ORCHID ISLAND CAPITAL, INC.
10-Ks and 10-Qs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
☒
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________
to ___________
Commission File Number
:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
,
,
(Address of principal executive offices) (Zip Code)
(
)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
Title of Each Class
Trading Symbol:
Name of Each Exchange on Which
Registered
Indicate by check
mark whether the
registrant (1) has filed
all reports required
to be filed
by Section 13 or
15(d) of the
Securities Exchange Act
of
1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports),
and (2) has been subject to such
filing requirements for the past 90 days.
☒
☐
Indicate by check mark whether
the registrant has submitted electronically
every Interactive Data File required
to be submitted pursuant to
Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required
to submit such
files).
☒
☐
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer,
a non-accelerated filer, a smaller reporting
company, or
an emerging growth company. See the definitions of "large accelerated filer,"
"accelerated filer", "smaller reporting company", and "emerging growth
company" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer
☐
☒
Non-accelerated filer
☐
Smaller reporting company
Emerging growth company
If an emerging growth company,
indicate by check mark if the registrant has elected
not to use the extended transition period for complying with
any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).
Yes
☐
☒
Number of shares outstanding at April 30, 2021:
ORCHID ISLAND
CAPITAL, INC.
TABLE OF CONTENTS
PART I. FINANCIAL
INFORMATION
ITEM 1. Financial
Statements
1
Condensed
Balance Sheets
(unaudited)
1
Condensed
Statements
of Operations
(unaudited)
2
Condensed
Statements
of Stockholders’
Equity (unaudited)
3
Condensed
Statements
of Cash Flows
(unaudited)
4
Notes to Condensed
Financial Statements
5
ITEM 2. Management’s
Discussion
and Analysis
of Financial
Condition
and Results
of Operations
23
ITEM 3. Quantitative
and Qualitative
Disclosures
about Market
Risk
44
ITEM 4. Controls
and Procedures
47
PART II. OTHER INFORMATION
ITEM 1. Legal
Proceedings
48
ITEM 1A.
Risk Factors
48
ITEM 2. Unregistered
Sales of Equity
Securities
and Use of
Proceeds
48
ITEM 3. Defaults
upon Senior
Securities
48
ITEM 4. Mine
Safety Disclosures
48
ITEM 5. Other
Information
48
ITEM 6. Exhibits
49
SIGNATURES
50
1
PART I. FINANCIAL
INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORCHID ISLAND CAPITAL, INC.
CONDENSED BALANCE SHEETS
($ in thousands, except per share data)
(Unaudited)
March 31, 2021
December 31, 2020
ASSETS:
Mortgage-backed securities, at fair value
Pledged to counterparties
$
$
Unpledged
Total mortgage
-backed securities
Cash and cash equivalents
Restricted cash
Accrued interest receivable
Derivative assets, at fair value
Receivable for securities sold, pledged to counterparties
Other assets
Total Assets
$
$
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements
$
$
Payable for unsettled securities purchased
Dividends payable
Derivative liabilities, at fair value
Accrued interest payable
Due to affiliates
Other liabilities
Total Liabilities
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $
and outstanding as of March 31, 2021 and December 31, 2020
Common Stock, $
shares issued and outstanding as of March 31, 2021 and
and outstanding as of December 31, 2020
Additional paid-in capital
Accumulated deficit
(
47,363
)
(
17,994
)
Total Stockholders' Equity
Total Liabilities
and Stockholders' Equity
$
$
See Notes to Financial Statements
2
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS
OF OPERATIONS
(Unaudited)
For the Three Months Ended March 31, 2021 and 2020
($ in thousands, except per share data)
Three Months Ended March 31,
2021
2020
Interest income
$
$
Interest expense
(
1,941
)
(
16,523
)
Net interest income
Realized losses on mortgage-backed securities
(
7,397
)
(
28,380
)
Unrealized (losses) gains on mortgage-backed securities
(
88,866
)
Gains (losses) on derivative and other hedging instruments
(
82,858
)
Net portfolio loss
(
25,876
)
(
89,058
)
Expenses:
Management fees
Allocated overhead
Accrued incentive compensation
(
436
)
Directors' fees and liability insurance
Audit, legal and other professional fees
Direct REIT operating expenses
Other administrative
Total expenses
Net loss
$
(
29,369
)
$
(
91,199
)
Basic net loss per share
$
(
0.34
)
$
(
1.41
)
Diluted net loss per share
$
(
0.34
)
$
(
1.41
)
Weighted Average Shares Outstanding
Dividends declared per common share
$
$
See Notes to Financial Statements
3
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS
OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Three Months Ended March 31, 2021 and 2020
(in thousands)
Additional
Retained
Common Stock
Paid-in
Earnings
Shares
Par Value
Capital
(Deficit)
Total
Balances, January 1, 2020
$
$
$
(
20,122
)
$
Net loss
-
(
91,199
)
(
91,199
)
Cash dividends declared
-
(
15,670
)
(
15,670
)
Issuance of common stock pursuant to public offerings, net
19,447
Stock based awards and amortization
Balances, March 31, 2020
$
$
$
(
111,321
)
$
Balances, January 1, 2021
$
$
$
(
17,994
)
$
Net loss
-
(
29,369
)
(
29,369
)
Cash dividends declared
-
(
17,226
)
(
17,226
)
Issuance of common stock pursuant to public offerings, net
Stock based awards and amortization
Balances, March 31, 2021
$
$
$
(
47,363
)
$
See Notes to Financial Statements
4
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS
OF CASH FLOWS
(Unaudited)
For the Three Months Ended March 31, 2021 and 2020
($ in thousands)
2021
2020
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss
$
(
29,369
)
$
(
91,199
)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Stock based compensation
Realized and unrealized losses on mortgage-backed securities
Realized and unrealized (gains) losses on interest rate swaptions
(
13,903
)
Realized and unrealized gains on interest rate floors
(
1,384
)
Realized and unrealized (gains) losses on interest rate swaps
(
30,053
)
Realized (gains) losses on forward settling to-be-announced securities
(
574
)
Changes in operating assets and liabilities:
Accrued interest receivable
(
1,050
)
Other assets
(
588
)
(
655
)
Accrued interest payable
(
236
)
(
7,287
)
Other liabilities
(
223
)
Due to (from) affiliates
(
102
)
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES
(
7,096
)
CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases
(
1,764,082
)
(
1,334,350
)
Sales
Principal repayments
Payments on net settlement of to-be-announced securities
(
3,289
)
(
7,602
)
Purchase of derivative financial instruments, net of margin cash received
(
7,385
)
(
45,458
)
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
(
662,353
)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements
Principal payments on repurchase agreements
(
6,931,062
)
(
14,240,566
)
Cash dividends
(
16,030
)
(
15,416
)
Proceeds from issuance of common stock, net of issuance costs
Shares withheld from employee stock awards for payment of taxes
(
297
)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
(
633,825
)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS
AND RESTRICTED CASH
(
77,205
)
CASH, CASH EQUIVALENTS AND
RESTRICTED CASH, beginning of the period
CASH, CASH EQUIVALENTS AND
RESTRICTED CASH, end of the period
$
$
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest
$
$
SUPPLEMENTAL DISCLOSURE OF
NONCASH INVESTING ACTIVITIES:
Securities acquired settled in later period
$
$
Securities sold settled in later period
See Notes to Financial Statements
5
ORCHID ISLAND
CAPITAL, INC.
NOTES TO CONDENSED
FINANCIAL
STATEMENTS
(Unaudited)
MARCH 31,
2021
NOTE 1.
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
and Business
Description
Orchid Island
Capital, Inc.
(“Orchid”
or the “Company”),
was incorporated
in Maryland
on August
17, 2010 for
the purpose
of creating
and managing
a leveraged
investment
portfolio
consisting
of residential
mortgage-backed
securities
(“RMBS”).
From incorporation
to
February 20,
2013,
Orchid was
a wholly owned
subsidiary
of Bimini Capital
Management,
Inc. (“Bimini”).
Orchid began
operations
on
November 24,
2010 (the
date of commencement
of operations).
From incorporation
through November
24, 2010,
Orchid’s only
activity
was the issuance
of common stock
to Bimini.
On January 23, 2020, Orchid entered into an equity distribution agreement (the
“January 2020 Equity Distribution Agreement”) with
three sales agents pursuant to which the Company could offer and sell, from time to time, up
to an aggregate amount of $
of shares of the Company’s common stock in transactions that were deemed to be “at the market” offerings and
privately negotiated
transactions.
The Company issued a total of
gross proceeds of
approximately $
its termination in August 2020.
On August 4, 2020, Orchid entered into an equity distribution agreement (the “August 2020
Equity Distribution Agreement”) with
four sales agents pursuant to which the Company may offer and sell, from time to time, up to
an aggregate amount of $
shares of the Company’s common stock in transactions that are deemed to be “at the market”
offerings and privately negotiated
transactions.
Through March 31, 2021, the Company issued a total of
Agreement for aggregate gross proceeds of
approximately $
commissions and fees.
On January 20, 2021, Orchid entered into an underwriting agreement (the “January
2021 Underwriting Agreement”) with J.P.
Morgan Securities LLC (“J.P. Morgan”), relating to the offer and sale of
Morgan purchased the shares of the Company’s common stock from the Company pursuant
to the January 2021 Underwriting
Agreement at $
21, 2021. The closing of the offering of
proceeds to the Company of approximately $
On March 2, 2021, Orchid entered into an underwriting agreement (the “March 2021
Underwriting Agreement”) with J.P. Morgan,
relating to the offer and sale of
Company’s common stock from the Company pursuant to the March 2021 Underwriting
Agreement at $
Company granted J.P. Morgan a 30-day option to purchase up to an additional
the same terms and conditions, which J.P. Morgan exercised in full on March 3, 2021. The closing of the offering of
of the Company’s common stock occurred on March 5, 2021, with net proceeds to the Company
of approximately $
offering expenses.
COVID-19 Impact
Beginning
in mid-March
2020, the
global pandemic
associated
with the novel
coronavirus
(“COVID-19”)
and related
economic
conditions
began to impact
our financial
position and
results of
operations.
As a result
of the economic,
health and
market turmoil
brought
6
about by COVID-19,
the Agency
RMBS market
experienced
severe dislocations.
This resulted
in falling
prices of our
assets and
increased
margin calls
from our repurchase
agreement
lenders, resulting
in material
adverse effects
on our results
of operations
and to our
financial
condition.
The Agency
RMBS market
largely stabilized
after the
Federal Reserve
announced
on March 23,
2020 that
it would purchase
Agency
RMBS and
U.S. Treasuries
in the amounts
needed to
support smooth
market functioning.
As of March
31, 2021,
we have timely
satisfied
all margin
calls. The
RMBS market
continues to
react to the
pandemic and
the various
measures put
in place to
stabilize the
market.
To
the extent
the financial
or mortgage
markets do
not respond
favorably to
any of these
actions, or
such actions
do not function
as intended,
our business,
results of
operations
and financial
condition may
continue to
be materially
adversely
affected. Although
the Company
cannot
estimate the
length or
gravity of
the impact
of the COVID-19
pandemic at
this time,
if the pandemic
continues,
it may continue
to have
materially
adverse effects
on the Company’s
results of
future operations,
financial position,
and liquidity
during 2021.
Basis of
Presentation
and Use of
Estimates
The accompanying
unaudited
financial
statements
have been
prepared in
accordance
with accounting
principles
generally
accepted
in the United
States (“GAAP”)
for interim
financial information
and with the
instructions
to Form 10-Q
and Article
8 of Regulation
S-X.
Accordingly, they
do not include
all of the
information
and footnotes
required by
GAAP for
complete financial
statements.
In the opinion
of
management,
all adjustments
(consisting
of normal
recurring
accruals)
considered
necessary
for a fair
presentation
have been
included.
Operating
results for
the three
month period
ended March
31, 2021 are
not necessarily
indicative
of the results
that may be
expected for
the year ending
December 31,
2021.
The balance
sheet at December
31, 2020 has
been derived
from the audited
financial statements
at that date
but does not
include all
of the information
and footnotes
required by
GAAP for
complete financial
statements.
For further
information,
refer to the
financial
statements
and footnotes
thereto included
in the Company’s
Annual Report
on Form 10-K
for the year
ended December
31, 2020.
The preparation
of financial
statements
in conformity
with GAAP
requires management
to make estimates
and assumptions
that affect
the reported
amounts of
assets and
liabilities
and disclosure
of contingent
assets and
liabilities
at the date
of the financial
statements
and
the reported
amounts of
revenues and
expenses during
the reporting
period. Actual
results could
differ from
those estimates.
The
significant
estimates
affecting the
accompanying
financial
statements
are the fair
values of RMBS
and derivatives.
Management
believes
the estimates
and assumptions
underlying
the financial
statements
are reasonable
based on the
information
available as
of March 31,
2021.
Variable Interest Entities (“VIEs”)
We obtain interests in VIEs through our investments in mortgage-backed securities.
Our interests in these VIEs are passive in
nature and are not expected to result in us obtaining a controlling financial interest in
these VIEs in the future.
As a result, we do not
consolidate these VIEs and we account for our interest in these VIEs as mortgage-backed
securities.
See Note 2 for additional
information regarding our investments in mortgage-backed securities.
Our maximum exposure to loss for these VIEs is the carrying
value of the mortgage-backed securities.
Cash and Cash Equivalents and Restricted Cash
Cash and cash
equivalents
include cash
on deposit
with financial
institutions
and highly
liquid investments
with original
maturities
of
three months
or less at
the time
of purchase.
Restricted
cash includes
cash pledged
as collateral
for repurchase
agreements
and other
borrowings,
and interest
rate swaps
and other
derivative
instruments.
The following
table provides
a reconciliation
of cash, cash
equivalents,
and restricted
cash reported
within the
statement
of financial
position that
sum to the
total of the
same such amounts
shown in
the statement
of cash flows.
7
(in thousands)
March 31, 2021
December 31, 2020
Cash and cash equivalents
$
$
Restricted cash
Total cash, cash equivalents
and restricted cash
$
$
The Company
maintains cash
balances at
three banks
and excess
margin on
account with
two exchange
clearing members.
At times,
balances may
exceed federally
insured limits.
The Company
has not experienced
any losses
related to
these balances.
The Federal
Deposit Insurance
Corporation
insures eligible
accounts up
to $250,000
per depositor
at each financial
institution.
Restricted
cash
balances are
uninsured,
but are held
in separate
customer accounts
that are segregated
from the general
funds of the
counterparty.
The
Company limits
uninsured
balances to
only large,
well-known
banks and exchange
clearing members
and believes
that it is
not exposed
to
any significant
credit risk
on cash and
cash equivalents
or restricted
cash balances.
Mortgage-Backed
Securities
The Company
invests primarily
in mortgage
pass-through
(“PT”) residential
mortgage backed
certificates
issued by Freddie
Mac,
Fannie Mae
or Ginnie Mae
(“RMBS”),
collateralized
mortgage obligations
(“CMOs”),
interest-only
(“IO”) securities
and inverse
interest-only
(“IIO”) securities
representing interest in or obligations backed by pools of RMBS.
We refer to RMBS and CMOs as PT RMBS. We refer
to IO and IIO securities as structured RMBS. The Company has elected to account for its
investment in RMBS under the fair value
option. Electing the fair value option requires
the Company to record changes in fair value in the statement of operations,
which, in
management’s view, more appropriately reflects the results of our operations for a particular reporting period and is consistent with the
underlying economics and how the portfolio is managed.
The Company
records RMBS
transactions
on the trade
date. Security
purchases that
have not
settled as
of the balance
sheet date
are included
in the RMBS
balance with
an offsetting
liability recorded,
whereas securities
sold that
have not settled
as of the
balance sheet
date are removed
from the RMBS
balance with
an offsetting
receivable recorded.
Fair value
is defined
as the price
that would
be received
to sell the
asset or paid
to transfer
the liability
in an orderly
transaction
between market
participants
at the measurement
date.
The fair value
measurement
assumes that
the transaction
to sell the
asset or
transfer the
liability either
occurs in
the principal
market for
the asset or
liability, or in
the absence
of a principal
market, occurs
in the most
advantageous
market for
the asset or
liability. Estimated
fair values
for RMBS
are based
on independent
pricing sources
and/or third
party
broker quotes,
when available.
Income on PT
RMBS securities
is based on
the stated
interest rate
of the security.
Premiums or
discounts present
at the date
of
purchase are
not amortized.
Premium lost
and discount
accretion
resulting from
monthly principal
repayments
are reflected
in unrealized
gains (losses)
on RMBS in
the statements
of operations.
For IO securities,
the income
is accrued
based on the
carrying value
and the
effective yield.
The difference
between income
accrued and
the interest
received on
the security
is characterized
as a return
of investment
and serves
to reduce
the asset’s
carrying value.
At each reporting
date, the
effective yield
is adjusted
prospectively
for future
reporting
periods
based on the
new estimate
of prepayments
and the contractual
terms of the
security. For IIO
securities,
effective yield
and income
recognition
calculations
also take
into account
the index value
applicable
to the security.
Changes in
fair value
of RMBS during
each
reporting
period are
recorded in
earnings and
reported as
unrealized
gains or losses
on mortgage-backed
securities
in the accompanying
statements
of operations.
Derivative and Other Hedging Instruments
The Company
uses derivative
and other
hedging instruments
to manage
interest rate
risk, facilitate
asset/liability
strategies
and
manage other
exposures,
and it may
continue to
do so in the
future. The
principal instruments
that the Company
has used to
date are
Treasury Note
(“T-Note”),
Fed Funds and
Eurodollar
futures contracts,
short positions
in U.S. Treasury
securities,
interest rate
swaps,
8
options to
enter in interest
rate swaps
(“interest
rate swaptions”)
and “to-be-announced”
(“TBA”) securities
transactions,
but the Company
may enter
into other
derivative
and other
hedging instruments
in the future.
The Company
accounts for
TBA securities
as derivative
instruments.
Gains and losses
associated
with TBA
securities
transactions
are reported
in gain (loss)
on derivative
instruments
in the accompanying
statements
of operations.
Derivative
and other
hedging instruments
are carried
at fair value,
and changes
in fair value
are recorded
in earnings
for each period.
The Company’s
derivative
financial
instruments
are not designated
as hedge accounting
relationships,
but rather
are used as
economic
hedges of
its portfolio
assets and
liabilities.
Holding derivatives
creates exposure
to credit
risk related
to the potential
for failure
on the part
of counterparties
and exchanges
to
honor their
commitments.
In the event
of default
by a counterparty,
the Company
may have difficulty
recovering
its collateral
and may not
receive payments
provided for
under the
terms of the
agreement.
The Company’s
derivative
agreements
require it
to post or
receive
collateral
to mitigate
such risk.
In addition,
the Company
uses only
registered
central clearing
exchanges and
well-established
commercial
banks as counterparties,
monitors positions
with individual
counterparties
and adjusts
posted collateral
as required.
Financial
Instruments
The fair value
of financial
instruments
for which
it is practicable
to estimate
that value
is disclosed
either in
the body of
the financial
statements
or in the
accompanying
notes. RMBS,
Eurodollar,
Fed Funds
and T-Note
futures contracts,
interest rate
swaps, interest
rate
swaptions
and TBA securities
are accounted
for at fair
value in the
balance sheets.
The methods
and assumptions
used to estimate
fair
value for
these instruments
are presented
in Note 12
of the financial
statements.
The estimated
fair value
of cash and
cash equivalents,
restricted
cash, accrued
interest receivable,
receivable
for securities
sold,
other assets,
due to affiliates,
repurchase
agreements,
payable for
unsettled securities
purchased,
accrued interest
payable and
other
liabilities
generally approximates
their carrying
values as of
March 31,
2021 and December
31, 2020 due
to the short-term
nature of
these
financial instruments.
Repurchase
Agreements
The Company
finances the
acquisition
of the majority
of its
RMBS through
the use of
repurchase
agreements
under master
repurchase
agreements.
Repurchase
agreements
are accounted
for as collateralized
financing
transactions,
which are
carried at
their
contractual
amounts, including
accrued interest,
as specified
in the respective
agreements.
Reverse Repurchase
Agreements
and Obligations
to Return Securities
Borrowed under
Reverse Repurchase
Agreements
The Company
borrows
securities
to cover short
sales of U.S.
Treasury securities
through reverse
repurchase
transactions
under our
master repurchase
agreements.
We account for
these as securities
borrowing
transactions
and recognize
an obligation
to return the
borrowed
securities
at fair value
on the balance
sheet based
on the value
of the underlying
borrowed
securities
as of the
reporting
date.
The securities
received as
collateral
in connection
with our reverse
repurchase
agreements
mitigate our
credit risk
exposure to
counterparties.
Our reverse
repurchase
agreements
typically
have maturities
of 30 days
or less.
Manager Compensation
The Company
is externally
managed by
Bimini Advisors,
LLC (the
“Manager”
or “Bimini
Advisors”),
a Maryland
limited liability
company and
wholly-owned
subsidiary
of Bimini.
The Company’s
management
agreement
with the
Manager provides
for payment
to the
Manager of
a management
fee and reimbursement
of certain
operating
expenses, which
are accrued
and expensed
during the
period for
which they
are earned
or incurred.
Refer to
Note 13 for
the terms of
the management
agreement.
9
Earnings
Per Share
Basic earnings
per share
(“EPS”) is
calculated
as net income
or loss attributable
to common stockholders
divided by
the weighted
average number
of shares
of common stock
outstanding
or subscribed
during the
period. Diluted
EPS is calculated
using the treasury
stock or two-class
method, as
applicable,
for common
stock equivalents,
if any. However, the
common stock
equivalents
are not included
in computing
diluted EPS
if the result
is anti-dilutive.
Income Taxes
Orchid has qualified and elected to be taxed as a real estate investment trust (“REIT”) under
the Internal Revenue Code of 1986,
as amended (the “Code”).
REITs are generally not subject to federal income tax on their REIT taxable income provided that they
distribute to their stockholders at least 90% of their REIT taxable income on an annual
basis. In addition, a REIT must meet other
provisions of the Code to retain its tax status.
Orchid assesses the likelihood, based on their technical merit, that uncertain tax positions
will be sustained upon examination
based on the facts, circumstances and information available at the end of each period.
All of Orchid’s tax positions are categorized as
highly certain.
There is no accrual for any tax, interest or penalties related to Orchid’s tax position
assessment.
The measurement of
uncertain tax positions is adjusted when new information is available, or
when an event occurs that requires a change.
Recent
Accounting
Pronouncements
On January 1, 2020, we adopted Accounting Standards Update (“ASU”) 2016-13,
Financial Instruments – Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments.
ASU 2016-13 requires credit losses on most financial assets measured
at amortized cost and certain other instruments to be measured using an expected credit
loss model (referred to as the current
expected credit loss model). The Company’s adoption of this ASU did not have a material effect on its financial
statements as its
financial assets were already measured at fair value through earnings.
In March 2020, the FASB issued ASU 2020-04 “
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate
Reform on Financial Reporting.
”
ASU 2020-04 provides optional expedients and exceptions to GAAP requirements for
modifications
on debt instruments, leases, derivatives, and other contracts, related to the expected market
transition from the London Interbank
Offered Rate (“LIBOR”), and certain other floating rate benchmark indices, or collectively, IBORs, to alternative reference rates. ASU
2020-04 generally considers contract modifications related to reference rate reform to
be an event that does not require contract
remeasurement at the modification date nor a reassessment of a previous accounting
determination. The guidance in ASU 2020-04 is
optional and may be elected over time, through December 31, 2022, as reference
rate reform activities occur. The Company does not
believe the adoption of this ASU will have a material impact on its consolidated financial
statements.
In January 2021, the FASB issued ASU 2021-01 “Reference Rate Reform (Topic 848). ASU 2021-01 expands the scope of ASC
848 to include all affected derivatives and give market participants the ability to apply certain
aspects of the contract modification and
hedge accounting expedients to derivative contracts affected by the discounting transition. In
addition, ASU 2021-01 adds
implementation guidance to permit a company to apply certain optional expedients
to modifications of interest rate indexes used for
margining, discounting or contract price alignment of certain derivatives as a result
of reference rate reform initiatives and extends
optional expedients to account for a derivative contract modified as a continuation of
the existing contract and to continue hedge
accounting when certain critical terms of a hedging relationship change to modifications
made as part of the discounting transition. The
guidance in ASU 2021-01 is effective immediately and available generally through December
31, 2022, as reference rate reform
activities occur. The Company does not believe the adoption of this ASU will have a material impact on its financial statements.
NOTE 2.
MORTGAGE-BACKED SECURITIES
10
The following
table presents
the Company’s
RMBS portfolio
as of March
31, 2021 and
December 31,
2020:
(in thousands)
March 31, 2021
December 31, 2020
Pass-Through RMBS Certificates:
Fixed-rate Mortgages
$
$
Fixed-rate CMOs
Total Pass-Through
Certificates
Structured RMBS Certificates:
Interest-Only Securities
Inverse Interest-Only Securities
Total Structured
RMBS Certificates
Total
$
$
NOTE 3.
REPURCHASE AGREEMENTS
The Company
pledges certain
of its RMBS
as collateral
under repurchase
agreements
with financial
institutions.
Interest rates
are
generally fixed
based on prevailing
rates corresponding
to the terms
of the borrowings,
and interest
is generally
paid at the
termination
of a
borrowing.
If the fair
value of the
pledged securities
declines,
lenders will
typically require
the Company
to post additional
collateral
or pay
down borrowings
to re-establish
agreed upon
collateral
requirements,
referred to
as "margin
calls." Similarly,
if the fair
value of the
pledged
securities
increases,
lenders may
release collateral
back to the
Company. As of March
31, 2021,
the Company
had met all
margin call
requirements.
As of March
31, 2021 and
December 31,
2020, the
Company’s repurchase
agreements
had remaining
maturities
as summarized
below:
($ in thousands)
OVERNIGHT
BETWEEN 2
BETWEEN 31
GREATER
(1 DAY OR
AND
AND
THAN
LESS)
30 DAYS
90 DAYS
90 DAYS
TOTAL
March 31, 2021
Fair market value of securities pledged, including
accrued interest receivable
$
$
$
$
$
Repurchase agreement liabilities associated with
these securities
$
$
$
$
$
Net weighted average borrowing rate
December 31, 2020
Fair market value of securities pledged, including
accrued interest receivable
$
$
$
$
$
Repurchase agreement liabilities associated with
these securities
$
$
$
$
$
Net weighted average borrowing rate
In addition, cash pledged to counterparties for repurchase agreements was approximately
$
March 31, 2021 and December 31, 2020, respectively.
If, during
the term of
a repurchase
agreement,
a lender files
for bankruptcy,
the Company
might experience
difficulty recovering
its
pledged assets,
which could
result in
an unsecured
claim against
the lender
for the difference
between the
amount loaned
to the Company
plus interest
due to the
counterparty
and the fair
value of the
collateral
pledged to
such lender, including the accrued interest
receivable
and cash posted by the Company as collateral. At March
31, 2021,
the Company
had an aggregate
amount at
risk (the difference
between the
amount loaned
to the Company,
including interest
payable and
securities
posted by
the counterparty
(if any),
and the fair
value of securities
and cash pledged
(if any),
including accrued
interest on
such securities)
with all
counterparties
of approximately
$
11
million.
The Company
did not have
an amount
at risk with
any individual
counterparty
greater than
10% of the
Company’s equity
at March
31, 2021 and
December 31,
2020.
NOTE 4. DERIVATIVE AND OTHER HEDGING INSTRUMENTS
The table
below summarizes
fair value
information
about our
derivative
and other
hedging instruments
assets and
liabilities
as of
March 31,
2021 and December
31, 2020.
(in thousands)
Derivative and Other Hedging Instruments
Balance Sheet Location
March 31, 2021
December 31, 2020
Assets
Interest rate swaps
Derivative assets, at fair value
$
$
Payer swaptions (long positions)
Derivative assets, at fair value
Interest rate floors
Derivative assets, at fair value
TBA securities
Derivative assets, at fair value
Total derivative
assets, at fair value
$
$
Liabilities
Interest rate swaps
Derivative liabilities, at fair value
$
$
Payer swaptions (short positions)
Derivative liabilities, at fair value
TBA securities
Derivative liabilities, at fair value
Total derivative
liabilities, at fair value
$
$
Margin Balances Posted to (from) Counterparties
Futures contracts
Restricted cash
$
$
TBA securities
Restricted cash
TBA securities
Other liabilities
(
7,407
)
(
2,520
)
Interest rate swaption contracts
Other liabilities
(
13,962
)
(
3,563
)
Interest rate swap contracts
Restricted cash
Total margin
balances on derivative contracts
$
(6,789)
$
14,451
Eurodollar, Fed
Funds and
T-Note futures
are cash settled
futures contracts
on an interest
rate, with
gains and losses
credited
or
charged to
the Company’s
cash accounts
on a daily
basis. A
minimum balance,
or “margin”,
is required
to be maintained
in the account
on
a daily basis.
The tables
below present
information
related to
the Company’s
Eurodollar
and T-Note futures
positions at
March 31,
2021
and December
31, 2020.
($ in thousands)
March 31, 2021
Average
Weighted
Weighted
Contract
Average
Average
Notional
Entry
Effective
Open
Expiration Year
Amount
Rate
Rate
Equity
(1)
Eurodollar Futures Contracts (Short Positions)
2021
$
50,000
$
(
301
)
Treasury Note Futures Contracts (Short
Position)
(2)
June 2021 5-year T-Note futures
(Jun 2021 - Jun 2026 Hedge Period)
$
69,000
$
($ in thousands)
December 31, 2020
Average
Weighted
Weighted
Contract
Average
Average
Notional
Entry
Effective
Open
12
Expiration Year
Amount
Rate
Rate
Equity
(1)
Eurodollar Futures Contracts (Short Positions)
2021
$
50,000
$
(
424
)
Treasury Note Futures Contracts (Short
Position)
(2)
March 2021 5 year T-Note futures
(Mar 2021 - Mar 2026 Hedge Period)
$
69,000
$
(
186
)
(1)
Open equity represents the cumulative gains (losses) recorded on open
futures positions from inception.
(2)
T-Note futures contracts were valued
at a price of $
short positions were $
Under our
interest rate
swap agreements,
we typically
pay a fixed
rate and receive
a floating
rate based
on LIBOR ("payer
swaps").
The floating
rate we receive
under our
swap agreements
has the effect
of offsetting
the repricing
characteristics
of our repurchase
agreements
and cash flows
on such liabilities.
We are typically
required to
post collateral
on our interest
rate swap
agreements.
The table
below presents
information
related to
the Company’s
interest rate
swap positions
at March 31,
2021 and December
31, 2020.
($ in thousands)
Average
Net
Fixed
Average
Estimated
Average
Notional
Pay
Receive
Fair
Maturity
Amount
Rate
Rate
Value
(Years)
March 31, 2021
Expiration > 3 to ≤ 5 years
$
$
Expiration > 5 years
$
$
December 31, 2020
Expiration > 3 to ≤ 5 years
$
$
(
23,760
)
Expiration > 5 years
(
944
)
$
$
(
24,704
)
The table
below presents
information
related to
the Company’s
interest rate
floor positions
at March 31,
2021.
($ in thousands)
Net
Strike
Estimated
Notional
Swap
Curve
Fair
Expiration
Amount
Cost
Rate
Spread
Value
February 3, 2023
$
$
30Y5Y
$
February 3, 2023
10Y2Y
$
$
The table
below presents
information
related to
the Company’s
interest rate
swaption positions
at March 31,
2021 and
2020.
($ in thousands)
Option
Underlying Swap
Weighted
Average
Weighted
Average
Average
Adjustabl
e
Average
Fair
Months to
Notional
Fixed
Rate
Term
Expiration
Cost
Value
Expiration
Amount
Rate
(LIBOR)
(Years)
March 31, 2021
Payer Swaptions - long
>1 year ≤ 2 years
$
$
$
3 Month
13
Payer Swaptions - short
≤ 1 year
$
(
10,720
)
$
(
35,057
)
$
(
782,850
)
3 Month
December 31, 2020
Payer Swaptions - long
≤ 1 year
$
$
$
3 Month
>1 year ≤ 2 years
3 Month
$
$
$
3 Month
Payer Swaptions - short
≤ 1 year
$
(
4,660
)
$
(
7,730
)
$
(
507,700
)
3 Month
The following table summarizes our contracts to purchase and sell TBA
securities as of March 31, 2021 and December 31, 2020
.
($ in thousands)
Notional
Net
Amount
Cost
Market
Carrying
Long (Short)
(1)
Basis
(2)
Value
(3)
Value
(4)
March 31, 2021
30-Year TBA securities:
2.5%
$
(
250,000
)
$
(
257,188
)
$
(
256,270
)
$
3.0%
(
1,062,000
)
(
1,114,345
)
(
1,105,807
)
Total
$
(
1,312,000
)
$
(
1,371,533
)
$
(
1,362,077
)
$
December 31, 2020
30-Year TBA securities:
2.0%
$
$
$
$
3.0%
(
328,000
)
(
342,896
)
(
343,682
)
(
786
)
Total
$
$
$
$
(1)
Notional amount represents the par value (or principal balance) of the
underlying Agency RMBS.
(2)
Cost basis represents the forward price to be paid (received) for the
underlying Agency RMBS.
(3)
Market value represents the current market value of the TBA securities
(or of the underlying Agency RMBS) as of period-end.
(4)
Net carrying value represents the difference between the market
value and the cost basis of the TBA securities as of period-end
and is reported
in derivative assets (liabilities) at fair value in our balance sheets.
Gain (Loss) From Derivative and Other Hedging Instruments, Net
The table below presents the effect of the Company’s derivative and other hedging instruments on the statements of
operations for the three months ended March 31, 2021 and 2020.
(in thousands)
Three Months Ended March 31,
2021
2020
Eurodollar futures contracts (short positions)
$
$
(
8,217
)
T-Note futures contracts (short position)
(
4,339
)
Interest rate swaps
(
60,623
)
Payer swaptions (short positions)
(
26,167
)
Payer swaptions (long positions)
(
2,589
)
Interest rate floors
TBA securities (short positions)
(
7,090
)
TBA securities (long positions)
(
8,559
)
Total
$
$
(
82,858
)
Credit Risk-Related Contingent Features
14
The use of derivatives and other hedging instruments creates exposure to credit risk relating to potential losses that
could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the
contracts. We minimize this risk by limiting our counterparties for instruments which are not centrally cleared on a registered
exchange to major financial institutions with acceptable credit ratings and monitoring positions with individual counterparties.
In addition, we may be required to pledge assets as collateral for our derivatives, whose amounts vary over time based on
the market value, notional amount and remaining term of the derivative contract. In the event of a default by a counterparty,
we may not receive payments provided for under the terms of our derivative agreements, and may have difficulty obtaining
our assets pledged as collateral for our derivatives. The cash and cash equivalents pledged as collateral for our derivative
instruments are included in restricted cash on our balance sheets.
It is the Company's policy not to offset assets and
liabilities associated with open derivative contracts. However, the Chicago Mercantile Exchange (“CME”) rules characterize
variation margin transfers as settlement payments, as opposed to adjustments to collateral. As a result, derivative assets
and liabilities associated with centrally cleared derivatives for which the CME serves as the central clearing party are
presented as if these derivatives had been settled as of the reporting date.
NOTE 5. PLEDGED ASSETS
Assets Pledged
to Counterparties
The table
below summarizes
our assets
pledged as
collateral
under our
repurchase
agreements
and derivative
agreements
by type,
including securities
pledged related
to securities
sold but not
yet settled,
as of March
31, 2021 and
December 31,
2020.
(in thousands)
March 31, 2021
December 31, 2020
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Counterparties
Agreements
Agreements
Total
Agreements
Agreements
Total
PT RMBS - fair value
$
$
$
$
$
$
Structured RMBS - fair value
Accrued interest on pledged securities
Receivable for securities sold
Restricted cash
Total
$
$
$
$
$
$
Assets Pledged
from Counterparties
The table
below summarizes
our assets
pledged to
us from counterparties
under our
repurchase
agreements,
reverse repurchase
agreements
and derivative
agreements
as of March
31, 2021 and
December 31,
2020.
(in thousands)
March 31, 2021
December 31, 2020
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Orchid
Agreements
Agreements
Total
Agreements
Agreements
Total
Cash
$
$
$
$
$
$
U.S. Treasury securities - fair value
Total
$
$
$
$
$
$
$
RMBS and
U.S. Treasury
securities
received as
margin under
our repurchase
agreements
are not recorded
in the balance
sheets
because the
counterparty
retains ownership
of the security.
U.S. Treasury
securities
received from
counterparties
as collateral
under our
reverse repurchase
agreements
are recognized
as obligations
to return
securities
borrowed
under reverse
repurchase
agreements
in the
balance sheet.
Cash received
as margin is
recognized
as cash and
cash equivalents
with a corresponding
amount recognized
as an
15
increase in
repurchase
agreements
or other liabilities
in the balance
sheets.
NOTE 6. OFFSETTING ASSETS AND LIABILITIES
The Company’s
derivative
agreements
and repurchase
agreements
and reverse
repurchase
agreements
are subject
to underlying
agreements
with master
netting or
similar arrangements,
which provide
for the right
of offset in
the event
of default
or in the event
of
bankruptcy
of either
party to the
transactions.
The Company
reports its
assets and
liabilities
subject to
these arrangements
on a gross
basis.
The following
table presents
information
regarding
those assets
and liabilities
subject to
such arrangements
as if the Company
had
presented
them on a
net basis as
of March 31,
2021 and December
31, 2020.
(in thousands)
Offsetting of Assets
Gross Amount Not
Net Amount
Offset in the Balance Sheet
of Assets
Financial
Gross Amount
Gross Amount
Presented
Instruments
Cash
of Recognized
Offset in the
in the
Received as
Received as
Net
Assets
Balance Sheet
Balance Sheet
Collateral
Collateral
Amount
March 31, 2021
Interest rate swaps
$
$
$
$
$
$
Interest rate swaptions
(
13,962
)
Interest rate floors
TBA securities
(
7,407
)
$
$
$
$
$
(
21,369
)
$
December 31, 2020
Interest rate swaps
$
$
$
$
$
$
Interest rate swaptions
(
3,563
)
TBA securities
(
2,520
)
$
$
$
$
$
(
6,083
)
$
(in thousands)
Offsetting of Liabilities
Gross Amount Not
Net Amount
Offset in the Balance Sheet
of Liabilities
Financial
Gross Amount
Gross Amount
Presented
Instruments
of Recognized
Offset in the
in the
Posted as
Cash Posted
Net
Liabilities
Balance Sheet
Balance Sheet
Collateral
as Collateral
Amount
March 31, 2021
Repurchase Agreements
$
$
$
$
(
4,079,105
)
$
(
102,575
)
$
Interest rate swaptions
$
$
$
$
(
4,079,105
)
$
(
102,575
)
$
December 31, 2020
Repurchase Agreements
$
$
$
$
(
3,536,757
)
$
(
58,829
)
$
Interest rate swaps
(
19,761
)
Interest rate swaptions
TBA securities
(
284
)
$
$
$
$
(
3,536,757
)
$
(
78,874
)
$
The amounts
disclosed for
collateral
received by
or posted
to the same
counterparty
up to and
not exceeding
the net amount
of the
asset or liability
presented
in the balance
sheets.
The fair value
of the actual
collateral
received by
or posted
to the same
counterparty
16
typically exceeds
the amounts
presented.
See Note
5 for a discussion
of collateral
posted or
received against
or for repurchase
obligations
and derivative
and other
hedging instruments.
NOTE 7.
CAPITAL STOCK
Common Stock
Issuances
During the
three months
ended March
31, 2021 and
the year ended
December 31,
2020, the
Company completed
the following
public
offerings of
shares of
its common
stock.
($ in thousands, except per share amounts)
Weighted
Average
Price
Received
Net
Type of Offering
Period
Per Share
(1)
Shares
Proceeds
(2)
2021
At the Market Offering Program
(3)
First Quarter
$
$
Follow-on Offerings
First Quarter
Total
$
2020
At the Market Offering Program
(3)
First Quarter
$
$
At the Market Offering Program
(3)
Second Quarter
At the Market Offering Program
(3)
Third Quarter
At the Market Offering Program
(3)
Fourth Quarter
$
(1)
Weighted average price received per share is after deducting
the underwriters’ discount, if applicable, and other offering
costs.
(2)
Net proceeds are net of the underwriters’ discount, if applicable, and
other offering costs.
(3)
The Company has entered into eight equity distribution agreements,
seven of which have either been terminated because all shares were sold
or were replaced with a subsequent agreement.
Stock Repurchase Program
On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to
common stock. On February 8, 2018, the Board of Directors approved an increase
in the stock repurchase program for up to an
additional
share authorization, the increased authorization brought the total authorization to
Company’s then outstanding share count. As part of the stock repurchase program, shares
may be purchased in open market
transactions, block purchases, through privately negotiated transactions, or pursuant
to any trading plan that may be adopted in
accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”).
Open market repurchases
will be made in accordance with Exchange Act Rule 10b-18, which sets certain restrictions
on the method, timing, price and volume of
open market stock repurchases. The timing, manner, price and amount of any repurchases will be determined by the
Company in its
discretion and will be subject to economic and market conditions, stock price, applicable
legal requirements and other factors.
The
authorization does not obligate the Company to acquire any particular amount of
common stock and the program may be suspended or
discontinued at the Company’s discretion without prior notice.
From the inception of the stock repurchase program through March 31, 2021, the Company
repurchased a total of
shares at an aggregate cost of approximately $
share. No shares were repurchased during the three months ended March 31, 2021
and 2020. The remaining authorization under the
repurchase program as of March 31, 2021 was
17
Cash Dividends
The table below presents the cash dividends declared on the Company’s common stock.
(in thousands, except per share amounts)
Year
Per Share
Amount
Total
2013
$
$
2014
2015
2016
2017
2018
2019
2020
2021 - YTD
(1)
Totals
$
$
(1)
On
, the Company declared a dividend of $
.
The effect of this dividend is included in
the table above but is not reflected in the Company’s financial statements
as of March 31, 2021.
NOTE 8.
STOCK INCENTIVE PLAN
In October 2012, the Company’s Board of Directors adopted and Bimini, then the Company’s sole stockholder,
approved, the Orchid Island Capital, Inc. 2012 Equity Incentive Plan (the “Incentive Plan”) to recruit and retain employees,
directors and other service providers, including employees of the Manager and other affiliates. The Incentive Plan provides
for the award of stock options, stock appreciation rights, stock award, performance units, other equity-based awards (and
dividend equivalents with respect to awards of performance units and other equity-based awards) and incentive awards.
The Incentive Plan is administered by the Compensation Committee of the Company’s Board of Directors except that the
Company’s full Board of Directors will administer awards made to directors who are not employees of the Company or its
affiliates.
The Incentive Plan provides for awards of up to an aggregate of 10% of the issued and outstanding shares of our
common stock (on a fully diluted basis) at the time of the awards, subject to a maximum aggregate
Company’s common stock that may be issued under the Incentive Plan.
Performance Units
The Company has issued, and may in the future issue additional, performance units under the Incentive Plan to certain
executive officers and employees of its Manager.
“Performance Units” vest after the end of a defined performance period,
based on satisfaction of the performance conditions set forth in the performance unit agreement.
When earned, each
Performance Unit will be settled by the issuance of one share of the Company’s common stock, at which time the
Performance Unit will be cancelled.
The Performance Units contain dividend equivalent rights, which entitle the Participants
to receive distributions declared by the Company on common stock, but do not include the right to vote the underlying
shares of common stock.
Performance Units are subject to forfeiture should the participant no longer serve as an executive
officer or employee of the Company or the Manager.
Compensation expense for the Performance Units is recognized over
the remaining vesting period once it becomes probable that the performance conditions will be achieved.
The following table presents information related to Performance Units outstanding during the three months ended
March 31, 2021 and 2020.
($ in thousands, except per share data)
Three Months Ended March 31,
18
2021
2020
Weighted
Weighted
Average
Average
Grant Date
Grant Date
Shares
Fair Value
Shares
Fair Value
Unvested, beginning of period
$
$
Granted
Vested and issued
(
2,277
)
(
4,153
)
Unvested, end of period
$
$
Compensation expense during period
$
$
Unrecognized compensation expense, end of period
$
$
Intrinsic value, end of period
$
$
Weighted-average remaining vesting term (in years)
The number of shares of common stock issuable upon the vesting of the remaining outstanding Performance Units was
reduced in the third quarter of 2020 as a result of the book value impairment event that occurred pursuant to the Company's
Long Term
Incentive Compensation Plans (the "Plans"). The book value impairment event occurred when the Company's
book value per share declined by more than 15% during the quarter ended March 31, 2020 and the Company's book value
per share decline from January 1, 2020 to June 30, 2020 was more than 10%. The Plans provide that if such a book value
impairment event occurs, then the number of outstanding Performance Units that are outstanding as of the last day of such
two-quarter period shall be reduced by 15%.
Stock Awards
The Company has issued, and may in the future issue additional, immediately vested common stock under the
Incentive Plan to certain executive officers and employees of its Manager. The following table presents information related
to fully vested common stock issued during the three months ended March 31, 2021 and 2020. All of the fully vested shares
of common stock issued during the three months ended March 31, 2021, and the related compensation expense, were
granted with respect to service performed during the previous fiscal year.
($ in thousands, except per share data)
Three Months Ended March 31,
2021
2020
Fully vested shares granted
Weighted average grant date price per share
$
Compensation expense related to fully vested shares of common stock awards
(1)
$
$
(1)
The awards issued during the three months ended March 31, 2021 were granted
with respect to service performed in 2020. Approximately
$600,000 of compensation expense related to the 2021 awards was
accrued and recognized in 2020.
Deferred Stock Units
Non-employee directors began to receive a portion of their compensation in the form of deferred stock unit awards
(“DSUs”) pursuant to the Incentive Plan beginning with the awards for the second quarter of 2018.
Each DSU represents a
right to receive one share of the Company’s common stock. The DSUs are immediately vested and are settled at a future
date based on the election of the individual participant.
The DSUs contain dividend equivalent rights, which entitle the
participant to receive distributions declared by the Company on common stock.
These dividend equivalent rights are settled
in cash or additional DSUs at the participant’s election. The DSUs do not include the right to vote the underlying shares of
common stock.
The following table presents information related to the DSUs outstanding during the three months ended March 31,
2021 and 2020.
19
($ in thousands, except per share data)
Three Months Ended March 31,
2021
2020
Weighted
Weighted
Average
Average
Grant Date
Grant Date
Shares
Fair Value
Shares
Fair Value
Outstanding, beginning of period
$
$
Granted and vested
Issued
Outstanding, end of period
$
$
Compensation expense during period
$
$
Intrinsic value, end of period
$
$
NOTE 9.
COMMITMENTS AND CONTINGENCIES
From time to time, the Company may become involved in various claims and
legal actions arising in the ordinary course of
business. Management is not aware of any reported or unreported contingencies
at March 31, 2021.
NOTE 10. INCOME TAXES
The Company will generally not be subject to federal income tax on its REIT taxable
income to the extent it distributes its REIT
taxable income to its stockholders and satisfies the ongoing REIT requirements, including
meeting certain asset, income and stock
ownership tests. A REIT must generally distribute at least 90% of its REIT
taxable income to its stockholders, of which 85% generally
must be distributed within the taxable year, in order to avoid the imposition of an excise tax. The remaining balance
may be distributed
up to the end of the following taxable year, provided the REIT elects to treat such amount as a prior year distribution
and meets certain
other requirements.
NOTE 11.
EARNINGS PER SHARE (EPS)
The Company
had dividend
eligible Performance
Units and
Deferred Stock
Units that
were outstanding
during the
three months
ended March
31, 2021 and
2020. The
basic and diluted
per share
computations
include these
unvested Performance
Units and
Deferred
Stock Units
if there is
income available
to common stock,
as they have
dividend participation
rights. The
unvested Performance
Units and
Deferred
Stock Units
have no contractual
obligation
to share in
losses. Because
there is no
such obligation,
the unvested
Performance
Units and
Deferred
Stock Units
are not included
in the basic
and diluted
EPS computations
when no income
is available
to common
stock
even though
they are considered
participating
securities.
The table
below reconciles
the numerator
and denominator
of EPS for
the three months
ended March
31, 2021 and
2020.
(in thousands, except per share information)
Three Months Ended March 31,
2021
2020
Basic and diluted EPS per common share:
Numerator for basic and diluted EPS per share of common stock:
Net loss - Basic and diluted
$
(
29,369
)
$
(
91,199
)
Weighted average shares of common stock:
Shares of common stock outstanding at the balance sheet date
Effect of weighting
(
9,066
)
(
1,647
)
Weighted average shares-basic and diluted
Net loss per common share:
20
Basic and diluted
$
(
0.34
)
$
(
1.41
)
Anti-dilutive incentive shares not included in calculation.
NOTE 12.
FAIR VALUE
The framework
for using
fair value
to measure
assets and
liabilities
defines fair
value as the
price that
would be received
to sell an
asset or paid
to transfer
a liability
(an exit price).
A fair value
measure should
reflect the
assumptions
that market
participants
would use
in
pricing the
asset or liability,
including
the assumptions
about the
risk inherent
in a particular
valuation
technique,
the effect of
a restriction
on the sale
or use of
an asset and
the risk of
non-performance.
Required disclosures
include stratification
of balance
sheet amounts
measured at
fair value
based on
inputs the
Company uses
to derive
fair value
measurements.
These stratifications
are:
●
Level 1 valuations,
where the
valuation
is based on
quoted market
prices for
identical assets
or liabilities
traded in
active markets
(which include
exchanges and
over-the-counter
markets with
sufficient volume),
●
Level 2 valuations,
where the
valuation
is based on
quoted market
prices for
similar instruments
traded in
active markets,
quoted
prices for
identical or
similar instruments
in markets
that are not
active and
model-based
valuation
techniques
for which
all
significant
assumptions
are observable
in the market,
and
●
Level 3 valuations,
where the
valuation
is generated
from model-based
techniques
that use significant
assumptions
not
observable
in the market,
but observable
based on Company-specific
data. These
unobservable
assumptions
reflect the
Company’s own
estimates for
assumptions
that market
participants
would use
in pricing
the asset or
liability. Valuation
techniques
typically
include option
pricing models,
discounted
cash flow
models and
similar techniques,
but may also
include the
use of market
prices of assets
or liabilities
that are not
directly comparable
to the subject
asset or
liability.
The Company's
RMBS and
TBA securities
are Level
2 valuations,
and such valuations
currently are
determined
by the Company
based on independent
pricing sources
and/or third
party broker
quotes, when
available. Because
the price
estimates may
vary, the
Company must
make certain
judgments
and assumptions
about the
appropriate
price to use
to calculate
the fair values.
The Company
and
the independent
pricing sources
use various
valuation techniques
to determine
the price
of the Company’s
securities.
These techniques
include observing
the most recent
market for
like or identical
assets (including
security coupon,
maturity, yield,
and prepayment
speeds),
spread pricing
techniques
to determine
market credit
spreads
(option adjusted
spread, zero
volatility
spread, spread
to the U.S.
Treasury
curve or spread
to a benchmark
such as a TBA),
and model driven
approaches
(the discounted
cash flow
method, Black
Scholes and
SABR models
which rely
upon observable
market rates
such as the
term structure
of interest
rates and
volatility).
The appropriate
spread
pricing method
used is based
on market
convention.
The pricing
source determines
the spread
of recently
observed trade
activity or
observable
markets for
assets similar
to those being
priced. The
spread is then
adjusted based
on variances
in certain
characteristics
between the
market observation
and the asset
being priced.
Those characteristics
include: type
of asset, the
expected life
of the asset,
the
stability and
predictability
of the expected
future cash
flows of the
asset, whether
the coupon
of the asset
is fixed or
adjustable,
the
guarantor
of the security
if applicable,
the coupon,
the maturity, the
issuer, size of
the underlying
loans, year
in which the
underlying
loans
were originated,
loan to value
ratio, state
in which the
underlying
loans reside,
credit score
of the underlying
borrowers
and other variables
if appropriate.
The fair value
of the security
is determined
by using the
adjusted spread.
The Company’s
futures contracts
are Level
1 valuations,
as they are
exchange-traded
instruments
and quoted
market prices
are
readily available.
Futures contracts
are settled
daily. The Company’s
interest rate
swaps and
interest rate
swaptions
are Level
2
valuations.
The fair value
of interest
rate swaps
is determined
using a discounted
cash flow
approach
using forward
market interest
rates
and discount
rates, which
are observable
inputs. The
fair value
of interest
rate swaptions
is determined
using an option
pricing model.
RMBS (based
on the fair
value option),
derivatives
and TBA securities
were recorded
at fair value
on a recurring
basis during
the
three months
ended March
31, 2021 and
2020. When
determining
fair value
measurements,
the Company
considers the
principal or
most
advantageous
market in which
it would transact
and considers
assumptions
that market
participants
would use
when pricing
the asset.
When possible,
the Company
looks to active
and observable
markets to
price identical
assets.
When identical
assets are
not traded
in
active markets,
the Company
looks to market
observable
data for
similar assets.
21
The following
table presents
financial assets
(liabilities)
measured
at fair value
on a recurring
basis as of
March 31,
2021 and
December 31,
2020.
(in thousands)
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
Assets
Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
March 31, 2021
Mortgage-backed securities
$
$
$
Interest rate swaps
Interest rate swaptions
Interest rate floors
TBA securities
December 31, 2020
Mortgage-backed securities
$
$
$
Interest rate swaps
(
24,704
)
Interest rate swaptions
TBA securities
During the three months ended March 31, 2021 and 2020, there were no transfers
of financial assets or liabilities between levels 1,
2 or 3.
NOTE 13. RELATED PARTY
TRANSACTIONS
Management Agreement
The Company is externally managed and advised by Bimini Advisors, LLC (the “Manager”) pursuant to the terms of a
management agreement. The management agreement has been renewed through February 20, 2022 and provides for
automatic one-year extension options thereafter and is subject to certain termination rights.
Under the terms of the
management agreement, the Manager is responsible for administering the business activities and day-to-day operations of
the Company.
The Manager receives a monthly management fee in the amount of:
●
One-twelfth of 1.5% of the first $250 million of the Company’s month-end equity,
as defined in the management
agreement,
●
One-twelfth of 1.25% of the Company’s month-end equity that is greater than $250 million and less than or
equal to $500 million, and
●
One-twelfth of 1.00% of the Company’s month-end equity that is greater than $500 million.
The Company is obligated to reimburse the Manager for any direct expenses incurred on its behalf and to pay the
Manager the Company’s pro rata portion of certain overhead costs set forth in the management agreement.
Should the
Company terminate the management agreement without cause, it will pay the Manager a termination fee equal to three
times the average annual management fee, as defined in the management agreement, before or on the last day of the term
of the agreement.
22
Total
expenses recorded for the management fee and costs incurred were approximately $
for the three months ended March 31, 2021 and 2020, respectively. At
March 31, 2021 and December 31, 2020, the net
amount due to affiliates was approximately $
Other Relationships with Bimini
Robert Cauley, our Chief Executive Officer and Chairman of our Board of Directors, also serves as Chief Executive Officer and
Chairman of the Board of Directors of Bimini and owns shares of common stock of
Bimini. George H. Haas, IV, our Chief Financial
Officer, Chief Investment Officer, Secretary and a member of our Board of Directors, also serves as the Chief Financial Officer, Chief
Investment Officer and Treasurer of Bimini and owns shares of common stock of Bimini. In addition, as of March
31, 2021, Bimini
owned
23
ITEM 2. MANAGEMENT’S
DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF
OPERATIONS
The following discussion of our financial condition and results of operations should be
read in conjunction with the financial
statements and notes to those statements included in Item 1 of this Form 10-Q. The
discussion may contain certain forward-looking
statements that involve risks and uncertainties. Forward-looking statements are
those that are not historical in nature. As a result of
many factors, such as those set forth under “Risk Factors” in our most recent Annual
Report on Form 10-K, our actual results may
differ materially from those anticipated in such forward-looking statements.
Overview
We are a specialty finance company that invests in residential mortgage-backed securities
(“RMBS”) which are issued and
guaranteed by a federally chartered corporation or agency (“Agency RMBS”). Our
investment strategy focuses on, and our portfolio
consists of, two categories of Agency RMBS: (i) traditional pass-through Agency RMBS,
such as mortgage pass-through certificates
issued by Fannie Mae, Freddie Mac or Ginnie Mae (the “GSEs”) and collateralized
mortgage obligations (“CMOs”) issued by the GSEs
(“PT RMBS”) and (ii) structured Agency RMBS, such as interest-only securities (“IOs”), inverse
interest-only securities (“IIOs”) and
principal only securities (“POs”), among other types of structured Agency RMBS.
We were formed by Bimini in August 2010,
commenced operations on November 24, 2010 and completed our initial public offering (“IPO”)
on February 20, 2013.
We are
externally managed by Bimini Advisors, an investment adviser registered with the Securities
and Exchange Commission (the “SEC”).
Our business objective is to provide attractive risk-adjusted total returns over the long term
through a combination of capital
appreciation and the payment of regular monthly distributions. We intend to achieve this objective
by investing in and strategically
allocating capital between the two categories of Agency RMBS described above. We seek
to generate income from (i) the net interest
margin on our leveraged PT RMBS portfolio and the leveraged portion of our
structured Agency RMBS portfolio, and (ii) the interest
income we generate from the unleveraged portion of our structured Agency RMBS
portfolio. We intend to fund our PT RMBS and
certain of our structured Agency RMBS through short-term borrowings structured
as repurchase agreements. PT RMBS and structured
Agency RMBS typically exhibit materially different sensitivities to movements in interest
rates. Declines in the value of one portfolio
may be offset by appreciation in the other. The percentage of capital that we allocate to our two Agency RMBS asset categories will
vary and will be actively managed in an effort to maintain the level of income generated by the
combined portfolios, the stability of that
income stream and the stability of the value of the combined portfolios. We believe that this
strategy will enhance our liquidity,
earnings, book value stability and asset selection opportunities in various interest
rate environments.
We operate so as to qualify to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue
Code of 1986, as
amended (the “Code”).
We generally will not be subject to U.S. federal income tax to the extent that we currently distribute
all of our
REIT taxable income (as defined in the Code) to our stockholders and maintain
our REIT qualification.
The Company’s common stock trades on the New York Stock Exchange under the symbol “ORC”.
Capital Raising Activities
On January 23, 2020, we entered into an equity distribution agreement (the “January
2020 Equity Distribution Agreement”) with
three sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount
of $200,000,000 of shares
of our common stock in transactions that were deemed to be “at the market” offerings and
privately negotiated transactions.
We issued
a total of 3,170,727 shares under the January 2020 Equity Distribution Agreement for aggregate
gross proceeds of $19.8 million, and
net proceeds of approximately $19.4 million, net of commissions and fees, prior to
its termination in August 2020.
On August 4, 2020, we entered into an equity distribution agreement (the “August 2020
Equity Distribution Agreement”) with four
sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate amount
of $150,000,000 of shares of our
common stock in transactions that are deemed to be “at the market” offerings and privately
negotiated transactions. Through March 31,
24
2021, we issued a total of 10,156,561 shares under the August 2020 Equity Distribution
Agreement for aggregate gross proceeds of
approximately $54.1 million, and net proceeds of approximately $53.2
million, net of commissions and fees.
On January 20, 2021, we entered into an underwriting agreement (the “January 2021
Underwriting Agreement”) with J.P. Morgan
Securities LLC (“J.P. Morgan”), relating to the offer and sale of 7,600,000 shares of our common stock. J.P.
Morgan purchased the
shares of our common stock from the Company pursuant to the January 2021 Underwriting
Agreement at $5.20 per share. In addition,
we granted J.P.
Morgan a 30-day option to purchase up to an additional 1,140,000 shares
of our common stock on the same terms and
conditions, which J.P. Morgan exercised in full on January 21, 2021. The closing of the offering of 8,740,000 shares of our common
stock occurred on January 25, 2021, with net proceeds to us of approximately
$45.2 million,
net of offering expenses.
On March 2, 2021 we entered into an underwriting agreement (the “March 2021 Underwriting
Agreement”) with J.P. Morgan,
relating to the offer and sale of 8,000,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from
the Company pursuant to the March 2021 Underwriting Agreement at $5.45 per share.
In addition, we granted J.P. Morgan a 30-day
option to purchase up to an additional 1,200,000 shares of our common stock on the
same terms and conditions, which J.P. Morgan
exercised in full on March 3, 2021. The closing of the offering of 9,200,000 shares of our common stock
occurred on March 5, 2021,
with net proceeds to us of approximately $50.1 million, net of offering expenses.
Stock Repurchase Agreement
On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to 2,000,000
shares of our common stock.
The timing, manner, price and amount of any repurchases is determined by the Company in its discretion and is subject to
economic
and market conditions, stock price, applicable legal requirements and other factors.
The authorization does not obligate the Company
to acquire any particular amount of common stock and the program may be
suspended or discontinued at the Company’s discretion
without prior notice. On February 8, 2018, the Board of Directors approved an increase
in the stock repurchase program for up to an
additional 4,522,822 shares of the Company’s common stock. Coupled with the 783,757 shares
remaining from the original 2,000,000
share authorization, the increased authorization brought the total authorization to 5,306,579
shares, representing 10% of the
Company’s then outstanding share count. This stock repurchase program has no termination
date.
From the inception of the stock repurchase program through March 31, 2021, the Company
repurchased a total of 5,685,511
shares at an aggregate cost of approximately $40.4
million, including commissions and fees, for a weighted average price
of $7.10
per
share. The Company did not repurchase any shares of its common stock during the three months
ended March 31, 2021. The
remaining authorization under the repurchase program as of March 31, 2021 was 837,311 shares.
Factors that Affect our Results of Operations and Financial Condition
A variety of industry and economic factors may impact our results of operations and
financial condition. These factors include:
●
interest rate trends;
●
the difference between Agency RMBS yields and our funding and hedging costs;
●
competition for, and supply of, investments in Agency RMBS;
●
actions taken by the U.S. government, including the presidential administration,
the Fed, the Federal Housing Financing
Agency (the “FHFA”), the Federal Open Market Committee (the “FOMC”) and the U.S. Treasury;
●
prepayment rates on mortgages underlying our Agency RMBS and credit trends
insofar as they affect prepayment rates; and
●
other market developments.
In addition, a variety of factors relating to our business may also impact our results
of operations and financial condition. These
factors include:
25
●
our degree of leverage;
●
our access to funding and borrowing capacity;
●
our borrowing costs;
●
our hedging activities;
●
the market value of our investments; and
●
the requirements to qualify as a REIT and the requirements to qualify for a
registration exemption under the Investment
Company Act.
Results of
Operations
Described
below are
the Company’s
results of
operations
for the three
months ended
March 31,
2021, as compared
to the
Company’s results
of operations
for the three
months ended
March 31,
2020.
Net (Loss)
Income Summary
Net loss for
the three
months ended
March 31,
2021 was $29.4
million, or
$0.34 per
share. Net
loss for the
three months
ended
March 31, 2020
was $91.2
million, or
$1.41 per
share. The
components
of net loss
for the three
months ended
March 31,
2021 and
2020,
along with
the changes
in those components
are presented
in the table
below:
(in thousands)
2021
2020
Change
Interest income
$
26,856
$
35,671
$
(8,815)
Interest expense
(1,941)
(16,523)
14,582
Net interest income
24,915
19,148
5,767
Losses on RMBS and derivative contracts
(50,791)
(108,206)
57,415
Net portfolio deficiency
(25,876)
(89,058)
63,182
Expenses
(3,493)
(2,141)
(1,352)
Net loss
$
(29,369)
$
(91,199)
$
61,830
GAAP and Non-GAAP Reconciliations
In addition to the results presented in accordance with GAAP,
our results of operations discussed below include certain
non-GAAP financial information, including “Net Earnings Excluding Realized and Unrealized Gains and Losses”, “Economic
Interest Expense” and “Economic Net Interest Income.”
Net Earnings Excluding Realized and Unrealized Gains and Losses
We have elected to account for our Agency RMBS under the fair value option. Securities held under the fair value
option are recorded at estimated fair value, with changes in the fair value recorded as unrealized gains or losses through
the statements of operations.
In addition, we have not designated our derivative financial instruments used for hedging purposes as hedges for
accounting purposes, but rather hold them for economic hedging purposes. Changes in fair value of these instruments are
presented in a separate line item in the Company’s statements of operations and are not included in interest expense.
As
such, for financial reporting purposes, interest expense and cost of funds are not impacted by the fluctuation in value of the
derivative instruments.
Presenting net earnings excluding realized and unrealized gains and losses allows management to: (i) isolate the net
interest income and other expenses of the Company over time, free of all fair value adjustments and (ii) assess the
effectiveness of our funding and hedging strategies on our capital allocation decisions and our asset allocation performance.
26
Our funding and hedging strategies, capital allocation and asset selection are integral to our risk management strategy, and
therefore critical to the management of our portfolio.
We believe that the presentation of our net earnings excluding realized
and unrealized gains is useful to investors because it provides a means of comparing our results of operations to those of
our peers who have not elected the same accounting treatment.
Our presentation of net earnings excluding realized and
unrealized gains and losses may not be comparable to similarly-titled measures of other companies, who may use different
calculations. As a result, net earnings excluding realized and unrealized gains and losses should not be considered as a
substitute for our GAAP net income (loss) as a measure of our financial performance or any measure of our liquidity under
GAAP.
The table below presents a reconciliation of our net income (loss) determined in accordance with GAAP and net
earnings excluding realized and unrealized gains and losses.
Net Earnings Excluding Realized and Unrealized Gains and Losses
(in thousands, except per share data)
Per Share
Net Earnings
Net Earnings
Excluding
Excluding
Realized and
Realized and
Realized and
Realized and
Net
Unrealized
Unrealized
Net
Unrealized
Unrealized
Income
Gains and
Gains and
Income
Gains and
Gains and
(GAAP)
Losses
(1)
Losses
(GAAP)
Losses
Losses
Three Months Ended
March 31, 2021
$
(29,369)
$
(50,791)
$
21,422
$
(0.34)
$
(0.60)
$
0.26
December 31, 2020
16,479
(4,605)
21,084
0.23
(0.07)
0.30
September 30, 2020
28,076
5,745
22,331
0.42
0.09
0.33
June 30, 2020
48,772
28,749
20,023
0.74
0.43
0.31
March 31, 2020
(91,199)
(108,206)
17,007
(1.41)
(1.68)
0.27
(1)
Includes realized and unrealized gains (losses) on RMBS and derivative financial
instruments,
including net interest income or expense on
interest rate swaps
.
Economic Interest Expense and Economic Net Interest Income
We use derivative and other hedging instruments, specifically Eurodollar,
Fed Funds and Treasury Note (“T-Note”)
futures contracts, short positions in U.S. Treasury securities, interest rate swaps and swaptions, to hedge a portion of the
interest rate risk on repurchase agreements in a rising rate environment.
We have not elected to designate our derivative holdings for hedge accounting treatment. Changes in fair value of these
instruments are presented in a separate line item in our statements of operations and not included in interest expense. As
such, for financial reporting purposes,
interest expense and cost of funds are not impacted by the fluctuation in value of the
derivative instruments.
For the purpose of computing economic net interest income and ratios relating to cost of funds measures, GAAP
interest expense has been adjusted to reflect the realized and unrealized gains or losses on certain derivative instruments
the Company uses, specifically Eurodollar, Fed Funds and U.S. Treasury
futures, and interest rate swaps and swaptions,
that pertain to each period presented. We believe that adjusting our interest expense for the periods presented by the gains
or losses on these derivative instruments would not accurately reflect our economic interest expense for these periods. The
reason is that these derivative instruments may cover periods that extend into the future, not just the current period. Any
realized or unrealized gains or losses on the instruments reflect the change in market value of the instrument caused by
changes in underlying interest rates applicable to the term covered by the instrument, not just the current period. For each
period presented, we have combined the effects of the derivative financial instruments in place for the respective period with
the actual interest expense incurred on borrowings to reflect total economic interest expense for the applicable period.
Interest expense, including the effect of derivative instruments for the period, is referred to as economic interest expense.
Net interest income, when calculated to include the effect of derivative instruments for the period, is referred to as economic
27
net interest income. This presentation includes gains or losses on all contracts in effect during the reporting period, covering
the current period as well as periods in the future.
The Company may invest in TBAs, which are forward contracts for the purchase or sale of Agency RMBS at a
predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific Agency
RMBS to be delivered into the contract are not known until shortly before the settlement date. We may choose, prior to
settlement, to move the settlement of these securities out to a later date by entering into a dollar roll transaction. The
Agency RMBS purchased or sold for a forward settlement date are typically priced at a discount to equivalent securities
settling in the current month. Consequently, forward purchases of Agency RMBS and dollar roll transactions represent a
form of off-balance sheet financing. These TBAs are accounted for as derivatives and marked to market through the income
statement. Gains or losses on TBAs are included with gains or losses on other derivative contracts and are not included in
interest income for purposes of the discussions below.
We believe that economic interest expense and economic net interest income provide meaningful information to
consider, in addition to the respective amounts prepared in accordance with GAAP.
The non-GAAP measures help
management to evaluate its financial position and performance without the effects of certain transactions and GAAP
adjustments that are not necessarily indicative of our current investment portfolio or operations. The unrealized gains or
losses on derivative instruments presented in our statements of operations are not necessarily representative of the total
interest rate expense that we will ultimately realize. This is because as interest rates move up or down in the future, the
gains or losses we ultimately realize, and which will affect our total interest rate expense in future periods, may differ from
the unrealized gains or losses recognized as of the reporting date.
Our presentation of the economic value of our hedging strategy has important limitations. First, other market
participants may calculate economic interest expense and economic net interest income differently than the way we
calculate them. Second, while we believe that the calculation of the economic value of our hedging strategy described
above helps to present our financial position and performance, it may be of limited usefulness as an analytical tool.
Therefore, the economic value of our investment strategy should not be viewed in isolation and is not a substitute for
interest expense and net interest income computed in accordance with GAAP.
The tables below present a reconciliation of the adjustments to interest expense shown for each period relative to our
derivative instruments, and the income statement line item, gains (losses) on derivative instruments, calculated in
accordance with GAAP for each quarter of 2021 to date and 2020.
Gains (Losses) on Derivative Instruments
(in thousands)
Funding Hedges
Recognized in
Attributed to
Attributed to
Income
U.S. Treasury and TBA
Current
Future
Statement
Securities Gain (Loss)
Period
Periods
(GAAP)
(Short Positions)
(Long Positions)
(Non-GAAP)
(Non-GAAP)
Three Months Ended
March 31, 2021
$
45,472
$
9,133
$
(8,559)
$
(4,044)
$
48,942
December 31, 2020
8,538
(436)
5,480
(5,790)
$
9,284
September 30, 2020
4,079
131
3,336
(6,900)
$
7,512
June 30, 2020
(8,851)
582
1,133
(5,751)
$
(4,815)
March 31, 2020
(82,858)
(7,090)
-
(4,900)
$
(70,868)
Economic Interest Expense and Economic Net Interest Income
(in thousands)
Interest Expense on Borrowings
Gains
(Losses) on
28
Derivative
Instruments
Net Interest Income
GAAP
Attributed
Economic
GAAP
Economic
Interest
Interest
to Current
Interest
Net Interest
Net Interest
Income
Expense
Period
(1)
Expense
(2)
Income
Income
(3)
Three Months Ended
March 31, 2021
$
26,856
$
1,941
$
(4,044)
$
5,985
$
24,915
$
20,871
December 31, 2020
25,893
2,011
(5,790)
7,801
23,882
18,092
September 30, 2020
27,223
2,043
(6,900)
8,943
25,180
18,280
June 30, 2020
27,258
4,479
(5,751)
10,230
22,779
17,028
March 31, 2020
35,671
16,523
(4,900)
21,423
19,148
14,248
(1)
Reflects the effect of derivative instrument hedges for only the
period presented.
(2)
Calculated by adding the effect of derivative instrument hedges
attributed to the period presented to GAAP interest expense.
(3)
Calculated by adding the effect of derivative instrument hedges
attributed to the period presented to GAAP net interest income.
Net Interest Income
During the
three months
ended March
31, 2021,
we generated
$24.9 million
of net interest
income, consisting
of $26.9 million
of
interest income
from RMBS
assets offset
by $1.9 million
of interest
expense on
borrowings.
For the comparable
period ended
March 31,
2020, we generated
$19.1 million
of net interest
income, consisting
of $35.7 million
of interest
income from
RMBS assets
offset by $16.5
million of
interest expense
on borrowings.
The $8.8 million
decrease in
interest income
was due to
a 170 basis
point ("bps")
decrease in
the yield on
average RMBS,
partially offset
by the $762.9
million increase
in average
RMBS. The
$14.6 million
decrease in
interest
expense was
due to a 191
bps decrease
in the average
cost of funds,
partially offset
by a $759.5
million increase
in average
outstanding
borrowings.
We had more
average assets
and borrowings
during the
first quarter
of 2021 compared
to the first
quarter of
2020 as we
deployed the
proceeds of
our capital
raising activity
during the
second half
of 2020 and
the first
quarter of
2021.
On an economic
basis, our
interest
expense on
borrowings
for the three
months ended
March 31,
2021 and 2020
was $6.0 million
and $21.4
million, respectively,
resulting in
$20.9 million
and $14.2
million of
economic net
interest
income, respectively.
The lower
economic interest
expense during
the three
months ended
March 31,
2021 was due
to the 191
bps decrease
in the average
cost of funds
noted above,
partially offset
by the $759.5
million increase
in average
outstanding
borrowings
and the negative
performance
of our
hedging activities
during the
period.
The tables
below provide
information
on our portfolio
average balances,
interest income,
yield on
assets, average
borrowings,
interest
expense, cost
of funds,
net interest
income and
net interest
spread for
each quarter
in 2021 to date
and 2020 on
both a GAAP
and
economic basis.
($ in thousands)
Average
Yield on
Interest Expense
Average Cost of Funds
RMBS
Interest
Average
Average
GAAP
Economic
GAAP
Economic
Held
(1)
Income
RMBS
Borrowings
(1)
Basis
Basis
(2)
Basis
Basis
(3)
Three Months Ended
March 31, 2021
$
4,032,716
$
26,856
2.66%
$
3,888,633
$
1,941
$
5,985
0.20%
0.62%
December 31, 2020
3,633,631
25,893
2.85%
3,438,444
2,011
7,801
0.23%
0.91%
September 30, 2020
3,422,564
27,223
3.18%
3,228,021
2,043
8,943
0.25%
1.11%
June 30, 2020
3,126,779
27,258
3.49%
2,992,494
4,479
10,230
0.60%
1.37%
March 31, 2020
3,269,859
35,671
4.36%
3,129,178
16,523
21,423
2.11%
2.74%
($ in thousands)
Net Interest Income
Net Interest Spread
GAAP
Economic
GAAP
Economic
Basis
Basis
(2)
Basis
Basis
(4)
Three Months Ended
29
March 31, 2021
$
24,915
$
20,871
2.46%
2.04%
December 31, 2020
23,882
18,093
2.62%
1.94%
September 30, 2020
25,180
18,280
2.93%
2.07%
June 30, 2020
22,779
17,028
2.89%
2.12%
March 31, 2020
19,148
14,248
2.25%
1.62%
(1)
Portfolio yields and costs of borrowings presented in the tables above
and the tables on pages
29 and 30 are calculated based on the
average balances of the underlying investment portfolio/borrowings
balances and are annualized for the periods presented. Average
balances for quarterly periods are calculated using two data points, the
beginning and ending balances.
(2)
Economic interest expense and economic net interest income
presented in the table above and the tables on page 30 include
the effect
of our derivative instrument hedges for only the periods presented.
(3) Represents
interest cost of our borrowings and the effect of derivative
instrument hedges attributed to the period divided by average
RMBS.
(4) Economic
net interest spread is calculated by subtracting average economic
cost of funds from realized yield on average RMBS.
Interest Income and Average Asset Yield
Our interest
income for
the three
months ended
March 31,
2021 and
2020 was $26.9
million and
$35.7 million,
respectively.
We had
average RMBS
holdings of
$4,032.7 million
and $3,269.9
million for
the three
months ended
March 31,
2021 and 2020,
respectively.
The
yield on our
portfolio
was 2.66%
and 4.36%
for the three
months ended
March 31,
2021 and 2020,
respectively. For
the three
months
ended March
31, 2021 as
compared
to the three
months ended
March 31,
2020, there
was a $8.8
million decrease
in interest
income due
to a 170 bps
decrease in
the yield
on average
RMBS,
partially offset
by a $762.9
million increase
in average
RMBS.
The table
below presents
the average
portfolio
size, income
and yields
of our respective
sub-portfolios,
consisting
of structured
RMBS
and PT RMBS
for each quarter
in 2021 to
date and 2020.
($ in thousands)
Average RMBS Held
Interest Income
Realized Yield on Average RMBS
PT
Structured
PT
Structured
PT
Structured
Three Months Ended
RMBS
RMBS
Total
RMBS
RMBS
Total
RMBS
RMBS
Total
March 31, 2021
$
3,997,965
$
34,751
$
4,032,716
$
26,869
$
(13)
$
26,856
2.69%
(0.15)%
2.66%
December 31, 2020
3,603,885
29,746
3,633,631
25,933
(40)
25,893
2.88%
(0.53)%
2.85%
September 30, 2020
3,389,037
33,527
3,422,564
27,021
202
27,223
3.19%
2.41%
3.18%
June 30, 2020
3,088,603
38,176
3,126,779
27,004
254
27,258
3.50%
2.67%
3.49%
March 31, 2020
3,207,467
62,392
3,269,859
35,286
385
35,671
4.40%
2.47%
4.36%
Interest Expense and the Cost of Funds
We had average
outstanding
borrowings
of $3,888.6
million and
$3,129.2 million
and total
interest
expense of
$1.9 million
and $16.5
million for
the three
months ended
March 31,
2021 and 2020,
respectively. Our
average cost
of funds was
0.20% and
2.11% for the three
months ended
March 31,
2021 and
2020, respectively.
Contributing
to the decrease
in interest
expense was
a 191 bps
decrease
in the
average cost
of funds,
partially offset
by a $759.5
million increase
in average
outstanding
borrowings
during the
three months
ended
March 31,
2021 as compared
to the three
months ended
March 31,
2020.
Our economic
interest expense
was $6.0 million
and $21.4
million for
the three
months ended
March 31,
2021 and 2020,
respectively.
There was
a 212 bps
decrease in
the average
economic cost
of funds to
0.62% for
the three
months ended
March 31,
2021 from
2.74%
for the three
months ended
March 31,
2020.
Since all of
our repurchase
agreements
are short-term,
changes in
market rates
directly affect
our interest
expense. Our
average cost
of funds calculated
on a GAAP
basis was 7
bps above the
average one-month
LIBOR and
3 bps below
the average
six-month
LIBOR for
the quarter
ended March
31, 2021.
Our average
economic cost
of funds was
49 bps above
the average
one-month
LIBOR and
39 bps
above the average
six-month LIBOR
for the quarter
ended March
31, 2021.
The average
term to maturity
of the outstanding
repurchase
30
agreements
was 43 days
at March
31, 2021 and
31 days at
December 31,
2020.
The tables
below present
the average
balance of
borrowings
outstanding,
interest expense
and average
cost of funds,
and average
one-month
and six-month
LIBOR rates
for each quarter
in 2021 to date
and 2020 on
both a GAAP
and economic
basis.
($ in thousands)
Average
Interest Expense
Average Cost of Funds
Balance of
GAAP
Economic
GAAP
Economic
Three Months Ended
Borrowings
Basis
Basis
Basis
Basis
March 31, 2021
$
3,888,633
$
1,941
$
5,985
0.20%
0.62%
December 31, 2020
3,438,444
2,011
7,801
0.23%
0.91%
September 30, 2020
3,228,021
2,043
8,943
0.25%
1.11%
June 30, 2020
2,992,494
4,479
10,230
0.60%
1.37%
March 31, 2020
3,129,178
16,523
21,423
2.11%
2.74%
Average GAAP Cost of Funds
Average Economic Cost of Funds
Relative to Average
Relative to Average
Average LIBOR
One-Month
Six-Month
One-Month
Six-Month
One-Month
Six-Month
LIBOR
LIBOR
LIBOR
LIBOR
Three Months Ended
March 31, 2021
0.13%
0.23%
0.07%
(0.03)%
0.49%
0.39%
December 31, 2020
0.15%
0.27%
0.08%
(0.04)%
0.76%
0.64%
September 30, 2020
0.17%
0.35%
0.08%
(0.10)%
0.94%
0.76%
June 30, 2020
0.55%
0.70%
0.05%
(0.10)%
0.82%
0.67%
March 31, 2020
1.34%
1.43%
0.77%
0.68%
1.40%
1.31%
Gains or Losses
The table
below presents
our gains
or losses for
the three
months ended
March 31,
2021 and 2020.
(in thousands)
2021
2020
Change
Realized losses on sales of RMBS
$
(7,397)
$
(28,380)
$
20,983
Unrealized (losses) gains on RMBS
(88,866)
3,032
(91,898)
Total losses on
RMBS
(96,263)
(25,348)
(70,915)
Gains (losses) on interest rate futures
2,488
(12,556)
15,044
Gains (losses) on interest rate swaps
27,123
(60,623)
87,746
Losses on payer swaptions (short positions)
(26,167)
-
(26,167)
Gains (losses) on payer swaptions (long positions)
40,070
(2,589)
42,659
Gains on interest rate floors
1,384
-
1,384
Losses on TBA securities (long positions)
(8,559)
-
(8,559)
Gains (losses) on TBA securities (short positions)
9,133
(7,090)
16,223
Total
$
(50,791)
$
(108,206)
$
57,415
We invest in
RMBS with
the intent
to earn net
income from
the realized
yield on those
assets over
their related
funding and
hedging
costs, and
not for the
purpose of
making short
term gains
from sales.
However, we have
sold, and may
continue to
sell,
existing assets
to
acquire new
assets, which
our management
believes might
have higher
risk-adjusted
returns in
light of current
or anticipated
interest rates,
federal government
programs or
general economic
conditions
or to manage
our balance
sheet as part
of our asset/liability
management
strategy. During
the three
months ended
March 31,
2021 and 2020,
we received
proceeds of
$988.5 million
and $1,808.9
million,
respectively, from
the sales of
RMBS. Most
of these sales
in the first
quarter of
2020 occurred
during the
second half
of March 2020
as we
sold assets
in order to
maintain sufficient
cash and liquidity
and reduce
risk associated
with the
market turmoil
brought about
by COVID-
19.
31
Realized and
unrealized
gains and
losses on RMBS
are driven
in part by
changes in
yields and
interest rates,
which affect
the pricing
of the securities
in our portfolio.
As rates increased
during the
three months
ended March
31, 2021,
it had a negative
impact on
our RMBS
portfolio.
Gains and losses
on interest
rate futures
contracts are
affected by
changes in
implied forward
rates during
the reporting
period.
The table
below presents
historical
interest rate
data for each
quarter end
during 2021
to date and
2020.
5 Year
10 Year
15 Year
30 Year
Three
U.S. Treasury
U.S. Treasury
Fixed-Rate
Fixed-Rate
Month
Rate
(1)
Rate
(1)
Mortgage Rate
(2)
Mortgage Rate
(2)
LIBOR
(3)
March 31, 2021
0.94%
1.75%
2.39%
3.08%
0.19%
December 31, 2020
0.36%
0.92%
2.22%
2.68%
0.23%
September 30, 2020
0.27%
0.68%
2.39%
2.89%
0.24%
June 30, 2020
0.29%
0.65%
2.60%
3.16%
0.31%
March 31, 2020
0.38%
0.70%
2.89%
3.45%
1.10%
(1)
Historical 5 and 10 Year
U.S. Treasury Rates are obtained from quoted
end of day prices on the Chicago Board Options Exchange.
(2)
Historical 30 Year and
15 Year Fixed
Rate Mortgage Rates are obtained from Freddie Mac’s
Primary Mortgage Market Survey.
(3)
Historical LIBOR is obtained from the Intercontinental Exchange Benchmark
Administration Ltd.
Expenses
Total
operating expenses were approximately $3.5 million and $2.1 million for the three months ended March 31, 2021
and 2020, respectively.
The table below presents a breakdown of operating expenses for the three months ended March
31, 2021 and 2020.
(in thousands)
2021
2020
Change
Management fees
$
1,621
$
1,377
$
244
Overhead allocation
404
347
57
Accrued incentive compensation
364
(436)
800
Directors fees and liability insurance
272
260
12
Audit, legal and other professional fees
318
255
63
Other direct REIT operating expenses
421
206
215
Other expenses
93
132
(39)
Total expenses
$
3,493
$
2,141
$
1,352
We are externally managed and advised by Bimini Advisors, LLC (the “Manager”) pursuant
to the terms of a management
agreement. The management agreement has been renewed through February 20,
2022 and provides for automatic one-year extension
options thereafter and is subject to certain termination rights.
Under the terms of the management agreement, the Manager is
responsible for administering the business activities and day-to-day operations of
the Company.
The Manager receives a monthly
management fee in the amount of:
●
One-twelfth of 1.5% of the first $250 million of the Company’s month end equity, as defined in the management agreement,
●
One-twelfth of 1.25% of the Company’s month end equity that is greater than $250 million
and less than or equal to $500
million, and
●
One-twelfth of 1.00% of the Company’s month end equity that is greater than $500 million.
The Company is obligated to reimburse the Manager for any direct expenses
incurred on its behalf and to pay the Manager the
Company’s pro rata portion of certain overhead costs set forth in the management agreement.
Should the Company terminate the
management agreement without cause, it will pay the Manager a termination
fee equal to three times the average annual management
fee, as defined in the management agreement,
before or on the last day of the term of the agreement.
32
The following table summarizes the management fee and overhead allocation expenses
for each quarter in 2021 to date and
2020.
($ in thousands)
Average
Average
Advisory Services
Orchid
Orchid
Management
Overhead
Three Months Ended
MBS
Equity
Fee
Allocation
Total
March 31, 2021
$
4,032,716
$
453,353
$
1,621
$
404
$
2,025
December 31, 2020
3,633,631
387,503
1,384
442
1,826
September 30, 2020
3,422,564
368,588
1,252
377
1,629
June 30, 2020
3,126,779
361,093
1,268
348
1,616
March 31, 2020
3,269,859
376,673
1,377
347
1,724
Financial
Condition:
Mortgage-Backed Securities
As of March
31, 2021,
our RMBS portfolio
consisted of
$4,338.5 million
of Agency RMBS
at fair value
and had a
weighted average
coupon on
assets of 3.02%.
During the
three months
ended March
31, 2021,
we received
principal repayments
of $123.9
million
compared to
$142.3 million
for the three
months ended
March 31,
2020.
The average
three month
prepayment
speeds for
the quarters
ended March
31, 2021 and
2020 were
12.0% and
11.9%, respectively.
The following
table presents
the 3-month constant
prepayment
rate (“CPR”)
experienced on
our structured
and PT RMBS
sub-portfolios,
on an annualized
basis, for
the quarterly
periods presented.
CPR is a method
of expressing
the prepayment
rate for a mortgage
pool that assumes
that a constant
fraction of
the remaining
principal is
prepaid each
month or year.
Specifically, the
CPR in the chart
below represents
the three month
prepayment rate
of the securities
in the respective
asset
category.
Assets that
were not owned
for the entire
quarter have
been excluded
from the calculation.
The exclusion
of certain
assets during
periods of high
trading activity
can create a
very high,
and often volatile,
reliance on
a small sample
of underlying
loans.
Structured
PT RMBS
RMBS
Total
Three Months Ended
Portfolio (%)
Portfolio (%)
Portfolio (%)
March 31, 2021
9.9
40.3
12.0
December 31, 2020
16.7
44.3
20.1
September 30, 2020
14.3
40.4
17.0
June 30, 2020
13.9
35.3
16.3
March 31, 2020
9.8
22.9
11.9
The following
tables summarize
certain characteristics
of the Company’s
PT RMBS and
structured
RMBS as of
March 31,
2021 and
December 31,
2020:
($ in thousands)
Weighted
Percentage
Average
of
Weighted
Maturity
Fair
Entire
Average
in
Longest
Asset Category
Value
Portfolio
Coupon
Months
Maturity
March 31, 2021
Fixed Rate RMBS
$
4,297,731
99.1%
2.95%
335
1-Mar-51
Total Mortgage-backed Pass-through
4,297,731
99.1%
2.95%
335
1-Mar-51
33
Interest-Only Securities
35,521
0.8%
3.98%
264
25-May-50
Inverse Interest-Only Securities
5,284
0.1%
3.77%
311
15-Jun-42
Total Structured RMBS
40,805
0.9%
3.93%
275
25-May-50
Total Mortgage Assets
$
4,338,536
100.0%
3.02%
331
1-Mar-51
December 31, 2020
Fixed Rate RMBS
$
3,560,746
95.5%
3.09%
339
1-Jan-51
Fixed Rate CMOs
137,453
3.7%
4.00%
312
15-Dec-42
Total Mortgage-backed Pass-through
3,698,199
99.2%
3.13%
338
1-Jan-51
Interest-Only Securities
28,696
0.8%
3.98%
268
25-May-50
Total Structured RMBS
28,696
0.8%
3.98%
268
25-May-50
Total Mortgage Assets
$
3,726,895
100.0%
3.19%
333
1-Jan-51
($ in thousands)
March 31, 2021
December 31, 2020
Percentage of
Percentage of
Agency
Fair Value
Entire Portfolio
Fair Value
Entire Portfolio
Fannie Mae
$
3,439,588
79.3%
$
2,733,960
73.4%
Freddie Mac
898,948
20.7%
992,935
26.6%
Total Portfolio
$
4,338,536
100.0%
$
3,726,895
100.0%
March 31, 2021
December 31, 2020
Weighted Average Pass-through Purchase Price
$
107.56
$
107.43
Weighted Average Structured Purchase Price
$
18.69
$
20.06
Weighted Average Pass-through Current Price
$
106.14
$
108.94
Weighted Average Structured Current Price
$
13.83
$
10.87
Effective Duration
(1)
4.090
2.360
(1)
Effective duration is the approximate percentage change
in price for a 100 bps change in rates.
An effective duration of 4.090 indicates that an
interest rate increase of 1.0% would be expected to cause a 4.090% decrease in
the value of the RMBS in the Company’s investment
portfolio
at March 31, 2021.
An effective duration of 2.360 indicates that an interest rate
increase of 1.0% would be expected to cause a 2.360%
decrease in the value of the RMBS in the Company’s investment
portfolio at December 31, 2020. These figures include the structured
securities
in the portfolio, but do not include the effect of the Company’s
funding cost hedges.
Effective duration quotes for individual investments are
obtained from The Yield Book, Inc.
The following
table presents
a summary
of portfolio
assets acquired
during the three
months ended
March 31, 2021
and
2020,
including securities
purchased
during the period
that settled
after the end
of the period,
if any.
($ in thousands)
2021
2020
Total Cost
Average
Price
Weighted
Average
Yield
Total Cost
Average
Price
Weighted
Average
Yield
Pass-through RMBS
$
1,971,296
$
107.09
1.38%
$
1,334,350
$
107.18
2.28%
Structured RMBS
4,807
6.93
0.14
-
-
0.00%
Borrowings
As of March
31, 2021,
we had established
borrowing
facilities
in the repurchase
agreement
market with
a number of
commercial
banks and other
financial institutions
and had borrowings
in place with
21 of these
counterparties.
None of these
lenders are
affiliated with
the Company. These
borrowings
are secured
by the Company’s
RMBS and
cash, and bear
interest at
prevailing
market rates.
We believe
our established
repurchase
agreement
borrowing
facilities
provide borrowing
capacity in
excess of
our needs.
34
As of March
31, 2021,
we had obligations
outstanding
under the
repurchase
agreements
of approximately
$4,181.7 million
with a net
weighted average
borrowing
cost of 0.18%.
The remaining
maturity of
our outstanding
repurchase
agreement
obligations
ranged from
1 to
166 days, with
a weighted
average remaining
maturity of
43 days.
Securing the
repurchase
agreement
obligations
as of March
31, 2021
are RMBS
with an estimated
fair value,
including accrued
interest,
of approximately
$4,285.9 million
and a weighted
average maturity
of
339 months,
and cash pledged
to counterparties
of approximately
$102.6 million.
Through April
30, 2021,
we have been
able to maintain
our repurchase
facilities
with comparable
terms to those
that existed
at March 31,
2021 with
maturities
through October
8, 2021.
The table below presents information about our period end, maximum and average balances
of borrowings for each quarter in
2021 to date and 2020.
($ in thousands)
Difference Between Ending
Ending
Maximum
Average
Borrowings and
Balance of
Balance of
Balance of
Average Borrowings
Three Months Ended
Borrowings
Borrowings
Borrowings
Amount
Percent
March 31, 2021
$
4,181,680
$
4,204,935
$
3,888,633
$
293,047
7.54%
December 31, 2020
3,595,586
3,597,313
3,438,444
157,142
4.57%
September 30, 2020
3,281,303
3,286,454
3,228,021
53,282
1.65%
June 30, 2020
3,174,739
3,235,370
2,992,494
182,245
6.09%
March 31, 2020
2,810,250
4,297,621
3,129,178
(318,928)
(10.19)%
(1)
(1)
The lower ending balance relative to the average balance during the quarter
ended March 31, 2020 reflects the disposal of RMBS pledged as
collateral in order to maintain cash and liquidity in response to the dislocations
in the financial and mortgage markets resulting from the
economic impacts of COVID-19.
During the quarter ended March 31, 2020, the Company’s investment
in RMBS decreased $642.1 million.
Liquidity and Capital Resources
Liquidity is
our ability
to turn non-cash
assets into
cash, purchase
additional
investments,
repay principal
and interest
on borrowings,
fund overhead,
fulfill margin
calls and
pay dividends.
Our principal
immediate sources
of liquidity
include cash
balances, unencumbered
assets and
borrowings
under repurchase
agreements.
Our borrowing
capacity will
vary over time
as the market
value of our
interest
earning assets
varies.
Our balance
sheet also
generates
liquidity
on an on-going
basis through
payments of
principal and
interest
we
receive on
our RMBS
portfolio.
Management
believes that
we currently
have sufficient
liquidity
and capital
resources available
for (a) the
acquisition
of additional
investments
consistent
with the size
and nature
of our existing
RMBS portfolio,
(b) the repayments
on borrowings
and (c) the
payment of
dividends
to the extent
required for
our continued
qualification
as a REIT.
We may also
generate liquidity
from time
to time by
selling our
equity or
debt securities
in public offerings
or private
placements.
Because our
PT RMBS portfolio
consists entirely
of government
and agency
securities,
we do not
anticipate
having difficulty
converting
our assets
to cash should
our liquidity
needs ever
exceed our
immediately
available
sources of
cash.
Our structured
RMBS
portfolio
also consists
entirely of
governmental
agency securities,
although they
typically
do not trade
with comparable
bid / ask spreads
as
PT RMBS.
However, we anticipate
that we would
be able to
liquidate such
securities readily,
even in distressed
markets, although
we
would likely
do so at prices
below where
such securities
could be sold
in a more
stable market.
To enhance our liquidity
even further,
we
may pledge
a portion
of our structured
RMBS as part
of a repurchase
agreement
funding, but
retain the
cash in lieu
of acquiring
additional
assets.
In this way
we can, at
a modest cost,
retain higher
levels of
cash on hand
and decrease
the likelihood
we will have
to sell assets
in
a distressed
market in order
to raise cash.
Our strategy
for hedging
our funding
costs typically
involves taking
short positions
in interest
rate futures,
treasury futures,
interest rate
swaps, interest
rate swaptions
or other instruments.
When the market
causes
these short
positions
to decline
in value we
are required
to
meet margin
calls with
cash.
This can reduce
our liquidity
position
to the extent
other securities
in our portfolio
move in price
in such a
way
that we do
not receive
enough cash
via margin
calls to offset
the derivative
related margin
calls. If
this were
to occur in
sufficient
magnitude,
the loss of
liquidity might
force us to
reduce the
size of the
levered portfolio,
pledge additional
structured
securities
to raise
35
funds or risk
operating
the portfolio
with less liquidity.
Our master
repurchase
agreements
have no stated
expiration,
but can be
terminated
at any time
at our option
or at the
option of the
counterparty. However,
once a definitive
repurchase
agreement
under a master
repurchase
agreement
has been entered
into, it generally
may not be
terminated
by either
party.
A negotiated
termination
can occur, but
may involve
a fee to
be paid by
the party
seeking to
terminate
the repurchase
agreement
transaction,
as it did during
the three
months ended
March 31,
2020.
Under our
repurchase
agreement funding
arrangements,
we are required
to post margin
at the initiation
of the borrowing.
The margin
posted represents
the haircut,
which is a
percentage
of the market
value of the
collateral
pledged.
To the extent the market
value of the
asset collateralizing
the financing
transaction
declines, the
market value
of our posted
margin will
be insufficient
and we will
be required
to
post additional
collateral.
Conversely, if
the market
value of the
asset pledged
increases in
value, we
would be over
collateralized
and we
would be entitled
to have excess
margin returned
to us by the
counterparty.
Our lenders
typically
value our
pledged securities
daily to
ensure the
adequacy of
our margin
and make margin
calls as needed,
as do we.
Typically, but not always,
the parties
agree to a
minimum
threshold
amount for
margin calls
so as to avoid
the need for
nuisance margin
calls on a
daily basis.
Our master
repurchase
agreements
do not specify
the haircut;
rather haircuts
are determined
on an individual
repurchase
transaction
basis. Throughout
the three
months
ended March
31, 2021,
haircuts on
our pledged
collateral
remained
stable and
as of March
31, 2021,
our weighted
average haircut
was
approximately
5.0% of the
value of our
collateral.
TBAs represent
a form of
off-balance sheet
financing and
are accounted
for as derivative
instruments.
(See Note
4 to our Financial
Statements
in this Form
10-Q
for additional
details on
our TBAs).
Under certain
market conditions,
it may be uneconomical
for us to
roll our
TBAs into
future months
and we may
need to take
or make physical
delivery of
the underlying
securities.
If we were
required to
take
physical delivery
to settle a
long TBA,
we would have
to fund our
total purchase
commitment
with cash
or other financing
sources and
our
liquidity position
could be negatively
impacted.
Our TBAs are
also subject
to margin
requirements
governed by
the Mortgage-Backed
Securities
Division ("MBSD")
of the FICC
and
by our master
securities
forward transaction
agreements,
which may
establish margin
levels in
excess of the
MBSD. Such
provisions
require that
we establish
an initial
margin based
on the notional
value of the
TBA, which
is subject
to increase
if the estimated
fair value
of
our TBAs
or the estimated
fair value of
our pledged
collateral
declines. The
MBSD has
the sole discretion
to determine
the value
of our
TBAs and of
the pledged
collateral
securing such
contracts.
In the event
of a margin
call, we must
generally provide
additional
collateral
on
the same business
day.
Settlement
of our TBA
obligations
by taking delivery
of the underlying
securities
as well as
satisfying
margin requirements
could
negatively
impact our
liquidity
position.
However, since
we do not
use TBA dollar
roll transactions
as our primary
source of
financing,
we
believe that
we will have
adequate sources
of liquidity
to meet such
obligations.
As discussed
earlier, we invest
a portion
of our capital
in structured
Agency RMBS.
We generally
do not apply
leverage to
this portion
of our portfolio.
The leverage
inherent in
structured
securities
replaces the
leverage obtained
by acquiring
PT securities
and funding
them
in the repurchase
market.
This structured
RMBS strategy
has been a
core element
of the Company’s
overall investment
strategy since
inception.
However, we have
and may continue
to pledge
a portion
of our structured
RMBS in order
to raise our
cash levels,
but generally
will not pledge
these securities
in order to
acquire additional
assets.
The following
table summarizes
the effect on
our liquidity
and cash flows
from contractual
obligations
for repurchase
agreements
and
interest expense
on repurchase
agreements.
(in thousands)
Obligations Maturing
Within One
Year
One to Three
Years
Three to Five
Years
More than
Five Years
Total
Repurchase agreements
$
4,181,680
$
-
$
-
$
-
$
4,181,680
36
Interest expense on repurchase agreements
(1)
1,800
-
-
-
1,800
Totals
$
4,183,480
$
-
$
-
$
-
$
4,183,480
(1)
Interest expense
on repurchase
agreements is
based on current
interest rates
as of March 31,
2021 and the
remaining term
of the liabilities
existing
at that date.
In future
periods, we
expect to continue
to finance
our activities
in a manner
that is consistent
with our current
operations
through
repurchase
agreements.
As of March
31, 2021,
we had cash
and cash equivalents
of $211.4 million.
We generated
cash flows
of $149.7
million from
principal and
interest
payments on
our RMBS
and had average
repurchase
agreements
outstanding
of $3,888.6
million during
the three
months ended
March 31,
2021.
Stockholders’
Equity
On January 23, 2020, we entered into the January 2020 Equity Distribution Agreement
with three sales agents pursuant to which
we could offer and sell, from time to time, up to an aggregate amount of $200,000,000 of shares
of our common stock in transactions
that were deemed to be “at the market” offerings and privately negotiated transactions.
We issued a total of 3,170,727 shares under
the January 2020 Equity Distribution Agreement for aggregate gross proceeds of $19.8
million, and net proceeds of approximately
$19.4 million, net of commissions and fees, prior to its termination in August 2020.
On August 4, 2020, we entered into the August 2020 Equity Distribution Agreement with
four sales agents pursuant to which we
may offer and sell, from time to time, up to an aggregate amount of $150,000,000 of shares
of our common stock in transactions that
are deemed to be “at the market” offerings and privately negotiated transactions. Through March 31,
2021, we issued a total of
10,156,561 shares under the August 2020 Equity Distribution Agreement for aggregate
gross proceeds of approximately $54.1 million,
and net proceeds of approximately $53.2 million, net of commissions and fees.
On January 20, 2021, we entered into the January 2021 Underwriting Agreement
with J.P.
Morgan Securities LLC (“J.P. Morgan”),
relating to the offer and sale of 7,600,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from
the Company pursuant to the January 2021 Underwriting Agreement at $5.20 per share.
In addition, we granted J.P. Morgan a 30-day
option to purchase up to an additional 1,140,000 shares of our common stock on the
same terms and conditions, which J.P. Morgan
exercised in full on January 21, 2021. The closing of the offering of 8,740,000 shares of our common
stock occurred on January 25,
2021, with net proceeds to us of approximately $45.2 million, net of offering expenses.
On March 2, 2021 we entered into the “March 2021 Underwriting Agreement with J.P. Morgan, relating to the offer and sale of
8,000,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from the Company pursuant to the
March 2021 Underwriting Agreement at $5.45 per share. In addition, we granted
J.P.
Morgan a 30-day option to purchase up to an
additional 1,200,000 shares of our common stock on the same terms and conditions,
which J.P. Morgan exercised in full on March 3,
2021. The closing of the offering of 9,200,000 shares of our common stock occurred on March
5, 2021, with net proceeds to us of
approximately $50.1 million, net of offering expenses payable.
Outlook
Economic Summary
During the first
quarter of 2021
the economy
made tremendous
strides towards
recovery from
the COVID-19
pandemic.
Evidence of
the recovery
was pervasive.
New cases of
COVID-19, which
peaked around
the turn of
the year, moderated
significantly, as
did hospitalizations
and deaths.
As a result
of the U.S. Senate
run-off elections
in early January,
both of which
were won by
Democrats,
one party was
now in control
of the White
House and both
houses of Congress.
This led the
way to a
new stimulus
package being
passed that was
at the high
end of market
expectations
- $1.9 trillion.
The American
Rescue Plan
Act of 2021 was
signed into
law on March
11, 2021.
This marked
the third legislative
act related
to the nation’s
recovery from
37
the COVID-19
pandemic, after
the $2.2 trillion
CARES Act (described
below), which
passed on March
27, 2020 and
the $2.3
trillion
Consolidated
Appropriations
Act of 2021,
which contained
$900 billion
of COVID-19
relief and was
signed on December
27, 2020.
Given the momentum
the administration
had after passing
the American
Rescue Plan
Act of 2021,
President
Biden
shortly thereafter
announced plans
for a $2 trillion-plus
infrastructure
bill.
The vaccine
roll-out,
which initially
seemed
haphazard, improved
to the point
where the U.S.
became a world
leader.
The U.S. was
well on its
way to herd
immunity as
over 200 million
inoculations
were administered
by April 21, 2021,
well ahead
of even the
most optimistic
projections at
the
beginning of
the year.
Economic data
released over
the course of
the first quarter
has been consistently
very strong.
Fueled
by two rounds
of stimulus
checks
during the first
quarter, consumers
have been spending.
Retail sales,
home sales, demand
for new cars
and other durable
goods are all
benefitting
from the stimulus
and considerable
pent-up demand.
Job growth
appears to be
accelerating
quickly, and the unemployment
rate has dropped
to 6.0%.
All of the developments
described
above have stoked
inflation fears.
The most obvious
evidence of
potential price
pressures relate
to supply shortages
of a
variety of
consumer goods
and commodities
caused by the
combination
of still constrained
production and
surging demand
that have begun
to surface
across the
economy.
The factors
highlighted
above have led
to a surging
economy, which grew
at an annualized
rate of 6.4%
during the
first
quarter.
They have also
impacted the
financial markets.
The various
broad equity
indices are
making new all-time
highs on a
frequent basis,
and corporate
debt issuance
levels – both
investment
grade and high
yield – are
at or near record
levels
reflecting
the demand for
capital and
investor appetite
for yield.
U.S. Treasury rates,
at least longer-term
rates, have
risen
significantly. The
ten-year U.S.
Treasury note yield
increased from
0.916% to 1.742%
over the course
of the first
quarter, an
increase of
82.6 basis points,
and the U.S.
Treasury curve
has steepened
substantially.
The market
has moved up
expectations
for a recovery
from the pandemic
and return to
normalcy significantly.
The Federal
Reserve (the
“Fed”) gave
a
green light
to higher rates,
referring to
them as a sign
of economic
strength.
However, when the
market has
attempted to
price
in an acceleration
to the timing
of the rate increases
by the Fed,
the Fed has
pushed back
against such
sentiment.
These
efforts have largely
been successful,
and current
market pricing
only reflects
one interest
rate hike by
the end of 2022.
Legislative
Response and
the Federal
Reserve
Congress passed
the CARES Act
quickly in
response to
the pandemic’s
emergence last
spring and followed
with
additional legislation
over the ensuing
months.
However, as certain
provisions
of the CARES
Act expired,
such as
supplemental
unemployment
insurance last
July, there appeared
to be a need
for additional
stimulus for
the economy
to deal
with the surge
in the pandemic
that occurred
as cold
weather set in,
particularly
over the Christmas
holiday.
As mentioned
above, the Federal
government eventually
passed an additional
stimulus package
in late December
of 2020 and again
in
March of 2021.
In addition,
the Fed has provided,
and continues
to provide,
as much support
to the markets
and the economy
as it can within
the constraints
of its mandate.
During the third
quarter of 2020,
the Fed unveiled
a new monetary
policy
framework
focused on average
inflation rate
targeting that
allows the
Fed Funds rate
to remain quite
low, even if inflation
is
expected to temporarily
surpass the
2% target level.
Further, the Fed
will look
past the presence
of very tight
labor markets,
should they be
present at
the time.
This marks
a significant
shift from
their prior
policy framework,
which was focused
on the
unemployment
rate as a key
indicator of
impending inflation.
Adherence to
this policy
could steepen
the U.S. Treasury
curve
as short-term
rates could
remain low
for a considerable
period but longer-term
rates could rise
given the Fed’s
intention to
let
inflation potentially
run above 2%
in the future
as the economy
more fully
recovers.
As mentioned
above, this
appears to
be
occurring early
in 2021 now that
effective vaccines
have been found
and inoculations
are distributed
at an accelerating
pace.
Interest Rates
Interest rates
steadily increased
throughout the
first quarter
as described
above and levels
of implied
volatility
rose as well.
Mortgage rates
slowly declined
at the end of
2020 as originators
added capacity
and could handle
ever increasing
levels of
production volume.
This trend in
mortgage rates
quickly reversed
during the first
quarter of 2021
as rates began
to increase,
especially
in late February
and March. With
the increase
in interest
rates, prepayment
activity slowed.
The percent
of the
Agency RMBS
universe with
sufficient rate
incentive to
economically
refinance has
declined from
approximately
80% at the
end of 2020 to
approximately
46% at the end
of the first
quarter. However, the
spread between
rates available
to borrowers
and the implied
yield on a current
coupon mortgage,
known as the
primary/secondary
spread, has
continued to
compress.
38
The spread is
still slightly
above long-term
average levels
so further
compression
is possible,
meaning rates
available to
borrowers could
remain at current
levels even
if U.S. Treasury
rates increased
further. Since the
end of the first
quarter,
interest rates
have declined
by approximately
20 basis points
in the case
of the 10-year
U.S. Treasury
note.
Accordingly,
prepayment levels
on RMBS securities
are likely
to remain high
unless U.S.
Treasury rates
increase above
current levels.
The Agency RMBS
Market
The market
conditions that
prevailed throughout
the first quarter
were not conducive
to mortgage
performance.
In fact,
apart from
high yield
bonds, all fixed
income sectors
had negative returns
for quarter.
Interest rates
rose rapidly, and volatility
was elevated.
Agency RMBS
had negative
absolute and
excess returns
for the first
quarter of -1.2%
and -0.3%, respectively
(both vs U.S
Treasuries
and LIBOR/swaps).
There is a
benefit to higher
interest rates,
and as interest
rates rose
prepayment
levels declined.
The Mortgage
Bankers Association
refinance index
declined from
approximately
4700 in early
January 2021
to approximately
2900 in early
April 2021,
before rebounding
slightly in
mid-April 2021.
The Agency RMBS
market continues
to be essentially
bifurcated with
two separate
and distinct
sub-markets.
Lower coupon fixed
rate mortgages,
coupons
of 1.5%
through 2.5%,
are purchased
by the Fed.
Fed purchase
activity maintains
substantial
price pressure
under these coupons,
and they benefit
from attractive
TBA dollar
roll drops.
Higher coupons
in the TBA market
do not have
the benefit
of Fed
purchases.
Importantly, the Fed
tends to take
the worst
performing
collateral
out of the market.
The absence of
Fed
purchases of
higher coupons
means the market
is left to absorb
still very
high prepayment
speeds on these
securities
as rates
have not risen
enough to eliminate
the economic
incentive to
refinance.
The market
expects prepayments
on higher coupons
will eventually
decline as “burn
out” sets in
– a phenomenon
whereby refinancing
activity declines
as borrowers
are exposed to
refinancing
incentives
for an extended
period.
Through the
March 2021 prepayment
report released
in early April,
this has yet
to occur.
While market
participants
continue to favor
specified
pools that have
favorable
prepayment characteristics
that mute
the refinance
incentive,
the premium
over generic
TBA securities
has declined
significantly
with the reduced
refinance
incentive caused
by the increase
in rates available
to borrowers.
Recent Legislative
and Regulatory
Developments
The Fed conducted
large scale
overnight repo
operations
from late 2019
until July
2020 to address
disruptions
in the U.S.
Treasury, Agency debt and
Agency MBS financing
markets. These
operations ceased
in July 2020
after the central
bank
successfully
tamed volatile
funding costs
that had threatened
to cause disruption
across the
financial system.
The Fed has taken
a number
of other actions
to stabilize
markets as
a result of
the impacts
of the COVID-19
pandemic.
In
March of 2020,
the Fed announced
a $700 billion
asset purchase
program to
provide liquidity
to the U.S. Treasury
and Agency
RMBS markets.
The Fed also
lowered the
Fed Funds rate
to a range of
0.0% – 0.25%,
after having
already lowered
the Fed
Funds rate by
50 bps earlier
in the month.
Later that same
month the Fed
announced
a program to
acquire U.S.
Treasuries
and Agency RMBS
in the amounts
needed to support
smooth market
functioning.
With these
purchases, market
conditions
improved substantially.
Currently, the Fed is
committed to
purchasing $80
billion of
U.S. Treasuries
and $40 billion
of Agency
RMBS each month.
Chairman Powell
and the Fed have
reiterated
their commitment
to this level
of asset purchases
at every
meeting since
their meeting
on June 30,
2020. Chairman
Powell has
also maintained
that the Fed
expects to
maintain interest
rates at this
level until
the Fed is confident
that the economy
has weathered
the pandemic
and its impact
on economic
activity
and is on track
to achieve its
maximum employment
and price stability
goals. The Fed
has
taken various
other steps
to support
certain other
fixed income
markets, to
support mortgage
servicers and
to implement
various portions
of the Coronavirus
Aid,
Relief, and
Economic Security
(“CARES”)
Act.
The CARES Act
was passed by
Congress and
signed into
law by President
Trump on March
27, 2020.
The CARES
Act
provided many
forms of direct
support to individuals
and small businesses
in order to
stem the steep
decline in
economic
activity.
This over $2
trillion COVID-19
relief bill,
among other things,
provided for
direct payments
to each American
making
up to $75,000
a year, increased
unemployment
benefits for
up to four months
(on top of
state benefits),
funding to hospitals
and health providers,
loans and investments
to businesses,
states and municipalities
and grants to
the airline
industry. On April
24, 2020, President
Trump signed an
additional
funding bill
into law that
provides an
additional $484
billion of
funding to
individuals,
small businesses,
hospitals, health
care providers
and additional
coronavirus
testing efforts.
Various provisions
of
39
the CARES Act
began to expire
in July 2020,
including a
moratorium
on evictions
(July 25, 2020),
expanded unemployment
benefits (July
31, 2020), and
a moratorium
on foreclosures
(August 31, 2020).
On August 8,
2020, President
Trump issued
Executive Order
13945, directing
the Department
of Health and
Human Services,
the Centers
for Disease
Control and
Prevention (“CDC”),
the Department
of Housing and
Urban Development,
and Department
of the Treasury
to take measures
to
temporarily
halt residential
evictions and
foreclosures,
including through
temporary financial
assistance.
On December
27, 2020, President
Trump signed into
law an additional
$900 billion
coronavirus
aid package as
part of the
Consolidated
Appropriations
Act of 2021,
providing for
extensions of
many of the
CARES Act
policies and
programs as
well as
additional relief.
The package provided
for, among other things,
direct payments
to most Americans
with a gross
income of
less than $75,000
a year, extension
of unemployment
benefits through
March 14, 2021,
funding for
procurement
of vaccines
and health providers,
loans to qualified
businesses,
funding for
rental assistance
and funding
for schools.
On January
29,
2021, the CDC
issued guidance
extending eviction
moratoriums
for covered persons
through March
31, 2021,
which was
further extended
to June 30,
2021 on March
29, 2021.
In addition,
on February
9, 2021, the
FHFA announced that
the
foreclosure
moratorium
begun under the
CARES Act for
loans backed
by Fannie Mae
and Freddie
Mac and the
eviction
moratorium
for real estate
owned by Fannie
Mae and Freddie
Mac were extended
until March
31, 2021, which
was further
extended to
June 30, 2021
on February
25,
2021. On February
16, 2021, the
U.S. Housing
and Urban Development
Department announced
the extension
of the FHA eviction
and foreclosure
moratorium
to June 30, 2021.
On March 11, 2021, the
$1.9 trillion
American Rescue
Plan Act of
2021 was signed
into law.
This stimulus
program
furthered the
Federal government’s
efforts to stabilize
the economy and
provide assistance
to sectors of
the population
still
suffering from
the various
physical and
economic effects
of the pandemic.
In January 2019,
the Trump administration
made statements
of its plans
to work with
Congress to
overhaul Fannie
Mae
and Freddie
Mac and expectations
to announce a
framework
for the development
of a policy
for comprehensive
housing
finance reform
soon. On September
30, 2019, the
FHFA announced that
Fannie Mae
and Freddie
Mac were allowed
to
increase their
capital buffers
to $25 billion
and $20 billion,
respectively, from
the prior limit
of $3 billion
each. This
step could
ultimately
lead to Fannie
Mae and Freddie
Mac being privatized
and represents
the first
concrete step
on the road
to GSE
reform.
On June 30, 2020,
the FHFA released
a proposed rule
on a new regulatory
framework
for the GSEs
which seeks
to
implement both
a risk-based
capital framework
and minimum leverage
capital requirements.
The final rule
on the new capital
framework
for the GSEs
was published
in the federal
register in
December 2020.
On January 14,
2021, the U.S.
Treasury and
the FHFA executed
letter agreements
allowing the
GSEs to continue
to retain capital
up to their
regulatory
minimums,
including
buffers, as prescribed
in the December
rule.
These letter
agreements provide,
in part, (i)
there will
be no exit from
conservatorship
until all material
litigation is
settled and the
GSE has common
equity Tier
1 capital of
at least 3%
of its assets,
(ii) the GSEs
will comply
with the FHFA’s regulatory
capital framework,
(iii) higher-risk
single-family
mortgage acquisitions
will
be restricted
to current
levels, and (iv)
the U.S. Treasury
and the FHFA will
establish a timeline
and process
for future GSE
reform. However,
no definitive
proposals or
legislation
have been released
or enacted
with respect
to ending the
conservatorship,
unwinding the
GSEs, or materially
reducing the
roles of the
GSEs in the
U.S. mortgage
market.
In 2017, policymakers
announced that
LIBOR will
be replaced by
December 31,
2021. The directive
was spurred
by the
fact that banks
are uncomfortable
contributing
to the LIBOR
panel given the
shortage of
underlying
transactions
on which to
base levels
and
the liability
associated with
submitting
an unfounded
level. The
ICE Benchmark
Administration,
in its capacity
as administrator
of USD LIBOR,
has confirmed
that it will
cease publication
of (i) the
one-week and
two-month USD
LIBOR
settings immediately
following the
LIBOR publication
on December
31, 2021, and
(ii) the overnight
and one, three,
six and 12-
month USD LIBOR
settings immediately
following the
LIBOR publication
on June 30, 2023.
A joint statement
by key regulatory
authorities
calls on banks
to cease entering
into new contracts
that use USD
LIBOR as a reference
rate by no later
than
December 31,
2021. The Alternative
Reference Rates
Committee,
a steering committee
comprised of
large U.S.
financial
institutions,
has proposed
replacing USD-LIBOR
with
a new SOFR,
a rate based
on U.S. repo
trading. Many
banks believe
that it may
take four to
five years
to complete
the transition
to SOFR, for
certain, despite
the 2021 deadline.
We will monitor
the
emergence of
this new rate
carefully
as it will potentially
become the new
benchmark
for hedges and
a range of
interest rate
investments.
At this time,
however, no consensus
exists as to
what rate or
rates may become
accepted alternatives
to LIBOR.
40
Effective January
1, 2021, Fannie
Mae, in alignment
with Freddie
Mac, will
extend the timeframe
for its delinquent
loan
buyout policy
for Single-Family
Uniform Mortgage-Backed
Securities
(UMBS) and Mortgage-Backed
Securities
(MBS) from
four consecutively
missed monthly
payments to
twenty-four
consecutively
missed monthly
payments (i.e.,
24 months past
due). This
new timeframe
will apply
to outstanding
single-family
pools and newly
issued single-family
pools and was
first
reflected when
January 2021
factors were
released on
the fourth business
day in February
2021.
For Agency RMBS
investors, when
a delinquent
loan is bought
out of a pool
of mortgage
loans, the removal
of the loan
from the pool
is the same
as a total prepayment
of the loan.
The respective
GSEs currently
anticipate,
however, that
delinquent loans
will be repurchased
in most cases
before the 24-month
deadline under
one of the following
exceptions listed
below.
• a
loan that is
paid in full,
or where the
related lien
is released
and/or the
note debt is
satisfied or
forgiven;
• a
loan repurchased
by a seller/servicer
under applicable
selling and
servicing
requirements;
• a
loan entering
a permanent
modification,
which generally
requires it
to be removed
from the MBS.
During any
modification
trial period,
the loan will
remain in the
MBS until the
trial period
ends;
• a
loan subject
to a short sale
or deed-in-lieu
of foreclosure;
or
• a
loan referred
to foreclosure.
Because of these
exceptions,
the GSEs currently
believe based
on prevailing
assumptions
and market conditions
this
change will
have only a
marginal impact
on prepayment
speeds, in aggregate.
Cohort level
impacts may
vary. For example,
more than half
of loans referred
to foreclosure
are historically
referred within
six months of
delinquency. The degree
to which
speeds are affected
depends on
delinquency
levels, borrower
response, and
referral to
foreclosure
timelines.
The scope and
nature of the
actions the
U.S. government
or the Fed will
ultimately
undertake are
unknown and
will
continue to evolve,
especially
in light of
the COVID-19
pandemic, President
Biden’s new administration
and the new
Congress
in the United
States.
Effect on Us
Regulatory
developments,
movements in
interest rates
and prepayment
rates affect
us in many
ways, including
the
following:
Effects on our
Assets
A change in or
elimination
of the guarantee
structure of
Agency RMBS
may increase
our costs (if,
for example,
guarantee
fees increase)
or require
us to change our
investment
strategy altogether.
For example,
the elimination
of the guarantee
structure of
Agency RMBS
may cause us
to change our
investment
strategy to
focus on non-Agency
RMBS, which
in turn
would require
us to significantly
increase our
monitoring of
the credit
risks of our
investments
in addition
to interest
rate and
prepayment risks.
Lower long-term
interest rates
can affect the
value of our
Agency RMBS
in a number
of ways. If
prepayment rates
are
relatively
low (due, in
part, to the
refinancing
problems described
above), lower
long-term interest
rates can increase
the value
of higher-coupon
Agency RMBS.
This is because
investors typically
place a premium
on assets with
yields that
are higher than
market yields.
Although lower
long-term interest
rates may increase
asset values
in our portfolio,
we may not be
able to invest
new funds in
similarly-yielding
assets.
If prepayment
levels increase,
the value of
our Agency
RMBS affected
by such prepayments
may decline.
This is because
a principal
prepayment accelerates
the effective
term of an Agency
RMBS, which
would shorten
the period during
which an
investor would
receive above-market
returns (assuming
the yield on
the prepaid asset
is higher than
market yields).
Also,
prepayment proceeds
may not be able
to be reinvested
in similar-yielding
assets. Agency
RMBS backed
by mortgages
with
high interest
rates are more
susceptible
to prepayment
risk because
holders of those
mortgages are
most likely
to refinance
to
41
a lower rate.
IOs and IIOs,
however, may be the
types of Agency
RMBS most sensitive
to increased
prepayment rates.
Because the holder
of an IO or
IIO receives
no principal
payments, the
values of IOs
and IIOs are
entirely dependent
on the
existence of
a principal
balance on the
underlying
mortgages. If
the principal
balance is
eliminated due
to prepayment,
IOs and
IIOs essentially
become worthless.
Although increased
prepayment
rates can negatively
affect the value
of our IOs
and IIOs,
they have the
opposite effect
on POs. Because
POs act like
zero-coupon
bonds, meaning
they are purchased
at a discount
to
their par value
and have an
effective interest
rate based on
the discount
and the term
of the underlying
loan, an increase
in
prepayment rates
would reduce
the effective
term of our
POs and accelerate
the yields
earned on those
assets, which
would
increase our
net income.
Higher long-term
rates can
also affect the
value of our
Agency RMBS.
As long-term
rates rise,
rates available
to
borrowers also
rise.
This tends to
cause prepayment
activity
to slow and
extend the expected
average life
of mortgage
cash
flows.
As the expected
average life
of the mortgage
cash flows
increases,
coupled with
higher discount
rates, the
value of
Agency RMBS
declines.
Some of the instruments
the Company
uses to hedge
our Agency
RMBS assets,
such as interest
rate futures,
swaps and swaptions,
are stable average
life instruments.
This means
that to the extent
we use such
instruments
to hedge our
Agency RMBS
assets, our
hedges may not
adequately protect
us from price
declines, and
therefore may
negatively impact
our book value.
It is for this
reason we use
interest only
securities
in our portfolio.
As interest
rates rise,
the
expected average
life of these
securities
increases, causing
generally positive
price movements
as the number
and size of
the
cash flows
increase the
longer the underlying
mortgages remain
outstanding.
This makes
interest only
securities
desirable
hedge instruments
for pass-through
Agency RMBS.
As described
above, the Agency
RMBS market
began to experience
severe dislocations
in mid-March
2020 as a result
of
the economic,
health and market
turmoil brought
about by COVID-19.
In March of
2020, the Fed
announced that
it would
purchase Agency
RMBS and U.S.
Treasuries in
the amounts needed
to support
smooth market
functioning,
which largely
stabilized
the Agency RMBS
market, a commitment
it reaffirmed
at all subsequent
Fed meetings,
including its
most recent
meeting in April
of 2021. If the
Fed modifies,
reduces or
suspends its
purchases of
Agency RMBS,
our investment
portfolio
could be negatively
impacted. Further,
the moratoriums
on foreclosures
and evictions
described above
will likely
delay
potential defaults
on loans that
would otherwise
be bought out
of Agency MBS
pools as described
above.
Depending on
the
ultimate resolution
of the foreclosure
or evictions,
when and if it
occurs, these
loans may be
removed from
the pool into
which
they were securitized.
If this were
to occur, it would
have the effect
of delaying
a prepayment
on the Company’s
securities
until
such time.
As the majority
of the Company’s
Agency RMBS
assets were
acquired at
a premium
to par, this will
tend to
increase the
realized yield
on the asset
in question.
Because we base
our investment
decisions on
risk management
principles
rather than
anticipated
movements in
interest
rates, in a
volatile interest
rate environment
we may allocate
more capital
to structured
Agency RMBS
with shorter
durations.
We believe these
securities
have a lower
sensitivity
to changes in
long-term interest
rates than other
asset classes.
We may
attempt to mitigate
our exposure
to changes in
long-term
interest
rates by investing
in IOs and IIOs,
which typically
have
different sensitivities
to changes in
long-term interest
rates than PT
RMBS, particularly
PT RMBS backed
by fixed-rate
mortgages.
Effects on our
borrowing costs
We leverage our
PT RMBS portfolio
and a portion
of our structured
Agency RMBS
with principal
balances through
the use
of short-term
repurchase agreement
transactions.
The interest
rates on our
debt are determined
by the short
term interest
rate
markets. An
increase in
the Fed Funds
rate or LIBOR
would increase
our borrowing
costs, which
could affect our
interest rate
spread if there
is no corresponding
increase in
the interest
we earn on our
assets. This
would be most
prevalent with
respect to
our Agency RMBS
backed by fixed
rate mortgage
loans because
the interest
rate on a
fixed-rate
mortgage loan
does not
change even though
market rates
may change.
In order to
protect our
net interest
margin against
increases in
short-term
interest rates,
we may enter
into interest
rate
swaps, which
economically
convert our
floating-rate
repurchase agreement
debt to fixed-rate
debt, or utilize
other hedging
instruments
such as Eurodollar,
Fed Funds and
T-Note futures
contracts or
interest rate
swaptions.
42
Summary
COVID-19 continues
to dominate the
performance
of the markets
and economy.
In the case
of the first
quarter of 2021
this meant the
recovery from
the pandemic,
in stark contrast
to the first
quarter of 2020
when the pandemic
first emerged
in the
U.S. The recovery
has been driven
by many factors
– the emergence
and widespread
distribution
of a very effective
vaccine,
substantial
government stimulus
and accommodative
monetary policy. The
economy is recovering
rapidly as
the emergence
of
an effective vaccine
has allowed
pent-up demand
to lead to
a surge in demand
for goods and
services,
fueled further
by
multiple rounds
of stimulus
checks and numerous
other means
of financial
support provided
by the government.
Financial
markets are
benefiting from
extremely lose
financial conditions,
abundant liquidity,
high risk
tolerance and
an insatiable
demand for returns.
The surge in
economic activity
during the first
quarter of 2021
and expectations
for activity
to return to
pre-pandemic
levels
much sooner
than anticipated
caused interest
rates to rise
rapidly as
well.
The yield on
the 10-year
U.S. Treasury
note
increased by
over 82 basis
points and closed
the quarter
at approximately
1.75%, not far
below the yield
level that prevailed
last January
before the pandemic
emerged last
March.
In addition,
the U.S. Treasury
curve has steepened
as the market
fears an outbreak
in inflation
caused by the
combination
of abundant liquidity
via government
stimulus,
loose financial
conditions and
very strong
demand for all
types of goods
and services.
Constrained
supply
of needed raw
materials,
various
inputs to consumer
goods, such
as micro chips,
and even labor
have exacerbated
the upward
pressure on
prices. It
remains to
be seen if these
price pressures
prove to be temporary
or lead to more
sustained inflation.
The Fed believes
the effects are
transitory.
Current market
pricing is
roughly in line
with the Fed’s
view as the
Eurodollar
and Fed Funds
futures markets
only
reflect at
most one interest
rate hike by
the end of 2022.
The Agency RMBS
market did
not perform
well during
the first quarter
as market conditions
– rapidly rising
rates and
increased volatility
– led to extension
fears in mortgage
cash flows,
driving convexity
related selling
and spread widening.
Agency RMBS
had negative
absolute and
excess returns
for the first
quarter of 2021
of -1.2% and
-0.3%, respectively
(both vs
U.S. Treasuries
and LIBOR/swaps).
A positive impact
from higher
rates and lowered
prepayment expectations
is slower
premium amortization,
which enhances
net income
all else equal.
The Mortgage
Bankers Association
refinance index
declined
from approximately
4700 in early
January 2021
to approximately
2900 in early
April, before
rebounding slightly
in mid-April.
As
was the case
for much of
2020, the Agency
RMBS market
continues to
be essentially
bifurcated with
two separate
and distinct
sub-markets.
Lower coupon
fixed rate mortgages,
coupons of 1.5%
through 2.5%,
are purchased
by the Fed and
benefit from
the substantial
price pressure
and attractive
TBA dollar
roll drops.
Higher coupons
in the TBA market
do not have
the benefit
of Fed purchases,
so the market
is left to
absorb still
very high prepayment
speeds on
these securities
as rates have
not risen
enough to eliminate
the economic
incentive to
refinance.
The market
expects prepayments
on higher coupons
will eventually
decline as “burn
out” sets in,
although this
has yet to occur.
One final element
to poor MBS
performance
for the quarter
was
the impact of
higher rates
on the premiums
paid for specified
pools.
The
premium over
generic TBA
securities
has declined
significantly
with the reduced
refinance incentive
caused by the
increase in
rates available
to borrowers.
Now that the
containment
of the COVID-19
pandemic appears
to be within
sight, at least
in the U.S.,
the economy
and life
as we were
accustomed to
should return
to pre-pandemic
norms.
The key questions
the market
must grapple
with going
forward relate
to whether there
have been any
permanent changes
that will result,
including, for
example, inflationary
pressures resulting
from the unprecedented
government stimulus
and monetary
quantitative
easing by the
Fed, the impact
of
the many technological
advancements
that were born
out of the pandemic,
such as employees’
ability to effectively
work
remotely, the
desire to live
in congested cities
and the implications
for commercial
real estate values
for the cities
that many
may not want
to return to,
and the willingness
to gather in
large numbers
or travel by
air. These factors
will matter
to the
Company to the
extent they
impact the levels
of interest
rates and the
efficacy of refinancing
specifically, and
economic activity
and inflation
generally.
Critical Accounting Estimates
43
Our condensed financial statements are prepared in accordance with GAAP.
GAAP requires our management to make
some complex and subjective decisions and assessments. Our most critical accounting estimates involve decisions and
assessments which could significantly affect reported assets, liabilities, revenues and expenses.
There have been no
changes to our critical accounting estimates as discussed in our annual report on Form 10-K for the year ended December
31, 2020.
Capital Expenditures
At March 31, 2021, we had no material commitments for capital expenditures.
Off-Balance Sheet Arrangements
At March 31, 2021, we did not have any off-balance sheet arrangements.
Dividends
In addition to other requirements that must be satisfied to qualify as a REIT,
we must pay annual dividends to our
stockholders of at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and
excluding any net capital gains. REIT taxable income (loss) is computed in accordance with the Code, and can be greater
than or less than our financial statement net income (loss) computed in accordance with GAAP.
These book to tax
differences primarily relate to the recognition of interest income on RMBS, unrealized gains and losses on RMBS, and the
amortization of losses on derivative instruments that are treated as funding hedges for tax purposes.
We intend to pay regular monthly dividends to our stockholders and have declared the following dividends since the
completion of our IPO.
(in thousands, except per share amounts)
Year
Per Share
Amount
Total
2013
$
1.395
$
4,662
2014
2.160
22,643
2015
1.920
38,748
2016
1.680
41,388
2017
1.680
70,717
2018
1.070
55,814
2019
0.960
54,421
2020
0.790
53,570
2021 - YTD
(1)
0.260
23,374
Totals
$
11.915
$
365,337
(1)
On April 14, 2021, the Company declared a dividend of $0.065 per
share to be paid on May 26, 2021.
The effect of this dividend is included in
the table above, but is not reflected in the Company’s financial statements
as of March 31, 2021.
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 financial statements are prepared in accordance with GAAP and our
distributions will be determined by our Board of Directors consistent with our obligation to distribute to our stockholders at
least 90% of our REIT taxable income on an annual basis in order to maintain our REIT qualification; in each case, our
activities and balance sheet are measured with reference to historical cost and/or fair market value without considering
inflation.
44
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET
RISK
Market risk is the exposure to loss resulting from changes in market factors such as interest rates, foreign currency
exchange rates, commodity prices and equity prices. The primary market risks that we are exposed to are interest rate risk,
prepayment risk, spread risk, liquidity risk, extension risk and counterparty credit risk.
Interest Rate Risk
Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and
international economic and political considerations and other factors beyond our control.
Changes in the general level of interest rates can affect our net interest income, which is the difference between the
interest income earned on interest-earning assets and the interest expense incurred in connection with our interest-bearing
liabilities, by affecting the spread between our interest-earning assets and interest-bearing liabilities. Changes in the level of
interest rates can also affect the rate of prepayments of our securities and the value of the RMBS that constitute our
investment portfolio, which affects our net income, ability to realize gains from the sale of these assets and ability to borrow,
and the amount that we can borrow against these securities.
We may utilize a variety of financial instruments in order to limit the effects of changes in interest rates on our
operations. The principal instruments that we use are futures contracts, interest rate swaps and swaptions. These
instruments are intended to serve as an economic hedge against future interest rate increases on our repurchase
agreement borrowings.
Hedging techniques are partly based on assumed levels of prepayments of our Agency RMBS.
If
prepayments are slower or faster than assumed, the life of the Agency RMBS will be longer or shorter, which would reduce
the effectiveness of any hedging strategies we may use and may cause losses on such transactions.
Hedging strategies
involving the use of derivative securities are highly complex and may produce volatile returns.
Hedging techniques are also
limited by the rules relating to REIT qualification.
In order to preserve our REIT status,
we may be forced to terminate a
hedging transaction at a time when the transaction is most needed.
Our profitability and the value of our investment portfolio (including derivatives used for hedging purposes) may be
adversely affected during any period as a result of changing interest rates, including changes in the forward yield curve.
Our portfolio of PT RMBS is typically comprised of adjustable-rate RMBS (“ARMs”),
fixed-rate RMBS and hybrid
adjustable-rate RMBS. We generally seek to acquire low duration assets that offer high levels of protection from mortgage
prepayments provided that they are reasonably priced by the market.
Although the duration of an individual asset can
change as a result of changes in interest rates, we strive to maintain a hedged PT RMBS portfolio with an effective duration
of less than 2.0. The stated contractual final maturity of the mortgage loans underlying our portfolio of PT RMBS generally
ranges up to 30 years. However, the effect of prepayments of the underlying mortgage loans tends to shorten the resulting
cash flows from our investments substantially. Prepayments occur for various reasons, including refinancing of underlying
mortgages and loan payoffs in connection with home sales,
and borrowers paying more than their scheduled loan
payments, which accelerates the amortization of the loans.
The duration of our IO and IIO portfolios will vary greatly depending on the structural features of the securities.
While
prepayment activity will always affect the cash flows associated with the securities, the interest only nature of IOs may
cause their durations to become extremely negative when prepayments are high, and less negative when prepayments are
low.
Prepayments affect the durations of IIOs similarly, but the floating
rate nature of the coupon of IIOs (which is inversely
related to the level of one month LIBOR) causes
their price movements, and model duration, to be affected by changes in
both prepayments and one month LIBOR, both current and anticipated levels.
As a result, the duration of IIO securities will
also vary greatly.
Prepayments on the loans underlying our RMBS can alter the timing of the cash flows from the underlying loans to us.
45
As a result, we gauge the interest rate sensitivity of our assets by measuring their effective duration. While modified duration
measures the price sensitivity of a bond to movements in interest rates, effective duration captures both the movement in
interest rates and the fact that cash flows to a mortgage related security are altered when interest rates move. Accordingly,
when the contract interest rate on a mortgage loan is substantially above prevailing interest rates in the market, the effective
duration of securities collateralized by such loans can be quite low because of expected prepayments.
We face the risk that the market value of our PT RMBS assets will increase or decrease at different rates than that of
our structured RMBS or liabilities, including our hedging instruments. Accordingly,
we assess our interest rate risk by
estimating the duration of our assets and the duration of our liabilities. We generally calculate duration using various third
party models.
However, empirical results and various third party models may produce different duration numbers for the
same securities.
The following sensitivity analysis shows the estimated impact on the fair value of our interest rate-sensitive investments
and hedge positions as of March 31, 2021 and December 31, 2020, assuming rates instantaneously fall 200 bps, fall 100
bps, fall 50 bps, rise 50 bps, rise 100 bps and rise 200 bps, adjusted to reflect the impact of convexity, which is the
measure
of the sensitivity of our hedge positions and Agency RMBS’ effective duration to movements in interest rates.
All changes in value in the table below are measured as percentage changes from the investment portfolio value and
net asset value at the base interest rate scenario. The base interest rate scenario assumes interest rates and prepayment
projections as of March 31, 2021 and December 31, 2020.
Actual results could differ materially from estimates, especially in the current market environment. To
the extent that
these estimates or other assumptions do not hold true, which is likely in a period of high price volatility, actual results will
likely differ materially from projections and could be larger or smaller than the estimates in the table below. Moreover,
if
different models were employed in the analysis, materially different projections could result. Lastly,
while the table below
reflects the estimated impact of interest rate increases and decreases on a static portfolio, we may from time to time sell any
of our agency securities as a part of the overall management of our investment portfolio.
Interest Rate Sensitivity
(1)
Portfolio
Market
Book
Change in Interest Rate
Value
(2)(3)
Value
(2)(4)
As of March 31, 2021
-200 Basis Points
(0.93)%
(8.66)%
-100 Basis Points
0.03%
0.29%
-50 Basis Points
0.20%
1.87%
+50 Basis Points
(0.60)%
(5.61)%
+100 Basis Points
(1.45)%
(13.50)%
+200 Basis Points
(3.57)%
(33.27)%
As of December 31, 2020
-200 Basis Points
2.43%
21.85%
-100 Basis Points
1.35%
12.08%
-50 Basis Points
0.69%
6.18%
+50 Basis Points
(0.90)%
(8.03)%
+100 Basis Points
(2.39)%
(21.42)%
+200 Basis Points
(6.60)%
(59.22)%
(1)
Interest rate sensitivity is derived from models that are dependent
on inputs and assumptions provided by third parties as well as by our
Manager, and assumes there are no
changes in mortgage spreads and assumes a static portfolio. Actual results could
differ materially from
these estimates.
(2)
Includes the effect of derivatives and other securities used for
hedging purposes.
(3)
Estimated dollar change in investment portfolio value expressed as a
percent of the total fair value of our investment portfolio as of such
date.
(4)
Estimated dollar change in portfolio value expressed as a percent of stockholders'
equity as of such date.
46
In addition to changes in interest rates, other factors impact the fair value of our interest rate-sensitive investments,
such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions.
Accordingly, in the event of changes in actual interest rates, the change in the fair value of our assets would likely differ
from
that shown above and such difference might be material and adverse to our stockholders.
Prepayment Risk
Because residential borrowers have the option to prepay their mortgage loans at par at any time, we face the risk that
we will experience a return of principal on our investments faster than anticipated. Various factors affect
the rate at which
mortgage prepayments occur, including changes in the level of and directional trends in housing prices, interest rates,
general economic conditions, loan age and size, loan-to-value ratio, the location of the property and social and demographic
conditions. Additionally, changes to government sponsored entity underwriting practices or other governmental programs
could also significantly impact prepayment rates or expectations. Generally, prepayments on Agency
RMBS increase during
periods of falling mortgage interest rates and decrease during periods of rising mortgage interest rates. However, this may
not always be the case.
We may reinvest principal repayments at a yield that is lower or higher than the yield on the repaid
investment, thus affecting our net interest income by altering the average yield on our assets.
Spread Risk
When the market spread widens between the yield on our Agency RMBS and benchmark interest rates, our net book
value could decline if the value of our Agency RMBS falls by more than the offsetting fair value increases on our hedging
instruments tied to the underlying benchmark interest rates. We refer to this as "spread risk" or "basis risk." The spread risk
associated with our mortgage assets and the resulting fluctuations in fair value of these securities can occur independent of
changes in benchmark interest rates and may relate to other factors impacting the mortgage and fixed income markets,
such as actual or anticipated monetary policy actions by the Fed, market liquidity, or changes in required rates of return on
different assets. Consequently, while we use futures contracts and
interest rate swaps and swaptions to attempt to protect
against moves in interest rates, such instruments typically will not protect our net book value against spread risk.
Liquidity Risk
The primary liquidity risk for us arises from financing long-term assets with shorter-term borrowings through repurchase
agreements. Our assets that are pledged to secure repurchase agreements are Agency RMBS and cash. As of March 31,
2021, we had unrestricted cash and cash equivalents of $211.4 million and unpledged securities of approximately $218.0
million (not including securities pledged to us) available to meet margin calls on our repurchase agreements and derivative
contracts, and for other corporate purposes. However, should the value of our Agency RMBS pledged as collateral or the
value of our derivative instruments suddenly decrease, margin calls relating to our repurchase and derivative agreements
could increase, causing an adverse change in our liquidity position. Further, there is no assurance that we will always be
able to renew (or roll) our repurchase agreements. In addition, our counterparties have the option to increase our haircuts
(margin requirements) on the assets we pledge against repurchase agreements, thereby reducing the amount that can be
borrowed against an asset even if they agree to renew or roll the repurchase agreement. Significantly higher haircuts can
reduce our ability to leverage our portfolio or even force us to sell assets, especially if correlated with asset price declines or
faster prepayment rates on our assets.
Extension Risk
The projected weighted average life and the duration (or interest rate sensitivity) of our investments is based on our
Manager's assumptions regarding the rate at which the borrowers will prepay the underlying mortgage loans. In general, we
use futures contracts and interest rate swaps and swaptions to help manage our funding cost on our investments in the
event that interest rates rise. These hedging instruments allow us to reduce our funding exposure on the notional amount of
the instrument for a specified period of time.
47
However, if prepayment rates decrease in a rising interest rate environment, the average life or duration of our fixed-
rate assets or the fixed-rate portion of the ARMs or other assets generally extends. This could have a negative impact on
our results from operations, as our hedging instrument expirations are fixed and will, therefore, cover a smaller percentage
of our funding exposure on our mortgage assets to the extent that their average lives increase due to slower prepayments.
This situation may also cause the market value of our Agency RMBS and CMOs collateralized by fixed rate mortgages or
hybrid ARMs to decline by more than otherwise would be the case while most of our hedging instruments would not receive
any incremental offsetting gains. In extreme situations, we may be forced to sell assets to maintain adequate liquidity,
which
could cause us to incur realized losses.
Counterparty Credit Risk
We are exposed to counterparty credit risk relating to potential losses that could be recognized in the event that the
counterparties to our repurchase agreements and derivative contracts fail to perform their obligations under such
agreements. The amount of assets we pledge as collateral in accordance with our agreements varies over time based on
the market value and notional amount of such assets as well as the value of our derivative contracts. In the event of a
default by a counterparty, we may not receive payments provided for
under the terms of our agreements and may have
difficulty obtaining our assets pledged as collateral under such agreements. Our credit risk related to certain derivative
transactions is largely mitigated through daily adjustments to collateral pledged based on changes in market value and we
limit our counterparties to registered central clearing exchanges and major financial institutions with acceptable credit
ratings, monitoring positions with individual counterparties and adjusting collateral posted as required. However, there is no
guarantee our efforts to manage counterparty credit risk will be successful and we could suffer significant losses if
unsuccessful.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report (the “evaluation date”), we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive Officer (the “CEO”) and Chief
Financial Officer (the “CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures, as
defined in Rule 13a-15(e) under the Exchange Act. Based on this evaluation, the CEO and CFO concluded our disclosure
controls and procedures, as designed and implemented, were effective as of the evaluation date (1) in ensuring that
information regarding the Company is accumulated and communicated to our management, including our CEO and CFO,
by our employees, as appropriate to allow timely decisions regarding required disclosure and (2) in providing reasonable
assurance that information we must disclose in our periodic reports under the Exchange Act is recorded, processed,
summarized and reported within the time periods prescribed by the SEC’s rules and forms.
Changes in Internal Controls over Financial Reporting
There were no significant changes in the Company’s internal control over financial reporting that occurred during the
Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
48
PART II. OTHER
INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
We are not party to any material pending legal proceedings as described in Item 103 of Regulation
S-K.
ITEM 1A. RISK FACTORS
A description
of certain
factors that
may affect our
future results
and risk factors
is set forth
in our Annual
Report on Form
10-K
for the year
ended December
31, 2020. As of
March 31, 2021,
there have
been no material
changes in our
risk factors
from those
set forth in
our Annual Report
on Form 10-K
for the year
ended December
31, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The table below
presents the
Company’s share
repurchase activity
for the three
months ended
March 31, 2021.
Shares Purchased
Maximum Number
Total Number
Weighted-Average
as Part of Publicly
of Shares That May Yet
of Shares
Price Paid
Announced
Be Repurchased Under
Repurchased
(1)
Per Share
Programs
(2)
the Authorization
(2)
January 1, 2021 - January 31, 2021
-
$
-
-
837,311
February 1, 2021 - February 28, 2021
-
-
-
837,311
March 1, 2021 - March 31, 2021
50,577
5.88
-
837,311
Totals / Weighted Average
50,577
$
5.88
-
837,311
(1)
Includes shares
of the Company’s
common stock
acquired by the
Company in connection
with the satisfaction
of tax withholding
obligations on
vested employment-related
awards under
equity incentive
plans. These repurchases
do not reduce
the number of shares
available under
the stock
repurchase program
authorization.
(2)
On July 29,
2015, the Company's
Board of Directors
authorized the
repurchase of
up to 2,000,000
shares of the
Company's common
stock. On
February 8,
2018, the Board
of Directors
approved an increase
in the stock
repurchase program
for up to an
additional 4,522,822
shares of the
Company's common
stock. Unless
modified or
revoked by the
Board, the authorization
does not expire.
The Company
did not have
any unregistered
sales of its
equity securities
during the three
months ended
March 31,
2021.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.
MINE SAFETY
DISCLOSURES
Not Applicable.
ITEM 5.
OTHER INFORMATION
None.
49
ITEM 6. EXHIBITS
Exhibit No.
3.1
3.2
3.3
4.1
10.1
31.1
31.2
32.1
32.2
Exhibit 101.INS XBRL
Inline XBRL Instance Document – the instance document does not appear in the
Interactive Data File because its XBRL tags are embedded within the Inline XBRL
document.***
Exhibit 101.SCH XBRL
Taxonomy Extension Schema Document ***
Exhibit 101.CAL XBRL
Taxonomy Extension Calculation Linkbase Document***
Exhibit 101.DEF XBRL
Additional Taxonomy Extension Definition Linkbase Document Created***
Exhibit 101.LAB XBRL
Taxonomy Extension Label Linkbase Document ***
Exhibit 101.PRE XBRL
Taxonomy Extension Presentation Linkbase Document ***
Exhibit 104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
* Filed
herewith.
** Furnished herewith.
*** Submitted
electronically herewith.
† Management contract or compensatory plan.
50
Signatures
Pursuant to the requirements of
Section 13 or 15(d) of
the Securities Exchange Act of
1934, as amended, the registrant
has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Orchid Island Capital, Inc
.
Registrant
Date:
April 30, 2021
By:
/s/ Robert E. Cauley
Robert E. Cauley
Chief Executive Officer, President and Chairman of the Board
(Principal Executive Officer)
Date:
April 30, 2021
By:
/s/ George H. Haas, IV
George H. Haas,
IV
Secretary, Chief Financial Officer, Chief Investment Officer and
Director (Principal Financial and Accounting Officer)
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsNote 1. Organization and Significant Accounting PoliciesNote 2. Mortgage-backed SecuritiesNote 3. Repurchase AgreementsNote 4. Derivative and Other Hedging InstrumentsNote 5. Pledged AssetsNote 6. Offsetting Assets and LiabilitiesNote 7. Capital StockNote 8. Stock Incentive PlanNote 9. Commitments and ContingenciesNote 10. Income TaxesNote 11. Earnings Per Share (eps)Note 12. Fair ValueNote 13. Related Party TransactionsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits