(B)
| Weighted average maturity of the underlying residential mortgage loans in the pool is based on the unpaid principal balance.(C) | MSR cost basis consists of the carrying value of the prior period, adjusted for any purchases and sales of the underlying residential mortgage loans.loans in the pool is based on the unpaid principal balance. |
The tables below summarize the geographic distribution for the states representing 5% or greater of the aggregate UPB of the residential mortgage loans underlying the Servicing Related Assets as of the dates indicated: Geographic Concentration of Servicing Related Assets As of JuneSeptember 30, 2021
| | Percentage of Total Outstanding Unpaid Principal Balance | | California | | | 11.912.6 | % | Virginia | | | 9.5 | % | New York | | | 8.99.0 | % | Maryland | | | 7.2 | % | Texas | | | 6.1 | % | North Carolina | | | 5.95.8 | % | All other | | | 50.549.8 | % | Total | | | 100.0 | % |
As of December 31, 2020
| | Percentage of Total Outstanding Unpaid Principal Balance | | California | | | 11.1 | % | Virginia | | | 8.4 | % | New York | | | 7.7 | % | Maryland | | | 6.7 | % | Texas | | | 5.8 | % | North Carolina | | | 5.5 | % | All other | | | 54.8 | % | Total | | | 100.0 | % |
Geographic concentrations of investments expose the Company to the risk of economic downturns within the relevant states. Any such downturn in a state where the Company holds significant investments could affect the underlying borrower’s ability to make the mortgage payment and, therefore, could have a meaningful, negative impact on the Company’s Servicing Related Assets.
Note 6 — Equity and Earnings per Common Share
Common and Preferred Stock
On October 9, 2013, the Company completed an initial public offering (the “IPO”) and a concurrent private placement of its common stock. The Company did not conduct any activity prior to the IPO and the concurrent private placement.
The Company’s 8.20% Series A Cumulative Redeemable Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”) ranks senior to the Company’s common stock with respect to rights to the payment of dividends and the distribution of assets upon the Company’s liquidation, dissolution or winding up. The Series A Preferred Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and will remain outstanding indefinitely unless repurchased or redeemed by the Company or converted by the holders of the Series A Preferred Stock into the Company’s common stock in connection with certain changes of control. The Series A Preferred Stock is not redeemable by the Company prior to August 17, 2022, except under circumstances intended to preserve the Company’s qualification as a REIT for U.S. federal income tax purposes and except upon the occurrence of certain changes of control. On and after August 17, 2022, the Company may, at its option, redeem the Series A Preferred Stock, in whole or in part, at any time or from time to time, for cash at a redemption price equal to $25.00 per share, plus any accumulated and unpaid dividends to, but not including, the date fixed for redemption. If the Company does not exercise its rights to redeem the Series A Preferred Stock upon certain changes in control, the holders of the Series A Preferred Stock have the right to convert some or all of their shares of Series A Preferred Stock into a number of shares of the Company’s common stock based on a defined formula, subject to a share cap, or alternative consideration. The share cap on each share of Series A Preferred Stock is 2.62881 shares of common stock, subject to certain adjustments. The Company pays cumulative cash dividends at the rate of 8.20% per annum of the $25.00 per share liquidation preference (equivalent to $2.05 per annum per share) on the Series A Preferred Stock, in arrears, on or about the 15th day of January, April, July and October of each year.
On June 4, 2018, the Company issued and sold 2,750,000 shares of its common stock, par value $0.01 per share. The underwriters subsequently exercised their option to purchase an additional 338,857 shares for total proceeds of approximately $53.8 million after underwriting discounts and commissions but before expenses of approximately $265,000. All of the net proceeds were invested in RMBS.
The Company’s 8.250% Series B Fixed-to-Floating Rate Cumulative Redeemable Stock, par value $0.01 per share (the “Series B Preferred Stock”) ranks senior to the Company’s common stock with respect to rights to the payment of dividends and the distribution of assets upon the Company’s liquidation, dissolution or winding up, and on parity with the Company’s Series A Preferred Stock with respect to rights to the payment of dividends and the distribution of assets upon the Company’s liquidation, dissolution or winding up. The Series B Preferred Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and will remain outstanding indefinitely unless repurchased or redeemed by the Company or converted by the holders of the Series B Preferred Stock into the Company’s common stock in connection with certain changes of control. The Series B Preferred Stock is not redeemable by the Company prior to April 15, 2024, except under circumstances intended to preserve the Company’s qualification as a REIT for U.S. federal income tax purposes and except upon the occurrence of certain changes of control. On and after April 15, 2024, the Company may, at its option, redeem the Series B Preferred Stock, in whole or in part, at any time or from time to time, for cash at a redemption price equal to $25.00 per share, plus any accumulated and unpaid dividends to, but not including, the date fixed for redemption. If the Company does not exercise its rights to redeem the Series B Preferred Stock upon certain changes in control, the holders of the Series B Preferred Stock have the right to convert some or all of their shares of Series B Preferred Stock into a number of shares of the Company’s common stock based on a defined formula, subject to a share cap, or alternative consideration. The share cap on each share of Series B Preferred Stock is 2.68962 shares of common stock, subject to certain adjustments. Holders of Series B Preferred Stock will be entitled to receive cumulative cash dividends (i) from and including February 11, 2019 to, but excluding, April 15, 2024 at a fixed rate equal to 8.250% per annum of the $25.00 per share liquidation preference (equivalent to $2.0625 per annum per share) and (ii) from and including April 15, 2024, at a floating rate equal to three-month LIBOR plus a spread of 5.631% per annum. Dividends are payable quarterly in arrears on the 15th day of each January, April, July and October, when and as authorized by the Company’s board of directors and declared by the Company.
On April 28, 2020, the Company issued 527,010 shares of Common Stock in partial payment of the previously declared cash dividend of $0.40 per share of Common Stock.
Common Stock ATM Program
In August 2018, the Company instituted an at-the-market offering program (the “Common Stock ATM Program”) of up to $50.0 million of its common stock. Under the Common Stock ATM Program, the Company may, but is not obligated to, sell shares of common stock from time to time through one or more selling agents. The Common Stock ATM Program has no set expiration date and may be renewed or terminated by the Company at any time. During the three and sixnine-month periodperiods ended JuneSeptember 30, 2021 the Company issued and sold 553,500 shares of common stock under the Common Stock ATM Program. The shares were sold at a weighted average price of $8.97 per share for gross proceeds of approximately $5.0 million before fees of approximately $99,000. andDuring the year ended December 31, 2020, the Company did 0t0t issue any shares of common stock under the Common Stock ATM Program.
Preferred Stock ATM Program
In April 2018, the Company instituted an at-the-market offering program (the “Preferred Series A ATM Program”) of up to $35.0 million of its Series A Preferred Stock. Under the Preferred Series A ATM Program, the Company may, but is not obligated to, sell shares of Series A Preferred Stock from time to time through one or more selling agents. The Preferred Series A ATM Program has no set expiration date and may be renewed or terminated by the Company at any time. During the three and six-monthnine-month period ended JuneSeptember 30, 2021 and the year ended December 31, 2020, the Company did 0t issue any shares of Series A Preferred Stock under the Preferred Series A ATM Program.
Share Repurchase Program
In September 2019, the Company instituted a share repurchase program that allows for the repurchase of up to an aggregate of $10.0 million of the Company’s common stock. Shares may be repurchased from time to time through privately negotiated transactions or open market transactions, pursuant to a trading plan in accordance with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, or by any combination of such methods. The manner, price, number and timing of share repurchases are subject to a variety of factors, including market conditions and applicable SEC rules. The share repurchase program does not require the purchase of any minimum number of shares, and, subject to SEC rules, purchases may be commenced or suspended at any time without prior notice. During the three and sixnine-month period ended JuneSeptember 30, 2021, the Company did 0t repurchase any shares under the share repurchase program. During the year ended December 31, 2020, the Company repurchased 142,531 shares of its common stock at a weighted average purchase price of $12.96 per share and paid broker commissions of approximately $4,300 on such repurchases.
Equity Incentive Plan
During 2013, the board of directors approved and the Company adopted the Cherry Hill Mortgage Investment Corporation 2013 Equity Incentive Plan (the “2013 Plan”). The 2013 Plan provides for the grant of options to purchase shares of the Company’s common stock, stock awards, stock appreciation rights, performance units, incentive awards and other equity-based awards, including long term incentive plan units (“LTIP-OP Units”) of the Operating Partnership. LTIP-OP Units are a special class of partnership interest in the Operating Partnership. LTIP-OP Units may be issued to eligible participants for the performance of services to or for the benefit of the Operating Partnership. Initially, LTIP-OP Units do not have full parity with the Operating Partnership’s common units of limited partnership interest (“OP Units”) with respect to liquidating distributions; however, LTIP-OP Units receive, whether vested or not, the same per-unit distributions as OP Units and are allocated their pro-rata share of the Operating Partnership’s net income or loss. Under the terms of the LTIP-OP Units, the Operating Partnership will revalue its assets upon the occurrence of certain specified events, and any increase in the Operating Partnership’s valuation from the time of grant of the LTIP-OP Units until such event will be allocated first to the holders of LTIP-OP Units to equalize the capital accounts of such holders with the capital accounts of the holders of OP Units. Upon equalization of the capital accounts of the holders of LTIP-OP Units with the other holders of OP Units, the LTIP-OP Units will achieve full parity with OP Units for all purposes, including with respect to liquidating distributions. If such parity is reached, vested LTIP-OP Units may be converted into an equal number of OP Units at any time and, thereafter, enjoy all the rights of OP Units, including redemption rights. Each LTIP-OP Unit awarded is deemed equivalent to an award of 1 share of the Company’s common stock under the 2013 Plan and reduces the 2013 Plan’s share authorization for other awards on a one-for-one basis.
An LTIP-OP Unit and a share of common stock of the Company have substantially the same economic characteristics in as much as they effectively share equally in the net income or loss of the Operating Partnership. Holders of LTIP-OP Units that have reached parity with OP Units have the right to redeem their LTIP-OP Units, subject to certain restrictions. The redemption is required to be satisfied in cash, or at the Company’s option, the Company may purchase the OP Units for common stock, calculated as follows: one share of the Company’s common stock, or cash equal to the fair value of a share of the Company’s common stock at the time of redemption, for each LTIP-OP Unit. When an LTIP-OP Unit holder redeems an OP Unit (as described above), non-controlling interest in the Operating Partnership is reduced and the Company’s equity is increased.
LTIP-OP Units vest ratably over the first three annual anniversaries of the grant date. The fair value of each LTIP-OP Unit was determined based on the closing price of the Company’s common stock on the applicable grant date in all other cases. The following table sets forth the number of shares of the Company’s common stock as well as LTIP-OP Units and the values thereof (based on the closing prices on the respective dates of grant) granted under the 2013 Plan. Except as otherwise indicated, all shares are fully vested.
Equity Incentive Plan Information
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Number of Securities Remaining Available For | | | Weighted Average | | | | | | | | | | | | | | | | | | | | | Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans | | | Weighted Average Issuance Price | | | | LTIP-OP Units | | | Shares of Common Stock | | | Future Issuance Under | | | Issuance | | | LTIP-OP Units | | | Shares of Common Stock | | | | | | | | Issued | | | Forfeited | | | Converted | | | Redeemed | | | Issued | | | Forfeited | | | Equity Compensation Plans | | | Price | | | Issued | | | Forfeited | | | Converted | | | Redeemed | | | Issued | | | Forfeited | | | | | | December 31, 2019 | | | (290,275 | ) | | | 916 | | | | 18,917 | | | | 0 | | | | (76,664 | ) | | | 3,155 | | | | 1,156,049 | | | | | | | (290,275 | ) | | | 916 | | | | 18,917 | | | | 0 | | | | (76,664 | ) | | | 3,155 | | | | 1,156,049 | | | | | Number of securities issued or to be issued upon exercise | | | (41,900 | )(A) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (41,900 | ) | | $ | 14.55 | | | | (41,900 | )(A) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (41,900 | ) | | $ | 14.55 | | Number of securities issued or to be issued upon exercise | | | 0 | | | | 0 | | | | 9,500 | | | | 0 | | | | (9,500 | ) | | | 0 | | | | 0 | | | $ | 8.01 | | | | 0 | | | | 0 | | | | 9,500 | | | | 0 | | | | (9,500 | ) | | | 0 | | | | 0 | | | $ | 8.01 | | March 31, 2020 | | | (332,175 | ) | | | 916 | | | | 28,417 | | | | 0 | | | | (86,164 | ) | | | 3,155 | | | | 1,114,149 | | | | | | | | (332,175 | ) | | | 916 | | | | 28,417 | | | | 0 | | | | (86,164 | ) | | | 3,155 | | | | 1,114,149 | | | | | | Number of securities issued or to be issued upon exercise | | | (9,672 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (9,672 | ) | | $ | 6.27 | | | | (9,672 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (9,672 | ) | | $ | 6.27 | | Number of securities issued or to be issued upon exercise | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (22,224 | ) | | | 0 | | | | (22,224 | ) | | $ | 9.18 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (22,224 | ) | | | 0 | | | | (22,224 | ) | | $ | 9.18 | | June 30, 2020 | | | (341,847 | ) | | | 916 | | | | 28,417 | | | | 0 | | | | (108,388 | ) | | | 3,155 | | | | 1,082,253 | | | | | | | | (341,847 | ) | | | 916 | | | | 28,417 | | | | 0 | | | | (108,388 | ) | | | 3,155 | | | | 1,082,253 | | | | | | Number of securities issued or to be issued upon exercise | | | | 0 | | | | 0 | | | | 0 | | | | | | | | 0 | | | | 0 | | | | 0 | | | | | | September 30, 2020 | | | | (341,847) | | | | 916 | | | | 28,417 | | | | | | | | (108,388) | | | | 3,155 | | | | 1,082,253 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | | (341,847 | ) | | | 916 | | | | 28,417 | | | | 0 | | | | (108,388 | ) | | | 3,155 | | | | 1,082,253 | | | | | | | | (341,847 | ) | | | 916 | | | | 28,417 | | | | 0 | | | | (108,388 | ) | | | 3,155 | | | | 1,082,253 | | | | | | Number of securities issued or to be issued upon exercise | | | (49,800 | )(B) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (49,800 | ) | | $ | 8.81 | | | | (49,800 | )(B) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (49,800 | ) | | $ | 8.81 | | Number of securities issued or to be issued upon exercise | | | 0 | | | | 0 | | | | 16,378 | | | | 0 | | | | (16,378 | ) | | | 0 | | | | 0 | | | $ | 9.00 | | | | 0 | | | | 0 | | | | 16,378 | | | | 0 | | | | (16,378 | ) | | | 0 | | | | 0 | | | $ | 9.00 | | March 31, 2021 | | | (391,647 | ) | | | 916 | | | | 44,795 | | | | 0 | | | | (124,766 | ) | | | 3,155 | | | | 1,032,453 | | | | | | | | (391,647 | ) | | | 916 | | | | 44,795 | | | | 0 | | | | (124,766 | ) | | | 3,155 | | | | 1,032,453 | | | | | | Number of securities redeemed | | | 0 | | | | 0 | | | | 0 | | | | 3,500 | | | | 0 | | | | 0 | | | | 0 | | | $ | 9.53 | | | | 0 | | | | 0 | | | | 0 | | | | 3,500 | | | | 0 | | | | 0 | | | | 0 | | | $ | 9.53 | | Number of securities redeemed | | | 0 | | | | 0 | | | | 0 | | | | 3,354 | | | | 0 | | | | 0 | | | | 0 | | | $ | 10.48 | | | | 0 | | | | 0 | | | | 0 | | | | 3,354 | | | | 0 | | | | 0 | | | | 0 | | | $ | 10.48 | | Number of securities issued or to be issued upon exercise | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | (20,214 | ) | | | 0 | | | | (20,214 | ) | | $ | 10.39 | | | | 0 | | | | 0 | | | | 0 | | | |
| | | | (20,214 | )(C) | | | 0 | | | | (20,214 | ) | | $ | 10.39 | | June 30, 2021 | | | (391,647 | ) | | | 916 | | | | 44,795 | | | | 6,854 | | | | (144,980 | ) | | | 3,155 | | | | 1,012,239 | | | | | | | June 30, 2021 | | | | (391,647 | ) | | | 916 | | | | 44,795 | | | | 6,854 | | | | (144,980 | ) | | | 3,155 | | | | 1,012,239 | | | | | | Number of securities redeemed | | | | 0 | | | | 0 | | | | 0 | | | | 1,200 | | | | 0 | | | | 0 | | | | 0 | | | $
| 9.21 | | Number of securities redeemed | | | | | | | | | | | | | | | | 1,000 | | | | | | | | | | | | 0 | | | $
| 9.36 | | September 30, 2021 | | | | (391,647) | | | | 916 | | | | 44,795 | | | | 9,054 | | | | (144,980) | | | | 3,155 | | | | 1,012,239 | | | | | |
| (A) | Subject to forfeiture in certain circumstances prior to January 2, 2023. |
| (B) | Subject to forfeiture in certain circumstances prior to January 4, 2024. |
| (C) | Subject to forfeiture in certain circumstances prior to June 17, 2022. |
The Company recognized approximately $333,000$212,000 and $359,000$237,000 in share-based compensation expense in the three-month periods ended JuneSeptember 30, 2021 and JuneSeptember 30, 2020, respectively. The Company recognized approximately $626,000$837,000 and $675,000$808,000 in share-based compensation expense in the six-monthnine-month periods ended JuneSeptember 30, 2021 and JuneSeptember 30, 2020, respectively. There was approximately $945,000$785,000 of total unrecognized share-based compensation expense as of JuneSeptember 30, 2021, which was related to unvested LTIP-OP Units and unvested directors compensation paid in stock.stock subject to forfeiture. This unrecognized share-based compensation expense is expected to be recognized ratably over the remaining vesting period of up to three years. The aggregate expense related to the LTIP-OP Unit grants is presented as “General and administrative expense” in the Company’s consolidated statements of income (loss).
Non-Controlling Interests in Operating Partnership
Non-controlling interests in the Operating Partnership in the accompanying consolidated financial statements relate to LTIP-OP Units and OP Units issued upon conversion of LTIP-OP Units, in either case, held by parties other than the Company.
As of JuneSeptember 30, 2021, the non-controlling interest holders in the Operating Partnership owned 345,501342,771 LTIP-OP Units, or approximately 2.02%2.0% of the units of the Operating Partnership. Pursuant to ASC 810, Consolidation, changes in a parent’s ownership interest (and transactions with non-controlling interest unit holders in the Operating Partnership) while the parent retains its controlling interest in its subsidiary should be accounted for as equity transactions. The carrying amount of the non-controlling interest will be adjusted to reflect the change in its ownership interest in the subsidiary, with the offset to equity attributable to the Company.
Earnings per Common Share
The Company is required to present both basic and diluted earnings per common share (“EPS”). Basic EPS is calculated by dividing net income applicable to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted EPS is calculated by dividing net income applicable to common stockholders by the weighted average number of shares of common stock outstanding plus the additional dilutive effect of common stock equivalents during each period. In accordance with ASC 260, Earnings Per Share, if there is a loss from continuing operations, the common stock equivalents are deemed anti-dilutive and earnings (loss) per share is calculated excluding the potential common shares.
The following table presents basic and diluted earnings per share of common stock for the periods indicated (dollars in thousands, except per share data):
Earnings per Common Share Information | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | Numerator: | | | | | | | | | | | | | | | | | | | | | | | | | Net income (loss) | | $ | (11,613 | ) | | $ | (12,683 | ) | | $ | 9,615 | | | $ | (61,519 | ) | | $ | (3,790 | ) | | $ | (742 | ) | | $ | 5,825 | | | $ | (62,261 | ) | Net (income) loss allocated to noncontrolling interests in Operating Partnership | | | 240 | | | | 227 | | | | (194 | ) | | | 1,137 | | | | 77 | | | | 10 | | | | (117 | ) | | | 1,147 | | Dividends on preferred stock | | | 2,465 | | | | 2,461 | | | | 4,928 | | | | 4,920 | | | | 2,462 | | | | 2,459 | | | | 7,390 | | | | 7,379 | | Net income (loss) applicable to common stockholders | | $ | (13,838 | ) | | $ | (14,917 | ) | | $ | 4,493 | | | $ | (65,302 | ) | | $ | (6,175 | ) | | $ | (3,191 | ) | | $ | (1,682 | ) | | $ | (68,493 | ) | Denominator: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average common shares outstanding | | | 17,073,943 | | | | 16,882,077 | | | | 17,069,861 | | | | 16,746,758 | | | | 17,185,872 | | | | 17,054,634 | | | | 17,108,956 | | | | 16,850,133 | | Weighted average diluted shares outstanding | | | 17,096,124 | | | | 16,895,408 | | | | 17,092,064 | | | | 16,759,818 | | | | 17,206,086 | | | | 17,076,858 | | | | 17,130,489 | | | | 16,866,269 | | Basic and Diluted EPS: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | (0.81 | ) | | $ | (0.88 | ) | | $ | 0.26 | | | $ | (3.90 | ) | | $ | (0.36 | ) | | $ | (0.19 | ) | | $ | (0.10 | ) | | $ | (4.06 | ) | Diluted | | $ | (0.81 | ) | | $ | (0.88 | ) | | | | | | | | | | $ | (0.36 | ) | | $ | (0.19 | ) | | | | | | | | |
There were 0 participating securities or equity instruments outstanding that were anti-dilutive for purposes of calculating earnings per share for the periods presented.
Note 7 — Transactions with Related Parties
Manager
The Company has entered into the Management Agreement with the Manager, pursuant to which the Manager provides for the day-to-day management of the Company’s operations. The Management Agreement requires the Manager to manage the Company’s business affairs in conformity with the policies that are approved and monitored by the Company’s board of directors. Pursuant to the Management Agreement, the Manager, under the supervision of the Company’s board of directors, formulates investment strategies, arranges for the acquisition of assets, arranges for financing, monitors the performance of the Company’s assets and provides certain advisory, administrative and managerial services in connection with the operations of the Company. For performing these services, the Company pays the Manager the management fee which is payable in cash quarterly in arrears, in an amount equal to 1.5% per annum of the Company’s stockholders’ equity (as defined in the Management Agreement). The term of the Management Agreement expires on October 22, 20212022 and will be automatically renewed for a one-year term on such date and on each anniversary of such date thereafter unless terminated or not renewed as described below. Either the Company or the Manager may elect not to renew the Management Agreement upon expiration of its initial term or any renewal term by providing written notice of non-renewal at least 180 days, but not more than 270 days, before expiration. No such written notice of non-renewal was provided in 2021. In the event the Company elects not to renew the term, the Company will be required to pay the Manager a termination fee equal to three times the average annual management fee amount earned by the Manager during the two four-quarter periods ending as of the end of the most recently completed fiscal quarter prior to the non-renewal. The Company may terminate the Management Agreement at any time for cause effective upon 30 days prior written notice of termination from the Company to the Manager, in which case no termination fee would be due. The Company’s board of directors will review the Manager’s performance prior to the automatic renewal of the Management Agreement and, as a result of such review, upon the affirmative vote of at least two-thirds of the members of the Company’s board of directors or of the holders of a majority of the Company’s outstanding common stock, the Company may terminate the Management Agreement based upon unsatisfactory performance by the Manager that is materially detrimental to the Company or a determination by the Company’s independent directors that the management fees payable to the Manager are not fair, subject to the right of the Manager to prevent such a termination by agreeing to a reduction of the management fees payable to the Manager. Upon any termination of the Management Agreement based on unsatisfactory performance or unfair management fees, the Company would be required to pay the Manager the termination fee described above. The Manager may terminate the Management Agreement in the event that the Company becomes regulated as an investment company under the Investment Company Act of 1940, as amended, in which case the Company would not be required to pay the termination fee described above. The Manager may also terminate the Management Agreement upon 60 days’ written notice if the Company defaults in the performance of any material term of the Management Agreement and the default continues for a period of 30 days after written notice to the Company, whereupon the Company would be required to pay the Manager the termination fee described above.
The Manager is a party to a services agreement (the “Services Agreement”) with Freedom Mortgage (in such capacity, the “Services Provider”), pursuant to which Freedom Mortgagethe Services Provider provides to the Manager personnel and payroll and benefits administration services as needed by the Manager to carry out its obligations and responsibilities under the Management Agreement. The Company is a named third-party beneficiary to the Services Agreement and, as a result, has, as a non-exclusive remedy, a direct right of action against Freedom Mortgagethe Services Provider in the event of any breach by the Manager of any of its duties, obligations or agreements under the Management Agreement that arise out of or result from any breach by Freedom Mortgagethe Services Provider of its obligations under the Services Agreement. The Services Agreement will terminate upon the termination of the Management Agreement.
The Management Agreement between the Company and the Manager was negotiated between related parties, and the terms, including fees payable, may not be as favorable to the Company as if it had been negotiated with an unaffiliated third party. At the time the Management Agreement was negotiated, both the Manager and Freedom Mortgagethe Services Provider were controlled by Mr. Stanley Middleman. In 2016, ownership of the Manager was transferred to CHMM Blind Trust, a grantor trust for the benefit of Mr. Middleman. The Management Agreement provides that the Company will reimburse the Manager for (i) various expenses incurred by the Manager or its officers, and agents on the Company’s behalf, including costs of software, legal, accounting, tax, administrative and other similar services rendered for the Company by providers retained by the Manager and (ii) an agreed upon portion of the compensation paid to specified officers of the Company. The amounts under “Due to Manager” on the consolidated balance sheets consisted of the following for the periods indicated (dollars in thousands):
Management Fees and Compensation Reimbursement to Manager
| | Three Months Ended June 30, | | | Six Months Ended June 30, | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | Management fees | | $ | 1,699 | | | $ | 1,736 | | | $ | 3,410 | | | $ | 3,463 | | | $ | 1,709 | | | $ | 1,727 | | | $ | 5,119 | | | $ | 5,190 | | Compensation reimbursement | | | 250 | | | | 238 | | | | 500 | | | | 476 | | | | 250 | | | | 262 | | | | 750 | | | | 738 | | Total | | $ | 1,949 | | | $ | 1,974 | | | $ | 3,910 | | | $ | 3,939 | | | $ | 1,959 | | | $ | 1,989 | | | $ | 5,869 | | | $ | 5,928 | |
Subservicing Agreements
During the year ended December 31, 2020, Freedom Mortgage directly serviced Aurora’s portfolio of Ginnie Mae MSRs pursuant to a subservicing agreement entered into on June 10, 2015. Following the sale of the Ginnie Mae MSRs to Freedom Mortgage in June 2020 as described below, Freedom Mortgage has continued to subservice certain loans that had been purchased from Ginnie Mae pools due to delinquency or default. Once these loans and any related advance claims are rehabilitated or liquidated, the subservicing agreement with Freedom Mortgage will be terminated. It is not clear when that will occur due to the forbearance requirements as a result of the pandemic.
In August 2020, Freedom Mortgage acquired RoundPoint Mortgage Servicing Corporation (“RoundPoint”), one of Aurora’s subservicers and a seller of Fannie Mae and Freddie Mac MSRs pursuant to a flow purchase agreement with Aurora. The subservicing agreement with RoundPoint had an initial term of two years and is subject to automatic renewal for additional terms equal to the initial term unless either party chooses not to renew. The subservicing agreement may be terminated without cause by either party by giving notice as specified in the agreement. If the agreement is not renewed by Aurora or terminated by Aurora without cause, de-boarding fees will be due to the subservicer. Under the subservicing agreement, the sub-servicer agrees to service the applicable mortgage loans in accordance with applicable law. During the three and nine-months ended September 30, 2021, Aurora paid RoundPoint $1.8 million and $6.2 million, respectively, in servicing costs. During the three and nine-months ended September 30, 2020, Aurora paid RoundPoint $3.4 million and $9.8 million, respectively, in servicing costs. Aurora had servicing receivables of $1.2 million and $227,000 from RoundPoint as of September 30, 2021 and December 31, 2020, respectively. The flow purchase agreement provides that RoundPoint may offer, and Aurora may purchase mortgage servicing rights from time to time on loans originated through RoundPoint’s network of loan sellers. RoundPoint’s sellers sell the loans to Fannie Mae or Freddie Mac and sell the mortgage servicing rights to RoundPoint which sells the MSR to Aurora. RoundPoint then subservices the loans for Aurora pursuant to the subservicing agreement.
The following table provides information about loans refinanced byDuring the three and nine-month periods ended September 30, 2021, Aurora purchased MSRs with an aggregate UPB of approximately $72.2 million and $2.5 billion, respectively from RoundPoint aspursuant to the flow agreement for purchase prices of $680,000 and $21.1 million, respectively. During the dates indicated (dollars in thousands):
three and nine-month periods ended September 30, 2020, Aurora purchased MSRs with an aggregate UPB of approximately $1.1 billion and $3.8 billion, respectively from RoundPoint pursuant to the flow agreement for purchase prices of $6.7 million and $32.6 million, respectively.
| | Three Months Ended | | | | June 30, 2021 | | | June 30, 2020 | | Number of loans refinanced | | | 2,173 | | | | 691 | | Aggregate unpaid principal balance of refinanced loans | | $ | 547,290 | | | $ | 178,409 | |
| | Six Months Ended | | | | June 30, 2021 | | | June 30, 2020 | | Number of loans refinanced | | | 4,926 | | | | 1,443 | | Aggregate unpaid principal balance of refinanced loans | | $ | 1,240,012 | | | $ | 377,764 | |
Joint Marketing Recapture Agreements
In May 2018, Aurora entered into a recapture purchase and sale agreement with RoundPoint and since August 2020, a wholly-owned subsidiary of Freedom Mortgage. Pursuant to this agreement, RoundPoint attempts to refinance certain mortgage loans underlying Aurora’s MSR portfolio subserviced by RoundPoint as directed by Aurora. If a loan is refinanced, RoundPoint will sell the loan to Fannie Mae or Freddie Mac, as applicable, retain the sale proceeds and transfer the related MSR to Aurora. The agreement continues in effect while the subservicing agreement remains in effect.
Other Transactions with Related Parties
Aurora leases 3 employees from Freedom Mortgagethe Services Provider and reimburses Freedom Mortgagethe Services Provider on a monthly basis.
On June 30, 2020, Aurora sold its portfolio of Ginnie Mae MSRs with a carrying value of approximately $15.7 million to Freedom Mortgage pursuant to a Loan Servicing Purchase and Sale Agreement, dated as of that date, between Freedom Mortgage as buyer and Aurora as seller for proceeds of approximately $15.8 million. The Company recorded a realized loss of $11.3 million on the sale which includes $11.5 million of previously incurred unrealized losses in market value through the six-month period ended June 30, 2020. The sale is part of the Company’s servicing related assets segment. The sale was approved by the Nominating and Corporate Governance Committee of the Company’s board of directors which consists solely of independent directors. The proceeds were used in part to pay off in full a $11.2 million term loan facility financing the Ginnie Mae MSRs and a related advancing facility, with the balance of the proceeds available for general corporate purposes.
The Ginnie Mae MSRs were originally acquired from Freedom Mortgage pursuant to the loan servicing purchase and sale agreement with Freedom Mortgage, dated as of December 15, 2016. As a result of the sale of these MSRs back to Freedom Mortgage the remaining holdback payable under the original purchase agreement of approximately $757,000 was applied to reduce the original cost of acquisition and included within “Realized loss on investments in MSRs, net” on the consolidated statements of income (loss) for the six-monthnine-month period ended JuneSeptember 30, 2020.
Note 8 — Derivative Instruments
Interest Rate Swap Agreements, Swaptions, TBAs and U.S. Treasury Futures
In order to help mitigate exposure to higher short-term interest rates in connection with borrowings under its repurchase agreements, the Company enters into interest rate swap agreements and swaption agreements. Interest rate swap agreements establish an economic fixed rate on related borrowings because the variable-rate payments received on the interest rate swap agreements largely offset interest accruing on the related borrowings, leaving the fixed-rate payments to be paid on the interest rate swap agreements as the Company’s effective borrowing rate, subject to certain adjustments including changes in spreads between variable rates on the interest rate swap agreements and actual borrowing rates. A swaption is an option granting its owner the right but not the obligation to enter into an underlying swap. The Company’s interest rate swap agreements and swaptions have not been designated as qualifying hedging instruments for GAAP purposes.
In order to help mitigate duration risk and manage basis risk and the pricing risk under the Company’s financing facilities, the Company utilizes U.S. Treasurytreasury futures and forward-settling purchases and sales of RMBS where the underlying pools of mortgage loans are TBAs. Pursuant to these TBA transactions, the Company agrees to purchase or sell, for future delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date. Unless otherwise indicated, references to U.S. Treasurytreasury futures include options on U.S. Treasurytreasury futures.
The following table summarizes the outstanding notional amounts of derivative instruments as of the dates indicated (dollars in thousands):
Derivatives | | June 30, 2021 | | | December 31, 2020 | | | September 30, 2021 | | | December 31, 2020 | | Notional amount of interest rate swaps | | $ | 1,427,500 | | | $ | 1,451,900 | | | $ | 1,413,000 | | | $ | 1,451,900 | | Notional amount of swaptions | | | 70,000 | | | | 70,000 | | | | 55,000 | | | | 70,000 | | Notional amount of TBAs, net | | | 352,900 | | | | 332,000 | | | | 536,000 | | | | 332,000 | | Notional amount of treasury futures | | | 67,000 | | | | 110,000 | | | Notional amount of options on treasury futures | | | 30,000 | | | | 0 | | | Notional amount of U.S. treasury futures | | | | (30,000 | ) | | | 110,000 | | Notional amount of options on U.S. treasury futures | | | | 50,000 | | | | 0 | | Total notional amount | | $ | 1,947,400 | | | $ | 1,963,900 | | | $ | 2,024,000 | | | $ | 1,963,900 | |
The following table presents information about the Company’s interest rate swap agreements as of the dates indicated (dollars in thousands):
| | Notional Amount | | | Fair Value | | | Weighted Average
Pay Rate | | | Weighted Average Receive Rate | | | Weighted Average Years to Maturity | | September 30, 2021 | | $ | 1,413,000 | | | $
| 16,906 | | | | 0.48 | % | | | 0.71 | % | | | 6.3 | | December 31, 2020 | | $ | 1,451,900 | | | $ | 4,913 | | | | 0.45 | % | | | 0.84 | % | | | 6.4 | |
| | Notional Amount | | | Fair Value | | | Weighted Average Pay Rate | | | Weighted Average Receive Rate | | | Weighted Average Years to Maturity | | June 30, 2021 | | $ | 1,427,500 | | | $ | 14,268 | | | | 0.50 | % | | | 0.72 | % | | | 6.6 | | December 31, 2020 | | $ | 1,451,900 | | | $ | 4,913 | | | | 0.45 | % | | | 0.84 | % | | | 6.4 | |
The following table presents information about the Company’s interest rate swaption agreements as of the dates indicated (dollars in thousands): | | Notional Amount | | | Fair Value | | | Weighted Average Underlying Pay Rate | | Weighted Average Underlying Receive Rate(A) | | Weighted Average Underlying Years to Maturity(B) | | | Weighted Average Years to Expiration | | | Notional Amount | | | Fair Value | | | Weighted Average Underlying Pay
Rate | | Weighted Average Underlying Receive Rate(A) | | Weighted Average Underlying Years to Maturity(B) | | | Weighted Average Years to
Expiration | | June 30, 2021 | | $ | 70,000 | | | $ | 1,516 | | | | 1.54 | % | LIBOR-BBA% | | | 9.3 | | | | 0.6 | | | September 30, 2021 | | | $ | 55,000 | | | $
| 694 | | | | 1.73 | % | LIBOR-BBA% | | | 8.8 | | | | 0.5 | | December 31, 2020 | | $ | 70,000 | | | $ | 798 | | | | 1.32 | % | LIBOR-BBA% | | | 10.6 | | | | | | | $ | 70,000 | | | $
| 798 | | | | 1.32 | % | LIBOR-BBA% | | | 10.6 | | | | | |
(A) | Floats in accordance with LIBOR. |
(B) | Weighted average years to maturity of the underlying swaps from the reporting date. |
The following tables present information about the Company’s TBA derivatives as of the dates indicated (dollars in thousands): As JuneSeptember 30, 2021
Purchase and sale contracts for derivative TBAs | | Notional | | | Implied Cost Basis | | | Implied Fair Value | | | Net Carrying Value | | Purchase contracts | | $ | 1,364,500 | | | $ | 1,405,001 | | | $ | 1,407,235 | | | $ | 2,235 | | Sale contracts | | | (1,011,600 | ) | | | (1,042,991 | ) | | | (1,044,343 | ) | | | (1,352 | ) | Net TBA derivatives | | $ | 352,900 | | | $ | 362,010 | | | $ | 362,892 | | | $ | 883 | |
Purchase and sale contracts for derivative TBAs | | Notional | | | Implied Cost Basis | | | Implied Fair Value | | | Net Carrying Value | | Purchase contracts | | $ | 1,472,000 | | | $ | 1,514,278 | | | $ | 1,510,342 | | | $
| (3,935 | ) | Sale contracts | | | (936,000 | ) | | | (964,923 | ) | | | (965,776 | ) | | | (853 | ) | Net TBA derivatives | | $ | 536,000 | | | $ | 549,355 | | | $ | 544,566 | | | $
| (4,788 | ) |
As of December 31, 2020
Purchase and sale contracts for derivative TBAs | | Notional | | | Implied Cost Basis | | | Implied Fair Value | | | Net Carrying Value | | Purchase contracts | | $ | 875,000 | | | $ | 904,653 | | | $ | 911,393 | | | $ | 6,740 | | Sale contracts | | | (543,000 | ) | | | (564,934 | ) | | | (567,544 | ) | | | (2,610 | ) | Net TBA derivatives | | $ | 332,000 | | | $ | 339,719 | | | $ | 343,849 | | | $ | 4,130 | |
Purchase and sale contracts for derivative TBAs | | Notional | | | Implied Cost Basis | | | Implied Fair Value | | | Net Carrying Value | | Purchase contracts | | $ | 875,000 | | | $ | 904,653 | | | $ | 911,393 | | | $
| 6,740 | | Sale contracts | | | (543,000 | ) | | | (564,934 | ) | | | (567,544 | ) | | | (2,610 | ) | Net TBA derivatives | | $ | 332,000 | | | $ | 339,719 | | | $ | 343,849 | | | $
| 4,130 | |
The following tables present information about the Company’s U.S. Treasurytreasury futures agreements as of the dates indicated (dollars in thousands):
As of JuneSeptember 30, 2021
Maturity | | Notional Amount - Long | | | Notional Amount - Short | | | Fair Value | | | Notional Amount - Long | | | Notional Amount - Short | | | Fair Value | | 5 years | | $ | 11,500 | | | $ | 0 | | | $ | 18 | | | 10 years | | | 55,500 | | | | 0 | | | | (42 | ) | | $ | 0 | | | $
| (30,000 | ) | | $ | (42 | ) | Total | | $ | 67,000 | | | $ | 0 | | | $ | (24 | ) | | $ | 0 | | | $ | (30,000 | ) | | $ | (42 | ) |
As of December 31, 2020
Maturity | | Notional Amount - Long | | | Notional Amount - Short | | | Fair Value | | 5 years | | $ | 85,000 | | | $ | 0 | | | $ | 252 | | 10 years | | | 25,000 | | | | 0 | | | | 0 | | Total | | $ | 110,000 | | | $ | 0 | | | $ | 252 | |
34
The Company did not have any U.S. Treasurytreasury futures options agreements as of December 31, 2020. The following table presents information about the Company’s U.S. Treasurytreasury futures options agreements as of the dates indicated (dollars in thousands): As of JuneSeptember 30, 2021 Maturity | | Notional Amount - Long | | | Notional Amount - Short | | | Fair Value | | | Notional Amount - Long | | | Notional Amount - Short | | | Fair Value | | 10 years | | $ | 70,000 | | | $ | 40,000 | ) | | $ | 83 | | | $ | 80,000 | | | $ | (30,000 | ) | | $ | 198 | | Total | | $ | 70,000 | | | $ | (40,000 | ) | | $ | 83 | | | $ | 80,000 | | | $ | (30,000 | ) | | $
| 198 | |
The following table presents information about realized gain (loss) on derivatives, which is included on the consolidated statements of income (loss) for the periods indicated (dollars in thousands):
Realized Gains (Losses) on Derivatives | | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | Derivatives | Consolidated Statements of Income (Loss) Location | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | Consolidated Statements of Income (Loss) Location | | 2021 | | | 2020 | | | 2021 | | | 2020 | | Interest rate swaps | Realized gain (loss) on derivatives, net | | $ | (209 | ) | | $ | (6,759 | ) | | $ | (292 | ) | | $ | (54,624 | ) | | Realized loss on derivatives, net | | $ | (968 | ) | | $ | (8,832 | ) | | $ | (1,260 | ) | | $ | (63,456 | ) | Swaptions | Realized gain (loss) on derivatives, net | | | (321 | ) | | | (212 | ) | | | (594 | ) | | | (212 | ) | | Realized loss on derivatives, net | | | (210 | ) | | | 0 | | | | (804 | ) | | | (212 | ) | TBAs | Realized gain (loss) on derivatives, net | | | (7,473 | ) | | | (115 | ) | | | (10,739 | ) | | | 344 | | | Realized loss on derivatives, net | | | 332 | | | | (1,279 | ) | | | (10,407 | ) | | | (935 | ) | Treasury futures | Realized gain (loss) on derivatives, net | | | (2,136 | ) | | | 11,644 | | | | (3,255 | ) | | | 40,294 | | | U.S Treasury futures | | | Realized loss on derivatives, net | | | (2,177 | ) | | | 2,270 | | | | (5,432 | ) | | | 42,564 | | Total | | | $ | (10,139 | ) | | $ | 4,558 | | | $ | (14,880 | ) | | $ | (14,198 | ) | | | | $ | (3,023 | ) | | $ | (7,841 | ) | | $ | (17,903 | ) | | $ | (22,039 | ) |
Offsetting Assets and Liabilities
The Company has netting arrangements in place with all of its derivative counterparties pursuant to standard documentation developed by the International Swaps and Derivatives Association. Under GAAP, if the Company has a valid right of offset, it may offset the related asset and liability and report the net amount. The Company presents interest rate swaps, swaptions and U.S. Treasurytreasury futures assets and liabilities on a gross basis in its consolidated balance sheets, but in the case of interest rate swaps, net of variation margin. The Company presents TBA assets and liabilities on a net basis in its consolidated balance sheets. The Company presents repurchase agreements in this section even though they are not derivatives because they are subject to master netting arrangements. However, repurchase agreements are presented on a gross basis. Additionally, the Company does not offset financial assets and liabilities with the associated cash collateral on the consolidated balance sheets. The following tables present information about the Company’s assets and liabilities that are subject to master netting arrangements or similar agreements and can potentially be offset on the Company’s consolidated balance sheets as of the dates indicated (dollars in thousands):
Offsetting Assets and Liabilities As of JuneSeptember 30, 2021 | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | | | | Gross Amounts of Recognized Assets or Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheet | | Net Amounts of Assets and Liabilities Presented in the Consolidated Balance Sheet | | Financial Instruments | | Cash Collateral Received (Pledged) | | Net Amount | | Assets | | | | | | | | | | | | | Interest rate swaps | | $ | 17,226 | | | $ | 0 | | | $ | 17,226 | | | $ | (17,226 | ) | | $ | 0 | | | $ | 0 | | Interest rate swaptions | | | 694 | | | | 0 | | | | 694 | | | | (694 | ) | | | 0 | | | | 0 | | TBAs | | | 670 | | | | (670 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | U.S. treasury futures options | | | 198 | | | | 0 | | | | 198 | | | | 837 | | | | (1,035 | ) | | | 0 | | Total Assets | | $ | 18,788 | | | $ | (670 | ) | | $ | 18,118 | | | $ | (17,083 | ) | | $ | (1,035 | ) | | $ | 0 | |
| | | | | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | | | | | | Gross Amounts of Recognized Assets or Liabilities | | | Gross Amounts Offset in the Consolidated Balance Sheet | | | Net Amounts of Assets and Liabilities Presented in the Consolidated Balance Sheet | | | Financial Instruments | | | Cash Collateral Received (Pledged) | | | Net Amount | | Assets | | | | | | | | | | | | | | | | | | | Interest rate swaps | | $ | 15,164 | | | $ | 0 | | | $ | 15,164 | | | $ | (15,164 | ) | | $ | 0 | | | $ | 0 | | Interest rate swaptions | | | 1,516 | | | | 0 | | | | 1,516 | | | | (1,516 | ) | | | 0 | | | | 0 | | TBAs | | | 2,235 | | | | (1,352 | ) | | | 883 | | | | (883 | ) | | | 0 | | | | 0 | | U.S. treasury futures options | | | 83 | | | | 0 | | | | 83 | | | | 1,129 | | | | (1,212 | ) | | | 0 | | Total Assets | | $ | 18,998 | | | $ | (1,352 | ) | | $ | 17,646 | | | $ | (16,434 | ) | | $ | (1,212 | ) | | $ | 0 | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | Repurchase agreements | | $ | 897,047 | | | $ | 0 | | | $ | 897,047 | | | $ | (888,441 | ) | | $ | (8,606 | ) | | $ | 0 | | Interest rate swaps | | | 896 | | | | 0 | | | | 896 | | | | (896 | ) | | | 0 | | | | 0 | | TBAs | | | 1,352 | | | | (1,352 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | U.S. treasury futures | | | 24 | | | | 0 | | | | 24 | | | | (24 | ) | | | 0 | | | | 0 | | Total Liabilities | | $ | 899,319 | | | $ | (1,352 | ) | | $ | 897,967 | | | $ | (889,361 | ) | | $ | (8,606 | ) | | $ | 0 | |
| | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | | | | Repurchase agreements | | $ | 777,416 | | | $ | 0 | | | $ | 777,416 | | | $ | (762,211 | ) | | $ | (15,205 | ) | | $ | 0 | | Interest rate swaps | | | 320 | | | | 0 | | | | 320 | | | | (320 | ) | | | 0 | | | | 0 | | TBAs | | | 5,458 | | | | (670 | ) | | | 4,788 | | | | (4,788 | ) | | | 0 | | | | 0 | | U.S. treasury futures | | | 42 | | | | 0 | | | | 42 | | | | (42 | ) | | | 0 | | | | 0 | | Total Liabilities | | $ | 783,236 | | | $ | (670 | ) | | $ | 782,566 | | | $ | (767,361 | ) | | $ | (15,205 | ) | | $ | 0 | |
| | | | | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | | | | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | | | | | Gross Amounts of Recognized Assets or Liabilities | | | Gross Amounts Offset in the Consolidated Balance Sheet | | | Net Amounts of Assets and Liabilities Presented in the Consolidated Balance Sheet | | | Financial Instruments | | | Cash Collateral Received (Pledged) | | | Net Amount | | Gross Amounts of Recognized Assets or Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheet | | Net Amounts of Assets and Liabilities Presented in the Consolidated Balance Sheet | | Financial Instruments | | Cash Collateral Received (Pledged) | | Net Amount | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate swaps | | $ | 10,791 | | | $ | 0 | | | $ | 10,791 | | | $ | (10,791 | ) | | $ | 0 | | | $ | 0 | | | $ | 10,791 | | | $ | 0 | | | $ | 10,791 | | | $ | (10,791 | ) | | $ | 0 | | | $ | 0 | | Interest rate swaptions | | | 798 | | | | 0 | | | | 798 | | | | (798 | ) | | | 0 | | | | 0 | | | | 798 | | | | 0 | | | | 798 | | | | (798 | ) | | | 0 | | | | 0 | | TBAs | | | 6,740 | | | | (2,611 | ) | | | 4,129 | | | | (4,129 | ) | | | 0 | | | | 0 | | | | 6,740 | | | | (2,611 | ) | | | 4,129 | | | | (4,129 | ) | | | 0 | | | | 0 | | Treasury futures | | | 252 | | | | 0 | | | | 252 | | | | 1,717 | | | | (1,969 | ) | | | 0 | | | U.S. treasury futures | | | | 252 | | | | 0 | | | | 252 | | | | 1,717 | | | | (1,969 | ) | | | 0 | | Total Assets | | $ | 18,581 | | | $ | (2,611 | ) | | $ | 15,970 | | | $ | (14,001 | ) | | $ | (1,969 | ) | | $ | 0 | | | $ | 18,581 | | | $ | (2,611 | ) | | $ | 15,970 | | | $ | (14,001 | ) | | $ | (1,969 | ) | | $ | 0 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | Repurchase agreements | | $ | 1,149,978 | | | $ | 0 | | | $ | 1,149,978 | | | $ | (1,105,621 | ) | | $ | (44,357 | ) | | $ | 0 | | | Interest rate swaps | | | 5,878 | | | | 0 | | | | 5,878 | | | | (5,878 | ) | | | 0 | | | | 0 | | | TBAs | | | 2,611 | | | | (2,611 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | Total Liabilities | | $ | 1,158,467 | | | $ | (2,611 | ) | | $ | 1,155,856 | | | $ | (1,111,499 | ) | | $ | (44,357 | ) | | $ | 0 | | |
| | | | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | | | | | | Repurchase agreements | | $ | 1,149,978 | | | $ | 0 | | | $ | 1,149,978 | | | $ | (1,105,621 | ) | | $ | (44,357 | ) | | $ | 0 | | Interest rate swaps | | | 5,878 | | | | 0 | | | | 5,878 | | | | (5,878 | ) | | | 0 | | | | 0 | | TBAs | | | 2,611 | | | | (2,611 | ) | | | 0 | | | | 0 | | | | 0 | | | | 0 | | Total Liabilities | | $ | 1,158,467 | | | $ | (2,611 | ) | | $ | 1,155,856 | | | $ | (1,111,499 | ) | | $ | (44,357 | ) | | $ | 0 | |
Note 9 – Fair Value
Fair Value Measurements
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 clarifies that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e., observable inputs) and the lowest priority to data lacking transparency (i.e., unobservable inputs). Additionally, ASC 820 requires an entity to consider all aspects of nonperformance risk, including the entity’s own credit standing, when measuring the fair value of a liability.
ASC 820 establishes a three-level hierarchy to be used when measuring and disclosing fair value. An instrument’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. Following is a description of the three levels: Level 1 inputs are quoted prices in active markets for identical assets or liabilities as of the measurement date under current market conditions. Additionally, the entity must have the ability to access the active market and the quoted prices cannot be adjusted by the entity.
Level 2 inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive markets for identical or similar assets or liabilities; or inputs that are observable or can be corroborated by observable market data by correlation or other means for substantially the full-term of the assets or liabilities. Level 3 unobservable inputs are supported by little or no market activity. The unobservable inputs represent the assumptions that management believes market participants would use to price the assets and liabilities, including risk. Generally, Level 3 assets and liabilities are valued using pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation.
Recurring Fair Value Measurements
The following is a description of the methods used to estimate the fair values of the Company’s assets and liabilities measured at fair value on a recurring basis, as well as the basis for classifying these assets and liabilities as Level 2 or 3 within the fair value hierarchy. The Company’s valuations consider assumptions that it believes a market participant would consider in valuing the assets and liabilities, the most significant of which are disclosed below. The Company reassesses and periodically adjusts the underlying inputs and assumptions used in the valuations for recent historical experience, as well as for current and expected relevant market conditions.
RMBS
The Company holds a portfolio of RMBS that are classified as available for sale and are carried at fair value in the consolidated balance sheets. The Company determines the fair value of its RMBS based upon prices obtained from third-party pricing providers. The third-party pricing providers use pricing models that generally incorporate such factors as coupons, primary and secondary mortgage rates, rate reset period, issuer, prepayment speeds, credit enhancements and expected life of the security. As a result, the Company classified 100% of its RMBS as Level 2 fair value assets at JuneSeptember 30, 2021 and December 31, 2020.
MSRs
The Company, through its subsidiary Aurora, holds a portfolio of MSRs that are reported at fair value in the consolidated balance sheets. The Company uses a discounted cash flow model to estimate the fair value of these assets. Although MSR transactions are observable in the marketplace, the valuation includes unobservable market data inputs (prepayment speeds, delinquency levels, costs to service and discount rates). As a result, the Company classified 100% of its MSRs as Level 3 fair value assets at JuneSeptember 30, 2021 and December 31, 2020.
Derivative Instruments
The Company enters into a variety of derivative instruments as part of its economic hedging strategies. The Company executes interest rate swaps, swaptions, TBAs and U.S. Treasurytreasury futures. The Company utilizes third-party pricing providers to value its derivative instruments. As a result, the Company classified 100% of its derivative instruments as Level 2 fair value assets and liabilities at JuneSeptember 30, 2021 and December 31, 2020.
Both the Company and the derivative counterparties under their netting arrangements are required to post cash collateral based upon the net underlying market value of the Company’s open positions with the counterparties. Posting of cash collateral typically occurs daily, subject to certain dollar thresholds. Due to the existence of netting arrangements, as well as frequent cash collateral posting at low posting thresholds, credit exposure to the Company and/or counterparties is considered materially mitigated. The Company’s interest rate swaps and U.S. Treasurytreasury futures are required to be cleared on an exchange, which further mitigates, but does not eliminate, credit risk. Based on the Company’s assessment, there is no requirement for any additional adjustment to derivative valuations specifically for credit.
The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis as of the dates indicated (dollars in thousands). Recurring Fair Value Measurements As of JuneSeptember 30, 2021 | | Level 1 | | | Level 2 | | | Level 3 | | | Carrying Value | | Assets | | | | | | | | | | | | | RMBS | | | | | | | | | | | | | Fannie Mae | | $ | 0 | | | $ | 522,166 | | | $ | 0 | | | $ | 522,166 | | Freddie Mac | | | 0 | | | | 343,738 | | | | 0 | | | | 343,738 | | RMBS total | | | 0 | | | | 865,904 | | | | 0 | | | | 865,904 | | Derivative assets | | | | | | | | | | | | | | | | | Interest rate swaps | | | 0 | | | | 17,226 | | | | 0 | | | | 17,226 | | Interest rate swaptions | | | 0 | | | | 694 | | | | 0 | | | | 694 | | U.S. treasury futures options | | | 0 | | | | 198 | | | | 0 | | | | 198 | | Derivative assets total | | | 0 | | | | 18,118 | | | | 0 | | | | 18,118 | | Servicing related assets | | | 0 | | | | 0 | | | | 210,819 | | | | 210,819 | | Total Assets | | $ | 0 | | | $ | 884,022 | | | $ | 210,819 | | | $ | 1,094,841 | | Liabilities | | | | | | | | | | | | | | | | | Derivative liabilities | | | | | | | | | | | | | | | | | Interest rate swaps | | | 0 | | | | 320 | | | | 0 | | | | 320 | | TBAs | | | 0 | | | | 4,788 | | | | 0 | | | | 4,788 | | U.S. treasury futures | | | 0 | | | | 42 | | | | 0 | | | | 42 | | Derivative liabilities total | | | 0 | | | | 5,150 | | | | 0 | | | | 5,150 | | Total Liabilities | | $ | 0 | | | $ | 5,150 | | | $ | 0 | | | $ | 5,150 | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Carrying Value | | Assets | | | | | | | | | | | | | RMBS | | | | | | | | | | | | | Fannie Mae | | $ | 0 | | | $ | 617,044 | | | $ | 0 | | | $ | 617,044 | | Freddie Mac | | | 0 | | | | 381,755 | | | | 0 | | | | 381,755 | | RMBS total | | | 0 | | | | 998,799 | | | | 0 | | | | 998,799 | | Derivative assets | | | | | | | | | | | | | | | | | Interest rate swaps | | | 0 | | | | 15,164 | | | | 0 | | | | 15,164 | | Interest rate swaptions | | | 0 | | | | 1,516 | | | | 0 | | | | 1,516 | | TBAs | | | 0 | | | | 883 | | | | 0 | | | | 883 | | U.S. treasury futures options | | | 0 | | | | 83 | | | | 0 | | | | 83 | | Derivative assets total | | | 0 | | | | 17,646 | | | | 0 | | | | 17,646 | | Servicing related assets | | | 0 | | | | 0 | | | | 211,995 | | | | 211,995 | | Total Assets | | $ | 0 | | | $ | 1,016,445 | | | $ | 211,995 | | | $ | 1,228,440 | | Liabilities | | | | | | | | | | | | | | | | | Derivative liabilities | | | | | | | | | | | | | | | | | Interest rate swaps | | | 0 | | | | 896 | | | | 0 | | | | 896 | | U.S. treasury futures | | | 0 | | | | 24 | | | | 0 | | | | 24 | | Derivative liabilities total | | | 0 | | | | 920 | | | | 0 | | | | 920 | | Total Liabilities | | $ | 0 | | | $ | 920 | | | $ | 0 | | | $ | 920 | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Carrying Value | | | Level 1 | | | Level 2 | | | Level 3 | | | Carrying Value | | Assets | | | | | | | | | | | | | | | | | | | | | | | | | RMBS | | | | | | | | | | | | | | | | | | | | | | | | | Fannie Mae | | $ | 0 | | | $ | 715,156 | | | $ | 0 | | | $ | 715,156 | | | $ | 0 | | | $ | 715,156 | | | $ | 0 | | | $ | 715,156 | | Freddie Mac | | | 0 | | | | 506,954 | | | | 0 | | | | 506,954 | | | | 0 | | | | 506,954 | | | | 0 | | | | 506,954 | | Private Label MBS | | | 0 | | | | 6,141 | | | | 0 | | | | 6,141 | | | | 0 | | | | 6,141 | | | | 0 | | | | 6,141 | | RMBS total | | | 0 | | | | 1,228,251 | | | | 0 | | | | 1,228,251 | | | | 0 | | | | 1,228,251 | | | | 0 | | | | 1,228,251 | | Derivative assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate swaps | | | 0 | | | | 10,791 | | | | 0 | | | | 10,791 | | | | 0 | | | | 10,791 | | | | 0 | | | | 10,791 | | Interest rate swaptions | | | 0 | | | | 798 | | | | 0 | | | | 798 | | | | 0 | | | | 798 | | | | 0 | | | | 798 | | TBAs | | | 0 | | | | 4,129 | | | | 0 | | | | 4,129 | | | | 0 | | | | 4,129 | | | | 0 | | | | 4,129 | | Treasury futures | | | 0 | | | | 252 | | | | 0 | | | | 252 | | | U.S. treasury futures | | | | 0 | | | | 252 | | | | 0 | | | | 252 | | Derivative assets total | | | 0 | | | | 15,970 | | | | 0 | | | | 15,970 | | | | 0 | | | | 15,970 | | | | 0 | | | | 15,970 | | Servicing related assets | | | 0 | | | | 0 | | | | 174,414 | | | | 174,414 | | | | 0 | | | | 0 | | | | 174,414 | | | | 174,414 | | Total Assets | | $ | 0 | | | $ | 1,244,221 | | | $ | 174,414 | | | $ | 1,418,635 | | | $ | 0 | | | $ | 1,244,221 | | | $ | 174,414 | | | $ | 1,418,635 | | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivative liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate swaps | | | 0 | | | | 5,878 | | | | 0 | | | | 5,878 | | | | 0 | | | | 5,878 | | | | 0 | | | | 5,878 | | Derivative liabilities total | | | 0 | | | | 5,878 | | | | 0 | | | | 5,878 | | | | 0 | | | | 5,878 | | | | 0 | | | | 5,878 | | Total Liabilities | | $ | 0 | | | $ | 5,878 | | | $ | 0 | | | $ | 5,878 | | | $ | 0 | | | $ | 5,878 | | | $ | 0 | | | $ | 5,878 | |
The Company may be required to measure certain assets or liabilities at fair value from time to time. These periodic fair value measures typically result from application of certain impairment measures under GAAP. These items would constitute nonrecurring fair value measures under ASC 820. As of JuneSeptember 30, 2021 and December 31, 2020, the Company did not have any assets or liabilities measured at fair value on a nonrecurring basis in the periods presented.
Level 3 Assets and Liabilities
The valuation of Level 3 assets and liabilities requires significant judgment by management. The Company estimates the fair value of its Servicing Related Assets based on internal pricing models rather than quotations, and compares the results of these internal models against the results from models generated by third-party pricing providers. The third-party pricing providers and management rely on inputs such as market price quotations from market makers (either market or indicative levels), original transaction price, recent transactions in the same or similar instruments, and changes in financial ratios or cash flows to determine fair value. Level 3 instruments may also be discounted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by third-party pricing providers and management in the absence of market information. Assumptions used by third-party pricing providers and management due to lack of observable inputs may significantly impact the resulting fair value and, therefore, the Company’s consolidated financial statements. The Company’s management reviews all valuations that are based on pricing information received from third-party pricing providers. As part of this review, prices are compared against other pricing or input data points in the marketplace, along with internal valuation expertise, to ensure the pricing is reasonable.
Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant change to estimated fair values. The determination of estimated cash flows used in pricing models is inherently subjective and imprecise. It should be noted that minor changes in assumptions or estimation methodologies can have a material effect on these derived or estimated fair values, and that the fair values reflected below are indicative of the interest rate and credit spread environments as of JuneSeptember 30, 2021 and December 31, 2020 and do not take into consideration the effects of subsequent changes in market or other factors. The tables below present the reconciliation for the Company’s Level 3 assets (Servicing Related Assets) measured at fair value on a recurring basis as of the dates indicated (dollars in thousands):
Level 3 Fair Value Measurements As of JuneSeptember 30, 2021 | | Level 3 | | | Level 3 | | | | MSRs | | | MSRs | | Balance at December 31, 2020 | | $ | 174,414 | | | $ | 174,414 | | Purchases, sales and principal paydowns: | | | | | | | | | Purchases | | | 36,059 | | | | 43,428 | | Other changes (A) | | | (441 | ) | | | (1,072 | ) | Purchases, sales and principal paydowns: | | $ | 35,618 | | | Purchases and sales:
| | | $ | 42,356 | | Changes in Fair Value due to: | | | | | | | | | Changes in valuation inputs or assumptions used in valuation model | | | 47,201 | | | | 54,458 | | Other changes in fair value (B) | | | (45,238 | ) | | | (60,409 | ) | Unrealized gain (loss) included in Net Income | | $ | 1,963 | | | $ | (5,951 | ) | Balance at June 30, 2021 | | $ | 211,995 | | | Balance at September 30, 2021 | | | $ | 210,819 | |
As of December 31, 2020 | | Level 3 | | | Level 3 | | | | MSRs | | | MSRs | | Balance at December 31, 2019 | | $ | 291,111 | | | $ | 291,111 | | Purchases, sales and principal paydowns: | | | | | | | | | Purchases | | | 54,439 | | | | 54,439 | | Sales | | | (27,754 | ) | | | (27,754 | ) | Other changes (A) | | | (1,482 | ) | | | (1,482 | ) | Purchases, sales and principal paydowns: | | $ | 25,203 | | | Purchases and sales: | | | $ | 25,203 | | Changes in Fair Value due to: | | | | | | | | | Changes in valuation inputs or assumptions used in valuation model | | | (8,318 | ) | | | (8,318 | ) | Other changes in fair value (B) | | | (133,582 | ) | | | (133,582 | ) | Unrealized gain (loss) included in Net Income | | $ | (141,900 | ) | | $ | (141,900 | ) | Balance at December 31, 2020 | | $ | 174,414 | | | $ | 174,414 | |
(A) | Represents purchase price adjustments, principally contractual prepayment protection, and changes due to the Company’s repurchase of the underlying collateral. |
(B) | Represents changes due to realization of expected cash flows and estimated MSR runoff. |
The tables below present information about the significant unobservable inputs used in the fair value measurement of the Company’s Servicing Related Assets classified as Level 3 fair value assets as of the dates indicated (dollars in thousands): As of JuneSeptember 30, 2021 | Fair Value | | Valuation Technique | | Unobservable Input (A) | | Range | | Weighted Average | | Fair Value | | Valuation Technique | | Unobservable Input (A) | | Range | | Weighted Average (B) | | MSRs | $ | 211,995 | | Discounted cash flow | | Constant prepayment speed | | 6.9% - 25.0 | % | | 12.7 | % | $ | 210,819 | | Discounted cash flow | | Constant prepayment speed | | 5.0% - 21.0 | % | | | 12.2 | % | | | | | | | Uncollected payments | | 0.3% - 2.5 | % | | 0.7 | % | | | | | | Uncollected payments | | 0.4% - 2.6 | % | | | 0.6 | % | | | | | | | Discount rate | | | | | 7.0 | % | | | | | | Discount rate | | | | | 7.0 | % | | | | | | | Annual cost to service, per loan | | | | $ | 76 | | | | | | | Annual cost to service, per loan | | | | $ | 76 | | Total | $ | 211,995 | | | | | | | | | | | $ | 210,819 | | | | | | | | | | |
| Fair Value | | Valuation Technique | | Unobservable Input (A) | | Range | | Weighted Average | | Fair Value | | Valuation Technique | | Unobservable Input (A) | | Range | | Weighted Average (B) | | MSRs | $ | 174,414 | | Discounted cash flow | | Constant prepayment speed | | 5.0% -38.0 | % | | 15.4 | % | $ | 174,414 | | Discounted cash flow | | Constant prepayment speed | | 5.0% -38.0 | % | | | 15.4 | % | | | | | | | Uncollected payments | | 0.3% - 2.6 | % | | 0.6 | % | | | | | | Uncollected payments | | 0.3% - 2.6 | % | | | 0.6 | % | | | | | | | Discount rate | | | | | 6.1 | % | | | | | | Discount rate | | | | | 6.1 | % | | | | | | | Annual cost to service, per loan | | | | $ | 76 | | | | | | | Annual cost to service, per loan | | | | $ | 76 | | Total | $ | 174,414 | | | | | | | | | | $ | 174,414 | | | | | | | | | |
| (A) | Significant increases (decreases) in any of the inputs in isolation may result in significantly lower (higher) fair value measurements. A change in the assumption used for discount rates may be accompanied by a directionally similar change in the assumption used for the probability of uncollected payments and a directionally opposite change in the assumption used for prepayment rates. |
| (B) | Weighted averages for unobservable inputs are calculated based on the unpaid principal balance of the portfolios. |
Fair Value of Financial Assets and Liabilities
In accordance with ASC 820, the Company is required to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the consolidated balance sheets, for which fair value can be estimated. The following describes the Company’s methods for estimating the fair value for financial instruments.
RMBS available for sale securities, Servicing Related Assets, derivative assets and derivative liabilities are recurring fair value measurements; carrying value equals fair value. See discussion of valuation methods and assumptions within the “Fair Value Measurements” section of this footnote. Cash and cash equivalents and restricted cash have a carrying value which approximates fair value because of the short maturities of these instruments. The carrying value of repurchase agreements and corporate debt that mature in less than one year generally approximates fair value due to the short maturities. The Company does not hold any repurchase agreements that are considered long-term.
Corporate debt that matures in more than one year consists solely of financing secured by Aurora’s Servicing Related Assets. All of the Company’s debt is revolving and bears interest at adjustable rates. The Company considers that the amount of the corporate debt generally approximates fair value. The fixed rate portion of the financing for all of the Company’s Servicing Related Assets was paid in full on June 30, 2020.
Note 10 — Commitments and Contingencies
The commitments and contingencies of the Company as of JuneSeptember 30, 2021 and December 31, 2020 are described below.
Management Agreement
The Company pays the Manager a management fee, calculated and payable quarterly in arrears, equal to the product of one quarter of the 1.5% management fee annual rate and the stockholders’ equity, adjusted as set forth in the Management Agreement as of the end of such fiscal quarter. The Manager relies on Freedom Mortgage to provide the Manager with the necessary resources and personnel to conduct the Company’s operations. For further discussion regarding the management fee, see Note 7.
Legal and Regulatory
From time to time, the Company may be subject to potential liability under laws and government regulations and various claims and legal actions arising in the ordinary course of business. Liabilities are established for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts established for those claims. The Company has established immaterial reserves for these possible matters.
Commitments to Purchase/Sell RMBS
As of JuneSeptember 30, 2021 and December 31, 2020, the Company held forward TBA purchase and sale commitments, respectively, with counterparties, which are forward Agency RMBS trades, whereby the Company committed to purchasing or selling a pool of securities at a particular interest rate. As of the date of the trade, the mortgage-backed securities underlying the pool that will be delivered to fulfill a TBA trade are not yet designated. The securities are typically “to be announced” 48 hours prior to the established trade settlement date.
As of JuneSeptember 30, 2021 and December 31, 2020, the Company was 0t obligated to purchase or sell any RMBS securities. Acknowledgment Agreements
In connection with the Fannie Mae MSR Financing Facility (as defined below in Note 12), entered into by Aurora and QRS III, those parties also entered into an acknowledgment agreement with Fannie Mae. Pursuant to that agreement, Fannie Mae consented to the pledge by Aurora and QRS III of their respective interests in MSRs for loans owned or securitized by Fannie Mae, and acknowledged the security interest of the lender in those MSRs. See Note 12—Notes Payable for a description of the Fannie Mae MSR Financing Facility and the financing facility it replaced.
In connection with the MSR Revolver (as defined below in Note 12), Aurora, QRS V, and the lender, with a limited joinder by the Company, entered into an acknowledgement agreement with Freddie Mac pursuant to which Freddie Mac consented to the pledge of the Freddie Mac MSRs securing the MSR Revolver. Aurora and the lender also entered into a consent agreement with Freddie Mac pursuant to which Freddie Mac consented to the pledge of Aurora’s rights to reimbursement for advances on the underlying loans. See Note 12—Notes Payable for a description of the MSR Revolver.
Note 11 – Repurchase Agreements
The Company had outstanding approximately $897$777.4 million and $1.1 billion of borrowings under its repurchase agreements as of JuneSeptember 30, 2021 and December 31, 2020, respectively. The Company’s obligations under these agreements had weighted average remaining maturities of 4138 days and 28 days as of JuneSeptember 30, 2021 and December 31, 2020. RMBS and cash have been pledged as collateral under these repurchase agreements (see Note 4).
The repurchase agreements had the following remaining maturities and weighted average rates as of the dates indicated (dollars in thousands):
Repurchase Agreements Characteristics As of JuneSeptember 30, 2021 | | Repurchase Agreements | | | Weighted Average Rate | | | Repurchase Agreements | | | Weighted Average Rate | | Less than one month | | $ | 400,417 | | | | 0.10 | % | | $ | 300,823 | | | | 0.11 | % | One to three months | | | 496,630 | | | | 0.11 | % | | | 476,593 | | | | 0.12 | % | Total/Weighted Average | | $ | 897,047 | | | | 0.11 | % | | $ | 777,416 | | | | 0.11 | % |
As of December 31, 2020 | | Repurchase Agreements | | | Weighted Average Rate | | Less than one month | | $ | 482,319 | | | | 0.23 | % | One to three months | | | 667,659 | | | | 0.23 | % | Total/Weighted Average | | $ | 1,149,978 | | | | 0.23 | % |
There were 0 overnight or demand securities as of JuneSeptember 30, 2021 or December 31, 2020.
Note 12 – Notes Payable
In July 2018, the Company, Aurora and QRS V (collectively with Aurora and the Company, the “Borrowers”) entered into a $25.0 million revolving credit facility (the “MSR Revolver”) pursuant to which Aurora pledged all of its existing and future MSRs on loans owned or securitized by Freddie Mac. The term of the MSR Revolver is 364 days with the Borrowers’ option for 2 renewals for similar terms followed by a one-year term out feature with a 24-month amortization schedule. The MSR Revolver was upsized to $45.0 million in September 2018 and the Company had the ability to request up to an additional $5.0 million of borrowings. On April 2, 2019, the Borrowers entered into an amendment that increased the maximum amount of the MSR Revolver to $100.0 million. In July 2021, the Borrowers entered into an amendment to the MSR Revolver that extended the revolving period for an additional 364 days with the option for 2 more renewals of 364 days each. At the end of the revolving period, the outstanding amount will be converted to a one-year term loan. Amounts borrowed bear interest at an adjustable rate equal to a spread above one-month LIBOR. Approximately $63.0 million and $47.5 million was outstanding under the MSR Revolver at JuneSeptember 30, 2021 and December 31, 2020, respectively.
In September 2019, Aurora and QRS III entered into a loan and security agreement (the “Fannie Mae MSR Financing Facility”), to replace the MSR Financing Facility. Under the Fannie Mae MSR Facility, Aurora and QRS III pledged their respective rights in all existing and future MSRs for loans owned or securitized by Fannie Mae to secure borrowings outstanding from time to time. The maximum credit amount outstanding at any one time under the facility is $200.0 million of which $100.0 million is committed. Borrowings bear interest at a rate equal to a spread over one-month LIBOR subject to a floor. The term of the facility is 24 months subject to extension for an additional 12 months if the lender agrees beginning in the 20th month. The lender and Aurora is currently negotiating a replacementhave extended the term of this facility with another lender that is expected to close before the expiration of the Fannie Mae MSR Financing Facility in September 2021November 1, 2021.. The Company has guaranteed repayment of all indebtedness under the Fannie Mae MSR Financing Facility. Approximately $72.0 million and $64.0 million was outstanding under the Fannie Mae MSR Financing Facility at JuneSeptember 30, 2021 and December 31, 2020, respectively.respectively. See Note 16-Subsequent Events for a description of the replacement facility.
The outstanding borrowings had the following remaining maturities as of the dates indicated (dollars in thousands): Notes Payable Repayment Characteristics As of JuneSeptember 30, 2021 | | 2021 | | | 2022 | | | 2023 | | | 2024 | | | 2025 | | | 2026 | | | Total | | MSR Revolver | | | | | | | | | | | | | | | | | | | | | | Borrowings under MSR Revolver Facility | | $ | 0 | | | $ | 63,000 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 63,000 | | Fannie Mae MSR Financing Facility | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Borrowings under Fannie Mae MSR Financing Facility | | $ | 72,000 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 72,000 | | Total | | $ | 72,000 | | | $ | 63,000 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 135,000 | |
As of December 31, 2020 | | 2021 | | | 2022 | | | 2023 | | | 2024 | | | 2025 | | | 2026 | | | Total | | MSR Revolver | | | | | | | | | | | | | | | | | | | | | | Borrowings under MSR Revolver Facility | | $ | 47,500 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 47,500 | | Fannie Mae MSR Financing Facility | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Borrowings under Fannie Mae MSR Financing Facility | | $ | 64,000 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 64,000 | | Total | | $ | 111,500 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 111,500 | |
Note 13 – Receivables and Other Assets
The assets comprising “Receivables and other assets” as of JuneSeptember 30, 2021 and December 31, 2020 are summarized in the following table (dollars in thousands):
Receivables and Other Assets | | June 30, 2021 | | | December 31, 2020 | | | September 30, 2021 | | | December 31, 2020 | | Servicing advances | | $ | 14,589 | | | $ | 18,253 | | | $ | 15,630 | | | $ | 18,253 | | Interest receivable | | | 2,476 | | | | 3,119 | | | | 2,156 | | | | 3,119 | | Deferred tax receivable | | | 19,762 | | | | 21,523 | | | | 19,977 | | | | 21,523 | | Other receivables | | | 5,301 | | | | 1,740 | | | | 2,599 | | | | 1,740 | | Total other assets | | $ | 42,128 | | | $ | 44,635 | | | $ | 40,362 | | | $ | 44,635 | |
The Company only records as an asset those servicing advances that the Company deems recoverable.
Note 14 – Accrued Expenses and Other Liabilities
The liabilities comprising “Accrued expenses and other liabilities” as of JuneSeptember 30, 2021 and December 31, 2020 are summarized in the following table (dollars in thousands):
Accrued Expenses and Other Liabilities
| | June 30, 2021 | | | December 31, 2020 | | Accrued interest payable | | $ | 723 | | | $ | 1,008 | | Accrued expenses | | | 2,765 | | | | 2,737 | | Total accrued expenses and other liabilities | | $ | 3,488 | | | $ | 3,745 | |
| | September 30, 2021 | | | December 31, 2020 | | Accrued interest payable | | $ | 855 | | | $ | 1,008 | | Accrued expenses | | | 2,080 | | | | 2,737 | | Total accrued expenses and other liabilities | | $ | 2,935 | | | $ | 3,745 | |
The Company elected to be taxed as a REIT under Code Sections 856 through 860 beginning with its short taxable year ended December 31, 2013. As a REIT, the Company generally will not be subject to U.S. federal income tax to the extent that it distributes its taxable income to its stockholders. To maintain qualification as a REIT, the Company must distribute at least 90% of its annual REIT taxable income to its stockholders and meet certain other requirements such as assets it may hold, income it may generate and its stockholder composition. It is the Company’s policy to distribute all or substantially all of its REIT taxable income. To the extent there is any undistributed REIT taxable income at the end of a year, the Company can elect to distribute such shortfall within the next year as permitted by the Code.
Effective January 1, 2014, CHMI Solutions elected to be taxed as a corporation for U.S. federal income tax purposes; prior to this date, CHMI Solutions was a disregarded entity for U.S. federal income tax purposes. CHMI Solutions has jointly elected with the Company, the ultimate beneficial owner of CHMI Sub-REIT to be treated as a TRS of the Company, and all activities conducted through CHMI Solutions and its wholly-owned subsidiary, Aurora, are subject to federal and state income taxes. CHMI Solutions files a consolidated tax return with Aurora and is fully taxed as a U.S. C-Corporation.
The state and local tax jurisdictions for which the Company is subject to tax filing obligations recognize the Company’s status as a REIT, and therefore, the Company generally does not pay income tax in such jurisdictions. CHMI Solutions and Aurora are subject to U.S. federal, state and local income taxes.
The components of the Company’s income tax expense (benefit) are as follows for the periods indicated below (dollars in thousands):
| | Nine Months Ended September 30, | | | | 2021 | | | 2020 | | Current federal income tax benefit | | $ | (128 | ) | | $ | 0 | | Deferred federal income tax expense (benefit) | | | 1,402 | | | | (16,263 | ) | Deferred state income tax expense (benefit) | | | 144 | | | | (1,285 | ) | Provision for (benefit from) Corporate Business Taxes | | $ | 1,418 | | | $ | (17,548 | ) |
| | Six Months Ended June 30, | | | | 2021 | | | 2020 | | Current federal income tax benefit | | $ | (128 | ) | | $ | 0 | | Deferred federal income tax expense (benefit) | | | 1,595 | | | | (14,302 | ) | Deferred state income tax expense (benefit) | | | 166 | | | | (1,130 | ) | Provision for (benefit from) Corporate Business Taxes | | $ | 1,633 | | | $ | (15,432 | ) |
The following is a reconciliation of the statutory federal rate to the effective rate, for the periods indicated below (dollars in thousands):
| | Six Months Ended June 30, | | | Nine Months Ended September 30, | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | Computed income tax expense (benefit) at federal rate | | $ | 2,361 | | | | 21.0 | % | | $ | (16,160 | ) | | | 21.0 | % | | $ | 1,521 | | | | 21.0 | % | | $ | (16,760 | ) | | | 21.0 | % | State tax expense (benefit), net of federal tax, if applicable | | | 159 | | | | 1.4 | % | | | (1,130 | ) | | | 1.5 | % | | | 127 | | | | 1.8 | % | | | (1,284 | ) | | | 1.6 | % | Permanent differences in taxable income from GAAP pre-tax income | | | 66 | | | | 0.5 | % | | | 0 | | | | 0 | | | | 175 | | | | 2.4 | % | | | 0 | | | | 0 | % | Provision to return adjustment
| | | | (6 | ) | | | (0.1 | )% | | | (15 | ) | | | 0.0 | % | REIT income not subject to tax (benefit) | | | (953 | ) | | | (8.5 | )% | | | 1,858 | | | | (2.4 | )% | | | (399 | ) | | | (5.5 | )% | | | 511 | | | | (0.6 | )% | Provision for (benefit from) Corporate Business Taxes/Effective Tax Rate(A) | | $ | 1,633 | | | | 14.4 | % | | $ | (15,432 | ) | | | 20.1 | % | | $ | 1,418 | | | | 19.6 | % | | $ | (17,548 | ) | | | 22.0 | % |
(A) | The provision for income taxes is recorded at the TRS level. |
The Company’s consolidated balance sheets at June 30, 2021 and December 31, 2020, contain the following income taxes recoverable and deferred tax assets, which are recorded at the TRS level (dollars in thousands):
| | June 30, 2021 | | | December 31, 2020 | | | September 30, 2021 | | | December 31, 2020 | | Income taxes recoverable | | | | | | | | | | | | | Federal income taxes recoverable | | $ | 128 | | | $ | 0 | | | $ | 128
| | | $ | 0
| | Income taxes recoverable | | $ | 128 | | | $ | 0 | | | $ | 128
| | | $ | 0
| |
| | June 30, 2021 | | | December 31, 2020 | | | September 30, 2021 | | | December 31, 2020 | | Deferred tax assets | | | | | | | | | | | | | Deferred tax - mortgage servicing rights | | $ | 11,791 | | | $ | 15,176 | | | $ | 11,133 | | | $ | 15,176 | | Deferred tax - net operating loss | | | 7,971 | | | | 6,347 | | | | 8,844 | | | | 6,347 | | Total net deferred tax assets | | $ | 19,762 | | | $ | 21,523 | | | $ | 19,977 | | | $ | 21,523 | |
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. The Company’s net operating losses (“NOLs”) were created subsequent to 2017 and can be carried forward indefinitely pursuant to the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”) passed on December 22, 2017. As of JuneSeptember 30, 2021, the Company believes it is more likely than not that it will fully realize its deferred tax assets. Deferred tax assets are included in “Receivables and other assets” in the consolidated balance sheets.
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the 2017 Tax Act. Corporate taxpayers may carryback NOLs originating during 2018 through 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. The CARES Act did not have a material financial impact on the Company’s consolidated financial statements.
Based on the Company's evaluation, the Company has concluded that there are no significant liabilities for unrecognized tax benefits required to be reported in the Company's financial statements. Additionally, there were no amounts accrued for penalties or interest as of or during the period presented in these financial statements.
The Company’s 2020, 2019 2018 and 20172018 federal, state and local income tax returns remain open for examination by the relevant authorities.
Distributions to stockholders generally will be primarily taxable as ordinary income, although a portion of such distributions may be designated as qualified dividend income or may constitute a return of capital. The Company furnishes annually to each stockholder a statement setting forth distributions paid during the preceding year and their U.S. federal income tax treatment.
Note 16 – Subsequent Events
Events subsequentOn October 26, 2021, Aurora and QRS III entered into a loan and security agreement (the “Fannie Mae MSR Revolving Facility”), to June 30, 2021 were evaluatedreplace the Fannie Mae MSR Financing Facility. Under the Fannie Mae MSR Revolving Facility, Aurora and no additional events were identified requiring further disclosureQRS III pledged their respective rights in all existing and future MSRs for loans owned or securitized by Fannie Mae to secure borrowings outstanding from time to time. The maximum credit amount outstanding at any one time under the consolidated financial statementsfacility is $150.0 million. The revolving period is 24 months which may be extended by agreement. During the revolving period, borrowings bear interest at a rate equal to a spread over one-month LIBOR subject to a floor. At the end of the revolving period, the outstanding amount will be converted to a three-year term loan that will bear interest at a rate calculated at a spread over the rate for one-year interest rate swaps. The Company has guaranteed repayment of all indebtedness under the Fannie Mae MSR Revolving Facility..
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the accompanying notes included in “Part I, Item 1. Consolidated Financial Statements” of this Quarterly Report on Form 10-Q.
General
We are a public residential real estate finance company focused on acquiring, investing in and managing residential mortgage assets in the United States. We were incorporated in Maryland on October 31, 2012, and we commenced operations on or about October 9, 2013 following the completion of our initial public offering and a concurrent private placement. Our common stock, our 8.20% Series A Cumulative Redeemable Preferred Stock (our “Series A Preferred Stock”) and our 8.250% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (our “Series B Preferred Stock”) are listed and traded on the New York Stock Exchange under the symbols “CHMI,” “CHMI-PRA” and “CHMI-PRB,” respectively. We are externally managed by our Manager, Cherry Hill Mortgage Management, LLC, an SEC-registered investment adviser.
Our principal objective is to generate attractive current yields and risk-adjusted total returns for our stockholders over the long term, primarily through dividend distributions and secondarily through capital appreciation. We attempt to attain this objective by selectively constructing and actively managing a portfolio of Servicing Related Assets (as defined below) and residential mortgage-backed securities (“RMBS”) and, subject to market conditions, other cash flowing residential mortgage assets.
We are subject to the risks involved with real estate and real estate-related debt instruments. These include, among others, the risks normally associated with changes in the general economic climate, changes in the mortgage market, changes in tax laws, interest rate levels, and the availability of financing.
We elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our short taxable year ended December 31, 2013. We operate so as to continue to qualify to be taxed as a REIT. Our asset acquisition strategy focuses on acquiring a diversified portfolio of residential mortgage assets that balances the risk and reward opportunities our Manager observes in the marketplace. Aurora has or is in the process of obtaining the licenses necessary to invest in mortgage servicing rights (“MSRs”) on a nationwide basis and is an approved seller/servicer for Fannie Mae and Freddie Mac.
In addition to Servicing Related Assets, we invest in RMBS, primarily those backed by 30-, 20- and 15-year fixed rate mortgages that offer what we believe to be favorable prepayment and duration characteristics. Our RMBS consist primarily of Agency RMBS on which the payments of principal and interest are guaranteed by an Agency. We have also invested in collateralized mortgage obligations guaranteed by an Agency (“Agency CMOs”) consisting of interest only securities (“IOs”) as well as non-Agency collateralized mortgage obligations that are either risk-sharing securities issued by Fannie Mae or Freddie Mac or private label securities that are issued by a non-government related entity. We finance our RMBS with an amount of leverage, that varies from time to time depending on the particular characteristics of our portfolio, the availability of financing and market conditions. We do not have a targeted leverage ratio for our RMBS. Our borrowings for RMBS consist of short-term borrowings under master repurchase agreements.
Subject to maintaining our qualification as a REIT, we utilize derivative financial instruments (or hedging instruments) to hedge our exposure to potential interest rate mismatches between the interest we earn on our assets and our borrowing costs caused by fluctuations in short-term interest rates. In utilizing leverage and interest rate hedges, our objectives include, where desirable, locking in, on a long-term basis, a spread between the yield on our assets and the cost of our financing in an effort to improve returns to our stockholders.
We also operate our business in a manner that permits us to maintain our exclusion from registration as an investment company under the Investment Company Act.
Effective January 1, 2020, Cherry Hill Operating Partnership LP, the Company’s operating partnership subsidiary (the “Operating Partnership”), contributed substantially all of its assets to CHMI Sub-REIT, Inc. (the “Sub-REIT”) in exchange for all of the common stock of the Sub-REIT. As a result of this contribution, the Sub-REIT is a wholly-owned subsidiary of the Operating Partnership and operations formerly conducted by the Operating Partnership through its subsidiaries are now conducted by the Sub-REIT through those same subsidiaries. The Sub-REIT has elected to be taxed as a REIT under the Code commencing with its taxable year ended December 31, 2020.
On March 29, 2017, the Company issued and sold 5,175,000 shares of common stock, par value $0.01 per share, raising approximately $81.1 million after underwriting discounts and commissions but before expenses of approximately $229,000. All of the net proceeds were used to invest in RMBS.
On August 17, 2017, the Company issued and sold 2,400,000 shares of its Series A Preferred Stock, raising approximately $58.1 million after underwriting discounts and commissions but before expenses of approximately $193,000. All of the net proceeds from the Series A Preferred Stock offering were also invested in RMBS.
In April 2018, the Company initiated an at-the-market offering program (the “Preferred Series A ATM Program”) pursuant to which it may offer through one or more sales agents and sell from time to time up to $35.0 million of its Series A Preferred Stock at prices prevailing at the time, subject to volume and other regulatory limitations. The Company did not issue and sell any shares of the Series A Preferred Stock during the three and six-monthnine-month periods ended JuneSeptember 30, 2021 and the year ended December 31, 2020.
On June 4, 2018, the Company issued and sold 2,750,000 shares of its common stock. The underwriters subsequently exercised their option to purchase an additional 338,857 shares for total proceeds of approximately $53.8 million after underwriting discounts and commissions but before expenses of approximately $265,000. All of the net proceeds were invested in RMBS.
In August 2018, the Company initiated an at-the-market offering program (the “Common Stock ATM Program” and, together with the Preferred Series A ATM Program, the “ATM Programs”)) pursuant to which it may offer through one or more sales agents and sell from time to time up to $50.0 million of our common stock at prices prevailing at the time, subject to volume and other regulatory limitations. During the three and nine-month period ended September 30, 2021, the Company issued and sold 553,500 shares of common stock under the Common Stock ATM Program. The shares were sold at a weighted average price of $8.97 per share for gross proceeds of approximately $5.0 million before fees of approximately $99,000. The Company did not issue and sell any common stock under the Common Stock ATM Program during the three and six-month periods ended June 30, 2021 and the year ended December 31, 2020.
On February 11, 2019, the Company issued and sold 1,800,000 shares of its Series B Preferred Stock. The underwriters subsequently exercised their option to purchase an additional 200,000 shares for total proceeds of approximately $48.4 million after underwriting discounts and commissions but before expenses of approximately $285,000. The net proceeds from the Series B Preferred Stock offering were invested in RMBS and MSRs.
In September 2019, the Company initiated a share repurchase program that allows for the repurchase of up to an aggregate of $10.0 million of its common stock. Shares may be repurchased from time to time through privately negotiated transactions or open market transactions, pursuant to a trading plan in accordance with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or by any combination of such methods. The manner, price, number and timing of share repurchases are subject to a variety of factors, including market conditions and applicable SEC rules. The share repurchase program does not require the purchase of any minimum number of shares, and, subject to SEC rules, purchases may be commenced or suspended at any time without prior notice. During the three and six-monthnine-month periods ended JuneSeptember 30, 2021, the Company did not repurchase any common stock pursuant to the repurchase program. During the year ended December 31, 2020, the Company repurchased 142,531 shares of its common stock pursuant to the repurchase program for approximately $1.8 million.
A significant portion of the paydowns of the RMBS acquired as a result of these equity offerings havehas been deployed into the acquisition of MSRs. The Company may also sell certain of these RMBS and deploy the net proceeds from such sales to the extent necessary to fund the purchase price of MSRs.
Recent Developments
The COVID-19 pandemic continues to take its tollcreate substantial uncertainty for government policy makers and the Federal Reserve Board with consequent effects on the public health and the economy in the United States. The rollout ofWhile the available vaccineseconomy has had positive effects on reopening the economy. However,largely reopened, the increased presence of highly contagious variants, and particularly the Delta variant, of the virus has added toexacerbated supply chain issues that arose during the substantial uncertainty regarding the full and permanent reopeningshutdown of the economy. Forbearancevarious economies. Certain forbearance programs and prohibitions on foreclosures have been extended while others have expired adding to the uncertainty.concern of the consequences once all such programs end. As of JuneSeptember 30, 2021, 3.0%2.4% of borrowers on loans underlying the MSRs owned by Aurora are reflected as being in an active forbearance program, with 6.8%6.3% of those borrowers continuing to make their regular scheduled monthly payment. The Company continues to maintain an elevated level of unrestricted cash due to the continuing uncertainty regarding government policy and the economy. Based on information currently available to the Company, the Company continues to believe that it will be able to satisfy all of its servicing obligations in 2021.
Factors Impacting our Operating Results
Our income is generated primarily by the net spread between the income we earn on our assets and the cost of our financing and hedging activities as well as the amortization of any purchase premiums or the accretion of discounts. Our net income includes the actual interest payments we receive on our RMBS, the net servicing fees we receive on our MSRs and the accretion/amortization of any purchase discounts/premiums. Changes in various factors such as market interest rates, prepayment speeds, estimated future cash flows, servicing costs and credit quality could affect the amount of premium to be amortized or discount to be accreted into interest income for a given period. Prepayment speeds vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. Our operating results may also be affected by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers whose mortgage loans underly the MSRs held by Aurora or the non-Agency RMBS held in our portfolio.
Set forth below is the positive net spread between the yield on RMBS and our costs of funding those assets at the end of each of the quarters indicated below:
Average Net Yield Spread at Period End
Quarter Ended | | Average Asset Yield | | | Average Cost of Funds | | | Average Net Interest Rate Spread | | | Average Asset Yield | | | Average Cost of Funds | | | Average Net Interest Rate Spread | | September 30, 2021 | | | 2.94 | % | | 0.63 | % | | 2.31 | % | June 30, 2021 | | | 2.94 | % | | | 0.62 | % | | | 2.32 | % | | 2.94 | % | | 0.62 | % | | 2.32 | % | March 31, 2021 | | | 3.04 | % | | | 0.53 | % | | | 2.52 | % | | 3.04 | % | | 0.53 | % | | 2.52 | % | December 31, 2020 | | | 3.05 | % | | | 0.59 | % | | | 2.46 | % | | 3.05 | % | | 0.59 | % | | 2.46 | % | September 30, 2020 | | | 3.17 | % | | | 0.63 | % | | | 2.54 | % | |
The Average Cost of Funds also includes the benefits of related swaps.
Changes in the Market Value of Our Assets
We hold our Servicing Related Assets as long-term investments. Our MSRs are carried at their fair value with changes in their fair value recorded in other income or loss in our consolidated statements of income (loss). Those values may be affected by events or headlines that are outside of our control, such as the COVID-19 pandemic and other events impacting the U.S. or global economy generally or the U.S. residential market specifically, and events or headlines impacting the parties with which we do business. See “Part I, Item 1A. Risk Factors – Risks Related to Our Business” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Our RMBS are carried at their fair value, as available-for-sale in accordance with ASC 320, Investments – Debt and Equity Securities. Beginning on January 1, 2020, upon adoption of Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses, we evaluate the cost basis of our RMBS on a quarterly basis under ASC 326-30, Financial Instruments-Credit Losses: Available-for-Sale Debt Securities. When the fair value of a security is less than its amortized cost basis as of the balance sheet date, the security’s cost basis is considered impaired. If we determine that we intend to sell the security or it is more likely than not that we will be required to sell before recovery, we recognize the difference between the fair value and amortized cost as a loss in the consolidated statements of income (loss). If we determine we do not intend to sell the security or it is not more likely than not we will be required to sell the security before recovery, we must evaluate the decline in the fair value of the impaired security and determine whether such decline resulted from a credit loss or non-credit related factors. In our assessment of whether a credit loss exists, we perform a qualitative assessment around whether a credit loss exists and if necessary, we compare the present value of estimated future cash flows of the impaired security with the amortized cost basis of such security. The estimated future cash flows reflect those that a “market participant” would use and typically include assumptions related to fluctuations in interest rates, prepayment speeds, default rates, collateral performance, and the timing and amount of projected credit losses, as well as incorporating observations of current market developments and events. Cash flows are discounted at an interest rate equal to the current yield used to accrete interest income. If the present value of estimated future cash flows is less than the amortized cost basis of the security, an expected credit loss exists and is included in provision (reversal) for credit losses on securities in the consolidated statements of income (loss). If it is determined as of the financial reporting date that all or a portion of a security’s cost basis is not collectible, then we will recognize a realized loss to the extent of the adjustment to the security’s cost basis. This adjustment to the amortized cost basis of the security is reflected in realized gain (loss) on RMBS, available-for-sale, net in the consolidated statements of income (loss).
Impact of Changes in Market Interest Rates on Our Assets
The value of our assets may be affected by prepayment rates on mortgage loans. Prepayment speed is the measurement of how quickly borrowers pay down the unpaid principal balance (“UPB”) of their loans or how quickly loans are otherwise liquidated or charged off. Generally, in a declining interest rate environment, prepayment speeds tend to increase. Conversely, in an increasing interest rate environment, prepayment speeds tend to decrease. When we acquire Servicing Related Assets or RMBS, we anticipate that the underlying mortgage loans will prepay at a projected rate generating an expected cash flow (in the case of Servicing Related Assets) and yield. If we purchase assets at a premium to par value and borrowers prepay their mortgage loans faster than expected, the corresponding prepayments on our assets may reduce the expected yield on such assets because we will have to amortize the related premium on an accelerated basis. In addition, we will have to reinvest the greater amounts of prepayments in that lower rate environment thereby affecting future yields on our assets. If we purchase assets at a discount to par value, and borrowers prepay their mortgage loans slower than expected, the decrease in corresponding prepayments may reduce the expected yield on assets because we will not be able to accrete the related discount as quickly as originally anticipated. If prepayment speeds are significantly greater than expected, the fair value of the Servicing Related Assets could be less than their fair value as previously reported on our consolidated balance sheets. Such a reduction in the fair value of the Servicing Related Assets would have a negative impact on our book value. Furthermore, a significant increase in prepayment speeds could materially reduce the ultimate cash flows we receive from the Servicing Related Assets, and we could receive substantially less than what we paid for such assets. Our balance sheet, results of operations and cash flows are susceptible to significant volatility due to changes in the fair value of, or cash flows from, the Servicing Related Assets as interest rates change.
A slower than anticipated rate of prepayment due to an increase in market interest rates also will cause the life of the related RMBS to extend beyond that which was projected. As a result, we would have an asset with a lower yield than current investments for a longer period of time. In addition, if we have hedged our interest rate risk, extension may cause the security to be outstanding longer than the related hedge, thereby reducing the protection intended to be provided by the hedge.
Voluntary and involuntary prepayment rates may be affected by a number of factors including, but not limited to, the availability of mortgage credit, the relative economic vitality of, or natural disasters affecting, the area in which the related properties are located, the servicing of the mortgage loans, possible changes in tax laws, other opportunities for investment, homeowner mobility and other economic, social, geographic, demographic and legal factors, none of which can be predicted with any certainty.
We attempt to reduce the exposure of our MSRs to voluntary prepayments through the structuring of recapture agreements with Aurora’s subservicers. Under these agreements, the subservicer attempts to refinance specified mortgage loans. The subservicer sells the new mortgage loan to the applicable Agency, transfers the related MSR to Aurora and then subservices the new mortgage loan on behalf of Aurora. See “Part I, Item 1. Notes to Consolidated Financial Statements—Note 7. Transactions with Related Parties” for information regarding Aurora’s recapture agreements.
With respect to our business operations, increases in interest rates, in general, may over time cause:
the interest expense associated with our borrowings to increase; the value of our assets to fluctuate; the coupons on any adjustable-rate and hybrid RMBS we may own to reset, although on a delayed basis, to higher interest rates; prepayments on our RMBS to slow, thereby slowing the amortization of our purchase premiums and the accretion of our purchase discounts; and an increase in the value of any interest rate swap agreements we may enter into as part of our hedging strategy.
Conversely, decreases in interest rates, in general, may over time cause:
prepayments on our RMBS to increase, thereby accelerating the amortization of our purchase premiums and the accretion of our purchase discounts; the interest expense associated with our borrowings to decrease; the value of our assets to fluctuate; a decrease in the value of any interest rate swap agreements we may enter into as part of our hedging strategy; and coupons on any adjustable-rate and hybrid RMBS assets we may own to reset, although on a delayed basis, to lower interest rates. Effects of Spreads on our Assets
The spread between the yield on our assets and our funding costs affects the performance of our business. Wider spreads imply the potential for greater income on new asset purchases but may have a negative impact on our stated book value. Wider spreads may also negatively impact asset prices. In an environment where spreads are widening, counterparties may require additional collateral to secure borrowings which may require us to reduce leverage by selling assets. Conversely, tighter spreads imply the potential for lower income on new asset purchases but may have a positive impact on stated book value of our existing assets. In this case, we may be able to reduce the amount of collateral required to secure borrowings.
Credit Risk
We are subject to varying degrees of credit risk in connection with our assets. Although we expect relatively low credit risk with respect to our portfolios of Agency RMBS, we are subject to the credit risk of borrowers under the loans backing any CMOs that we may own and to the credit enhancements built into the CMO structure. We also are subject to the credit risk of the borrowers under the mortgage loans underlying the MSRs that Aurora owns. Through loan level due diligence, we attempt to mitigate this risk by seeking to acquire high quality assets at appropriate prices given anticipated and unanticipated losses. We also conduct ongoing monitoring of acquired MSRs. Nevertheless, unanticipated credit losses could occur which could adversely impact our operating results.
Critical Accounting Policies and Use of Estimates
Our financial statements are prepared in accordance with US GAAP, which requires the use of estimates that involve the exercise of judgment and the use of assumptions as to future uncertainties. In accordance with SEC guidance, the following discussion addresses the accounting policies that we apply with respect to our operations. Our most critical accounting policies involve decisions and assessments that could affect our reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, as well as our reported amounts of revenues and expenses. We believe that the decisions and assessments upon which our financial statements are based were reasonable at the time made and based upon information available to us at that time. Our critical accounting policies and accounting estimates may be expanded over time as we diversify our portfolio. The material accounting policies and estimates that we expect to be most critical to an investor’s understanding of our financial results and condition and require complex management judgment are discussed below.
Classification of Investment Securities and Impairment of Financial Instruments
ASC 320, Investments – Debt and Equity Securities, requires that at the time of purchase, we designate a security as either trading, available-for-sale, or held-to-maturity depending on our ability and intent to hold such security to maturity. Securities available-for-sale will be reported at fair value, while securities held-to-maturity will be reported at amortized cost. Although we may hold most of our securities until maturity, we may, from time to time, sell any of our securities as part of our overall management of our asset portfolio. Accordingly, we elect to classify all of our RMBS as available-for-sale. All assets classified as available-for-sale will be reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity. See “–Fair Valued Assets and Liabilities.” Beginning on January 1, 2020, upon adoption of ASU 2016-13, Financial Instruments-Credit Losses, we evaluate the cost basis of our RMBS on a quarterly basis under ASC 326-30, Financial Instruments-Credit Losses: Available-for-Sale Debt Securities. When the fair value of a security is less than its amortized cost basis as of the balance sheet date, the security’s cost basis is considered impaired. If we determine that we intend to sell the security or it is more likely than not that we will be required to sell before recovery, we recognize the difference between the fair value and amortized cost as a loss in the consolidated statements of income (loss). If we determine we do not intend to sell the security or it is not more likely than not we will be required to sell the security before recovery, we must evaluate the decline in the fair value of the impaired security and determine whether such decline resulted from a credit loss or non-credit related factors. In our assessment of whether a credit loss exists, we perform a qualitative assessment around whether a credit loss exists and if necessary, we compare the present value of estimated future cash flows of the impaired security with the amortized cost basis of such security. The estimated future cash flows reflect those that a “market participant” would use and typically include assumptions related to fluctuations in interest rates, prepayment speeds, default rates, collateral performance, and the timing and amount of projected credit losses, as well as incorporating observations of current market developments and events. Cash flows are discounted at an interest rate equal to the current yield used to accrete interest income. If the present value of estimated future cash flows is less than the amortized cost basis of the security, an expected credit loss exists and is included in provision (reversal) for credit losses on securities in the consolidated statements of income (loss). If it is determined as of the financial reporting date that all or a portion of a security’s cost basis is not collectible, then we will recognize a realized loss to the extent of the adjustment to the security’s cost basis. This adjustment to the amortized cost basis of the security is reflected in realized gain (loss) on RMBS, available-for-sale, net in the consolidated statements of income (loss).
Fair Valued Assets and Liabilities
ASC 820, Fair Value Measurements and Disclosures, defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 clarifies that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e., observable inputs) and the lowest priority to data lacking transparency (i.e., unobservable inputs). Additionally, ASC 820 requires an entity to consider all aspects of nonperformance risk, including the entity’s own credit standing, when measuring the fair value of a liability.
ASC 820 establishes a three-level hierarchy to be used when measuring and disclosing fair value. An instrument’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. Following is a description of the three levels:
| • | Level 1 inputs are quoted prices in active markets for identical assets or liabilities as of the measurement date under current market conditions. Additionally, the entity must have the ability to access the active market and the quoted prices cannot be adjusted by the entity. |
| • | Level 2 inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive markets for identical or similar assets or liabilities; or inputs that are observable or can be corroborated by observable market data by correlation or other means for substantially the full-term of the assets or liabilities. |
| • | Level 3 unobservable inputs are supported by little or no market activity. The unobservable inputs represent the assumptions that management believes market participants would use to price the assets and liabilities, including risk. Generally, Level 3 assets and liabilities are valued using pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation. |
The level in the fair value hierarchy within which the entirety of a fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. We have used Level 2 for our RMBSs, our derivative assets and liabilities and Level 3 for our Servicing Related Assets.
When available, we use quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, we will consult independent pricing services or third-party broker quotes, provided that there is no ongoing material event that affects the issuer of the securities being valued or the market. If there is such an ongoing event, or if quoted market prices are not available, we will determine the fair value of the securities using valuation techniques that use, when possible, current market-based or independently-sourced market parameters, such as interest rates.
Investments in MSRs
We have elected the fair value option to record our investments in MSRs in order to provide users of our consolidated financial statements with better information regarding the effects of prepayment risk and other market factors on the MSRs. Under this election, we record a valuation adjustment on our investments in MSRs on a quarterly basis to recognize the changes in fair value of our MSRs in net income as described below. As an owner and manager of MSRs, we may be obligated to fund advances of principal and interest payments due to third-party owners of the underlying loans, but not yet received from the individual borrowers. These advances are reported as servicing advances within the “Receivables and other assets” line item on the consolidated balance sheets. Although transactions in MSRs are observable in the marketplace, the valuation includes unobservable market data inputs (prepayment speeds, delinquency levels, costs to service and discount rates). Changes in the fair value of MSRs as well as servicing fee income and servicing expenses are reported on the consolidated statements of income (loss). In determining the valuation of MSRs, management uses internally developed models that are primarily based on observable market-based inputs but which also include unobservable market data inputs. For additional information on our fair value methodology, see “Part I, Item 1. Consolidated Financial Statements–Note 9. Fair Value.”
Revenue Recognition on Investments in MSRs
Mortgage servicing fee income represents revenue earned from the ownership of MSRs. The servicing fees are based on a contractual percentage of the outstanding principal balance and are recognized as revenue as the related mortgage payments are collected. Corresponding costs to service are charged to expense as incurred. Approximately $14.6$15.6 million and $18.3 million in reimbursable servicing advances were receivable at JuneSeptember 30, 2021 and December 31, 2020, respectively, and have been classified within “Receivables and other assets” on the consolidated balance sheets.
Servicing fee income received, and servicing expenses incurred, are reported on the consolidated statements of income (loss). The difference between the fair value of MSRs and their amortized cost basis is recorded on the consolidated statements of income (loss) as “Unrealized gain (loss) on investments in Servicing Related Assets”. Fair value is generally determined by discounting the expected future cash flows using discount rates that incorporate the market risks and liquidity premium specific to the MSRs and, therefore, may differ from their effective yields.
Revenue Recognition on Securities
Interest income from coupon payments is accrued based on the outstanding principal amount of the RMBS and their contractual terms. Premiums and discounts associated with the purchase of the RMBS are amortized or accreted into interest income over the projected lives of the securities using the effective interest method. Our policy for estimating prepayment speeds for calculating the effective yield is to evaluate historical performance, consensus prepayment speeds, and current market conditions. Adjustments are made for actual prepayment activity.
Repurchase Transactions
We finance the acquisition of our RMBS for our portfolio through repurchase transactions under master repurchase agreements. Repurchase transactions are treated as collateralized financing transactions and are carried at their contractual amounts as specified in the respective transactions. Accrued interest payable is included in “Accrued expenses and other liabilities” on the consolidated balance sheets. Securities financed through repurchase transactions remain on our consolidated balance sheet as an asset and cash received from the purchaser is recorded on our consolidated balance sheet as a liability. Interest paid in accordance with repurchase transactions is recorded in interest expense on the consolidated statements of income (loss).
Income Taxes
We elected to be taxed as a REIT under the Code commencing with our short taxable year ended December 31, 2013. We expect to continue to qualify to be treated as a REIT. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate income tax rates to the extent that it annually distributes less than 100% of its taxable income. Our taxable REIT subsidiary, CHMI Solutions, Inc. and its wholly-owned subsidiary, Aurora, are subject to U.S. federal income taxes on their taxable income.
We account for income taxes in accordance with ASC 740, Income Taxes. ASC 740 requires the recording of deferred income taxes that reflect the net tax effect of temporary differences between the carrying amounts of our assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, including operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in earnings in the period that includes the enactment date. We assess our tax positions for all open tax years and determine if we have any material unrecognized liabilities in accordance with ASC 740. We record these liabilities to the extent we deem them more-likely-than-not to be incurred. We record interest and penalties related to income taxes within the provision for income taxes in the consolidated statements of income (loss). We have not incurred any interest or penalties.
Results of Operations
Presented below is a comparison of the Company’s results of operations for the periods indicated (dollars in thousands):
Results of Operations
| | Three Months Ended June 30, | | | Six Months Ended June 30, | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | Income | | | | | | | | | | | | | | | | | | | | | | Interest income | | $ | 7,085 | | | $ | 10,132 | | | $ | 13,070 | | | $ | 30,381 | | | $ | 7,043 | | $ | 10,001 | | $ | 20,113 | | $ | 40,382 | | Interest expense | | | 449 | | | | 3,425 | | | | 561 | | | | 15,716 | | | | 646 | | | (18 | ) | | | 1,207 | | | 15,698 | | Net interest income | | | 6,636 | | | | 6,707 | | | | 12,509 | | | | 14,665 | | | 6,397 | | 10,019 | | 18,906 | | 24,684 | | Servicing fee income | | | 13,748 | | | | 18,032 | | | | 27,288 | | | | 37,551 | | | 13,839 | | 14,365 | | 41,127 | | 51,916 | | Servicing costs | | | 4,072 | | | | 6,594 | | | | 7,154 | | | | 12,434 | | | | 3,080 | | | 5,266 | | | 10,234 | | | 17,700 | | Net servicing income | | | 9,676 | | | | 11,438 | | | | 20,134 | | | | 25,117 | | | 10,759 | | 9,099 | | 30,893 | | 34,216 | | Other income (loss) | | | | | | | | | | | | | | | | | | | | | | | | | | Realized gain (loss) on RMBS, available-for-sale, net | | | 983 | | | | (1,769 | ) | | | 3,077 | | | | (19,312 | ) | | (1,050 | ) | | 6,722 | | 2,027 | | (12,590 | ) | Realized loss on investments in MSRs, net | | | - | | | | (11,347 | ) | | | - | | | | (11,347 | ) | | - | | - | | - | | (11,347 | ) | Realized gain (loss) on derivatives, net | | | (10,139 | ) | | | 4,558 | | | | (14,880 | ) | | | (14,198 | ) | | Realized loss on derivatives, net | | | (3,023 | ) | | (7,841 | ) | | (17,903 | ) | | (22,039 | ) | Realized gain (loss) on acquired assets, net | | | 29 | | | | (548 | ) | | | 34 | | | | (502 | ) | | (19 | ) | | (95 | ) | | 15 | | (597 | ) | Unrealized gain (loss) on derivatives, net | | | 3,548 | | | | (4,581 | ) | | | (4,511 | ) | | | 47,619 | | | (5,467 | ) | | 3,702 | | (9,978 | ) | | 51,321 | | Unrealized gain (loss) on investments in Servicing Related Assets | | | (20,501 | ) | | | (17,025 | ) | | | 1,963 | | | | (110,878 | ) | | Unrealized loss on investments in Servicing Related Assets | | | | (7,914 | ) | | | (20,972 | ) | | | (5,951 | ) | | | (131,850 | ) | Total Income (Loss) | | | (9,768 | ) | | | (12,567 | ) | | | 18,326 | | | | (68,836 | ) | | (317 | ) | | 634 | | 18,009 | | (68,202 | ) | Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | General and administrative expense | | | 1,726 | | | | 1,420 | | | | 3,168 | | | | 4,176 | | | 1,729 | | 1,503 | | 4,897 | | 5,679 | | Management fee to affiliate | | | 1,949 | | | | 1,974 | | | | 3,910 | | | | 3,939 | | | | 1,959 | | | 1,989 | | | 5,869 | | | 5,928 | | Total Expenses | | | 3,675 | | | | 3,394 | | | | 7,078 | | | | 8,115 | | | | 3,688 | | | 3,492 | | | 10,766 | | | 11,607 | | Income (Loss) Before Income Taxes | | | (13,443 | ) | | | (15,961 | ) | | | 11,248 | | | | (76,951 | ) | | (4,005 | ) | | (2,858 | ) | | 7,243 | | (79,809 | ) | Provision for (Benefit from) corporate business taxes | | | (1,830 | ) | | | (3,278 | ) | | | 1,633 | | | | (15,432 | ) | | | (215 | ) | | | (2,116 | ) | | | 1,418 | | | (17,548 | ) | Net Income (Loss) | | | (11,613 | ) | | | (12,683 | ) | | | 9,615 | | | | (61,519 | ) | | (3,790 | ) | | (742 | ) | | 5,825 | | (62,261 | ) | Net (income) loss allocated to noncontrolling interests in Operating Partnership | | | 240 | | | | 227 | | | | (194 | ) | | | 1,137 | | | 77 | | 10 | | (117 | ) | | 1,147 | | Dividends on preferred stock | | | 2,465 | | | | 2,461 | | | | 4,928 | | | | 4,920 | | | | 2,462 | | | 2,459 | | | 7,390 | | | 7,379 | | Net Income (Loss) Applicable to Common Stockholders | | $ | (13,838 | ) | | $ | (14,917 | ) | | $ | 4,493 | | | $ | (65,302 | ) | | Net Loss Applicable to Common Stockholders | | | $ | (6,175 | ) | | $ | (3,191 | ) | | $ | (1,682 | ) | | $ | (68,493 | ) |
Presented below is summary financial data on our segments together with the data for the Company as a whole, for the periods indicated (dollars in thousands):
Segment Summary Data
| | Servicing Related Assets | | | RMBS | | | All Other | | | Total | | | | | | | | | | | | | | | | | Servicing Related Assets | | | RMBS | | | All Other | | | Total | | Income Statement | | | | | | | | | | | | | | | | | | | | | | Three Months Ended June 30, 2021 | | | | | | | | | | | | | | Interest income | | $ | 105 | | | $ | 6,980 | | | $ | - | | | $ | 7,085 | | | Interest expense | | | (771 | ) | | | 1,220 | | | | - | | | | 449 | | | Net interest income | | | 876 | | | | 5,760 | | | | - | | | | 6,636 | | | Servicing fee income | | | 13,748 | | | | - | | | | - | | | | 13,748 | | | Servicing costs | | | 4,072 | | | | - | | | | - | | | | 4,072 | | | Net servicing income | | | 9,676 | | | | - | | | | - | | | | 9,676 | | | Other expense | | | (12,995 | ) | | | (13,085 | ) | | | - | | | | (26,080 | ) | | Other operating expenses | | | 846 | | | | - | | | | 2,829 | | | | 3,675 | | | Benefit from corporate business taxes | | | (1,830 | ) | | | - | | | | - | | | | (1,830 | ) | | Net Loss | | $ | (1,459 | ) | | $ | (7,325 | ) | | $ | (2,829 | ) | | $ | (11,613 | ) | | | | | | | | | | | | | | | | | | | | Three Months Ended June 30, 2020 | | | | | | | | | | | | | | | | | | Three Months Ended September 30, 2021 | | | | | | | | | | | Interest income | | $ | 479 | | | $ | 9,653 | | | $ | - | | | $ | 10,132 | | | $ | 120 | | $ | 6,923 | | $ | - | | $ | 7,043 | | Interest expense | | | 438 | | | | 2,987 | | | | - | | | | 3,425 | | | | (808 | ) | | | 1,454 | | | - | | | 646 | | Net interest income | | | 41 | | | | 6,666 | | | | - | | | | 6,707 | | | 928 | | 5,469 | | - | | 6,397 | | Servicing fee income | | | 18,032 | | | | - | | | | - | | | | 18,032 | | | 13,839 | | - | | - | | 13,839 | | Servicing costs | | | 6,594 | | | | - | | | | - | | | | 6,594 | | | | 3,080 | | | - | | | - | | | 3,080 | | Net servicing income | | | 11,438 | | | | - | | | | - | | | | 11,438 | | | 10,759 | | - | | - | | 10,759 | | Other expense | | | (24,746 | ) | | | (5,966 | ) | | | - | | | | (30,712 | ) | | (14,210 | ) | | (3,263 | ) | | - | | (17,473 | ) | Other operating expenses | | | 1,135 | | | | - | | | | 2,259 | | | | 3,394 | | | 1,030 | | - | | 2,658 | | 3,688 | | Benefit from corporate business taxes | | | (3,278 | ) | | | - | | | | - | | | | (3,278 | ) | | | (215 | ) | | | - | | | - | | | (215 | ) | Net Income (Loss) | | $ | (11,124 | ) | | $ | 700 | | | $ | (2,259 | ) | | $ | (12,683 | ) | | $ | (3,338 | ) | | $ | 2,206 | | $ | (2,658 | ) | | $ | (3,790 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Six Months Ended June 30, 2021 | | | | | | | | | | | | | | | | | | Three Months Ended September 30, 2020 | | | | | | | | | | | Interest income | | | $ | 380 | | $ | 9,621 | | $ | - | | $ | 10,001 | | Interest expense | | | | (1,297 | ) | | | 1,279 | | | - | | | (18 | ) | Net interest income | | | 1,677 | | 8,342 | | - | | 10,019 | | Servicing fee income | | | 14,365 | | - | | - | | 14,365 | | Servicing costs | | | | 5,266 | | | - | | | - | | | 5,266 | | Net servicing income | | | 9,099 | | - | | - | | 9,099 | | Other income (expense) | | | (25,492 | ) | | 7,008 | | - | | (18,484 | ) | Other operating expenses | | | 1,178 | | - | | 2,314 | | 3,492 | | Benefit from corporate business taxes | | | | (2,116 | ) | | | - | | | - | | | (2,116 | ) | Net Income (Loss) | | | $ | (13,778 | ) | | $ | 15,350 | | $ | (2,314 | ) | | $ | (742 | ) | | | | | | | | | | | | Nine Months Ended September 30, 2021 | | | | | | | | | | | Interest income | | $ | 225 | | | $ | 12,845 | | | $ | - | | | $ | 13,070 | | | $ | 345 | | $ | 19,768 | | $ | - | | $ | 20,113 | | Interest expense | | | (1,959 | ) | | | 2,520 | | | | - | | | | 561 | | | | (2,767 | ) | | | 3,974 | | | - | | | 1,207 | | Net interest income | | | 2,184 | | | | 10,325 | | | | - | | | | 12,509 | | | 3,112 | | 15,794 | | - | | 18,906 | | Servicing fee income | | | 27,288 | | | | - | | | | - | | | | 27,288 | | | 41,127 | | - | | - | | 41,127 | | Servicing costs | | | 7,154 | | | | - | | | | - | | | | 7,154 | | | | 10,234 | | | - | | | - | | | 10,234 | | Net servicing income | | | 20,134 | | | | - | | | | - | | | | 20,134 | | | 30,893 | | - | | - | | 30,893 | | Other income (expense) | | | (19,880 | ) | | | 5,563 | | | | - | | | | (14,317 | ) | | (34,090 | ) | | 2,300 | | - | | (31,790 | ) | Other operating expenses | | | 1,408 | | | | - | | | | 5,670 | | | | 7,078 | | | 2,438 | | - | | 8,328 | | 10,766 | | Provision for corporate business taxes | | | 1,633 | | | | - | | | | - | | | | 1,633 | | | | 1,418 | | | - | | | - | | | 1,418 | | Net Income (Loss) | | $ | (603 | ) | | $ | 15,888 | | | $ | (5,670 | ) | | $ | 9,615 | | | $ | (3,941 | ) | | $ | 18,094 | | $ | (8,328 | ) | | $ | 5,825 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Six Months Ended June 30, 2020 | | | | | | | | | | | | | | | | | | Nine Months Ended September 30, 2020 | | | | | | | | | | | Interest income | | $ | 2,120 | | | $ | 28,261 | | | $ | - | | | $ | 30,381 | | | $ | 2,500 | | $ | 37,882 | | $ | - | | $ | 40,382 | | Interest expense | | | 2,147 | | | | 13,569 | | | | - | | | | 15,716 | | | | 850 | | | 14,848 | | | - | | | 15,698 | | Net interest income (expense) | | | (27 | ) | | | 14,692 | | | | - | | | | 14,665 | | | Net interest income | | | 1,650 | | 23,034 | | - | | 24,684 | | Servicing fee income | | | 37,551 | | | | - | | | | - | | | | 37,551 | | | 51,916 | | - | | - | | 51,916 | | Servicing costs | | | 12,434 | | | | - | | | | - | | | | 12,434 | | | | 17,700 | | | - | | | - | | | 17,700 | | Net servicing income | | | 25,117 | | | | - | | | | - | | | | 25,117 | | | 34,216 | | - | | - | | 34,216 | | Other expense | | | (56,602 | ) | | | (52,016 | ) | | | - | | | | (108,618 | ) | | (82,094 | ) | | (45,008 | ) | | - | | (127,102 | ) | Other operating expenses | | | 1,735 | | | | - | | | | 6,380 | | | | 8,115 | | | 2,913 | | - | | 8,694 | | 11,607 | | Benefit from corporate business taxes | | | (15,432 | ) | | | - | | | | - | | | | (15,432 | ) | | | (17,548 | ) | | | - | | | - | | | (17,548 | ) | Net Loss | | $ | (17,815 | ) | | $ | (37,324 | ) | | $ | (6,380 | ) | | $ | (61,519 | ) | | $ | (31,593 | ) | | $ | (21,974 | ) | | $ | (8,694 | ) | | $ | (62,261 | ) |
| | Servicing Related Assets | | | RMBS | | | All Other | | | Total | | Balance Sheet | | | | | | | | | | | | | September 30, 2021 | | | | | | | | | | | | | Investments | | $ | 210,819 | | | $ | 865,904 | | | $ | - | | | $ | 1,076,723 | | Other assets | | | 46,350 | | | | 28,281 | | | | 63,011 | | | | 137,642 | | Total assets | | | 257,169 | | | | 894,185 | | | | 63,011 | | | | 1,214,365 | | Debt | | | 135,000 | | | | 777,416 | | | | - | | | | 912,416 | | Other liabilities | | | 1,829 | | | | 5,212 | | | | 12,402 | | | | 19,443 | | Total liabilities | | | 136,829 | | | | 782,628 | | | | 12,402 | | | | 931,859 | | Book value | | $ | 120,340 | | | $ | 111,557 | | | $ | 50,609 | | | $ | 282,506 | |
December 31, 2020 | | | | | | | | | | | | | Investments | | $ | 174,414 | | | $ | 1,228,251 | | | $ | - | | | $ | 1,402,665 | | Other assets | | | 51,063 | | | | 55,260 | | | | 84,500 | | | | 190,823 | | Total assets | | | 225,477 | | | | 1,283,511 | | | | 84,500 | | | | 1,593,488 | | Debt | | | 111,379 | | | | 1,149,978 | | | | - | | | | 1,261,357 | | Other liabilities | | | 2,392 | | | | 6,370 | | | | 10,803 | | | | 19,565 | | Total liabilities | | | 113,771 | | | | 1,156,348 | | | | 10,803 | | | | 1,280,922 | | Book value | | $ | 111,706 | | | $ | 127,163 | | | $ | 73,697 | | | $ | 312,566 | |
| | Servicing Related Assets | | | RMBS | | | All Other | | | Total | | Balance Sheet | | | | | | | | | | | | | June 30, 2021 | | | | | | | | | | | | | Investments | | $ | 211,995 | | | $ | 998,799 | | | $ | - | | | $ | 1,210,794 | | Other assets | | | 48,668 | | | | 20,638 | | | | 54,656 | | | | 123,962 | | Total assets | | | 260,663 | | | | 1,019,437 | | | | 54,656 | | | | 1,334,756 | | Debt | | | 134,978 | | | | 897,047 | | | | - | | | | 1,032,025 | | Other liabilities | | | 2,575 | | | | 837 | | | | 12,271 | | | | 15,683 | | Total liabilities | | | 137,553 | | | | 897,884 | | | | 12,271 | | | | 1,047,708 | | Book value | | $ | 123,110 | | | $ | 121,553 | | | $ | 42,385 | | | $ | 287,048 | | December 31, 2020 | | | | | | | | | | | | | | | | | Investments | | $ | 174,414 | | | $ | 1,228,251 | | | $ | - | | | $ | 1,402,665 | | Other assets | | | 51,063 | | | | 55,260 | | | | 84,500 | | | | 190,823 | | Total assets | | | 225,477 | | | | 1,283,511 | | | | 84,500 | | | | 1,593,488 | | Debt | | | 111,379 | | | | 1,149,978 | | | | - | | | | 1,261,357 | | Other liabilities | | | 2,392 | | | | 6,370 | | | | 10,803 | | | | 19,565 | | Total liabilities | | | 113,771 | | | | 1,156,348 | | | | 10,803 | | | | 1,280,922 | | Book value | | $ | 111,706 | | | $ | 127,163 | | | $ | 73,697 | | | $ | 312,566 | |
Interest Income
Interest income for the three-month period ended JuneSeptember 30, 2021 was $7.1$7.0 million as compared to $10.1$10.0 million for the three-month period ended JuneSeptember 30, 2020. This $3.0 million decrease in interest income primarily resulted from the sale of RMBS during 2020 in order to rebuild the Company’s unrestricted cash due to uncertain economic conditions as a result of the COVID-19 pandemic.RMBS.
Interest income for the six-monthnine-month period ended JuneSeptember 30, 2021 was $13.1$20.1 million as compared to $30.4$40.4 million for the six-monthnine-month period ended JuneSeptember 30, 2020. This $17.3$20.3 million decrease in interest income primarily resulted from the sale of RMBS during 2020 in order to rebuild the Company’s unrestricted cash due to uncertain economic conditions as a result of the COVID-19 pandemic.RMBS.
Interest Expense
Interest expense for the three-month period ended JuneSeptember 30, 2021 was $449,000$646,000 as compared to $3.4 million$(18,000) for the three-month period ended JuneSeptember 30, 2020. The $3.0$664,000 increase in interest expense was substantially related to an increase in interest expense being offset against net interest income on interest rate swaps. Interest expense for the nine-month period ended September 30, 2021 was $1.2 million as compared to $15.7 million for the nine-month period ended September 30, 2020. The $14.5 million decrease in interest expense was substantially related to fewer repurchase agreement borrowings as the Company sold securities and repaid related borrowings to rebuild the Company’s unrestricted cash due to uncertain economic conditions as a result of the COVID-19 pandemic and an overall decrease in repurchase rates.borrowings.
Interest expense for the six-month period ended June 30, 2021 was $561,000 as compared to $15.7 million for the six-month period ended June 30, 2020. The $15.2 million decrease in interest expense was substantially related to fewer repurchase agreement borrowings as the Company sold securities and repaid related borrowings to rebuild the Company’s unrestricted cash due to uncertain economic conditions as a result58
Change in Fair Value of Investments in Servicing Related Assets
The fair value of our investments in Servicing Related Assets for the three-month periods ended JuneSeptember 30, 2021 and JuneSeptember 30, 2020 decreased by approximately $20.5$7.9 million and $17.0$21.0 million, respectively, primarily due to changes in valuation inputs or assumptions.assumptions and paydown of underlying loans.
The fair value of our investments in Servicing Related Assets for the six-monthnine-month periods ended JuneSeptember 30, 2021 and JuneSeptember 30, 2020 increased by approximately $2.0 million and decreased by approximately $110.9$6.0 million and $131.9 million, respectively, primarily due to changes in valuation inputs or assumptions.assumptions and paydown of underlying loans.
Change in Fair Value of Derivatives
The fair value of derivatives for the three-month periods ended JuneSeptember 30, 2021 and JuneSeptember 30, 2020 decreased by approximately $5.5 million and increased by approximately $3.5 million and decreased by approximately $4.6$3.7 million, respectively, primarily due to changes in interest rates and the composition of our derivatives relative to the prior year.
The fair value of derivatives for the six-monthnine-month periods ended JuneSeptember 30, 2021 and JuneSeptember 30, 2020 decreased by approximately $4.5$10.0 million and increased by approximately $47.6$51.3 million, respectively, primarily due to changes in interest rates and the composition of our derivatives relative to the prior year.
General and Administrative Expense
General and administrative expense for the three-month period ended JuneSeptember 30, 2021 increased by approximately $306,000$226,000 as compared to the three-month period ended JuneSeptember 30, 2020. The increase was primarily due to a one-time payment in settlement of claims by a state regulator that Aurora should be licensed as a mortgage servicer in order to hold MSRs, which was partially offset by a decrease of $225,000 in legal and information technology expenses.
General and administrative expense for the six-monthnine-month period ended JuneSeptember 30, 2021 decreased by approximately $1.0 million$782,000 as compared to the six-monthnine-month period ended JuneSeptember 30, 2020. The decrease was primarily due to higher professional fees related to market disruptions in the first quarter of 2020 due to the COVID-19 pandemic.
Management Fees to Manager
Management fees for the three-monththree and nine-month periods ended JuneSeptember 30, 2021 and Juneas compared to the comparable periods ended September 30, 2020, decreased by approximately $25,000$30,000 and increased by approximately $40,000, respectively, from the preceding year-end. Management fees for the six-month periods ended June 30, 2021 and June 30, 2020 decreased by approximately $29,000 and increased by approximately $196,000, respectively, from the preceding year-end. The increase in management fees during the three and six-month periods ended June 30, 2020 was due to the issuance of our capital stock during the year ended December 31, 2019 and the resulting increase in stockholders’ equity, which is the basis for the calculation of the management fee that we pay to the Manager.$59,000, respectively.
Net Income Allocated to Noncontrolling Interests in Operating Partnership
Net income allocated to noncontrolling interests in the Operating Partnership, which are LTIP-OP Units owned by directors and officers of the Company and by certain other individuals who provide services to us through the Manager, represented approximately 2.0% and 1.8% of net income for the three-month periods ended JuneSeptember 30, 2021 and JuneSeptember 30, 2020, respectively. The increase was due to the issuance of LTIP-OP Units during the six-monthnine-month period ended JuneSeptember 30, 2021.
Net income allocated to noncontrolling interests in the Operating Partnership, represented approximately 2.0% and 1.9%1.8% of net income for the six-monthnine-month periods ended JuneSeptember 30, 2021 and JuneSeptember 30, 2020, respectively. The increase was due to the issuance of LTIP-OP Units during the six-monthnine-month period ended JuneSeptember 30, 2021.
For the period indicated below, our accumulated other comprehensive income (loss) changed as a result of the indicated gains and losses (dollars in thousands):
Accumulated Other Comprehensive Income (Loss)
| | Three Months Ended June 30, 2021 | | | Three MonthsEnded September 30, 2021 | | Accumulated other comprehensive gain (loss), March 31, 2021 | | $ | 16,245 | | | Accumulated other comprehensive gain (loss), June 30, 2021 | | | $ | 14,241 | | Other comprehensive income (loss) | | | (2,004 | ) | | | 1,562 | | Accumulated other comprehensive gain (loss), June 30, 2021 | | $ | 14,241 | | | Accumulated other comprehensive gain (loss), September 30, 2021 | | | $ | 15,803 | | | | | | | | | | Nine Months Ended September 30, 2021 | | Accumulated other comprehensive gain (loss), December 31, 2020 | | | $ | 35,594 | | Other comprehensive income (loss) | | | | (19,791 | ) | Accumulated other comprehensive gain (loss), September 30, 2021 | | | $ | 15,803 | |
| | Six Months Ended June 30, 2021 | | Accumulated other comprehensive gain (loss), December 31, 2020 | | $ | 35,594 | | Other comprehensive income (loss) | | | (21,353 | ) | Accumulated other comprehensive gain (loss), June 30, 2021 | | $ | 14,241 | |
| | Three Months Ended September 30, 2020 | | Accumulated other comprehensive gain (loss), June 30, 2020 | | $ | 49,569 | | Other comprehensive income (loss) | | | (2,110 | ) | Accumulated other comprehensive gain (loss), September 30, 2020 | | $ | 47,459 | | | | | | | | | Nine Months Ended September 30, 2020 | | Accumulated other comprehensive gain (loss), December 31, 2019 | | $ | 41,414 | | Other comprehensive income (loss) | | | 6,045 | | Accumulated other comprehensive gain (loss), September 30, 2020 | | $ | 47,459 | |
| | Three Months Ended June 30, 2020 | | Accumulated other comprehensive gain (loss), March 31, 2020 | | $ | 33,783 | | Other comprehensive income (loss) | | | 15,786 | | Accumulated other comprehensive gain (loss), June 30, 2020 | | $ | 49,569 | |
| | Six Months Ended June 30, 2020 | | Accumulated other comprehensive gain (loss), December 31, 2019 | | $ | 41,414 | | Other comprehensive income (loss) | | | 8,155 | | Accumulated other comprehensive gain (loss), June 30, 2020 | | $ | 49,569 | |
Our GAAP equity changes as the values of our RMBS are marked to market each quarter, among other factors. The primary causes of mark to market changes are changes in interest rates and credit spreads.rates. During the three-month period ended JuneSeptember 30, 2021, credit spread wideningthe sales of securities contributed to a net unrealized lossgain on our RMBS of approximately $2.0$1.6 million, which is recorded in accumulated other comprehensive income (loss). During the six-monthnine-month period ended JuneSeptember 30, 2021, a 5259 basis point increase in the 10 Year U.S. Treasurytreasury rate combined with credit spread widening caused a net unrealized loss on our RMBS of approximately $21.4$19.8 million, which is recorded in accumulated other comprehensive income (loss). Non-GAAP Financial Measures
This Management’s Discussion and Analysis of Financial Condition and Results of Operations section contains analysis and discussion of a non-GAAP measurements. Themetric called Earnings Available for Distribution (“EAD”). Prior to this quarterly report on Form 10-Q we referred to this metric as core earnings. Although EAD and core earnings are calculated identically, we believe the revised name better reflects the purpose to which investors may use the metric in the following non-GAAP measurements include the following:measurements:
core earnings;earnings available for distribution; and
core earnings available for distribution per average common share.
Core earningsEAD is a non-GAAP financial measure that we currently define as GAAP net income (loss), excluding realized gain (loss) on RMBS, realized and unrealized gain (loss) on investments in MSRs (net of any estimated MSR amortization), realized and unrealized gain (loss) on derivatives and realized (gain) loss on acquired assets. MSR amortization refers to the portion of the change in fair value of the MSR that is primarily due to the realization of cashflows or runoff and includes an adjustment for any gain or loss on the capital used to purchase the MSR. Core earningsEAD is adjusted to exclude outstanding LTIP-OP Units in our Operating Partnership and dividends paid on preferred stock. Additionally, core earningsEAD excludes any tax (benefit) expense on realized and unrealized gain (loss) on MSRs.
Core earningsEAD are provided for purposes of potential comparability to other issuers that invest in residential mortgage-related assets. We believe providing investors with core earnings,EAD, in addition to related GAAP financial measures, may provide investors some insight into our ongoing operational performance. However, the concept of core earningsEAD does have significant limitations, including the exclusion of realized and unrealized gains (losses), and given the apparent lack of a consistent methodology among issuers for defining core earnings,EAD, it may not be comparable to similarly titled measures of other issuers, which define core earningsEAD differently from us and each other. As a result, core earningsEAD should not be considered a substitute for our GAAP net income (loss) or as a measure of our liquidity.While EAD is one indicia of the Company’s earnings capacity, it is not the only factor considered in setting a dividend and is not the same as REIT taxable income which is calculated in accordance with the rules of the IRS.
Core Earnings SummaryAvailable for Distribution
Core earningsEAD for the three and six-monthnine-month periods ended JuneSeptember 30, 2021 as compared to the comparable periods ended JuneSeptember 30, 2020, decreased by approximately $3.1$3.9 million and $7.4$11.3 million respectively, or $0.19$0.23 and $0.45$0.68 per average common share, respectively, primarily due to a decrease in the size of the RMBS portfolio during 2020.2020 and to a one-time payment in settlement of claims by a state regulator that Aurora should be licensed as a mortgage servicer in order to hold MSRs.
The following table reconciles the GAAP measure of net income (loss) to core earningsEAD and related per average common share amounts, for the periods indicated (dollars in thousands): | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | | 2021 | | | 2020 | | | 2021 | | | 2020 | | Net Income (Loss) | | $ | (3,790 | ) | | $ | (742 | ) | | $ | 5,825 | | | $ | (62,261 | ) | Realized loss (gain) on RMBS, net | | | 1,050 | | | | (6,722 | ) | | | (2,027 | ) | | | 12,590 | | Realized loss on derivatives, net | | | 3,023 | | | | 7,841 | | | | 17,903 | | | | 22,039 | | Realized loss on investments in MSRs, net | | | - | | | | - | | | | - | | | | 11,347 | | Realized loss (gain) on acquired assets, net | | | 19 | | | | 95 | | | | (15 | ) | | | 597 | | Unrealized loss (gain) on derivatives, net | | | 5,467 | | | | (3,702 | ) | | | 9,978 | | | | (51,321 | ) | Unrealized loss (gain) on investments in MSRs, net of estimated MSR amortization | | | 417 | | | | 15,091 | | | | (15,411 | ) | | | 113,654 | | Tax (benefit) expense on realized and unrealized (loss) gain on MSRs | | | 655 | | | | (1,017 | ) | | | 4,045 | | | | (14,849 | ) | Total EAD: | | $ | 6,841 | | | $ | 10,844 | | | $ | 20,298 | | | $ | 31,796 | | EAD attributable to noncontrolling interests in Operating Partnership | | | (134 | ) | | | (198 | ) | | | (406 | ) | | | (586 | ) | Dividends on preferred stock | | | 2,462 | | | | 2,459 | | | | 7,390 | | | | 7,379 | | EAD Attributable to Common Stockholders | | $ | 4,245 | | | $ | 8,187 | | | $ | 12,502 | | | $ | 23,831 | | EAD Attributable to Common Stockholders, per Diluted Share | | $ | 0.25 | | | $ | 0.48 | | | $ | 0.73 | | | $ | 1.41 | | GAAP Net Loss Per Share of Common Stock, per Diluted Share | | $ | (0.36 | ) | | $ | (0.19 | ) | | $ | (0.10 | ) | | $ | (4.06 | ) |
Our Portfolio
MSRs
Aurora’s portfolio of Fannie Mae and Freddie Mac MSRs have an aggregate UPB of approximately $21.5$20.8 billion as of JuneSeptember 30, 2021.
The following tables set forth certain characteristics of the mortgage loans underlying those MSRs as of the dates indicated (dollars in thousands):
MSR Collateral Characteristics
As of JuneSeptember 30, 2021
| | | | | Collateral Characteristics | | | | | Current Carrying Amount | | | Current Principal Balance | | | WA Coupon | | | WA Servicing Fee | | | WA Maturity (months) | | | Weighted Average Loan Age (months) | | | ARMs %(A) | | | | | | Collateral Characteristics | | | | | | | | | | | | | | | | | | | | | | | | | Current Carrying Amount | | | Current Principal Balance | | | WA Coupon | | | WA Servicing Fee | | | WA
Maturity (months) | | | Weighted Average Loan Age (months) | | | ARMs %(A) | | MSRs | | $ | 211,995 | | | $ | 21,523,383 | | | | 3.63 | % | | | 0.25 | % | | | 317 | | | | 23 | | | | 0.1 | % | | $ | 210,819 | | $ | 20,781,421 | | | 3.57 | % | | | 0.25 | % | | | 316 | | | 24 | | | 0.1 | % | MSR Total/Weighted Average | | $ | 211,995 | | | $ | 21,523,383 | | | | 3.63 | % | | | 0.25 | % | | | 317 | | | | 23 | | | | 0.1 | % | | $ | 210,819 | | $ | 20,781,421 | | 3.57 | % | | 0.25 | % | | 316 | | 24 | | 0.1 | % |
As of December 31, 2020
| | | | | Collateral Characteristics | | | | | | Collateral Characteristics | | | | Current Carrying Amount | | | Current Principal Balance | | | WA Coupon | | | WA Servicing Fee | | | WA Maturity (months) | | | Weighted Average Loan Age (months) | | | ARMs %(A) | | | Current Carrying Amount | | | Current Principal Balance | | | WA Coupon | | | WA
Servicing Fee | | | WA Maturity (months) | | | Weighted Average Loan Age (months) | | | ARMs %(A) | | MSRs | | $ | 174,414 | | | $ | 21,641,277 | | | | 3.92 | % | | | 0.25 | % | | | 316 | | | | 25 | | | | 0.2 | % | | $ | 174,414 | | $ | 21,641,277 | | | 3.92 | % | | | 0.25 | % | | | 316 | | | 25 | | | 0.2 | % | MSR Total/Weighted Average | | $ | 174,414 | | | $ | 21,641,277 | | | | 3.92 | % | | | 0.25 | % | | | 316 | | | | 25 | | | | 0.2 | % | | $ | 174,414 | | $ | 21,641,277 | | 3.92 | % | | 0.25 | % | | 316 | | 25 | | 0.2 | % |
ARMs % represents the percentage of the total principal balance of the pool that corresponds to ARMs and hybrid ARMs.
RMBS
The following tables summarize the characteristics of our RMBS portfolio and certain characteristics of the collateral underlying our RMBS as of the dates indicated (dollars in thousands):
RMBS Characteristics
As of JuneSeptember 30, 2021 | | | | | | | | Gross Unrealized | | | | | | | |
|
| Weighted Average | | Asset Type | | Original Face Value | | | Book Value | | | Gains | | | Losses | | | Carrying Value(A) | | | Number of Securities | | Rating | | Coupon | | | Yield(C) | | | Maturity (Years) | | RMBS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fannie Mae | | $ | 709,268 | | | $ | 510,769 | | | $ | 12,278 | | | $ | (881 | ) | | $ | 522,166 | | | | 70 | | (B) | | | 3.12 | % | | | 3.00 | % | | | 27 | | Freddie Mac | | | 422,028 | | | | 339,213 | | | | 6,557 | | | | (2,032 | ) | | | 343,738 | | | | 39 | | (B) | | | 2.99 | % | | | 2.86 | % | | | 28 | | Total/Weighted Average | | $ | 1,131,296 | | | $ | 849,982 | | | $ | 18,835 | | | $ | (2,913 | ) | | $ | 865,904 | | | | 109 | | | | | 3.07 | % | | | 2.94 | % | | | 28 | |
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As of December 31, 2020
| | | | | | Gross Unrealized | | | | | | | | | Weighted Average | | | | | | | | | Gross Unrealized | | | | | | | |
| | Weighted Average | | Asset Type | | Original Face Value | | Book Value | | Gains | | Losses | | Carrying Value(A) | | Number of Securities | | Rating | | | Coupon | | | Yield(C) | | | Maturity (Years) | | | Original Face Value | | | Book Value | | | Gains | | | Losses | | | Carrying Value(A) | | | Number of Securities | | Rating | | Coupon | | | Yield(C) | | | Maturity (Years) | | RMBS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fannie Mae | | $ | 840,175 | | $ | 692,665 | | $ | 22,530 | | $ | (39) | | $ | 715,156 | | | 81 | | | (B) | | | 3.31 | % | | 3.17 | % | | | 28 | | | $ | 840,175 | | $ | 692,665 | | $ | 22,530 | | $ | (39 | ) | | $ | 715,156 | | 81 | | (B) | | 3.31 | % | | 3.17 | % | | 28 | | Freddie Mac | | | 549,530 | | | 493,930 | | | 13,106 | | | (82) | | | 506,954 | | | 49 | | | (B) | | | 2.99 | % | | 2.87 | % | | | 28 | | | 549,530 | | 493,930 | | 13,106 | | (82 | ) | | 506,954 | | 49 | | (B) | | 2.99 | % | | 2.87 | % | | 28 | | Private Label MBS | | | 22,000 | | | 5,944 | | | 197 | | | - | | | 6,141 | | | 5 | | | (B) | | | | 4.08 | % | | | 4.08 | % | | | 28 | | | | 22,000 | | | 5,944 | | | 197 | | | - | | | 6,141 | | | 5 | | (B) | | | 4.08 | % | | | 4.08 | % | | | 28 | | Total/Weighted Average | | $ | 1,411,705 | | $ | 1,192,539 | | $ | 35,833 | | $ | (121) | | $ | 1,228,251 | | | 135 | | | | | | 3.18 | % | | 3.05 | % | | | 28 | | | $ | 1,411,705 | | $ | 1,192,539 | | $ | 35,833 | | $ | (121 | ) | | $ | 1,228,251 | | 135 | | | | 3.18 | % | | 3.05 | % | | 28 | |
(A) | See “Part I, Item 1. Notes to Consolidated Financial Statements—Note 9. Fair Value” regarding the estimation of fair value, which approximates carrying value for all securities. |
(B) | The Company used an implied AAA rating for the Agency RMBS. The Company’s private label RMBS were rated investment grade or better by at least one NRSRO as of December 31, 2020. |
(C) | The weighted average yield is based on the most recent gross monthly interest income, which is then annualized and divided by the book value of settled securities. |
The following table summarizes the net interest spread of our RMBS portfolio as of the dates indicated:
Net Interest Spread
| | June 30, 2021 | | | December 31, 2020 | | | September 30, 2021 | | December 31, 2020 | | Weighted Average Asset Yield | | | 2.89 | % | | | 2.49 | % | | 2.98 | % | | 2.49 | % | Weighted Average Interest Expense | | | 0.57 | % | | | 0.71 | % | | | 0.72 | % | | | 0.71 | % | Net Interest Spread | | | 2.32 | % | | | 1.78 | % | | 2.26 | % | | 1.78 | % |
Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments and other general business needs. Additionally, to maintain our status as a REIT under the Code, we must distribute annually at least 90% of our REIT taxable income. In 2017, the Internal Revenue Service issued a revenue procedure permitting “publicly offered” REITs to make elective stock dividends (i.e., dividends paid in a mixture of stock and cash), with at least 20% of the total distribution being paid in cash, to satisfy their REIT distribution requirements. On May 4, 2020, the Internal Revenue Service issued a revenue procedure that temporarily reduced (through the end of 2020) the minimum amount of the total distribution that must be paid in cash to 10%. Pursuant to these revenue procedures, the Company has in the past elected to make distributions of its taxable income in a mixture of stock and cash.
Our primary sources of funds for liquidity consist of cash provided by operating activities (primarily income from our investments in RMBS and net servicing income from our MSRs), sales or repayments of RMBS and borrowings under repurchase agreements and our MSR financing arrangements. The COVID-19 pandemic has not adversely affected our ability to access these traditional sources of our funds on the same or reasonably similar terms as available before the pandemic. In the future, sources of funds for liquidity may include additional MSR financing, warehouse agreements, securitizations and the issuance of equity or debt securities, when feasible. During the three and six-monthnine-month periods ended JuneSeptember 30, 2021, the Company issued and Junesold 553,000 shares of common stock under the Common Stock ATM Program. The shares were sold at a weighted average price of $8.97 per share for gross proceeds of approximately $5.0 million before fees of approximately $99,000. During the three and nine-month periods ended September 30, 2020, we did not sell any capital stock pursuant to the ATM programs. In the past we have used, and we anticipate that in the future we will use a significant portion of the paydowns of the RMBS to purchase MSRs. We may also sell certain RMBS and deploy the net proceeds from such sales to the extent necessary to fund the purchase price of MSRs.
Our primary uses of funds are the payment of interest, management fees, outstanding commitments, other operating expenses, investments in new or replacement assets, margin calls and the repayment of borrowings, as well as dividends. Due to the uncertainty regarding the economy and reopeningAlthough we continue to maintain a higher level of unrestricted cash than prior to the pandemic. As the permanent reopening of the economy becomes more establishedpandemic,. we would expect to invest more of that unrestricted cash in our targeted assets.assets if normalization of the economy continues. We may also use capital resources to repurchase additional shares of common stock under our stock repurchase program when we believe such repurchases are appropriate and/or the stock is trading at a significant discount to net asset value. We seek to maintain adequate cash reserves and other sources of available liquidity to meet any margin calls resulting from decreases in value related to a reasonably possible (in the opinion of management) change in interest rates.
As of the date of this filing, we believe we have sufficient liquid assets to satisfy all of our short-term recourse liabilities and to satisfy covenants in our financing documents. With respect to the next twelve months, we expect that our cash on hand combined with the cash flow provided by our operations will be sufficient to satisfy our anticipated liquidity needs with respect to our current investment portfolio, including related financings, potential margin calls and operating expenses. While it is inherently more difficult to forecast beyond the next twelve months, we currently expect to meet our long-term liquidity requirements through our cash on hand and, if needed, additional borrowings, proceeds received from repurchase agreements and similar financings, proceeds from equity offerings and the liquidation or refinancing of our assets.
Our operating cash flow differs from our net income due primarily to: (i) accretion of discount or premium on our RMBS, (ii) unrealized gains or losses on our Servicing Related Assets, and (iii) impairment on our securities, if any.
Repurchase Agreements
As of JuneSeptember 30, 2021, we had repurchase agreements with 32 counterparties and approximately $897$777.4 million of outstanding repurchase agreement borrowings from 1514 of those counterparties, which were used to finance RMBS. As of JuneSeptember 30, 2021, our exposure (defined as the amount of cash and securities pledged as collateral, less the borrowing under the repurchase agreement) to any of the counterparties under the repurchase agreements did not exceed five percent of the Company’s equity. Under these agreements, which are uncommitted facilities, we sell a security to a counterparty and concurrently agree to repurchase the same security at a later date at the same price that we initially sold the security plus the interest charged. The sale price represents financing proceeds and the difference between the sale and repurchase prices represents interest on the financing. The price at which the security is sold generally represents the market value of the security less a discount or “haircut.” The weighted average haircut on our repurchase debt at JuneSeptember 30, 2021 was approximately 4.8%. During the term of the repurchase transaction, which can be as short as a few days, the counterparty holds the security and posts margin as collateral. The counterparty monitors and calculates what it estimates to be the value of the collateral during the term of the transaction. If this value declines by more than a de minimis threshold, the counterparty requires us to post additional collateral (or “margin”) in order to maintain the initial haircut on the collateral. This margin is typically required to be posted in the form of cash and cash equivalents. Furthermore, we are, from time to time, a party to derivative agreements or financing arrangements that may be subject to margin calls based on the value of such instruments. Set forth below is the average aggregate balance of borrowings under the Company’s repurchase agreements for each of the periods shown and the aggregate balance as of the end of each such period (dollars in thousands):
Repurchase Agreement Average and Maximum Amounts
Quarter Ended | | Average Monthly Amount | | | Maximum Month-End Amount | | | Quarter Ending Amount | | | Average Monthly Amount | | | Maximum Month-End Amount | | | Quarter Ending Amount | | September 30, 2021 | | | $ | 790,587 | | $ | 821,540 | | $ | 777,416 | | June 30, 2021 | | $ | 858,269 | | | $ | 897,047 | | | $ | 897,047 | | | $ | 858,269 | | $ | 897,047 | | $ | 897,047 | | March 31, 2021 | | $ | 1,012,389 | | | $ | 1,118,231 | | | $ | 934,001 | | | $ | 1,012,389 | | $ | 1,118,231 | | $ | 934,001 | | December 31, 2020 | | $ | 1,303,927 | | | $ | 1,465,037 | | | $ | 1,149,978 | | | $ | 1,303,927 | | $ | 1,465,037 | | $ | 1,149,978 | | September 30, 2020 | | $ | 1,374,041 | | | $ | 1,419,991 | | | $ | 1,365,471 | | | $ | 1,374,041 | | $ | 1,419,991 | | $ | 1,365,471 | | June 30, 2020 | | $ | 1,286,998 | | | $ | 1,395,317 | | | $ | 1,395,317 | | | $ | 1,286,998 | | $ | 1,395,317 | | $ | 1,395,317 | | March 31, 2020 | | $ | 2,383,300 | | | $ | 1,565,232 | | | $ | 1,565,232 | | | $ | 2,383,300 | | $ | 1,565,232 | | $ | 1,565,232 | | December 31, 2019 | | $ | 2,324,976 | | | $ | 2,337,638 | | | $ | 2,337,638 | | | $ | 2,324,976 | | $ | 2,337,638 | | $ | 2,337,638 | | September 30, 2019 | | $ | 2,218,656 | | | $ | 2,279,448 | | | $ | 2,266,841 | | |
The decrease in the Company’s borrowings under its repurchase agreements was primarily due to the sale of RMBS securities during 2020.2020 and 2021.
These short-term borrowings were used to finance certain of our investments in RMBS. The RMBS repurchase agreements are guaranteed by the Company. The weighted average difference between the market value of the assets and the face amount of available financing for the RMBS repurchase agreements, or the haircut, was 4.8%4.8 % and 5.0% as of JuneSeptember 30, 2021 and December 31, 2020, respectively. The following tables provide additional information regarding borrowings under our repurchase agreements (dollars in thousands):
Repurchase Agreement Characteristics
As of JuneSeptember 30, 2021
| | RMBS Market Value | | | Repurchase Agreements | | | Weighted Average Rate | | | RMBS Market Value | | | Repurchase Agreements | | | Weighted Average Rate | | Less than one month | | $ | 411,641 | | | $ | 400,417 | | | | 0.10 | % | | $ | 304,204 | | $ | 300,823 | | 0.11 | % | One to three months | | | 521,459 | | | | 496,630 | | | | 0.11 | % | | | 496,898 | | | 476,593 | | | 0.12 | % | Total/Weighted Average | | $ | 933,100 | | | $ | 897,047 | | | | 0.11 | % | | $ | 801,102 | | $ | 777,416 | | 0.11 | % |
As of December 31, 2020 | | RMBS Market Value | | | Repurchase Agreements | | | Weighted Average Rate | | Less than one month | | $ | 484,920 | | | $ | 482,319 | | | | 0.23 | % | One to three months | | | 679,496 | | | | 667,659 | | | | 0.23 | % | Total/Weighted Average | | $ | 1,164,416 | | | $ | 1,149,978 | | | | 0.23 | % |
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The amount of collateral as of JuneSeptember 30, 2021 and December 31, 2020, including cash, was $942.0$816.3 million and $1,208.8 million, respectively.
The weighted average term to maturity of our borrowings under repurchase agreements as of JuneSeptember 30, 2021 and December 31, 2020 was 4138 days and 28 days, respectively.
MSR Financing
In July 2018, the Company, Aurora and QRS V (collectively with Aurora and the Company, the “Borrowers”) entered into a $25.0 million revolving credit facility (the “MSR Revolver”) pursuant to which Aurora pledged all of its existing and future MSRs on loans owned or securitized by Freddie Mac. The term of the MSR Revolver is 364 days with the Borrowers’ option for two renewals for similar terms followed by a one-year term out feature with a 24-month amortization schedule. The MSR Revolver was upsized to $45.0 million in September 2018. The Company also has the ability to request up to an additional $5.0 million of borrowings. On April 2, 2019, Aurora and QRS V entered into an amendment that increased the maximum amount of the MSR Revolver to $100.0 million. In July 2021, the Borrowers entered into an amendment to the MSR Revolver that extended the revolving period for an additional 364 days with the option for two more renewals of 364 days each. At the end of the revolving period, the outstanding amount will be converted to a one-year term loan. Amounts borrowed bear interest at an adjustable rate equal to a spread above one-month LIBOR. At JuneSeptember 30, 2021 and December 31, 2020, approximately $63.0 million and $47.5 million, respectively, was outstanding under the MSR Revolver.
In September 2019, Aurora and QRS III entered into a loan and security agreement (the “Fannie Mae MSR Financing Facility”), to replace the MSR Financing Facility. Under the Fannie Mae MSR Facility, Aurora and QRS III pledged their respective rights in all existing and future MSRs for loans owned or securitized by Fannie Mae to secure borrowings outstanding from time to time. The maximum credit amount outstanding at any one time under the facility is $200 million of which $100 million is committed. Borrowings bear interest at a rate equal to a spread over one-month LIBOR subject to a floor. The term of the facility is 24 months subject to extension for an additional 12 months if the lender agrees beginning in the 20th month. The lender and Aurora is currently negotiating a replacementhave extended the term of this facility with another lender that is expected to close before the expiration of the Fannie Mae MSR Financing Facility in SeptemberNovember 1, 2021. However, no assurance can be given that Aurora will enter into a replacement facility with another lender on attractive terms or at all prior to the maturity of the Fannie Mae MSR Financing Facility. The Company has guaranteed repayment of all indebtedness under the Fannie Mae MSR Financing Facility. At JuneSeptember 30, 2021 and December 31, 2020, approximately $72.0 million and $64.0 million, respectively, was outstanding under the Fannie Mae MSR Financing Facility. See Note 16 Subsequent Events for a description of the replacement facility.
Cash Flows
Operating and Investing Activities
Our operating activities provided cash of approximately $28.2$42.0 million and our investing activities provided cash of approximately $158.5$283.7 million for the six-monthnine-month period ended JuneSeptember 30, 2021.
Dividends
U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income. We intend to make regular quarterly distributions of all or substantially all of our REIT taxable income to holders of our common and preferred stock out of assets legally available for this purpose, if and to the extent authorized by our board of directors. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our repurchase agreements and other debt payable. If our cash available for distribution is less than our REIT taxable income, we could be required to sell assets or borrow funds to make cash distributions, or, with respect to our common stock, we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. We will make distributions only upon the authorization of our board of directors. The amount, timing and frequency of distributions will be authorized by our board of directors based upon a variety of factors, including: actual results of operations; our level of retained cash flows; our ability to make additional investments in our target assets; restrictions under Maryland law; the terms of our preferred stock; any debt service requirements; our taxable income;
the annual distribution requirements under the REIT provisions of the Code; and other factors that our board of directors may deem relevant.
Our ability to make distributions to our stockholders will depend upon the performance of our investment portfolio, and, in turn, upon our Manager’s management of our business. Distributions will be made quarterly in cash to the extent that cash is available for distribution. We may not be able to generate sufficient cash available for distribution to pay distributions to our stockholders. In addition, our board of directors may change our distribution policy with respect to our common stock in the future. No assurance can be given that we will be able to make any other distributions to our stockholders at any time in the future or that the level of any distributions we do make to our stockholders will achieve a market yield or increase or even be maintained over time.
We make distributions based on a number of factors, including an estimate of taxable earnings. Dividends distributed and taxable income will typically differ from GAAP earnings due to items such as fair value adjustments, differences in premium amortization and discount accretion, and nondeductible general and administrative expenses. Our common dividend per share may be substantially different than our taxable earnings and GAAP earnings per share. Our GAAP loss per diluted share for the three-month periodthree and nine-month periods ended JuneSeptember 30, 2021 was $0.81. Our GAAP income per diluted share for the six-month period ended June 30, 2021 was $0.26.$0.36 and $0.10, respectively. Our GAAP loss per diluted share for the three and six-monthnine-month periods ended JuneSeptember 30, 2020 was $0.88$0.19 and $3.90,$4.06, respectively.
Off-balance Sheet Arrangements
As of JuneSeptember 30, 2021, we did not have any off-balance sheet arrangements. We did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, or special purpose or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities or entered into any commitment or intend to provide additional funding to any such entities.
Contractual Obligations
Our contractual obligations as of JuneSeptember 30, 2021 and December 31, 2020 included repurchase agreements, borrowings under our MSR financing arrangements, our Management Agreement with our Manager, and our subservicing agreementsagreements. Following the sale of the Ginnie Mae MSRs to Freedom Mortgage in June 2020, Freedom Mortgage continues to subservice certain loans that had been purchased from Ginnie Mae pools due to delinquency or default. Once these loans and any related advance claims are rehabilitated or liquidated, our subservicing agreement with Freedom Mortgage will be terminated. It is not clear when that will occur due to the forbearance requirements as a result of the pandemic.occur.
The following table summarizes our contractual obligations for borrowed money as of the dates indicated (dollars in thousands):
Contractual Obligations Characteristics
As of JuneSeptember 30, 2021
| | Less than 1 year | | | 1 to 3 years | | | 3 to 5 years | | | More than 5 years | | | Total | | | Less than 1 year | | | 1 to 3 years | | | 3 to 5 years | | | More than 5 years | | | Total | | Repurchase agreements | | | | | | | | | | | | | | | | | | | | | | | | | | | Borrowings under repurchase agreements | | $ | 897,047 | | | $ | - | | | $ | - | | | $ | - | | | $ | 897,047 | | | $ | 777,416 | | $ | - | | $ | - | | $ | - | | $ | 777,416 | | Interest on repurchase agreement borrowings(A) | | $ | 70 | | | $ | - | | | $ | - | | | $ | - | | | $ | 70 | | | $ | 62 | | $ | - | | $ | - | | $ | - | | $ | 62 | | MSR Revolver | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Borrowings under MSR Revolver | | $ | - | | | $ | 63,000 | | | $ | - | | | $ | - | | | $ | 63,000 | | | $ | 63,000 | | $ | - | | $ | - | | $ | - | | $ | 63,000 | | Interest on MSR Revolver borrowings | | $ | 2,114 | | | $ | 150 | | | $ | - | | | $ | - | | | $ | 2,264 | | | $ | 2,370 | | $ | - | | $ | - | | $ | - | | $ | 2,370 | | Fannie Mae MSR Financing Facility | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Borrowings under Fannie Mae MSR Financing Facility | | $ | 72,000 | | | $ | - | | | $ | - | | | $ | - | | | $ | 72,000 | | | $ | 72,000 | | $ | - | | $ | - | | $ | - | | $ | 72,000 | | Interest on Fannie Mae MSR Financing Facility | | $ | 875 | | | $ | - | | | $ | - | | | $ | - | | | $ | 875 | | | $ | 438 | | $ | - | | $ | - | | $ | - | | $ | 438 | |
As of December 31, 2020
| | Less than 1 year | | | 1 to 3 years | | | 3 to 5 years | | | More than 5 years | | | Total | | Repurchase agreements | | | | | | | | | | | | | | | | Borrowings under repurchase agreements | | $ | 1,149,978 | | | $ | - | | | $ | - | | | $ | - | | | $ | 1,149,978 | | Interest on repurchase agreement borrowings(A) | | $ | 492 | | | $ | - | | | $ | - | | | $ | - | | | $ | 492 | | MSR Revolver | | | | | | | | | | | | | | | | | | | | | Borrowings under MSR Revolver | | $ | 47,500 | | | $ | - | | | $ | - | | | $ | - | | | $ | 47,500 | | Interest on MSR Revolver borrowings | | $ | 1,134 | | | $ | - | | | $ | - | | | $ | - | | | $ | 1,134 | | Fannie Mae MSR Financing Facility | | | | | | | | | | | | | | | | | | | | | Borrowings under Fannie Mae MSR Financing Facility | | $ | 64,000 | | | $ | - | | | $ | - | | | $ | - | | | $ | 64,000 | | Interest on Fannie Mae MSR Financing Facility | | $ | 1,655 | | | $ | - | | | $ | - | | | $ | - | | | $ | 1,655 | |
(A) | Interest expense is calculated based on the interest rate in effect at JuneSeptember 30, 2021 and December 31, 2020, respectively, and includes all interest expense incurred and expected to be incurred in the future through the contractual maturity of the associated repurchase agreement.those dates. |
Management Agreement
The Management Agreement with our Manager provides that our Manager is entitled to receive a management fee, the reimbursement of certain expenses and, in certain circumstances, a termination fee. The management fee is an amount equal to 1.5% per annum of our stockholders’ equity, adjusted as set forth in the Management Agreement, and calculated and payable quarterly in arrears. We will also be required to pay a termination fee equal to three times the average annual management fee earned by our Manager during the two four-quarter periods ending as of the end of the most recently completed fiscal quarter prior to the effective date of the termination. Such termination fee will be payable upon termination or non-renewal of the Management Agreement by us without cause or by our Manager if we materially breach the Management Agreement.
We pay all of our direct operating expenses, except those specifically required to be borne by our Manager under the Management Agreement. Our Manager is responsible for all costs incident to the performance of its duties under the Management Agreement. We believe that our Manager uses the proceeds from its management fee in part to pay Freedom Mortgagethe Services Provider for services provided under the Services Agreement between the Manager and Freedom Mortgage. Our officers receive no cash compensation directly from us. Our Manager provides us with our officers. Our Manager is entitled to be reimbursed for an agreed upon portion of the costs of the wages, salary and other benefits with respect to our chief financial officer, and general counsel, originally based on the percentages of their working time and efforts spent on matters related to the Company. The amount of the wages, salary and benefits reimbursed with respect to the officers our Manager provides to us is subject to the approval of the compensation committee of our board of directors.
The term of the Management Agreement will expire on October 22, 2021 and will be automatically renewed for a one-year term on such date and on each anniversary of such date thereafter unless terminated or not renewed as described below. Either we or our Manager may elect not to renew the Management Agreement upon expiration of its initial term or any renewal term by providing written notice of non-renewal at least 180 days, but not more than 270 days, before expiration. No such written notice of non-renewal was provided in 2021.2021 and the Management Agreement’s term was automatically extended until October 22, 2022. In the event we elect not to renew the term, we will be required to pay our Manager the termination fee described above. We may terminate the Management Agreement at any time for cause effective upon 30 days prior written notice of termination from us to our Manager, in which case no termination fee would be due. Our board of directors will review our Manager’s performance prior to the automatic renewal of the Management Agreement and, as a result of such review, upon the affirmative vote of at least two-thirds of the members of our board of directors or of the holders of a majority of our outstanding common stock, we may terminate the Management Agreement based upon unsatisfactory performance by our Manager that is materially detrimental to us or a determination by our independent directors that the management fees payable to our Manager are not fair, subject to the right of our Manager to prevent such a termination by agreeing to a reduction of the management fees payable to our Manager. Upon any termination of the Management Agreement based on unsatisfactory performance or unfair management fees, we are required to pay our Manager the termination fee described above. Our Manager may terminate the Management Agreement, without payment of the termination fee, in the event we become regulated as an investment company under the Investment Company Act. Our Manager may also terminate the Management Agreement upon 60 days’ written notice if we default in the performance of any material term of the Management Agreement and the default continues for a period of 30 days after written notice to us, whereupon we would be required to pay our Manager the termination fee described above. Subservicing Agreements
As of JuneSeptember 30, 2021, Aurora had four subservicing agreements in place, one of which is with Freedom Mortgage. Following the sale of the Ginnie Mae MSRs to Freedom Mortgage in June 2020, Freedom Mortgage continues to subservice certain loans that had been purchased from Ginnie Mae pools due to delinquency or default. Once these loans and any related advance claims are rehabilitated or liquidated, the subservicing agreement with Freedom Mortgage will be terminated. It is not clear when that will occur due to the forbearance requirements as a result of the pandemic.occur. One of the other subservicing agreements is with RoundPoint Mortgage Servicing Corporation (“RoundPoint”). Freedom Mortgage acquired RoundPoint and it became a wholly-owned subsidiary of Freedom Mortgage in August 2020. The agreements have varying initial terms (three years, for Freedom Mortgage, and two years for the other three sub-servicers) and are subject to automatic renewal for additional terms equal to the applicable initial term unless either party chooses not to renew. Each agreement may be terminated without cause by either party by giving notice as specified in the agreement. If an agreement is not renewed by the Company or terminated by the Company without cause, de-boarding fees will be due to the subservicer. Under each agreement, the subservicer agrees to service the applicable mortgage loans in accordance with applicable law and the requirements of the applicable Agency and the Company pays customary fees to the applicable subservicer for specified services.
Joint Marketing Recapture Agreement
We attempt to reduce the exposure of our MSRs to voluntary prepayments through the structuring of recapture agreements with Aurora’s subservicers.
In May 2018, Aurora entered into a recapture purchase and sale agreement with RoundPoint, one of Aurora’s subservicers and since August 2020, a wholly-owned subsidiary of Freedom Mortgage. Pursuant to this agreement, RoundPoint attempts to refinance certain mortgage loans underlying Aurora’s MSR portfolio subserviced by RoundPoint as directed by Aurora. If a loan is refinanced, RoundPoint will sell the loan to Fannie Mae or Freddie Mac, as applicable, retain the sale proceeds and transfer the related MSR to Aurora. The agreement continues in effect while the subservicing agreement remains in effect.
The following table provides information about loans refinanced by RoundPoint as of the dates indicated (dollars in thousands):
| | Three Months Ended | | | | June 30, 2021 | | | June 30, 2020 | | Number of loans refinanced | | | 2,173 | | | | 691 | | Aggregate unpaid principal balance of refinanced loans | | $ | 547,290 | | | $ | 178,409 | |
| | Six Months Ended | | | | June 30, 2021 | | | June 30, 2020 | | Number of loans refinanced | | | 4,926 | | | | 1,443 | | Aggregate unpaid principal balance of refinanced loans | | $ | 1,240,012 | | | $ | 377,764 | |
Inflation
Virtually all of our assets and liabilities are financial in nature. As a result, interest rates and other factors affect our performance more so than inflation, although inflation rates can often have a meaningful influence over the direction of interest rates. Furthermore, our financial statements are prepared in accordance with GAAP and our distributions are determined by our board of directors primarily based on our REIT taxable income, and, in each case, our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
We seek to manage our risks related to the credit quality of our assets, interest rates, liquidity, prepayment speeds and market value while, at the same time, seeking to provide an opportunity to stockholders to realize attractive risk-adjusted returns through ownership of our capital stock. While we do not seek to avoid risk completely, we believe the risk can be quantified from historical experience and seek to actively manage that risk, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake.
Interest Rate Risk
Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We are subject to interest rate risk in connection with our assets and our related financing obligations. In general, we finance the acquisition of certain of our assets through financings in the form of repurchase agreements and bank facilities. We expect to make use of additional MSR financing, as well as possibly warehouse facilities, securitizations, re-securitizations, and public and private equity and debt issuances in addition to transaction or asset specific funding arrangements. In addition, the values of our Servicing Related Assets are highly sensitive to changes in interest rates, historically increasing when rates rise and decreasing when rates decline. Subject to maintaining our qualification as a REIT, we attempt to mitigate interest rate risk and financing pricing risk through utilization of hedging instruments, primarily interest rate swap agreements and U.S. Treasurytreasury futures, respectively. We may also use financial futures, options, interest rate cap agreements, and forward sales. These instruments are intended to serve as a hedge against future interest rate or pricing changes on our borrowings.
Interest Rate Effect on Net Interest Income
Our operating results depend in large part on differences between the income earned on our assets and our cost of borrowing and hedging activities. The costs of our borrowings are generally based on prevailing market interest rates. During a period of rising interest rates, our borrowing costs generally will increase (1) while the yields earned on our leveraged fixed-rate mortgage assets will remain static and (2) at a faster pace than the yields earned on our leveraged adjustable-rate and hybrid adjustable-rate RMBS, which could result in a decline in our net interest spread and net interest margin. The severity of any such decline would depend on our asset/liability composition at the time as well as the magnitude and duration of the interest rate increase. Further, an increase in short-term interest rates could also have a negative impact on the market value of our assets, other than our Servicing Related Assets. A decrease in interest rates could have a negative impact on the market value of our Servicing Related Assets. If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could adversely affect our liquidity and results of operations.
Hedging techniques are partly based on assumed levels of prepayments of our assets, specifically our RMBS. If prepayments are slower or faster than assumed, the life of the investment 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 derivatives are highly complex and may produce volatile returns.
Interest Rate Cap Risk
Any adjustable-rate RMBS that we acquire will generally be subject to interest rate caps, which potentially could cause such RMBS to acquire many of the characteristics of fixed-rate securities if interest rates were to rise above the cap levels. This issue will be magnified to the extent we acquire adjustable-rate and hybrid adjustable-rate RMBS that are not based on mortgages which are fully indexed. In addition, adjustable-rate and hybrid adjustable-rate RMBS may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. This could result in our receipt of less cash income on such assets than we would need to pay the interest cost on our related borrowings. To mitigate interest rate mismatches, we may utilize the hedging strategies discussed above under “—Interest Rate Risk.” Actual economic conditions or implementation of decisions by our Manager may produce results that differ significantly from the estimates and assumptions used in our models. Prepayment Risk; Extension Risk
The following tables summarize the estimated change in fair value of our MSRs as of the dates indicated given several parallel shifts in the discount rate and voluntary prepayment rate (dollars in thousands):
MSR Fair Value Changes
As of JuneSeptember 30, 2021
| | _(20)% | | | _(10)% | | | _-% | | | _10% | | | _20% | | | | (20)% |
| | | (10)% |
| | | -% |
| | | 10% |
| | | 20% |
| Discount Rate Shift in % | | | | | | | | | | | | | | | | | | | | | | | | | | | Estimated FV | | $ | 225,827 | | | $ | 218,707 | | | $ | 211,995 | | | $ | 205,657 | | | $ | 199,667 | | | $ | 224,942 | | $ | 217,667 | | $ | 210,819 | | $ | 204,365 | | $ | 198,273 | | Change in FV | | $ | 13,832 | | | $ | 6,712 | | | $ | - | | | $ | (6,337 | ) | | $ | (12,328 | ) | | $ | 14,123 | | $ | 6,848 | | $ | - | | $ | (6,454 | ) | | $ | (12,547 | ) | % Change in FV | | | 7 | % | | | 3 | % | | | - | | | | (3 | )% | | | (6 | )% | | 7 | % | | 3 | % | | - | | (3 | )% | | (6 | )% | Voluntary Prepayment Rate Shift in % | | | | | | | | | | | | | | | | | | | | | Voluntary Prepayment Rate Shift in % | | | | | | | | | | Estimated FV | | $ | 241,234 | | | $ | 225,924 | | | $ | 211,995 | | | $ | 199,278 | | | $ | 187,623 | | | $ | 238,655 | | $ | 224,090 | | $ | 210,819 | | $ | 198,714 | | $ | 187,639 | | Change in FV | | $ | 29,239 | | | $ | 13,930 | | | $ | - | | | $ | (12,717 | ) | | $ | (24,372 | ) | | $ | 27,835 | | $ | 13,270 | | $ | - | | $ | (12,106 | ) | | $ | (23,181 | ) | % Change in FV | | | 14 | % | | | 7 | % | | | - | | | | (6 | )% | | | (11 | )% | | 13 | % | | 6 | % | | - | | (6 | )% | | (11 | )% | Servicing Cost Shift in % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Estimated FV | | $ | 218,673 | | | $ | 215,334 | | | $ | 211,995 | | | $ | 208,656 | | | $ | 205,317 | | | $ | 217,347 | | $ | 214,083 | | $ | 210,819 | | $ | 207,556 | | $ | 204,292 | | Change in FV | | $ | 6,678 | | | $ | 3,339 | | | $ | - | | | $ | (3,339 | ) | | $ | (6,678 | ) | | $ | 6,528 | | $ | 3,264 | | $ | - | | $ | (3,264 | ) | | $ | (6,528 | ) | % Change in FV | | | 3 | % | | | 2 | % | | | - | | | | (2 | )% | | | (3 | )% | | 3 | % | | 2 | % | | - | | (2 | )% | | (3 | )% |
As of December 31, 2020
| | _(20)% | | | _(10)% | | | _-% | | | _10% | | | _20% | | | | (20)% |
| | | (10)% |
| | | -% |
| | | |
| | | 20% |
| Discount Rate Shift in % | | | | | | | | | | | | | | | | | | | | | | | | | | | Estimated FV | | $ | 184,906 | | | $ | 179,511 | | | $ | 174,414 | | | $ | 169,595 | | | $ | 165,031 | | | $ | 184,906 | | $ | 179,511 | | $ | 174,414 | | $ | 169,595 | | $ | 165,031 | | Change in FV | | $ | 10,492 | | | $ | 5,096 | | | $ | - | | | $ | (4,820 | ) | | $ | (9,383 | ) | | $ | 10,492 | | $ | 5,096 | | $ | - | | $ | (4,820 | ) | | $ | (9,383 | ) | % Change in FV | | | 6 | % | | | 3 | % | | | - | | | | (3 | )% | | | (5 | )% | | 6 | % | | 3 | % | | - | | (3 | )% | | (5 | )% | Voluntary Prepayment Rate Shift in % | | | | | | | | | | | | | | | | | | | | | Voluntary Prepayment Rate Shift in % | | | | | | | | | | Estimated FV | | $ | 210,532 | | | $ | 191,603 | | | $ | 174,414 | | | $ | 158,811 | | | $ | 144,606 | | | $ | 210,532 | | $ | 191,603 | | $ | 174,414 | | $ | 158,811 | | $ | 144,606 | | Change in FV | | $ | 36,117 | | | $ | 17,189 | | | $ | - | | | $ | (15,603 | ) | | $ | (29,808 | ) | | $ | 36,117 | | $ | 17,189 | | $ | - | | $ | (15,603 | ) | | $ | (29,808 | ) | % Change in FV | | | 21 | % | | | 10 | % | | | - | | | | (9 | )% | | | (17 | )% | | 21 | % | | 10 | % | | - | | (9 | )% | | (17 | )% | Servicing Cost Shift in % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Estimated FV | | $ | 180,274 | | | $ | 177,344 | | | $ | 174,414 | | | $ | 171,485 | | | $ | 168,555 | | | $ | 180,274 | | $ | 177,344 | | $ | 174,414 | | $ | 171,485 | | $ | 168,555 | | Change in FV | | $ | 5,859 | | | $ | 2,930 | | | $ | - | | | $ | (2,930 | ) | | $ | (5,859 | ) | | $ | 5,859 | | $ | 2,930 | | $ | - | | $ | (2,930 | ) | | $ | (5,859 | ) | % Change in FV | | | 3 | % | | | 2 | % | | | - | | | | (2 | )% | | | (3 | )% | | 3 | % | | 2 | % | | - | | (2 | )% | | (3 | )% |
The following tables summarize the estimated change in fair value of our RMBS as of the dates indicated given several parallel shifts in interest rates (dollars in thousands):
RMBS Fair Value Changes
As of JuneSeptember 30, 2021
| | | | | Fair Value Change | | | | | Fair Value Change | | | | June 30, 2021 | | | +25 Bps | | | +50 Bps | | | +75 Bps | | | +100 Bps | | | +150 Bps | | | September 30, 2021 | | +25 Bps | | +50 Bps | | +75 Bps | | +100 Bps | | +150 Bps | | RMBS Portfolio | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | RMBS, available-for-sale, net of swaps | | $ | 1,381,066 | | | | | | | | | | | | | | | | | | $ | 1,436,545 | | | | | | | | | | | | RMBS Total Return (%) | | | | | | | (0.11 | )% | | | (0.38 | )% | | | (0.77 | )% | | | (1.26 | )% | | | (2.50 | )% | | | | | (0.21 | )% | | | (0.57 | )% | | | (1.06 | )% | | | (1.64 | )% | | | (3.07 | )% | RMBS Dollar Return | | | | | | $ | (1,565 | ) | | $ | (5,231 | ) | | $ | (10,595 | ) | | $ | (17,407 | ) | | $ | (34,539 | ) | | | | $ | (2,998 | ) | | $ | (8,176 | ) | | $ | (15,158 | ) | | $ | (23,584 | ) | | $ | (44,127 | ) |
As of December 31, 2020
| | | | | Fair Value Change | | | | December 31, 2020 | | | +25 Bps | | | +50 Bps | | | +75 Bps | | | +100 Bps | | | +150 Bps | | RMBS Portfolio | | | | | | | | | | | | | | | | | | | RMBS, available-for-sale, net of swaps | | $ | 1,570,182 | | | | | | | | | | | | | | | | | RMBS Total Return (%) | | | | | | | (0.07 | )% | | | (0.32 | )% | | | (0.74 | )% | | | (1.31 | )% | | | (2.81 | )% | RMBS Dollar Return | | | | | | $ | (1,160 | ) | | $ | (4,975 | ) | | $ | (11,554 | ) | | $ | (20,597 | ) | | $ | (44,187 | ) |
The sensitivity analysis is hypothetical and is presented solely to assist an analysis of the possible effects on the fair value under various scenarios. It is not a prediction of the amount or likelihood of a change in any particular scenario. In particular, the results are calculated by stressing a particular economic assumption independent of changes in any other assumption. In practice, changes in one factor may result in changes in another, which might counteract or amplify the sensitivities. In addition, changes in the fair value based on a 10% variation in an assumption generally may not be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Counterparty Risk
When we engage in repurchase transactions, we generally sell securities to lenders (i.e., the repurchase agreement counterparties) and receive cash from the lenders. The lenders are obligated to resell the same securities back to us at the end of the term of the transaction. Because the cash we receive from the lender when we initially sell the securities to the lender is less than the value of those securities (this difference is the haircut), if the lender defaults on its obligation to resell the same securities back to us we would incur a loss on the transaction equal to the amount of the haircut (assuming there was no change in the value of the securities). As of JuneSeptember 30, 2021, the Company’s exposure (defined as the amount of cash and securities pledged as collateral, less the borrowing under the repurchase agreement) to any of the counterparties under the repurchase agreements did not exceed five percent of the Company’s equity.
Our interest rate swaps and U.S. Treasurytreasury futures contracts are required to be cleared on an exchange which greatly mitigates, but does not entirely eliminate, counterparty risk.
Our investments in Servicing Related Assets are dependent on the applicable mortgage sub-servicer to perform its sub-servicing obligations. If our sub-servicer fails to perform its obligations and is terminated by one or more Agencies as an approved servicer, the value of the MSRs being subserviced by that sub-servicer may be adversely affected. In addition, when we purchase MSRs from third parties, we rely, to a certain extent, on the ability and willingness of the sellers to perform their contractual obligations to remedy breaches of representations and warranties or to repurchase the affected loan and indemnify us for any losses.
Funding Risk
To the extent available on desirable terms, we expect to continue to finance our RMBS with repurchase agreement financing. We also anticipate continuing to finance our MSRs with bank loans secured by a pledge of those MSRs. Over time, as market conditions change, in addition to these financings, we may use other forms of leverage. Weakness in the financial markets, the residential mortgage markets and the economy generally could adversely affect one or more of our potential lenders and could cause one or more of our potential lenders to be unwilling or unable to provide us with financing or to increase the costs of that financing.
Liquidity Risk
Our Servicing Related Assets, as well as some of the assets that may in the future comprise our portfolio, are not publicly traded. A portion of these assets may be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. The illiquidity of these assets may make it difficult for us to sell such assets if the need or desire arises, including in response to changes in economic and other conditions.
Credit Risk
Although we expect relatively low credit risk with respect to our portfolio of Agency RMBS, our investments in MSRs and any CMOs we may acquire expose us to the credit risk of borrowers.
Item 4. | Controls and Procedures |
Disclosure Controls and Procedures. The Company’s President and Chief Executive Officer and the Company’s Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d -15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information is recorded, processed, summarized and reported accurately and on a timely basis. Based on such evaluation, the Company’s President and Chief Executive Officer and the Company’s Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting. There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
From time to time, the Company may be involved in various claims and legal actions in the ordinary course of business. As of JuneSeptember 30, 2021, the Company is not aware of any material legal or regulatory claims or proceedings.
None.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Mine Safety Disclosures |
Not Applicable.
Not Applicable.
Exhibit Number | | Description | 31.1* | | Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. | | | | 31.2* | | Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. | | | | 32.1** | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | 32.2** | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | 101.INS* | | Inline XBRL Instance Document | | | | 101.SCH* | | Inline XBRL Taxonomy Extension Schema | | | | 101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase | | | | 101.DEF* | | Inline XBRL Taxonomy Definition Linkbase | | | | 101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase | | | | 101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase | | | | 104* | | Cover Page Interactive Data File - cover page XBRL tags are embedded within the Inline XBRL document |
*Filed herewith. **Furnished herewith.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CHERRY HILL MORTGAGE INVESTMENT CORPORATION | | | | AugustNovember 9, 2021 | By: | /s/ Jeffrey Lown II | | Jeffrey Lown II | | President and Chief Executive Officer (Principal Executive Officer) | | | | AugustNovember 9, 2021 | By: | /s/ Michael Hutchby | | Michael Hutchby | | Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer) |
CHERRY HILL MORTGAGE INVESTMENT CORPORATION FORM 10-Q June
September 30, 2021 INDEX OF EXHIBITS
Exhibit Number | | Description | | | Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. | | | | | | Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. | | | | | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | 101.INS* | | Inline XBRL Instance Document | | | | 101.SCH* | | Inline XBRL Taxonomy Extension Schema | | | | 101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase | | | | 101.DEF* | | Inline XBRL Taxonomy Definition Linkbase | | | | 101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase | | | | 101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase | | | | 104* | | Cover Page Interactive Data File - cover page XBRL tags are embedded within the Inline XBRL document |
*Filed herewith. **Furnished herewith.
79 81
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