealized Weighted Average Unpaid Principal Premium Amortized ($ in thousands) Balance (Discount) Cost Gains Losses Fair Value Coupon Yield(2) Life (Years)(3) Commercial mortgage loans, held-for-investment(1)$ 352,936 $
(1,042)$ 351,894 $ 1,517 $ (175) $ 353,236 7.65 % 7.57 % 1.02 (1)Includes our allocable portion of small-balance commercial loans, based on our ownership percentage, held in variable interest entities. Our equity investments in such variable interest entities are included in Investments in unconsolidated entities, at fair value on the Condensed Consolidated Balance Sheet. (2)Excludes commercial mortgage loans, in non-accrual status, with a fair value of$40.0 million . (3)Expected average lives of loans are generally shorter than stated contractual maturities. Average lives are affected by scheduled periodic payments of principal and unscheduled prepayments of principal. The table below summarizes our interests in commercial mortgage loans by property type of the underlying real estate collateral, as a percentage of total outstanding unpaid principal balance, as ofSeptember 30, 2021 : Property Type September 30, 2021 Multifamily(1) 47.7 % Industrial(1) 17.5 % Hotel 12.7 % Mixed Use 10.6 % Retail 3.9 % Other(1) 7.6 % 100.0 % (1)Includes our allocable portion of small-balance commercial loans, based on our ownership percentage, held in variable interest entities. Our equity investments in such variable interest entities are included in Investments in unconsolidated entities, at fair value on the Consolidated Balance Sheet. The table below summarizes our interests in residential mortgage loans by loan type and REO resulting from the foreclosure of residential mortgage loans as ofSeptember 30, 2021 : September 30, 2021 Unpaid Principal Property Type Balance Fair Value In thousands Non-QM loans$ 1,374,773 $ 1,430,437 Residential transition loans 199,144 199,138 Other residential loans 28,631 27,126 Total residential mortgage loans$ 1,602,548 $ 1,656,701 Residential REO(1) 2,178 Total residential mortgage loans and residential REO(1)$ 1,658,879
(1) REO is not considered a financial instrument and, therefore, is included at the lower of cost or fair value, as indicated in note 2 of the notes to the condensed consolidated financial statements.
85 -------------------------------------------------------------------------------- Table of Contents In early 2020, there was a significant nationwide increase in loan delinquencies, forbearances, deferments, and modifications, as a result of the economic impacts of COVID-19. While we saw the effects of this in some of our portfolios, the effects moderated considerably during the second half of 2020. As ofSeptember 30, 2021 , there were no material incremental effects from COVID-related forbearance or deferment activity in our non-QM, residential transition, consumer, or small balance commercial mortgage loan portfolios. The following table provides additional details about our investments in unconsolidated entities as ofSeptember 30, 2021 : Investment in Unconsolidated Entity Description Fair Value Loan Originators: Entity Type Longbridge Financial, LLC Reverse Mortgage Loan Originator$ 65,694 Residential Mortgage Loan LendSure Mortgage Corp. Originator 27,144 Residential Mortgage Loan and Other Consumer Loan Originators 10,568 103,406 Other Unconsolidated Entities: Underlying Product Type Co-investments with Ellington affiliate(s) Commercial Mortgage Loans 23,318 Equity investments in securitization-related risk retention vehicles Consumer Loans 11,698 Other Various 3,597 38,613$ 142,019 Agency RMBS Portfolio Performance Summary Our Agency strategy had modestly positive results during a quarter in which the Agency RMBS sector had mixed performance. In July and early August, interest rates continued to fall and volatility increased, causing Agency RMBS to underperformU.S. Treasuries. Moving into the latter half of the quarter, interest rates began to increase and volatility declined, and toward the end of the quarter, Agency yield spreads tightened as the market got more clarity on theFederal Reserve's tapering plan. Incrementally higher mortgage rates-particularly in September-led to reduced expectations for prepayment rates and boosted higher-coupon RMBS, while the anticipated withdrawal ofFederal Reserve purchases negatively impacted lower-coupon RMBS. Net interest income in our Agency portfolio, strong performance from our Agency interest-only securities, and net gains on our higher-coupon specified pools exceeded net losses on our lower-coupon holdings and reverse mortgage portfolio. On the hedging side, net losses on TBA short positions, particularly on higher coupons, slightly exceeded net gains on interest-rate swaps andU.S. Treasury hedges. Average pay-ups on our specified pools decreased to 1.04% as ofSeptember 30, 2021 , from 1.10% as ofJune 30, 2021 , as new purchases during the quarter mainly consisted of pools with lower pay-ups. Pay-ups are price premiums for specified pools relative to their TBA counterparts. During the third quarter, we continued to hedge interest rate risk, primarily through the use of interest rate swaps, and short positions in TBAs,U.S. Treasury securities, and futures. The size of our short TBA position increased quarter over quarter relative to our other hedging instruments, as measured by 10-year equivalents. In addition, we continued to maintain a long TBA portfolio concentrated in lower coupons. As of bothSeptember 30, 2021 andJune 30, 2021 , the weighted average net pass-through rate on our fixed-rate specified pools was 3.1%. Portfolio turnover for our Agency strategy, as measured by sales and excluding paydowns, was approximately 9% for the three-month period endedSeptember 30, 2021 . 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 andU.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. 86 -------------------------------------------------------------------------------- Table of Contents The following table summarizes the prepayment rates for our portfolio of fixed-rate specified pools (excluding those backed by reverse mortgages) for the three-month periods endedSeptember 30, 2021 ,June 30, 2021 ,March 31, 2021 ,December 31, 2020 , andSeptember 30, 2020 . Three-Month Period Ended September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 Three-Month Constant Prepayment Rates(1) 21.6% 21.7% 23.4% 24.4% 22.0% (1)Excludes Agency fixed-rate RMBS without any 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 ofSeptember 30, 2021 andJune 30, 2021 : September 30, 2021 June 30, 2021 Weighted Weighted Current Average Loan Current Average Loan Coupon (%) Principal Fair Value Age (Months) Principal Fair Value Age (Months) (In thousands) (In
thousands)
Fixed-rate Agency RMBS:
15-year fixed-rate
mortgages:
1.50-1.99 $ 5,101 $ 5,186 8 $ 5,387 $ 5,514 5
2.00-2.49 58,368 60,577 8 48,818 50,747 6
2.50-2.99 62,447 65,376 21 58,335 61,225 19
3.00-3.49 69,022 72,889 12 72,871 76,963 9
3.50-3.99 16,514 17,711 74 19,530 20,981 63
4.00-4.49 4,766 5,085 63 5,494 5,877 59
4.50-4.99 2,951 3,107 133 3,332 3,520 130
Total 15-year fixed-rate
mortgages 219,169 229,931 21 213,767 224,827 19
20-year fixed-rate
mortgages:
2.00-2.49 2,815 2,877 10 2,953 3,032 7
2.50-2.99 45,671 47,626 11 46,551 48,634 8
4.50-4.99 407 450 94 414 442 91
Total 20-year fixed-rate
mortgages 48,893 50,953 12 49,918 52,108 9
30-year fixed-rate
mortgages:
2.00-2.49 15,809 15,914 5 6,116 6,198 5
2.50-2.99 449,537 465,503 6 360,496 374,603 4
3.00-3.49 219,897 232,680 17 208,395 219,847 17
3.50-3.99 129,157 139,077 44 128,704 138,094 47
4.00-4.49 133,535 145,379 53 147,797 159,995 51
4.50-4.99 87,400 95,979 54 90,879 99,529 52
5.00-5.49 39,757 44,014 60 47,974 53,023 54
5.50-5.99 3,393 3,882 63 3,419 3,942 61
6.00-6.49 1,037 1,204 112 1,301 1,510 95
Total 30-year fixed-rate
mortgages 1,079,522 1,143,632 25 995,081 1,056,741 26
Total fixed-rate Agency
RMBS $ 1,347,584 $ 1,424,516 24 $ 1,258,766 $ 1,333,676 24
Our net Agency premium as a percentage of the fair value of our specified pool
holdings is one metric that we use to measure the overall prepayment risk of our
specified pool portfolio. Net Agency premium represents the total premium
(excess of market value over outstanding principal balance) on our specified
pool holdings less the total premium on related net short TBA positions. The
lower our net Agency premium, the less we believe that our specified pool
portfolio is exposed to market-
87
--------------------------------------------------------------------------------
Table of Contents
wide increases in Agency RMBS prepayments. Our net Agency premium as a
percentage of fair value of our specified pool holdings was approximately 2.4%
and 3.0% as of September 30, 2021 and June 30, 2021 , respectively. These figures
take into account the net short TBA positions that we use to hedge our specified
pool holdings, which had a notional value of $632.4 million and a fair value of
$677.3 million as of September 30, 2021 , as compared to a notional value of
$601.1 million and a fair value of $640.1 million as of June 30, 2021 . Excluding
these TBA hedging positions, our Agency premium as a percentage of fair value
was approximately 5.4% and 5.7% as of September 30, 2021 and June 30, 2021 ,
respectively. Our Agency premium percentage and net Agency premium percentage
may fluctuate from period to period based on a variety of factors, including
market factors such as interest rates and mortgage rates, and, in the case of
our net Agency premium percentage, based on the degree to which we hedge
prepayment risk with short TBA positions. We believe that our focus on
purchasing pools with specific prepayment characteristics provides a measure of
protection against prepayments.
Financing
The following table details our borrowings outstanding and debt-to-equity ratios
as of September 30, 2021 and June 30, 2021 :
As of
($ in thousands) September 30, 2021 June 30, 2021
Recourse(1) Borrowings:
Repurchase Agreements $ 1,886,094 $ 1,696,285
Other Secured Borrowings 51,727 52,237
Senior Notes, at par 86,000 86,000
Total Recourse Borrowings $ 2,023,821 $ 1,834,522
Debt-to-Equity Ratio Based on Total Recourse
Borrowings(1) 1.8:1 1.9:1
Debt ratio based on
1.8:1 1.9:1 Non-Recourse(2) Borrowings: Repurchase Agreements $ 219,742$ 220,464 Other Secured Borrowings 39,254 34,137 Other Secured Borrowings, at fair value(3) 872,306 1,003,037 Total Recourse and Non-Recourse Borrowings $ 3,155,123$ 3,092,160 Debt-to-Equity Ratio Based on Total Recourse and Non-Recourse Borrowings 2.9:1 3.2:1 Debt-to-Equity Ratio Based on Total Recourse and Non-Recourse Borrowings ExcludingU.S. Treasury Securities 2.9:1 3.2:1 (1)As ofSeptember 30, 2021 andJune 30, 2021 , excludes borrowings at certain unconsolidated entities that are recourse to us. Including such borrowings, our debt-to-equity ratio based on total recourse borrowings was 1.9:1 and 2.0:1 as ofSeptember 30, 2021 andJune 30, 2021 , respectively. (2)All of our non-recourse borrowings are secured by collateral. In the event of default under a non-recourse borrowing, the lender has a claim against the collateral but not any of theOperating Partnership's other assets. In the event of default under a recourse borrowing, the lender's claim is not limited to the collateral (if any). (3)Relates to our non-QM loan securitizations, where we have elected the fair value option on the related debt. Our debt-to-equity ratio including repos, Total other secured borrowings, and our Senior Notes, but excluding repos onU.S. Treasury securities, decreased to 2.9:1 as ofSeptember 30, 2021 as compared to 3.2:1 as ofJune 30, 2021 , as borrowings related to new purchases were partially offset by paydowns of non-recourse borrowings related to our non-QM securitizations, and as total equity increased. In addition, excluding repos onU.S. Treasury securities, our recourse debt-to-equity ratio decreased slightly to 1.8:1 as ofSeptember 30, 2021 , from 1.9:1 as ofJune 30, 2021 . Our recourse debt-to-equity ratio, adjusted for unsettled purchases and sales, was 1.9:1 as of bothSeptember 30, 2021 andJune 30, 2021 . 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. Our financing costs include interest expense related to our repo borrowings, Total other secured borrowings, and Senior Notes. Historically, the interest rates on our repo borrowings and Other secured borrowings have been highly correlated with, and often have been explicitly indexed to, certain benchmark interest rates such as LIBOR or the Secured Overnight Financing Rate, or "SOFR." For the three-month period endedSeptember 30, 2021 , our average cost of funds decreased to 1.15%, as compared to 1.33% for the three-month period endedJune 30, 2021 . The period-over-period decline in our average cost of funds was primarily due to lower financing rates on our credit borrowings. 88 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Estimates Our interim unaudited condensed consolidated financial statements include the accounts ofEllington Financial Inc. , itsOperating Partnership , its subsidiaries, and variable interest entities, or "VIEs," for which we are deemed to be the primary beneficiary. All intercompany balances and transactions have been eliminated. Certain of our critical accounting policies require 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. Actual results could differ from those estimates. 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 condensed consolidated financial statements for a complete discussion of our significant accounting policies. We have identified our most critical accounting policies 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"). 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 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 condensed 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 condensed consolidated financial statements for more information on valuation techniques used by management in the valuation of our assets and liabilities. Purchases and Sales of Investments and Investment Income: Purchase and sales transactions are generally recorded on trade date. Realized and unrealized gains and losses are calculated based on identified cost. We generally amortize premiums and accrete discounts on our fixed-income investments using the effective interest method. See the notes to our condensed 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 forU.S. federal income tax purposes commencing with our taxable year endedDecember 31, 2019 . As a REIT, we generally are not subject to corporate-level federal and state income tax on net income we distribute to our stockholders within the prescribed timeframes. To qualify as a REIT, we must meet a number of organizational and operational requirements, including distributing at least 90% of our taxable income to our stockholders. Even if we qualify as a REIT, we may be subject to certain federal, state, local and foreign taxes on our income and property, and to federal income and excise taxes on our undistributed taxable income. If we fail to qualify as a REIT, and do not qualify for certain statutory relief provisions, we will be subject toU.S. federal, state, and local income taxes and may be precluded from qualifying as a REIT for the four taxable years following the year in which we fail to qualify as a REIT. We elected to treat certain domestic and foreign subsidiaries as TRSs, and may in the future elect to treat other current or future subsidiaries as TRSs. In general, a TRS may hold assets and engage in activities that we cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business. A domestic TRS may, but is not required to, declare dividends to us; such dividends will be included in our taxable income/(loss) and may necessitate a distribution to our stockholders. Conversely, if we retain earnings at the level of a domestic TRS, such earnings will increase the book equity of the consolidated entity. A domestic TRS is subject toU.S. federal, state, and local corporate income taxes. We have elected and may elect in the future to treat certain of our foreign corporate subsidiaries as TRSs and, accordingly, taxable income generated by these TRSs may not be subject toU.S. federal, state, and local corporate income taxation, but generally will be included in our income on a current basis as Subpart F income, whether or not distributed. However, certain of our foreign subsidiaries may be subject to income taxes in the relevant foreign jurisdictions. Our financial results are generally not expected to reflect provisions for current or deferred income taxes, except for any activities conducted through one or more TRSs that are subject to corporate income taxation. We follow the authoritative guidance on accounting for and disclosure of uncertainty on tax positions, which requires management to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For uncertain tax positions, the tax benefit to be recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. We did not have any unrecognized tax benefits resulting from tax positions 89 -------------------------------------------------------------------------------- Table of Contents related to the current period or our open tax years. In the normal course of business, we may be subject to examination by federal, state, local, and foreign jurisdictions, where applicable, for the current period and our open tax years. 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 the notes to our condensed consolidated financial statements for additional details on income taxes. Recent Accounting Pronouncements Refer to the notes to our condensed consolidated financial statements for a description of relevant recent accounting pronouncements. Financial Condition The following table summarizes the fair value our investment portfolio(1) as ofSeptember 30, 2021 andDecember 31, 2020 . (In thousands) September 30, 2021 December 31, 2020 Long: Credit: Dollar Denominated: CLO(2) $ 65,678 $ 181,229 CMBS 13,604 117,652 Commercial Mortgage Loans and REO(3)(5) 325,733 269,287 Consumer Loans and ABS backed by Consumer Loans(2) 138,568 112,077 Corporate Debt and Equity and Corporate Loans 26,373 12,606 Debt and Equity Investments in Loan Origination Entities(4) 106,406 79,536 Non-Agency RMBS 168,044 154,492 Residential Mortgage Loans and REO(3) 1,658,879 1,188,731 Non-Dollar Denominated: CLO(2) 3,746 6,108 Consumer Loans and ABS backed by Consumer Loans 101 306 Corporate Debt and Equity 14 28 RMBS(6) 26,960 51,388 Agency: Fixed-Rate Specified Pools 1,424,516 807,704 Floating-Rate Specified Pools 10,880 6,454 IOs 38,077 47,656 Reverse Mortgage Pools 63,534 97,629 Total Long $ 4,071,113$ 3,132,883 Short: Credit: Dollar Denominated: Corporate Debt and Equity $ - $ (218) Government Debt: Non-Dollar Denominated (30,294) (38,424) Total Short $ (30,294) $ (38,642) (1)For more detailed information about the investments in our portfolio, please see the notes to the condensed consolidated financial statements. (2)Includes equity investments in securitization-related vehicles. (3)REO is not eligible to elect the fair value option as described in Note 2 of the notes to the condensed consolidated financial statements and, as a result, is included at the lower of cost or fair value. (4)Includes corporate loan to a loan origination entity in which we hold an equity investment. (5)Includes investments in unconsolidated entities holding small balance commercial mortgage loans and REO. (6)Includes an investment in an unconsolidated entity holding European RMBS. 90 -------------------------------------------------------------------------------- Table of Contents The following table summarizes our financial derivatives portfolio(1)(2) as ofSeptember 30, 2021 . Notional Net (In thousands) Long Short Net Fair Value Mortgage-Related Derivatives: CDS on MBS and MBS Indices$ 589
Total net mortgage derivatives
1,864 Corporate-Related Derivatives: CDS on Corporate Bonds and Corporate Bond Indices 2,206 (26,022) (23,816) (1,882) Options 30,000 - 30,000 146 Warrants(3) 1,897 - 1,897 938 Total Net Corporate-Related Derivatives (798) Interest Rate-Related Derivatives: TBAs 291,283 (923,651) (632,368) (682) Interest Rate Swaps 246,599 (1,430,497) (1,183,898) (234) U.S. Treasury Futures(4) 1,900 (221,400) (219,500) 1,347 Total Interest Rate-Related Derivatives 431 Other Derivatives: Foreign Currency Forwards(5) - (16,725) (16,725) 360 Total Net Other Derivatives 360 Net Total$ 1,857 (1)For more detailed information about the financial derivatives in our portfolio, please refer to Note 8 of the notes to the condensed consolidated financial statements. (2)In the table above, fair value of certain derivative transactions are shown on a net basis. The accompanying financial statements separate derivative transactions as either assets or liabilities. As ofSeptember 30, 2021 , derivative assets and derivative liabilities were$16.0 million and$(14.1) million , respectively, for a net fair value of$1.9 million , as reflected in "Net Total" above. (3)Notional represents the maximum number of shares available to be purchased upon exercise. (4)Notional value represents the total face amount ofU.S. Treasury securities underlying all contracts held. As ofSeptember 30, 2021 , a total of 19 long and 1,965 shortU.S. Treasury futures contracts were held. (5)Short notional value representsU.S. Dollars to be received by us at the maturity of the forward contract. 91 -------------------------------------------------------------------------------- Table of Contents The following table summarizes our financial derivatives portfolio(1)(2) as ofDecember 31, 2020 . December 31, 2020 Notional Net (In thousands) Long Short Net Fair Value Mortgage-Related Derivatives: CDS on MBS and MBS Indices$ 874 $ (13,846) $ (12,972) $ 2,401 Total Net Mortgage-Related Derivatives 2,401 Corporate-Related Derivatives: CDS on Corporate Bonds and Corporate Bond Indices 67,779 (121,197) (53,418) (3,765) Total Return Swaps on Corporate Bond Indices and Corporate Debt(3) 4,161 - 4,161 (475) Warrants(4) 1,897 - 1,897 36 Total Net Corporate-Related Derivatives (4,204) Interest Rate-Related Derivatives: TBAs 149,990 (504,067) (354,077) 37 Interest Rate Swaps 253,423 (408,295) (154,872) (6,655) U.S. Treasury Futures(5) 1,900 (178,500) (176,600) (374) Total Interest Rate-Related Derivatives (6,992) Other Derivatives: Foreign Currency Forwards(6) - (22,330) (22,330) (279) Total Net Other Derivatives (279) Net Total$ (9,074) (1)For more detailed information about the financial derivatives in our portfolio, please refer to Note 8 of the notes to condensed consolidated financial statements. (2)In the table above, fair value of certain derivative transactions are shown on a net basis. The accompanying financial statements separate derivative transactions as either assets or liabilities. As ofDecember 31, 2020 , derivative assets and derivative liabilities were$15.5 million and$(24.6) million , respectively, for a net fair value of$(9.1) million , as reflected in "Net Total" above. (3)Notional value represents the face amount of the underlying asset. (4)Notional represents the maximum number of shares available to be purchased upon exercise. (5)Notional value represents the total face amount ofU.S. Treasury securities underlying all contracts held. As ofDecember 31, 2020 , a total of 19 long and 1,558 shortU.S. Treasury futures contracts were held. (6)Short notional value representsU.S. Dollars to be received by us at the maturity of the forward contract As ofSeptember 30, 2021 , our Condensed Consolidated Balance Sheet reflected total assets of$4.4 billion and total liabilities of$3.3 billion . As ofDecember 31, 2020 , our Condensed Consolidated Balance Sheet reflected total assets of$3.4 billion and total liabilities of$2.5 billion . Our investments in securities, loans, and unconsolidated entities, financial derivatives, and real estate owned included in total assets were$4.1 billion and$3.1 billion as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. Our investments in securities sold short and financial derivatives included in total liabilities were$44.4 million and$63.2 million as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. As of bothSeptember 30, 2021 andDecember 31, 2020 , investments in securities sold short consisted principally of short positions in sovereign bonds. We primarily use short positions in sovereign bonds andU.S. Treasury securities to hedge the risk of rising interest rates and foreign currency risk. Typically, we hold a net short position in TBAs. The amounts of net short TBAs, as well as of other hedging instruments, may fluctuate according to the size of our investment portfolio as well as according to how we view market dynamics as favoring the use of one hedging instrument or another. As ofSeptember 30, 2021 andDecember 31, 2020 , we had a net short notional TBA position of$632.4 million and$354.1 million , respectively. The size of the net short notional TBA position increased in conjunction with the increased size of our Agency RMBS portfolio. In addition, we increased the notional amount of long TBAs held for investment as ofSeptember 30, 2021 as compared toDecember 31, 2020 . For a more detailed discussion of our investment portfolio, see "-Trends and Recent Market Developments-Portfolio Overview and Outlook" above. We use mortgage-related credit derivatives primarily to hedge credit risk in certain credit strategies, although we also take net long positions in certain CDS on RMBS and CMBS indices. Our CDS on individual RMBS represent "single-name" positions whereby we have synthetically purchased credit protection on specific non-Agency RMBS bonds. As there is no longer an active market for CDS on individual RMBS, our portfolio in this sector continues to run off. We also use CDS on corporate bond indices, options thereon, and various other instruments as a means to hedge credit risk. As market conditions 92 -------------------------------------------------------------------------------- Table of Contents change, especially as the pricing of various credit hedging instruments changes in relation to our outlook on future credit performance, we continuously re-evaluate both the extent to which we hedge credit risk and the particular mix of instruments that we use to hedge credit risk. We may hold long and/or short positions in corporate bonds or equities. Our long and short positions in corporate bonds or equities may serve as outright investments or portfolio hedges. We use a variety of instruments to hedge interest rate risk in our portfolio, including non-derivative instruments such asU.S. Treasury securities and sovereign debt instruments, and derivative instruments such as interest rate swaps, TBAs, Eurodollar andU.S. Treasury futures, and options on the foregoing. The mix of instruments that we use to hedge interest rate risk may change materially from one period to the next. We have also entered into foreign currency forward and futures contracts in order to hedge risks associated with foreign currency fluctuations. We have entered into repos to finance many of our assets. We account for our repos as collateralized borrowings. As ofSeptember 30, 2021 indebtedness outstanding on our repos was approximately$2.1 billion . As ofSeptember 30, 2021 , our assets financed with repos consisted of Agency RMBS of$1.5 billion and credit assets of$924.7 million . As ofSeptember 30, 2021 , outstanding indebtedness under repos was$1.4 billion for Agency RMBS and$669.0 million for credit assets. As ofDecember 31, 2020 indebtedness outstanding on our repos was approximately$1.5 billion . As ofDecember 31, 2020 , our assets financed with repos consisted of Agency RMBS of$947.0 million and credit assets of$884.2 million . As ofDecember 31, 2020 , outstanding indebtedness under repos was$921.9 million for Agency RMBS and$575.1 million for credit assets. In addition to our repos, as ofSeptember 30, 2021 we had Total other secured borrowings of$963.3 million , used to finance$1.056 billion of non-QM loans, consumer loans and ABS backed by consumer loans, and small balance commercial mortgage loans. This compares to Total other secured borrowings of$806.0 million as ofDecember 31, 2020 , used to finance$906.4 million of non-QM loans, consumer loans and ABS backed by consumer loans, and small balance commercial mortgage loans. In addition to our secured borrowings, we had$86.0 million of Senior Notes outstanding as of bothSeptember 30, 2021 andDecember 31, 2020 . As ofSeptember 30, 2021 andDecember 31, 2020 our debt-to-equity ratio was 2.9:1 and 2.6:1, respectively. Excluding repos onU.S. Treasury securities, our recourse debt-to-equity ratio was 1.8:1 as ofSeptember 30, 2021 as compared to 1.6:1 as ofDecember 31, 2020 . See the discussion in "-Liquidity and Capital Resources" below for further information on our borrowings. Equity As ofSeptember 30, 2021 , our equity increased by approximately$173.7 million to$1.095 billion from$921.6 million as ofDecember 31, 2020 . The increase principally consisted of net income of$101.7 million , net proceeds from the issuance of shares of common stock of$141.3 million , after underwriters' discounts and commissions and offering costs, and contributions from our non-controlling interests of$11.5 million . These increases were partially offset by common and preferred dividends of$61.9 million and distributions to non-controlling interests of$20.3 million . Stockholders' equity, which excludes the non-controlling interests related to the minority interest in theOperating Partnership as well as the minority interests of our joint venture partners, was$1.063 billion as ofSeptember 30, 2021 . 93 -------------------------------------------------------------------------------- Table of Contents Results of Operations for the Three- and Nine-Month Periods EndedSeptember 30, 2021 and 2020 The following table summarizes our results of operations for the three- and nine-month periods endedSeptember 30, 2021 and 2020: Three-Month Period Ended Nine-Month Period Ended September 30, September 30, September 30, (In thousands except per share amounts) 2021 2020 September 30, 2021 2020 Interest Income (Expense) Interest income$ 40,146 $ 43,075 $ 126,115 $ 134,463 Interest expense (10,604) (12,937) (33,111) (49,713) Net interest income 29,542 30,138 93,004 84,750 Other Income (Loss) Realized and unrealized gains (losses) on securities and loans, net 3,147 25,654 13,633 (67,753) Realized and unrealized gains (losses) on financial derivatives, net (627) (1,918) 10,621 (27,811) Realized and unrealized gains (losses) on real estate owned, net 622 104 (1,498) (341) Other, net 2,986 (2,747) 9,310 (1,503) Total other income (loss) 6,128 21,093 32,066 (97,408)
Expenses
Base management fee to affiliate (Net of fee rebates of$395 ,$201 ,$784 , and$853 , respectively)(1) 3,675 2,981 10,308 8,330 Incentive fee to affiliate 5,255 - 12,412 - Other investment related expenses 2,879 3,578 12,565 12,805 Other operating expenses 4,438 3,919 12,716 11,508 Total expenses 16,247 10,478 48,001 32,643 Net Income (Loss) before Income Tax Expense (Benefit) and Earnings (Losses) from Investments in Unconsolidated Entities 19,423 40,753 77,069 (45,301) Income tax expense (benefit) (2,009) 2,494 3,149 3,490 Earnings (losses) from investments in unconsolidated entities 2,549 11,443 27,786 10,590 Net Income (Loss) 23,981 49,702 101,706 (38,201) Net income (loss) attributable to non-controlling interests 1,476 1,559 4,809 1,894 Dividends on preferred stock 1,941 1,940 5,822 5,822 Net Income (Loss) Attributable to Common Stockholders$ 20,564 $ 46,203 $ 91,075 $ (45,917) Net Income (Loss) Per Common Share$ 0.41 $ 1.06 $ 1.99 $ (1.06) (1)See Note 13 of the notes to the condensed consolidated financial statements for further details on management fee rebates. Core Earnings We calculate Core Earnings asU.S. GAAP net income (loss) as adjusted for: (i) realized and unrealized gain (loss) on securities and loans, REO, financial derivatives (excluding periodic settlements on interest rate swaps), other secured borrowings, at fair value, and foreign currency transactions; (ii) incentive fee to affiliate; (iii) Catch-up Premium Amortization Adjustment (as defined below); (iv) non-cash equity compensation expense; (v) provision for income taxes; and (vi) certain other income or loss items that are of a non-recurring nature. For certain investments in unconsolidated entities, we include the relevant components of net operating income in Core Earnings. 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. Core Earnings is a supplemental non-GAAP financial measure. We believe that the presentation of Core Earnings provides a consistent measure of operating performance by excluding the impact of gains and losses and other adjustments listed above from operating results. We believe that Core Earnings provides information useful to investors because it is a 94 -------------------------------------------------------------------------------- Table of Contents metric that we use to assess our performance and to evaluate the effective net yield provided by our portfolio. In addition, we believe that presenting Core Earnings enables our investors to measure, evaluate, and compare our operating performance to that of our peers. However, because Core Earnings is an incomplete measure of our financial results and differs from net income (loss) computed in accordance withU.S. GAAP, it should be considered as supplementary to, and not as a substitute for, net income (loss) computed in accordance withU.S. GAAP. The following table reconciles, for the three- and nine-month periods endedSeptember 30, 2021 and 2020, Core Earnings to the line on the our Condensed Consolidated Statement of Operations entitled Net Income (Loss), which we believe is the most directly comparableU.S. GAAP measure. Three-Month Period Ended Nine-Month Period Ended September 30, September 30, September 30, (In thousands, except per share amounts) 2021 2020 September 30, 2021 2020 Net income (loss)$ 23,981 $ 49,702 $ 101,706 $ (38,201) Income tax expense (benefit) (2,009) 2,494 3,149 3,490 Net income (loss) before income tax expense (benefit) 21,972 52,196 104,855 (34,711)
Adjustments:
Realized (gains) losses on securities and loans, net (6,359) (1,446) (8,627) 2,335 Realized (gains) losses on financial derivatives, net 1,782 1,620 (4,438) 25,702 Realized (gains) losses on real estate owned, net 50 18 63 (121) Unrealized (gains) losses on securities and loans, net 3,212 (24,208) (5,006) 65,418 Unrealized (gains) losses on financial derivatives, net (1,155) 298 (6,183) 2,109 Unrealized (gains) losses on real estate owned, net (672) (122) 1,435 462 Other realized and unrealized (gains) losses, net(1) (1,133) 4,217 (3,901) 5,850 Net realized gains (losses) on periodic settlements of interest rate swaps (1,069) (1,150) (1,808) (1,900) Net unrealized gains (losses) on accrued periodic settlements of interest rate swaps 252 516 (47) 541 Incentive fee to affiliate 5,255 - 12,412 - Non-cash equity compensation expense 244 186 717 532 Negative (positive) component of interest income represented by Catch-up Premium Amortization Adjustment 2,944 (319) (10) 4,440 Debt issuance costs related to Other secured borrowings, at fair value - - 3,704 2,075 Non-recurring expenses 471 143 719 143 (Earnings) losses from investments in unconsolidated entities(2) 647 (10,895) (19,845) (8,489) Total Core Earnings 26,441 21,054 74,040 64,386 Dividends on preferred stock 1,941 1,940 5,822 5,822 Core Earnings attributable to non-controlling interests 1,544 1,148 4,200 3,683 Core Earnings Attributable to Common Stockholders$ 22,956 $ 17,966 $ 64,018 $ 54,881 Core Earnings Attributable to Common Stockholders, per share$ 0.46 $ 0.41 $ 1.40 $ 1.26 (1)Includes realized and unrealized gains (losses) on foreign currency and unrealized gain (loss) on other secured borrowings, at fair value, included in Other, net, on the Condensed Consolidated Statement of Operations. (2)Adjustment represents, for certain investments in unconsolidated entities, the net realized and unrealized gains and losses of the underlying investments of such entities. Results of Operations for the Three-Month Periods EndedSeptember 30, 2021 and 2020 Net Income (Loss) Attributable to Common Stockholders For the three-month period endedSeptember 30, 2021 we had net income (loss) attributable to common stockholders of$20.6 million compared to$46.2 million for the three-month period endedSeptember 30, 2020 . The period-over-period decrease in our results of operations was primarily due to a decrease in realized and unrealized gains on securities and loans, net, and earnings from investments in unconsolidated entities as well as an increase in incentive fees incurred. 95 -------------------------------------------------------------------------------- Table of Contents Interest Income Interest income was$40.1 million for the three-month period endedSeptember 30, 2021 , as compared to$43.1 million for the three-month period endedSeptember 30, 2020 . Interest income for both periods included coupon payments received and accrued on our holdings, the net accretion and amortization of purchase discounts and premiums on those holdings, and interest on our cash balances, including those balances held by our counterparties as collateral. For the three-month period endedSeptember 30, 2021 , interest income from our credit portfolio was$34.7 million , as compared to$36.4 million for the three-month period endedSeptember 30, 2020 . This period-over-period decrease was primarily due to lower average asset yields, partially offset by a larger credit portfolio for the three-month period endedSeptember 30, 2021 . For the three-month period endedSeptember 30, 2021 , interest income from our Agency RMBS was$5.2 million , as compared to$6.7 million for the three-month period endedSeptember 30, 2020 . This period-over-period decrease was due to lower average asset yields, partially offset by a larger Agency portfolio for the three-month period endedSeptember 30, 2021 . 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 endedSeptember 30, 2021 and 2020: Credit(1) Agency(1) Total(1) Interest Interest Interest (In thousands) IncomeAverage Holdings Yield IncomeAverage Holdings Yield IncomeAverage Holdings Yield Three-month period endedSeptember 30, 2021 $ 34,666 $ 2,168,359 6.39 %$ 5,246 $ 1,474,354 1.42 %$ 39,912 $ 3,642,713 4.38 % Three-month period endedSeptember 30, 2020 $ 36,354 $ 1,974,414 7.37 %$ 6,663 $ 835,533 3.19 %$ 43,017 $ 2,809,947 6.12 % (1)Amounts exclude interest income on cash and cash equivalents (including when posted as margin) and long positions inU.S. Treasury securities. Also excludes long holdings of corporate securities that represent components of certain relative value trading strategies. Some of the variability in our interest income and portfolio yields is due to the Catch-up Premium Amortization Adjustment. For the three-month period endedSeptember 30, 2021 , we had a negative Catch-up Premium Amortization Adjustment of$(2.9) million which decreased our interest income. Comparatively, for the three-month period endedSeptember 30, 2020 we had a positive Catch-up Premium Amortization Adjustment of$0.3 million which increased our interest income. Excluding the Catch-up Premium Amortization Adjustment, the weighted average yield of our Agency portfolio and our total portfolio was 2.22% and 4.71%, respectively, for the three-month period endedSeptember 30, 2021 . Excluding the Catch-up Premium Amortization Adjustment, the weighted average yield of our Agency portfolio and our total portfolio was 3.04% and 6.08%, respectively, for the three-month period endedSeptember 30, 2020 . Interest Expense Interest expense primarily includes interest on funds borrowed under repos and Total other secured borrowings, interest on our Senior Notes, coupon interest on securities sold short, the related net accretion and amortization of purchase discounts and premiums on those short holdings, and interest on our counterparties' cash collateral held by us. Our total interest expense decreased to$10.6 million for the three-month period endedSeptember 30, 2021 , as compared to$12.9 million for the three-month period endedSeptember 30, 2020 . The decline in interest expense was the result of a significant decrease in borrowing rates on both our Agency and credit assets. The table below summarizes the components of interest expense for the three-month periods endedSeptember 30, 2021 and 2020. Three-Month Period Ended (In thousands) September 30, 2021 September 30, 2020 Repos and Total other secured borrowings $ 8,684 $ 11,585 Senior Notes 1,248 1,248 Securities sold short (1) 613 20 Other (2) 59 84 Total$ 10,604 $ 12,937 (1)Amount includes the related net accretion and amortization of purchase discounts and premiums. (2)Primarily includes interest expense on our counterparties' cash collateral held by us and reverse repurchase agreements with negative interest rates. 96 -------------------------------------------------------------------------------- Table of Contents The following table summarizes our aggregate secured borrowings, including repos and Total other secured borrowings, for the three-month periods endedSeptember 30, 2021 and 2020. Three-Month Period Ended September 30, 2021 September 30, 2020 Average Average Collateral for Secured Average Interest Cost of Average Interest Cost of Borrowing Borrowings Expense Funds Borrowings Expense Funds (In thousands) Credit(1)$ 1,577,246 $ 8,060 2.03 %$ 1,356,028 $ 10,817 3.17 % Agency RMBS 1,408,058 624 0.18 % 876,995 768 0.35 % Subtotal(1) 2,985,304 8,684 1.15 % 2,233,023 11,585 2.06 % U.S. Treasury Securities 441 - 0.10 % 25 - (0.02) % Total$ 2,985,745 $ 8,684 1.15 %$ 2,233,048 $ 11,585 2.06 % Average One-Month LIBOR 0.09 % 0.16 % Average Six-Month LIBOR 0.15 % 0.31 % (1)Excludes U.S. Treasury Securities . Among other instruments, we use interest rate swaps to hedge against the risk of rising interest rates. If we were to include as a component of our cost of funds the amortization of upfront payments and the actual and accrued periodic payments on our interest rate swaps used to hedge our assets, our total average cost of funds would increase to 1.31% and 2.24% for the three-month periods endedSeptember 30, 2021 and 2020, respectively. Excluding the Catch-up Premium Amortization Adjustment, our net interest margin, defined as the yield on our portfolio of yield-bearing targeted assets less our cost of funds (including amortization of upfront payments and actual and accrued periodic payments on interest rate swaps as described above), was 3.40% and 3.84% for the three-month periods endedSeptember 30, 2021 and 2020, respectively. These metrics do not include costs associated with other instruments that we use to hedge interest rate risk, such as TBAs and futures. Base Management Fees For the three-month period endedSeptember 30, 2021 , the gross base management fee, which is based on total equity at the end of each quarter, was$4.1 million , and our Manager credited us with rebates on our base management fee of$0.4 million , resulting in a net base management fee of$3.7 million . For the three-month period endedSeptember 30, 2020 , the gross base management fee was$3.2 million , and our Manager credited us with rebates on our base management fee of$0.2 million , resulting in a net base management fee of$3.0 million . For each period, the base management fee rebates related to those of our CLO investments for which Ellington or one of its affiliates earned CLO management fees. The increase in the net base management fee period over period was due to a larger capital base atSeptember 30, 2021 . Incentive Fees In addition to the base management fee, our Manager is also entitled to a quarterly incentive fee if our performance (as measured by adjusted net income, as defined in the management agreement) over the relevant rolling four quarter calculation period (including any opening loss carryforward) exceeds a defined return hurdle for the period. For the three-month period endedSeptember 30, 2021 , the incentive fee was$5.3 million . There was no incentive fee for the three-month period endedSeptember 30, 2020 , since on a rolling four quarter basis, our income did not exceed the prescribed hurdle amount. Because our operating results can vary materially from one period to another, incentive fee expense can be highly variable. Other Investment Related Expenses Other investment related expenses consist of servicing fees on our mortgage and consumer loans, as well as various other expenses and fees directly related to our financial assets and certain financial liabilities carried at fair value. For the three-month periods endedSeptember 30, 2021 and 2020 other investment related expenses were$2.9 million and$3.6 million , respectively. The decrease in other investment related expenses was primarily due to a decrease in servicing expenses on our consumer loan portfolios, partially offset by an increase in various other expenses related to our residential mortgage loan portfolio. Other Operating Expenses Other operating expenses consist of professional fees, compensation expense related to our dedicated or partially dedicated personnel, and various other operating expenses necessary to run our business. Other operating expenses exclude management and incentive fees, interest expense, and other investment related expenses. Other operating expenses were$4.4 million for the three-month period endedSeptember 30, 2021 as compared to$3.9 million for the three-month period ended 97 -------------------------------------------------------------------------------- Table of ContentsSeptember 30, 2020 . The increase in other operating expenses for the three-month period endedSeptember 30, 2021 was primarily due to an increase in compensation expense. Other Income (Loss) Other income (loss) consists of net realized and unrealized gains (losses) on securities and loans, financial derivatives, and real estate owned. Other, net, another component of Other income (loss), includes rental income and income related to loan originations, as well as realized gains (losses) on foreign currency transactions and unrealized gains (losses) on foreign currency remeasurement and Other Secured Borrowings, at fair value. For the three-month period endedSeptember 30, 2021 , other income (loss) was$6.1 million , consisting primarily of$3.1 million of net realized and unrealized gains on our securities and loans,$3.0 million of Other, net, which primarily comprises other non-interest income related to our loan portfolios, and$0.6 million of net realized and unrealized gains on real estate owned. These gains were partially offset by net realized and unrealized losses on our financial derivatives of$(0.6) million . Net realized and unrealized gains of$3.1 million on our securities and loans primarily resulted from net realized and unrealized gains on CLOs and CMBS, partially offset by net realized and unrealized losses on Agency RMBS and non-QM loans. The net realized and unrealized gains on our CLOs and CMBS were driven by tighter yield spreads and opportunistic sales, while the net realized and unrealized losses on Agency RMBS were related to underperformance of lower-coupon holdings and net unrealized losses on our non-QM loans were due to higher interest rates and wider yield spreads during the quarter. Net realized and unrealized losses on our financial derivatives of$(0.6) million were primarily related to net realized and unrealized losses on TBAs and total return swaps, partially offset by net realized and unrealized gains on interest rate swaps and futures. For the three-month period endedSeptember 30, 2020 , other income (loss) was$21.1 million , consisting primarily of net realized and unrealized gains of$25.7 million on our securities and loans, partially offset by net realized and unrealized losses on our financial derivatives of$(1.9) million , and Other, net of$(2.7) million . Net realized and unrealized gains of$25.7 million on our securities and loans primarily resulted from net realized and unrealized gains on our non-QM loans, non-Agency RMBS, CMBS, CLOs, and asset-backed securities backed by consumer loans, partially offset by net realized and unrealized losses on consumer loans. These gains were primarily due to a tightening in credit yield spreads as liquidity continued to improve in these markets. Net realized and unrealized losses of$(1.9) million on our financial derivatives was primarily related to net realized and unrealized losses on CDS on corporate bond indices, forwards, CDS on corporate bonds, and total return swaps, partially offset by net realized and unrealized gains on TBAs and interest rate swaps. Other, net of$(2.7) million primarily comprised net unrealized losses on Other Secured Borrowings, at fair value, partially offset by other income related to our loan portfolios. Income Tax Expense (Benefit) Income tax expense (benefit) was$(2.0) million for the three-month period endedSeptember 30, 2021 , as compared to$2.5 million for the three-month period endedSeptember 30, 2020 . The reversal in income tax expense (benefit) for the three-month period endedSeptember 30, 2021 was primarily due to a decrease in current and deferred tax liabilities related to net unrealized losses on investments held in a domestic TRS for the three-month period endedSeptember 30, 2021 , as compared to unrealized gains on investments held in a domestic TRS for the three-month period endedSeptember 30, 2020 . Earnings (Losses) from Investments in Unconsolidated Entities We have elected the fair value option for our equity investments in unconsolidated entities. Earnings (losses) from investments in unconsolidated entities was$2.5 million for the three-month period endedSeptember 30, 2021 , as compared to$11.4 million for the three-month period endedSeptember 30, 2020 . Earnings from investments in unconsolidated entities for the three-month period endedSeptember 30, 2021 were primarily due to net realized and unrealized gains on our investments in entities holding commercial mortgage loans and REO, in which we co-invest with other Ellington affiliates, and unrealized gains on an equity investment in a securitization-related risk retention vehicle. Such gains were partially offset by net unrealized losses on our investments in mortgage loan originators. For the three-month period endedSeptember 30, 2020 , Earnings from investments in unconsolidated entities was primarily due to unrealized gains on our investments in mortgage originators. Results of Operations for the Nine-Month Periods EndedSeptember 30, 2021 and 2020 Net Income (Loss) Attributable to Common Stockholders For the nine-month period endedSeptember 30, 2021 we had net income (loss) attributable to common stockholders of$91.1 million compared to$(45.9) million for the nine-month period endedSeptember 30, 2020 . The period-over-period reversal in our results of operations was primarily due to net realized and unrealized gains on securities and loans, net realized and unrealized gains on financial derivatives, and earnings from investments in unconsolidated entities in the current period, as 98 -------------------------------------------------------------------------------- Table of Contents compared to losses on our securities, loans, and financial derivatives in the prior period, which were primarily the result of the market and economic disruptions caused by the COVID-19 pandemic in early 2020. Interest Income Interest income was$126.1 million for the nine-month period endedSeptember 30, 2021 , as compared to$134.5 million for the nine-month period endedSeptember 30, 2020 . Interest income for both periods included coupon payments received and accrued on our holdings, the net accretion and amortization of purchase discounts and premiums on those holdings, and interest on our cash balances, including those balances held by our counterparties as collateral. For the nine-month period endedSeptember 30, 2021 , interest income from our credit portfolio was$102.0 million , as compared to$111.4 million for the nine-month period endedSeptember 30, 2020 . This period-over-period decrease was primarily due to lower average asset yields, partially offset by the larger size of the credit portfolio for the nine-month period endedSeptember 30, 2021 . For the nine-month period endedSeptember 30, 2021 , interest income from our Agency RMBS was$23.3 million , as compared to$22.1 million for the nine-month period endedSeptember 30, 2020 . This period-over-period increase was due to the larger size of the Agency portfolio, partially offset by lower average asset yields, for the nine-month period endedSeptember 30, 2021 . The following table details our interest income, average holdings of yield-bearing assets, and weighted average yield based on amortized cost for the nine-month periods endedSeptember 30, 2021 and 2020: Credit(1) Agency(1) Total(1) Interest Interest Interest (In thousands) IncomeAverage Holdings Yield IncomeAverage Holdings Yield IncomeAverage Holdings Yield
Nine months
period endedSeptember 30, 2021 $ 102,015 $ 2,062,442 6.60 %$ 23,326 $ 1,380,854 2.25 %$ 125,341 $ 3,443,296 4.85 %
Nine months
period endedSeptember 30, 2020 $ 111,377 $ 1,941,332 7.65 %$ 22,116 $ 1,196,610 2.46 %$ 133,493 $ 3,137,942 5.67 % (1)Amounts exclude interest income on cash and cash equivalents (including when posted as margin) and long positions inU.S. Treasury securities. Also excludes long holdings of corporate securities that represent components of certain relative value trading strategies. Some of the variability in our interest income and portfolio yields is due to the Catch-up Premium Amortization Adjustment. For the nine-month period endedSeptember 30, 2021 we had a positive Catch-up Premium Amortization Adjustment of$10 thousand , which increased our interest income. In contrast, for the nine-month period endedSeptember 30, 2020 we had a negative Catch-up Premium Amortization Adjustment of$(4.4) million , which decreased our interest income. Excluding the Catch-up Premium Amortization Adjustment, the weighted average yield of our Agency portfolio and our total portfolio was 2.25% and 4.85%, respectively, for the nine-month period endedSeptember 30, 2021 . Excluding the Catch-up Premium Amortization Adjustment, the weighted average yield of our Agency portfolio and our total portfolio was 2.96% and 5.86%, respectively, for the nine-month period endedSeptember 30, 2020 . Interest Expense Interest expense primarily includes interest on funds borrowed under repos and Total other secured borrowings, interest on our Senior Notes, coupon interest on securities sold short, the related net accretion and amortization of purchase discounts and premiums on those short holdings, and interest on our counterparties' cash collateral held by us. Our total interest expense decreased to$33.1 million for the nine-month period endedSeptember 30, 2021 , as compared to$49.7 million for the nine-month period endedSeptember 30, 2020 . The decline in interest expense was the result of a significant decrease in borrowing rates on both our Agency and credit assets. 99 -------------------------------------------------------------------------------- Table of Contents The table below summarizes the components of interest expense for the nine-month periods endedSeptember 30, 2021 and 2020. Nine-Month Period Ended (In thousands) September 30, 2021 September 30, 2020 Repos and Total other secured borrowings$ 27,870 $ 45,377 Senior Notes 3,745 3,745 Securities sold short (1) 932 450 Other (2) 564 141 Total$ 33,111 $ 49,713 (1)Amount includes the related net accretion and amortization of purchase discounts and premiums. (2)Primarily includes interest expense on our counterparties' cash collateral held by us and reverse repurchase agreements with negative interest rates. The following table summarizes our aggregate secured borrowings, including repos and Total other secured borrowings, for the nine-month periods endedSeptember 30, 2021 and 2020. Nine-Month Period Ended September 30, 2021 September 30, 2020 Average Average Collateral for Secured Average Interest Cost of Average Interest Cost of Borrowing Borrowings Expense Funds Borrowings Expense Funds (In thousands) Credit(1)$ 1,472,463 $ 25,836 2.35 %$ 1,389,000 $ 34,132 3.28 % Agency RMBS 1,344,165 2,034 0.20 % 1,176,191 11,241 1.28 % Subtotal(1) 2,816,628 27,870 1.32 % 2,565,191 45,373 2.36 % U.S. Treasury Securities 258 - 0.06 % 513 4 0.96 % Total$ 2,816,886 $ 27,870 1.32 %$ 2,565,704 $ 45,377 2.36 % Average One-Month LIBOR 0.10 % 0.65 % Average Six-Month LIBOR 0.18 % 0.84 % (1)Excludes U.S. Treasury Securities . Among other instruments, we use interest rate swaps to hedge against the risk of rising interest rates. If we were to include as a component of our cost of funds the amortization of upfront payments and the actual and accrued periodic payments on our interest rate swaps used to hedge our assets, our total average cost of funds would increase to 1.46% and 2.45% for the nine-month periods endedSeptember 30, 2021 and 2020, respectively. Excluding the Catch-up Premium Amortization Adjustment, our net interest margin, defined as the yield on our portfolio of yield-bearing targeted assets less our cost of funds (including amortization of upfront payments and actual and accrued periodic payments on interest rate swaps as described above), was 3.39% and 3.41% for the nine-month periods endedSeptember 30, 2021 and 2020, respectively. These metrics do not include costs associated with other instruments that we use to hedge interest rate risk, such as TBAs and futures. Base Management Fees For the nine-month period endedSeptember 30, 2021 , the gross base management fee, which is based on total equity at the end of each quarter, was$11.1 million , and our Manager credited us with rebates on our base management fee of$0.8 million , resulting in a net base management fee of$10.3 million . For the nine-month period endedSeptember 30, 2020 , the gross base management fee was$9.2 million , and our Manager credited us with rebates on our base management fee of$0.9 million , resulting in a net base management fee of$8.3 million . For each period, the base management fee rebates related to those of our CLO investments for which Ellington or one of its affiliates earned CLO management fees. The increase in the net base management fee period over period was due to a larger capital base at each quarter end in 2021, as compared to the respective quarter ends in 2020. Incentive Fees In addition to the base management fee, our Manager is also entitled to a quarterly incentive fee if our performance (as measured by adjusted net income, as defined in the management agreement) over the relevant rolling four quarter calculation period (including any opening loss carryforward) exceeds a defined return hurdle for the period. For the nine-month period endedSeptember 30, 2021 , the incentive fee was$12.4 million . There was no incentive fee for the nine-month period endedSeptember 30, 2020 , since for each quarter during that period, our income did not exceed the prescribed hurdle amount on a 100 -------------------------------------------------------------------------------- Table of Contents rolling four quarter basis. Because our operating results can vary materially from one period to another, incentive fee expense can be highly variable. Other Investment Related Expenses Other investment related expenses consist of servicing fees on our mortgage and consumer loans, as well as various other expenses and fees directly related to our financial assets and certain financial liabilities carried at fair value. For the nine-month periods endedSeptember 30, 2021 and 2020 other investment related expenses were$12.6 million and$12.8 million , respectively. The decrease in other investment related expenses was primarily due to a decrease in servicing expenses on our consumer loan portfolios partially offset by an increase in debt issuance costs related to our non-QM loan securitizations, as well as an increase in various other expenses related to our residential mortgage loan portfolio. Other Operating Expenses Other operating expenses consist of professional fees, compensation expense related to our dedicated or partially dedicated personnel, and various other operating expenses necessary to run our business. Other operating expenses exclude management and incentive fees, interest expense, and other investment related expenses. Other operating expenses were$12.7 million for the nine-month period endedSeptember 30, 2021 as compared to$11.5 million for the nine-month period endedSeptember 30, 2020 . The increase in other operating expenses for the nine-month period endedSeptember 30, 2021 was primarily due to an increase in compensation expense. Other Income (Loss) Other income (loss) consists of net realized and unrealized gains (losses) on securities and loans, financial derivatives, and real estate owned. Other, net, another component of Other income (loss), includes rental income and income related to loan originations, as well as realized gains (losses) on foreign currency transactions and unrealized gains (losses) on foreign currency remeasurement and Other Secured Borrowings, at fair value. For the nine-month period endedSeptember 30, 2021 , other income (loss) was$32.1 million , consisting primarily of$13.6 million of net realized and unrealized gains on our securities and loans,$10.6 million of net realized and unrealized gains on our financial derivatives, and$9.3 million of Other, net, which primarily comprises other non-interest income related to our loan portfolios. Net realized and unrealized gains of$13.6 million on our securities and loans primarily resulted from net realized and unrealized gains on CMBS and CLOs, partially offset by net realized and unrealized losses on Agency RMBS. The net realized and unrealized gains on our CMBS and CLOs were driven by tighter yield spreads, while the net realized and unrealized losses in the Agency portfolio were due to wider yield spreads. Net realized and unrealized gains of$10.6 million on our financial derivatives were primarily related to net realized and unrealized gains on interest rate swaps, short TBAs, futures, and forwards, as long-term interest rates increased during the period, partially offset by net realized and unrealized losses on CDS on corporate bond indices and total return swaps. For the nine-month period endedSeptember 30, 2020 , other income (loss) was$(97.4) million , consisting primarily of net realized and unrealized losses of$(67.8) million on our securities and loans and net realized and unrealized losses on our financial derivatives of$(27.8) million . Net realized and unrealized losses of$(67.8) million on our securities and loans primarily resulted from net unrealized losses on CLOs, non-Agency RMBS, CMBS, and consumer loans and ABS backed by consumer loans, partially offset by net unrealized gains on Agency RMBS and non-QM loans. These unrealized losses were primarily due to the market and economic disruptions caused by the COVID-19 pandemic. Net realized and unrealized losses of$(27.8) million on our financial derivatives was primarily related to net realized and unrealized losses on interest rate swaps, TBAs, futures, and total return swaps, partially offset by net realized and unrealized gains on CDS on asset-backed indices, CDS on corporate bond indices, and CDS on corporate bonds. Income Tax Expense (Benefit) Income tax expense (benefit) was$3.1 million for the nine-month period endedSeptember 30, 2021 , as compared to$3.5 million for the nine-month period endedSeptember 30, 2020 . The income tax expense in both periods was related to net realized and unrealized gains on investments held in a domestic TRS. Earnings (Losses) from Investments in Unconsolidated Entities We have elected the fair value option for our equity investments in unconsolidated entities. Earnings (losses) from investments in unconsolidated entities was$27.8 million for the nine-month period endedSeptember 30, 2021 , as compared to$10.6 million for the nine-month period endedSeptember 30, 2020 . The increase in earnings from investments in unconsolidated entities primarily relates to an increase in unrealized gains on investments in loan originators period over period, an increase in net realized and unrealized gains on our investments in entities holding commercial mortgage loans and REO, in 101 -------------------------------------------------------------------------------- Table of Contents which we co-invest with other Ellington affiliates, and unrealized gains on an equity investment in a securitization-related risk retention vehicle for the nine-month period endedSeptember 30, 2021 . Liquidity and Capital Resources Liquidity refers to our ability to meet our cash needs, including repaying our borrowings, funding and maintaining positions in our targeted assets, making distributions in the form of dividends, and other general business needs. Our short-term (one year or less) and long-term liquidity requirements include acquisition costs for assets we acquire, payment of our base management fee and incentive fee, compliance with margin requirements under our repos, reverse repos, and financial derivative contracts, repayment of repo borrowings and other secured borrowings to the extent we are unable or unwilling to extend such borrowings, payment of our general operating expenses, payment of interest payments on our Senior Notes, and payment of our dividends. Our capital resources primarily include cash on hand, cash flow from our investments (including principal and interest payments received on our investments and proceeds from the sale of investments), borrowings under repos and other secured borrowings, and proceeds from equity and debt offerings. We expect that these sources of funds will be sufficient to meet our short-term and long-term liquidity needs. The following summarizes our borrowings under repos by remaining maturity: (In thousands) September 30, 2021 December 31, 2020 Outstanding Outstanding Remaining Days to Maturity Borrowings % of Total Borrowings % of Total 30 Days or Less$ 395,780 18.8 %$ 303,351 20.3 % 31 - 60 Days 235,407 11.2 % 469,695 31.4 % 61 - 90 Days 394,898 18.7 % 327,012 21.8 % 91 - 120 Days 60,787 2.9 % 89,931 6.0 % 121 - 150 Days 196,073 9.3 % 69,104 4.6 % 151 - 180 Days 90,435 4.3 % 70,920 4.7 % 181 - 364 Days 698,522 33.2 % 72,670 4.9 % > 364 Days 33,934 1.6 % 94,248 6.3 %$ 2,105,836 100.0 %$ 1,496,931 100.0 % Repos involving underlying investments that were sold prior toSeptember 30, 2021 for settlement followingSeptember 30, 2021 , are shown using their contractual maturity dates even though such repos may be expected to be terminated early upon settlement of the sale of the underlying investment. The amounts borrowed under our repo 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 ofSeptember 30, 2021 , the weighted average contractual haircut applicable to the assets that serve as collateral for our outstanding repo borrowings (excluding repo borrowings related toU.S. Treasury securities) was 25.4% with respect to credit assets, 5.5% with respect to Agency RMBS assets, and 13.2% overall. As ofDecember 31, 2020 these respective weighted average contractual haircuts were 33.0%, 6.0%, and 19.1%. The decrease in the weighted average contractual haircut on our overall portfolio is primarily due to lower haircuts on repo borrowings related to our Credit portfolio and to a lesser extent from the higher share of our outstanding borrowings on Agency assets atSeptember 30, 2021 as compared toDecember 31, 2020 . We expect to continue to borrow funds in the form of repos as well as other similar types of financings. The terms of our repo borrowings are predominantly governed by master repurchase agreements, which generally conform to the terms in the standard master repurchase agreement as published by theSecurities 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 repo lenders. As ofSeptember 30, 2021 andDecember 31, 2020 , we had$2.1 billion and$1.5 billion , respectively, of borrowings outstanding under our repos. As ofSeptember 30, 2021 , the remaining terms on our repos ranged from 1 day to 730 days, with a weighted average remaining term of 147 days. Our repo borrowings were with a total of 24 counterparties as ofSeptember 30, 2021 . As ofSeptember 30, 2021 , our repos had a weighted average borrowing rate of 0.80%. As ofSeptember 30, 2021 , our repos had interest rates ranging from 0.10% to 3.75%. As ofDecember 31, 2020 , the remaining terms on our repos ranged from 102 -------------------------------------------------------------------------------- Table of Contents 4 days to 516 days, with a weighted average remaining term of 94 days. Our repo borrowings were with a total of 24 counterparties as ofDecember 31, 2020 . As ofDecember 31, 2020 , our repos had a weighted average borrowing rate of 1.20%. As ofDecember 31, 2020 , our repos had interest rates ranging from 0.20% to 5.00%. Investments transferred as collateral under repos had an aggregate fair value of$2.4 billion and$1.8 billion as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. Historically, the interest rates of our repos have been highly correlated with, and often have been explicitly indexed to, certain benchmark interest rates such as LIBOR or SOFR. It is expected that amounts due upon maturity of our repos will be funded primarily through the roll/re-initiation of repos and, if we are unable or unwilling to roll/re-initiate our repos, through free cash and proceeds from the sale of securities. We have continued to extend and improve our sources of financing and leverage in 2021. In addition to adding two new loan financing facilities and extending the terms of other financing facilities, we completed two non-QM loan securitizations during the nine-month period endedSeptember 30, 2021 , and a third non-QM loan securitization subsequent to the third quarter. The following table details total outstanding borrowings, average outstanding borrowings, and the maximum outstanding borrowings at any month end for each quarter under repos for the past twelve quarters: Borrowings Average Maximum Borrowings Outstanding at Borrowings Outstanding at Any Quarter Ended Quarter End Outstanding Month End (In thousands) September 30, 2021$ 2,105,836 $ 1,958,411 $ 2,175,918 June 30, 2021 1,916,749 1,971,441 2,062,580 March 31, 2021 1,909,511 1,736,912 1,909,511 December 31, 2020 1,496,931 1,408,935 1,496,931 September 30, 2020 1,439,984 1,368,191 1,551,147 June 30, 2020(1) 1,294,549 1,520,985 1,542,577 March 31, 2020(2) 2,034,225 2,440,982 2,485,496 December 31, 2019(3) 2,445,300 2,119,394 2,445,300 September 30, 2019 2,056,422 1,796,310 2,056,422 June 30, 2019 1,715,506 1,769,909 1,962,866 March 31, 2019 1,550,016 1,471,592 1,550,016 December 31, 2018 1,498,849 1,509,819 1,595,118 (1)During this quarter, we continued to lower leverage and improve our liquidity given the uncertainty as a result of the COVID-19 pandemic. (2)InMarch 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. (3)At the end of 2019 we increased the size of both our credit and Agency portfolios which we subsequently financed through repos. In addition to our borrowings under repos, we have entered into various other types of transactions to finance certain of our investments, including non-QM loans and REO, commercial mortgage loans, and consumer loans and ABS backed by consumer loans; such transactions are accounted for as collateralized borrowings. As ofSeptember 30, 2021 andDecember 31, 2020 , we had outstanding borrowings related to such transactions in the amount of$963.3 million and$806.0 million , respectively, which is reflected under the captions "Other secured borrowings" and "Other secured borrowings, at fair value" on the Condensed Consolidated Balance Sheet. As ofSeptember 30, 2021 andDecember 31, 2020 , the fair value of non-QM loans, consumer loans and ABS backed by consumer loans, and small balance commercial mortgage loans collateralizing our Total other secured borrowings was$1.056 billion and$906.4 million , respectively. See Note 11 in the notes to our condensed consolidated financial statements for further information on our other secured borrowings. As of bothSeptember 30, 2021 andDecember 31, 2020 , we had$86.0 million outstanding of Senior Notes, maturing inSeptember 2022 and bearing interest at a rate of 5.50%, subject to adjustment based on changes, if any, in the ratings of the Senior Notes. See Note 11 in the notes to our condensed consolidated financial statements for further detail on the Senior Notes. As ofSeptember 30, 2021 , we had an aggregate amount at risk under our repos with 24 counterparties of approximately$337.6 million , and as ofDecember 31, 2020 , we had an aggregate amount at risk under our repos with 24 counterparties of approximately$363.1 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 repos. If the amounts outstanding under repos with a particular 103 -------------------------------------------------------------------------------- Table of Contents counterparty are greater than the collateral held by the counterparty, there is no amount at risk for the particular counterparty. Amount at risk as ofSeptember 30, 2021 andDecember 31, 2020 does not include approximately$3.7 million and$4.2 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 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 ofSeptember 30, 2021 , we had an aggregate amount at risk under our derivative contracts, excluding TBAs, with 10 counterparties of approximately$27.9 million . We also had$12.0 million of initial margin for cleared over-the-counter, or "OTC," derivatives posted to central clearinghouses as of that date. As ofDecember 31, 2020 , we had an aggregate amount at risk under our derivatives contracts, excluding TBAs, with eight counterparties of approximately$11.2 million . We also had$7.2 million of initial margin for cleared OTC derivatives posted to central clearinghouses as of that date. 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 sellTBAs 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 ofSeptember 30, 2021 , in connection with our forward settlingTBA and Agency pass-through certificates, we had an aggregate amount at risk with 9 counterparties of approximately$4.8 million . As ofDecember 31, 2020 , in connection with our forward settlingTBA and Agency pass-through certificates, we had an aggregate amount at risk with six counterparties of approximately$4.1 million . Amounts at risk in connection with our forward settlingTBA and Agency pass-through certificates represent the excess, if any, for each counterparty of the net fair value of the forward settling transactions 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 transactions plus our collateral held directly by the counterparty, there is no amount at risk for the particular counterparty. We held cash and cash equivalents of approximately$103.6 million and$111.6 million as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. OnJune 13, 2018 , our Board of Directors approved the adoption of a share repurchase program under which we are authorized to repurchase up to 1.55 million shares of common stock. 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 under 10b5-1 plans. Repurchases are at our discretion, subject to applicable law, share availability, price and our financial performance, among other considerations. In addition to making discretionary repurchases, we from time to time use 10b5-1 plans to increase the number of trading days available to implement these repurchases. From inception of the current repurchase plan throughAugust 6, 2021 , we repurchased 701,965 shares at an average price per share of$13.36 and a total cost of$9.4 million , and have authorization to repurchase an additional 848,035 common shares. We did not purchase any shares during the nine-month period endedSeptember 30, 2021 . We may declare dividends based on, among other things, our earnings, our financial condition, the REIT qualification requirements of the Internal Revenue Code of 1986, as amended, our working capital needs and new opportunities. The declaration of dividends to our stockholders and the amount of such dividends are at the discretion of our Board of Directors. 104 -------------------------------------------------------------------------------- Table of Contents The following table sets forth the dividend distributions authorized by the Board of Directors payable to common stockholders and holders of Convertible Non-controlling Interest Units (as defined in Note 2 of the condensed consolidated financial statements) for the periods indicated below: Nine-Month Period EndedSeptember 30, 2021 Declaration Date Dividend Per Share Dividend Amount Record Date Payment Date (In thousands) September 8, 2021 $ 0.15 $ 7,855 September 30, 2021 October 25, 2021 August 4, 2021 0.15 7,691 August 31, 2021 September 27, 2021 July 8, 2021 0.15 7,614 July 30, 2021 August 25, 2021 June 7, 2021 0.15 6,669 June 30, 2021 July 26, 2021 May 6, 2021 0.15 6,669 May 28, 2021 June 25, 2021 April 4, 2021 0.14 6,224 April 30, 2021 May 25, 2021 March 5, 2021 0.10 4,446 March 31, 2021 April 26, 2021 February 5, 2021 0.10 4,444 February 26, 2021 March 25, 2021 January 8, 2021 0.10 4,444 January 29, 2021 February 25, 2021
Nine month period ended
Declaration Date Dividend Per Share Dividend Amount Record Date Payment Date
(In thousands)
September 8, 2020 $ 0.09 $ 3,997 September 30, 2020 October 26, 2020
August 7, 2020 0.09 3,995 August 31, 2020 September 25, 2020
July 8, 2020 0.09 3,995 July 31, 2020 August 25, 2020
June 5, 2020 0.09 3,995 June 30, 2020 July 27, 2020
May 7, 2020 0.08 3,551 May 29, 2020 June 25, 2020
April 7, 2020 0.08 3,551 April 30, 2020 May 26, 2020
March 6, 2020 0.15 6,658 March 31, 2020 April 27, 2020
February 7, 2020 0.15 6,699 February 28, 2020 March 25, 2020
January 8, 2020 0.15 6,699 January 31, 2020 February 25, 2020
On October 7, 2021 , the Board of Directors approved a dividend in the amount of
$0.15 per share of common stock payable on November 26, 2021 to stockholders of
record as of October 29, 2021 . On November 5, 2021 , the Board of Directors
approved a dividend in the amount of $0.15 per share of common stock payable on
December 27, 2021 to stockholders of record as of November 30, 2021 .
The following table sets forth the dividend distributions authorized by the
Board of Directors during the nine-month periods ended September 30, 2021 and
2020 and payable to holders of our Series A Preferred Stock:
Dividend Per
Declaration Date Share Dividend Amount Record Date Payment Date
(In thousands)
July 8, 2021 $ 0.421875 $ 1,941 July 19, 2021 July 30, 2021
April 4, 2021 0.421875 1,941 April 19, 2021 April 30, 2021
January 8, 2021 0.421875 1,941 January 19, 2021 February 1, 2021
July 8, 2020 0.421875 1,941 July 20, 2020 July 30, 2020
April 7, 2020 0.421875 1,941 April 17, 2020 April 30, 2020
On October 7, 2021 , the Board of Directors approved a dividend in the amount of
$0.421875 per share of Series A Preferred Stock payable on November 1, 2021 to
stockholders of record as of October 18, 2021 .
105
--------------------------------------------------------------------------------
Table of Contents
On August 6, 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 10.0 million shares
of common stock from time to time. From commencement of the ATM program through
September 30, 2021 , we issued 1,549,900 shares of common stock under the ATM
program, which provided $28.2 million of net proceeds after $0.4 million of
agent commissions and offering costs. Through November 5, 2021 , we have issued
1,549,900 shares of common stock under the ATM program.
On July 9, 2021 , we completed a follow-on offering of 6,000,000 shares of our
common stock. On July 29, 2021 , we issued an additional 303,000 shares of common
stock pursuant to the exercise of the underwriters' option. The issuance and
sale of the 6,303,000 shares of common stock generated net proceeds, after
underwriters' discounts and offering costs, of $113.1 million .
On October 15, 2021 , we completed a follow-on offering of 5,750,000 shares of
our common stock, including 750,000 shares of common stock issued pursuant to
the exercise of the underwriters' option. The issuance and sale of the 5,750,000
shares of common stock generated net proceeds, after underwriters' discounts and
commissions and offering costs, of $103.5 million .
For the nine-month period ended September 30, 2021 , our operating activities
provided net cash in the amount of $58.8 million and our investing activities
used net cash in the amount of $1.222 billion . Our repo activity used to finance
many of our investments (including repayments of amounts borrowed under our
repos) provided net cash of $620.1 million . We received $599.3 million in
proceeds from the issuance of Total other secured borrowings and we used $137.2
million for principal payments on our Total other secured borrowings. Thus our
operating and investing activities, when combined with our repo financings and
Other secured borrowings (net of repayments), used net cash of $81.4 million for
the nine-month period ended September 30, 2021 . We received proceeds from the
issuance of common stock, net of underwriters' discounts and commissions and
offering costs paid, of $141.1 million , and we received contributions from
non-controlling interests of $10.7 million . We used $58.5 million to pay
dividends and $20.3 million for distributions to non-controlling interests (our
joint venture partners). As a result there was a decrease in our cash holdings
of $8.0 million , from $111.8 million as of December 31, 2020 to $103.8 million
as of September 30, 2021 .
For the nine-month period ended September 30, 2020 , our operating activities
provided net cash in the amount of $82.5 million and our investing activities
provided net cash in the amount of $713.5 million . Our repo activity used to
finance many of our investments (including repayments of amounts borrowed under
our repos) used net cash of $975.6 million . We received $251.3 million in
proceeds from the issuance of Total other secured borrowings and we used $59.9
million for principal payments on Other secured borrowings. Thus our operating
and investing activities, when combined with our repo financings and Other
secured borrowings (net of repayments), provided net cash of $11.7 million for
the nine-month period ended September 30, 2020 . We received proceeds from the
issuance of common stock, net of offering costs paid, of $95.3 million and
contributions from non-controlling interests provided cash of $9.1 million . We
used $50.6 million to pay dividends, $8.0 million for distributions to
non-controlling interests (our joint venture partners), and $3.1 million to
repurchase common stock. As a result there was an increase in our cash holdings
of $54.5 million , from $72.5 million as of December 31, 2019 to $127.0 million
as of September 30, 2020 .
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. However, the unexpected inability to
finance our Agency RMBS portfolio would create a serious short-term strain on
our liquidity and would require us to liquidate much of that portfolio, which in
turn would require us to restructure our portfolio to maintain our exclusion
from registration as an investment company under the Investment Company Act and
to maintain our qualification as a REIT. Steep declines in the values of our
credit assets financed using repos, or in the values of our derivative
contracts, would result in margin calls that would significantly reduce our free
cash position. Furthermore, a substantial increase in prepayment rates on our
assets financed by repos could cause a temporary liquidity shortfall, because we
are generally required to post margin on such assets in proportion to the amount
of the announced principal paydowns before the actual receipt of the cash from
such principal paydowns. If our cash resources are at any time insufficient to
satisfy our liquidity requirements, we may have to sell assets or issue
additional debt or equity securities.
Although we may from time to time enter into financing arrangements that limit
our leverage, our investment guidelines do not limit the amount of leverage that
we may use, 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
106
--------------------------------------------------------------------------------
Table of Contents
receive a base management fee, an incentive fee, 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 13 to our condensed consolidated
financial statements.
We have numerous contractual obligations and commitments related to our
outstanding borrowings (see Note 11 of the notes to our condensed consolidated
financial statements) and related to our financial derivatives (see Note 8 of
the notes to our condensed consolidated financial statements).
See Note 21 of the notes to our condensed consolidated financial statements for
further detail on our other contractual obligations and commitments.
Off-Balance Sheet Arrangements
As of September 30, 2021 , we did not have any material 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 to provide funding to any such entities that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or resources that would be material to an investor in our
securities. 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.
At September 30, 2021 we have not entered into any repurchase agreements for
which delivery of the borrowed funds is not scheduled until after period end.
Inflation
Virtually all of our assets and liabilities are interest rate sensitive in
nature. As a result, interest rates and other factors influence our performance
far more so than does inflation. Changes in interest rates do not necessarily
correlate with inflation rates or changes in inflation rates. Our activities and
balance sheet are measured with reference to historical cost and/or fair market
value without considering inflation.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The primary components of our market risk at September 30, 2021 are related to
credit risk, prepayment risk, and interest rate 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.
Credit Risk
We are subject to credit risk in connection with many of our assets, especially
non-Agency RMBS, CMBS, residential and commercial mortgage loans, corporate debt
investments including CLOs and investments in securitization warehouses, and
consumer loans.
Credit losses on real estate loans 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, businesses or
commercial properties, special hazards, earthquakes and other natural events,
such as the COVID-19 pandemic, or an outbreak of another highly infectious or
contagious disease, over-leveraging of the borrower on a property, reduction in
market rents and occupancy rates and poor property management services, 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.
The ability of borrowers to repay consumer loans may be adversely affected by
numerous borrower-specific factors, including unemployment, divorce, major
medical expenses or personal bankruptcy. General factors, including an economic
downturn, high energy costs or acts of God or terrorism, pandemics such as the
COVID-19 pandemic or another highly infectious or contagious disease, may also
affect the financial stability of borrowers and impair their ability or
willingness to repay their loans. Whenever any of our consumer loans defaults,
we are at risk of loss to the extent of any deficiency between the liquidation
value of the collateral, if any, securing the loan, and the principal and
accrued interest of the loan. Many of our consumer loans are unsecured, or are
secured by collateral (such as an automobile) that depreciates rapidly; as a
result, these loans may be at greater risk of loss than residential real estate
loans.
107
--------------------------------------------------------------------------------
Table of Contents
Our corporate investments, especially our lower-rated or unrated CLO
investments, corporate equity, and our investments in loan originators, have
significant risk of loss, and our efforts to protect these investments may
involve substantial costs and may not be successful. The risk of loss with
respect to these investments has been, and will likely continue to be,
exacerbated by the COVID-19 pandemic. We also will be subject to significant
uncertainty as to when and in what manner and for what value the corporate
debt in which we directly or indirectly invest will eventually be satisfied
(e.g., through liquidation of the obligor's assets, an exchange offer or plan of
reorganization involving the debt securities or a payment of some amount in
satisfaction of the obligation). In addition, these investments could involve
loans to companies that are more likely to experience bankruptcy or similar
financial distress, such as companies that are thinly capitalized, employ a high
degree of financial leverage, are in highly competitive or risky businesses, are
in a start-up phase, or are experiencing losses.
Similarly, we are exposed to the risk of potential credit losses on the other
assets in our credit portfolio. For many of our investments, the two primary
components of credit risk are default risk and severity risk.
Default Risk
Default risk is the risk that a borrower fails to make scheduled principal and
interest payments on a mortgage loan or other debt obligation. We may 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 MBS indices, corporate bond indices, or corporate entities. We
often rely on third-party servicers to mitigate our default risk, but such
third-party 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 or
other secured or unsecured debt obligation. Severity risk includes the risk of
loss of value of the property or other asset, if any, securing the mortgage loan
or debt obligation, as well as the risk of loss associated with taking over the
property or other asset, if any, including foreclosure costs. We often rely on
third-party servicers to mitigate our severity risk, but such third-party
servicers may have little or no economic incentive to mitigate loan loss
severities. In the case of mortgage loans, such mitigation efforts may include
loan modification programs and prompt foreclosure and property liquidation
following a default. Many of our consumer loans are unsecured, or are secured by
collateral (such as an automobile) that depreciates rapidly; as a result, these
loans may be at greater risk of loss than residential real estate loans.
Pursuing any remaining deficiency following a default on a consumer loan is
often difficult or impractical, especially when the borrower has a low credit
score, making further substantial collection efforts unwarranted. In addition,
repossessing personal property securing a consumer loan can present additional
challenges, including locating and taking physical possession of the collateral.
We rely on servicers who service these consumer loans, to, among other things,
collect principal and interest payments on the loans and perform loss mitigation
services, and these servicers may not perform in a manner that promotes our
interests. In the case of corporate debt, if a company declares bankruptcy, the
bankruptcy process has a number of significant inherent risks. Many events in a
bankruptcy proceeding are the product of contested matters and adversarial
proceedings and are beyond the control of the creditors. A bankruptcy filing by
a company whose debt we have purchased may adversely and permanently affect such
company. If the proceeding results in liquidation, the liquidation value of the
company may have deteriorated significantly from what we believed to be the case
at the time of our initial investment. The duration of a bankruptcy proceeding
is also difficult to predict, and our return on investment can be adversely
affected by delays until a plan of reorganization or liquidation ultimately
becomes effective. A bankruptcy court may also re-characterize our debt
investment as equity, and subordinate all or a portion of our claim to that of
other creditors. This could occur even if our investment had initially been
structured as senior debt.
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 of fixed-income assets in our
portfolio, 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 mortgage loans, including the
mortgage loans underlying our RMBS, and changes in prepayment rates of certain
of our consumer loan holdings. 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. 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. Additionally, increases in prepayment rates may
cause us to experience losses on our interest only securities and inverse
interest only securities, as those securities are extremely sensitive to
prepayment rates. Prepayment rates, besides being subject to interest rates and
borrower behavior, are also substantially affected by government policy and
regulation. For example, the government sponsored HARP program, which was
designed to encourage mortgage refinancings, was a steady contributor to Agency
RMBS prepayment speeds from its inception in 2009 until its expiration at the
end of 2018. Mortgage rates declined significantly during 2020, and remain very
low by historical standards. As a result, prepayments continue to represent a
meaningful risk, especially with respect to our Agency RMBS.
108
--------------------------------------------------------------------------------
Table of Contents
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.
Historically, the interest rates of our repurchase agreements have been highly
correlated with, and often have been explicitly indexed to, certain benchmark
interest rates such as LIBOR or SOFR. Whenever one of our repo borrowings
matures, it will generally be replaced with a new 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 futures, 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 assets and the duration of the liabilities used to finance such
assets. The majority of this mismatch currently relates to our Agency RMBS.
The following sensitivity analysis table shows the estimated impact on the value
of our portfolio segregated by certain identified categories as of September 30,
2021 , assuming a static portfolio and immediate and parallel shifts in interest
rates from current levels as indicated below.
(In thousands) Estimated Change for a Decrease in Interest Rates by Estimated Change for an Increase in Interest Rates by
50 Basis Points 100 Basis Points 50 Basis Points 100 Basis Points
% of % of % of % of
Category of Total Market Total Total Total
Instruments Market Value Equity Value Equity Market Value Equity Market Value Equity
Agency RMBS-Fixed
Pools and IOs
excluding TBAs $ 19,256 1.76 % $ 28,139 2.57 % $ (29,632) (2.71) % $ (69,637) (6.36) %
Non-Agency RMBS,
CMBS, ABS and
Loans 10,021 0.92 % 16,679 1.52 % (13,383) (1.22) % (30,129) (2.75) %
U.S. Treasury
Securities, and
Interest Rate
Swaps, Options,
and Futures (23,654) (2.16) % (47,984) (4.38) % 22,979 2.10 % 45,282 4.13 %
Long TBAs 7,377 0.67 % 12,359 1.13 % (9,771) (0.89) % (21,937) (2.00) %
Short TBAs (10,174) (0.93) % (13,980) (1.28) % 16,543 1.51 % 39,454 3.60 %
Other
Mortgage-Related
Derivatives 1 - % 3 - % (1) - % (1) - %
Corporate
Securities and
Derivatives on
Corporate
Securities 7 - % 14 - % (7) - % (15) - %
Repurchase
Agreements,
Reverse Repurchase
Agreements, and
Senior Notes (1,433) (0.13) % (1,430) (0.13) % 3,824 0.35 % 8,009 0.73 %
Total $ 1,401 0.13 % $ (6,200) (0.57) % $ (9,448) (0.86) % $ (28,974) (2.65) %
The preceding analysis does not show sensitivity to changes in interest rates
for instruments for which we believe that the effect of a change in interest
rates is not material to the value of the overall portfolio and/or cannot be
accurately estimated. In particular, this analysis excludes certain of our
holdings of corporate securities and derivatives on corporate securities, and
reflects only sensitivity to U.S. interest rates.
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 actively trade many of the instruments in our
portfolio, and therefore our current or future portfolios may have risks that
differ significantly from those of our September 30, 2021 portfolio estimated
above.
109
--------------------------------------------------------------------------------
Table of Contents
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 "-Special Note Regarding Forward-Looking
Statements."
Item 4. Controls and Procedures
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 September 30, 2021 . Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of September 30,
2021 .
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 September 30, 2021 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
110
————————————————– ——————————
© Edgar online, source
[ad_2]
