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PART I. FINANCIALINFORMATION
ORCHID ISLAND CAPITAL, INC. CONDENSED BALANCE SHEETS ($ in thousands, except per share data) (Unaudited) June 30, 2020 December 31, 2019 ASSETS: Mortgage-backed securities, at fair value Pledged to counterparties $ 3,294,042 $ 3,584,354 Unpledged 10,719 6,567 Total mortgage-backed securities 3,304,761 3,590,921 Cash and cash equivalents 175,269 193,770 Restricted cash 60,761 84,885 Accrued interest receivable 10,241 12,404 Derivative assets, at fair value 8,231 - Receivable for securities sold, pledged to counterparties 727 - Reverse repurchase agreements 139,738 - Other assets 680 100 Total Assets $ 3,700,408 $ 3,882,080 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Repurchase agreements $ 3,174,739 $ 3,448,106 Dividends payable 3,642 5,045 Derivative liabilities, at fair value 33,229 20,658 Accrued interest payable 706 11,101 Due to affiliates 569 622 Obligation to return securities borrowed under reverse repurchase agreements, at fair value 139,843 - Other liabilities 1,712 1,041 Total Liabilities 3,354,440 3,486,573 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $ 0.01 par value; 100,000,000 shares authorized; no shares issued and outstanding as of June 30, 2020 and December 31, 2019 - - Common Stock, $ 0.01 par value; 500,000,000 shares authorized, 66,220,664 shares issued and outstanding as of June 30, 2020 and 63,061,781 shares issued and outstanding as of December 31, 2019 662 631 Additional paid-in capital 407,855 414,998 Accumulated deficit (62,549) (20,122) Total Stockholders' Equity 345,968 395,507 Total Liabilities and Stockholders' Equity $ 3,700,408 $ 3,882,080 See Notes to Financial Statements ORCHID ISLAND CAPITAL, INC. CONDENSED STATEMENTS OF OPERATIONS (Unaudited) For the Six and Three Months Ended June 30, 2020 and 2019 ($ in thousands, except per share data) Six Months Ended June 30, Three Months Ended June 30, 2020 2019 2020 2019 Interest income $ 62,929 $ 68,888 $ 27,258 $ 36,455 Interest expense (21,002) (41,323) (4,479) (22,431) Net interest income 41,927 27,565 22,779 14,024 Realized (losses) gains on mortgage-backed securities (25,020) 355 3,360 112 Unrealized gains on mortgage-backed securities 37,272 44,547 34,240 26,506 Losses on derivative and other hedging instruments (91,709) (53,320) (8,851) (34,288) Net portfolio (loss) income (37,530) 19,147 51,528 6,354 Expenses: Management fees 2,645 2,611 1,268 1,326 Allocated overhead 695 650 348 327 Accrued incentive compensation (275) (226) 161 182 Directors' fees and liability insurance 508 490 248 237 Audit, legal and other professional fees 601 665 346 364 Direct REIT operating expenses 446 660 240 285 Other administrative 277 167 145 100 Total expenses 4,897 5,017 2,756 2,821 Net (loss) income $ (42,427) $ 14,130 $ 48,772 $ 3,533 Basic net (loss) income per share $ (0.65) $ 0.28 $ 0.74 $ 0.07 Diluted net (loss) income per share $ (0.65) $ 0.28 $ 0.73 $ 0.07 Weighted Average Shares Outstanding 65,408,722 50,762,883 66,310,219 52,600,758 Dividends declared per common share $ 0.405 $ 0.480 $ 0.165 $ 0.240 See Notes to Financial Statements ORCHID ISLAND CAPITAL, INC. CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited) For the Six and Three Months Ended June 30, 2020 and 2019 (in thousands) Additional Retained Common Stock Paid-in Earnings Shares Par Value Capital (Deficit) Total Balances, January 1, 2019 49,132 $ 491 $ 379,975 $ (44,387) $ 336,079 Net income - - - 10,597 10,597 Cash dividends declared - - (11,822) - (11,822) Issuance of common stock pursuant to public offerings, net 1,268 13 8,490 - 8,503 Issuance of common stock pursuant to stock based compensation plan 7 - (6) - (6) Amortization of stock based compensation - - 87 - 87 Shares repurchased and retired (469) (5) (3,019) - (3,024) Balances, March 31, 2019 49,938 $ 499 $ 373,705 $ (33,790) $ 340,414 Net income - - 3,533 3,533 Cash dividends declared - (12,859) - (12,859) Issuance of common stock pursuant to public offerings, net 4,338 44 28,451 - 28,495 Issuance of common stock pursuant to stock based compensation plan 7 - 43 - 43 Amortization of stock based compensation - 32 - 32 Balances, June 30, 2019 54,283 $ 543 $ 389,372 $ (30,257) $ 359,658 Balances, January 1, 2020 63,062 $ 631 $ 414,998 $ (20,122) $ 395,507 Net loss - - - (91,199) (91,199) Cash dividends declared - - (15,670) - (15,670) Issuance of common stock pursuant to public offerings, net 3,171 31 19,416 - 19,447 Issuance of common stock pursuant to stock based compensation plan 4 - - - - Amortization of stock based compensation - - 59 - 59 Balances, March 31, 2020 66,237 $ 662 $ 418,803 $ (111,321) $ 308,144 Net income - - - 48,772 48,772 Cash dividends declared - - (10,935) - (10,935) Issuance of common stock pursuant to stock based compensation plan 4 - - - - Amortization of stock based compensation - - 55 - 55 Shares repurchased and retired (20) - (68) - (68) Balances, June 30, 2020 66,221 $ 662 $ 407,855 $ (62,549) $ 345,968 See Notes to Financial Statements ORCHID ISLAND CAPITAL, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) For the Six Months Ended June 30, 2020 and 2019 ($ in thousands) 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (42,427) $ 14,130 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Stock based compensation 114 158 Realized and unrealized gains on mortgage-backed securities (12,252) (44,902) Realized and unrealized losses on interest rate swaptions 5,090 1,063 Realized and unrealized losses on interest rate swaps 64,357 35,869 Realized and unrealized losses on U.S. Treasury securities 131 - Realized losses on forward settling to-be-announced securities 5,244 6,325 Changes in operating assets and liabilities: Accrued interest receivable 2,163 (624) Other assets (580) 162 Accrued interest payable (10,395) 3,609 Other liabilities 671 (116) Due from affiliates (53) (100) NET CASH PROVIDED BY OPERATING ACTIVITIES 12,063 15,574 CASH FLOWS FROM INVESTING ACTIVITIES: From mortgage-backed securities investments: Purchases (1,985,756) (2,164,094) Sales 2,023,334 1,689,747 Principal repayments 260,834 229,633 Proceeds from U.S. Treasury securities 139,712 - Net payments on reverse repurchase agreements (139,738) - Payments on net settlement of to-be-announced securities (6,888) (10,559) Purchase of derivative financial instruments, net of margin cash received (64,190) (19,649) NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 227,308 (274,922) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from repurchase agreements 20,879,112 22,265,665 Principal payments on repurchase agreements (21,152,479) (21,961,190) Cash dividends (28,008) (24,271) Proceeds from issuance of common stock, net of issuance costs 19,447 36,998 Common stock repurchases (68) (3,024) NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (281,996) 314,178 NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH (42,625) 54,830 CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the period 278,655 126,263 CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the period $ 236,030 $ 181,093 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 31,397 $ 37,713 See Notes to Financial Statements ORCHID ISLAND CAPITAL, INC.1234
JUNE 30, 2020
2021
August 2020.
On January 23,4, 2020, Orchid entered into an equity distribution agreement (the “January“August 2020Equity Distribution Agreement”) with three
sale of
5
condition.
calls, we were forced to sell assets at levels significantly below their carrying values and closed several hedge positions.
We sold approximately $2.0 billion of RMBS during the six months ended June 30, 2020, realizing losses of approximately $25.0 million. Approximately $1.1 billion of these sales were executed on March 19th and March 20th and resulted in losses of approximately $31.4 million. The losses sustained on these two days were a direct result of the COVID-19pandemic atthis time,if the pandemiccontinues,it may continueto have
We terminated interest rate swap positions with an aggregate notional value of $1.2 billion and incurred approximately $54.5 million in mark to market losses effectson the positions throughCompany’sresults offuture operations,financial position,and liquidityduring 2021.
Our RMBS portfolio had a fair market value of approximately $3.3 billion as of June 30, 2020, compared to $3.6 billion as of year endingDecember 31, 2019. 2021.
Our outstanding balances under our repurchase agreement borrowings as of June 30, 2020 were approximately $3.2 billion, compared to $3.4 billion as of December 31, 2019 and $2.8 billion as of March 31, 2020.
Our stockholders’ equity was $346.0 million as of June 30, 2020, compared to $395.5 million as of December 31, 2019 and $308.1 million as of March 31, 2020.
In response to the Shelter in Place order issued in Florida, our Manager (as defined below) has invoked its Disaster Recovery Plan and its employees are working remotely. Prior planning resulted in the successful implementation of this plan and key operational team members maintain daily communication.
Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may continue to have adverse effects on the Company’s results of future operations, financial position, and liquidity in fiscal year 2020 and beyond.
In addition, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which has provided billions of dollars of relief to individuals, businesses, state and local governments, and the health care system suffering the impact of the pandemic, including mortgage loan forbearance and modification programs to qualifying borrowers who may have difficulty making their loan payments. The Company has evaluated the provisions of the CARES Act and has determined that it will not have a material effect on the Company’s business, results of operations and financial condition. The Federal Housing Financing Agency (the “FHFA”) has instructed the GSEs on how they will handle servicer advances for loans that back Agency RMBS that enter into forbearance, which should limit prepayments during the forbearance period that could have resulted otherwise. There can be no assurance as to how, in the long term, these and other actions by the U.S. government will affect the efficiency, liquidity and stability of the financial and mortgage markets. To the extent the financial or mortgage markets do not respond favorably to any of these actions, or such actions do not function as intended, our business, results of operations and financial condition may continue to be materially adversely affected.
Basis of Presentation and Use of Estimates
The accompanying unaudited financial statements have been prepared in accordance with accounting
6
principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six and three month period ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.
The balance sheet at December 31, 2019 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant estimates affecting the accompanying financial statements are the fair values of RMBS and derivatives. Management believes the estimates and assumptions underlying the financial statements are reasonable based on the information available as of June 30, 2020; however, uncertainty over the ultimate impact that COVID-19 will have on the global economy generally, and on Orchid’s business in particular, makes any estimates and assumptions as of June 30, 2020 inherently less certain than they would be absent the current and potential impacts of COVID-19.
The following table provides a reconciliation of
(in thousands) |
|
| ||
| June 30, 2020 | December 31, 2019 | ||
Cash and cash equivalents | $ | 175,269 | $ | 193,770 |
Restricted cash |
| 60,761 |
| 84,885 |
Total cash, cash equivalents and restricted cash | $ | 236,030 | $ | 278,655 |
7
clearing members.At times,
8
into otherderivativeand otherhedging instrumentsin the future.
Financial Instruments
The fair value of financial instruments for which it is practicable to estimate that value is disclosed either in the body of the financial statements or in the accompanying notes. RMBS, Eurodollar, Fed Funds and T-Note futures contracts, interest rate swaps, interest rate swaptions and TBA securities are accounted for at fair value in the balance sheets. The methods and assumptions used to estimate fair value for these instruments are presented in Note 12 of the financial statements.
The estimated fair value of cash and cash equivalents, restricted cash, accrued interest receivable, receivable for securities sold, other assets, due to affiliates, repurchase agreements, payable for unsettled securities purchased, accrued interest payable and other liabilities generally approximates their carrying values as of June 30, 2020 and December 31, 2019 due to the short-term nature of these financial instruments.
Repurchase Agreements
The Company finances the acquisition of the majority of its RMBS through the use of repurchase agreements under master repurchase agreements. Repurchase agreements are accounted for as collateralized financing transactions, which are carried at their contractual amounts, including accrued interest, as specified in the respective agreements.
Reverse Repurchase Agreements and Obligations to Return Securities Borrowed under Reverse Repurchase Agreements
The Company borrows securities to cover short sales of U.S. Treasury securities through reverse repurchase transactions under our master repurchase agreements. We account for these as securities borrowing transactions and recognize an obligation to return the borrowed securities at fair value on the balance sheet based on the value of the underlying borrowed securities as of the reporting date. The securities received as collateral in connection with our reverse repurchase agreements mitigate our credit risk exposure to counterparties. Our reverse repurchase agreements typically have maturities of 30 days or less.
Manager Compensation
9
The Company is externally managed by Bimini Advisors, LLC (the “Manager” or “Bimini Advisors”), a Maryland limited liability company and wholly-owned subsidiary of Bimini. The Company’s management agreement with the Manager provides for payment to the Manager of a management fee and reimbursement of certain operating expenses, which are accrued and expensed during the period for which they are earned or incurred. Refer to Note 13 for the terms of the managementagreement.
10
(in thousands) |
|
|
|
| |
|
| June 30, 2020 | December 31, 2019 | ||
Pass-Through RMBS Certificates: |
|
|
|
| |
| Adjustable-rate Mortgages | $ | 957 | $ | 1,014 |
| Fixed-rate Mortgages |
| 3,105,028 |
| 3,206,013 |
| Fixed-rate CMOs |
| 162,517 |
| 299,205 |
| Total Pass-Through Certificates |
| 3,268,502 |
| 3,506,232 |
Structured RMBS Certificates: |
|
|
|
| |
| Interest-Only Securities |
| 36,259 |
| 60,986 |
| Inverse Interest-Only Securities |
| - |
| 23,703 |
| Total Structured RMBS Certificates |
| 36,259 |
| 84,689 |
Total | $ | 3,304,761 | $ | 3,590,921 | |
2020
Repurchase Agreements
($ in thousands) |
|
|
|
|
|
|
|
|
|
| |
|
| OVERNIGHT | BETWEEN 2 | BETWEEN 31 |
| GREATER |
|
| |||
|
| (1 DAY OR | AND | AND |
| THAN |
|
| |||
|
| LESS) | 30 DAYS | 90 DAYS |
| 90 DAYS |
| TOTAL | |||
June 30, 2020 | |||||||||||
Fair market value of securities pledged, including |
|
|
|
|
|
|
|
|
|
| |
| accrued interest receivable | $ | 24,222 | $ | 2,449,070 | $ | 748,704 | $ | 82,469 | $ | 3,304,465 |
Repurchase agreement liabilities associated with |
|
|
|
|
|
|
|
|
|
| |
| these securities | $ | 20,666 | $ | 2,358,722 | $ | 716,434 | $ | 78,917 | $ | 3,174,739 |
Net weighted average borrowing rate |
| 0.74% |
| 0.26% |
| 0.27% |
| 0.30% |
| 0.27% | |
December 31, 2019 | |||||||||||
Fair market value of securities pledged, including |
|
|
|
|
|
|
|
|
|
| |
| accrued interest receivable | $ | - | $ | 2,470,263 | $ | 1,005,517 | $ | 120,941 | $ | 3,596,721 |
Repurchase agreement liabilities associated with |
|
|
|
|
|
|
|
|
|
| |
| these securities | $ | - | $ | 2,361,378 | $ | 964,368 | $ | 122,360 | $ | 3,448,106 |
Net weighted average borrowing rate |
| - |
| 2.04% |
| 1.94% |
| 2.60% |
| 2.03% | |
2020
11
If, duringthe term ofa repurchaseagreement,a lender filesfor bankruptcy,the Companymight experiencedifficulty recoveringits
Reverse Repurchase Agreements
As of June 30, 2020, the Company had $139.7 million of reverse repurchase agreements outstanding used primarily to borrow securities to cover short sales of U.S. Treasury securities, for which we had associated obligations to return borrowed securities at fair value of $139.8 million. The Company had no reverse repurchase agreements outstanding as of December 31, 2019.
The table below summarizes fair value information about our derivative and other hedging instruments assets and liabilities as of June 30, 2020 and
(in thousands) |
|
|
|
|
|
|
Derivative Instruments and Related Accounts |
| Balance Sheet Location | June 30, 2020 | December 31, 2019 | ||
Assets |
|
|
|
|
|
|
Payer swaptions - long |
| Derivative assets, at fair value | $ | 7,825 | $ | - |
TBA securities |
| Derivative assets, at fair value |
| 406 |
| - |
Total derivative assets, at fair value |
|
| $ | 8,231 | $ | - |
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
Interest rate swaps |
| Derivative liabilities, at fair value | $ | 29,940 | $ | 20,146 |
Payer swaptions - short |
| Derivative liabilities, at fair value |
| 3,289 |
| - |
TBA securities |
| Derivative liabilities, at fair value |
| - |
| 512 |
U.S. Treasury securities - short |
| Obligation to return securities borrowed |
| 139,843 |
| - |
Total derivative liabilities, at fair value |
|
| $ | 173,072 | $ | 20,658 |
|
|
|
|
|
|
|
Margin Balances Posted to (from) Counterparties |
|
|
|
|
|
|
Futures contracts |
| Restricted cash | $ | 655 | $ | 1,338 |
TBA securities |
| Restricted cash |
| - |
| 246 |
TBA securities |
| Other liabilities |
| (730) |
| - |
Interest rate swaption contracts |
| Restricted cash |
| 1,348 |
| - |
Interest rate swap contracts |
| Restricted cash |
| 23,149 |
| 17,450 |
Total margin balances on derivative contracts |
|
| $ | 24,422 | $ | 19,034 |
2020
12
Average
($ in thousands) |
|
|
|
|
|
|
|
|
| |
|
|
| June 30, 2020 | |||||||
|
|
| Average |
| Weighted |
| Weighted |
|
|
|
|
|
| Contract |
| Average |
| Average |
|
|
|
|
|
| Notional |
| Entry |
| Effective |
|
| Open |
Expiration Year |
| Amount |
| Rate |
| Rate |
|
| Equity(1) | |
Eurodollar Futures Contracts (Short Positions) |
|
|
|
|
|
|
|
|
| |
2020 | $ | 50,000 |
| 3.25% |
| 0.28% |
| $ | (742) | |
2021 |
| 50,000 |
| 1.03% |
| 0.19% |
|
| (419) | |
Total / Weighted Average | $ | 50,000 |
| 1.77% |
| 0.22% |
| $ | (1,161) | |
Treasury Note Futures Contracts (Short Position)(2) |
|
|
|
|
|
|
|
|
| |
September 2020 5-year T-Note futures |
|
|
|
|
|
|
|
|
| |
| (Sep 2020 - Sep 2025 Hedge Period) | $ | 69,000 |
| 0.81% |
| 0.75% |
| $ | (190) |
($ in thousands) |
|
|
|
|
|
|
|
|
| |
|
| December 31, 2019 | ||||||||
|
| Average |
| Weighted |
| Weighted |
|
|
| |
|
| Contract |
| Average |
| Average |
|
|
| |
|
| Notional |
| Entry |
| Effective |
|
| Open | |
Expiration Year |
| Amount |
| Rate |
| Rate |
|
| Equity(1) | |
Eurodollar Futures Contracts (Short Positions) |
|
|
|
|
|
|
|
|
| |
2020 | $ | 500,000 |
| 2.97% |
| 1.67% |
| $ | (6,505) | |
Total / Weighted Average | $ | 500,000 |
| 2.97% |
| 1.67% |
| $ | (6,505) | |
Treasury Note Futures Contracts (Short Position)(2) |
|
|
|
|
|
|
|
|
| |
March 2020 5 year T-Note futures |
|
|
|
|
|
|
|
|
| |
| (Mar 2020 - Mar 2025 Hedge Period) | $ | 69,000 |
| 1.96% |
| 2.06% |
| $ | 302 |
Weighted
($ in thousands) |
|
|
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|
|
|
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|
|
|
|
| Average |
|
|
|
| Net |
|
|
|
|
|
| Fixed |
| Average |
|
| Estimated |
| Average |
|
| Notional |
| Pay |
| Receive |
|
| Fair |
| Maturity |
|
| Amount |
| Rate |
| Rate |
|
| Value |
| (Years) |
June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
Expiration > 3 to ≤ 5 years | $ | 620,000 |
| 1.29% |
| 0.46% |
| $ | (27,018) |
| 4.1 |
Expiration > 5 years |
| 200,000 |
| 0.67% |
| 0.31% |
|
| (2,922) |
| 7.0 |
| $ | 820,000 |
| 1.14% |
| 0.42% |
| $ | (29,940) |
| 4.8 |
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
Expiration > 1 to ≤ 3 years | $ | 360,000 |
| 2.05% |
| 1.90% |
| $ | (3,680) |
| 2.3 |
Expiration > 3 to ≤ 5 years |
| 910,000 |
| 2.03% |
| 1.93% |
|
| (16,466) |
| 4.4 |
| $ | 1,270,000 |
| 2.03% |
| 1.92% |
| $ | (20,146) |
| 3.8 |
2020
13
Expiration > 3 to ≤ 5 years
$
($ in thousands) |
|
|
|
|
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|
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| |
|
| Option |
| Underlying Swap | ||||||||||||
|
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|
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|
|
| Weighted |
|
|
|
|
|
| Average |
| Weighted |
|
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|
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|
|
| Average |
|
|
|
| Average |
| Adjustable |
| Average |
|
|
|
|
| Fair |
| Months to |
|
| Notional |
| Fixed |
| Rate |
| Term |
Expiration |
| Cost |
| Value |
| Expiration |
|
| Amount |
| Rate |
| (LIBOR) |
| (Years) | |
June 30, 2020 |
|
|
|
|
|
|
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|
| |
Payer Swaptions - long |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| ≤ 1 year | $ | 3,450 | $ | 231 |
| 8.5 |
| $ | 500,000 |
| 0.95% |
| 3 Month |
| 4.0 |
| >1 year ≤ 2 years |
| 8,100 |
| 7,594 |
| 23.2 |
|
| 582,000 |
| 1.50% |
| 3 Month |
| 10.0 |
|
| $ | 11,550 | $ | 7,825 |
| 16.4 |
| $ | 1,082,000 |
| 1.25% |
| 3 Month |
| 7.2 |
Payer Swaptions - short |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| ≤ 1 year | $ | (2,400) | $ | (3,289) |
| 11.2 |
| $ | 436,200 |
| 1.50% |
| 3 Month |
| 10.0 |
2020
($ in thousands) |
|
|
|
|
|
|
|
| |
|
| Notional |
|
|
|
|
| Net | |
|
| Amount |
| Cost |
| Market |
| Carrying | |
|
| Long (Short)(1) |
| Basis(2) |
| Value(3) |
| Value(4) | |
June 30, 2020 |
|
|
|
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|
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|
| |
15-Year TBA securities: |
|
|
|
|
|
|
|
| |
| 2.0% | $ | 200,000 | $ | 206,094 | $ | 206,500 | $ | 406 |
Total | $ | 200,000 | $ | 206,094 | $ | 206,500 | $ | 406 | |
December 31, 2019 |
|
|
|
|
|
|
|
| |
30-Year TBA securities: |
|
|
|
|
|
|
|
| |
| 4.5% | $ | (300,000) | $ | (315,426) | $ | (315,938) | $ | (512) |
Total | $ | (300,000) | $ | (315,426) | $ | (315,938) | $ | (512) | |
2020
The following table summarizes our U.S. Treasury short positions as of June 30, 2020. There were no U.S. Treasury short positions as of December 31, 2019.
($ in thousands) |
|
|
|
|
|
|
|
| Face |
| Cost |
| Fair |
|
| Amount |
| Basis |
| Value |
Maturity |
|
|
|
|
|
|
5 Years | $ | (140,000) | $ | (139,712) | $ | (139,843) |
Total | $ | (140,000) | $ | (139,712) | $ | (139,843) |
2020.
14
(in thousands) |
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, |
| Three Months Ended June 30, | ||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
Eurodollar futures contracts (short positions) | $ | (8,318) | $ | (14,329) | $ | (101) | $ | (4,287) |
T-Note futures contracts (short position) |
| (4,724) |
| (5,199) |
| (385) |
| (3,523) |
Interest rate swaps |
| (68,202) |
| (26,404) |
| (7,579) |
| (24,109) |
Payer swaptions - short |
| (889) |
| - |
| (889) |
| - |
Payer swaptions - long |
| (4,201) |
| (1,063) |
| (1,612) |
| (685) |
Net TBA securities |
| (5,244) |
| (6,325) |
| 1,846 |
| (1,684) |
U.S. Treasury securities - short position |
| (131) |
| - |
| (131) |
| - |
Total | $ | (91,709) | $ | (53,320) | $ | (8,851) | $ | (34,288) |
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| June 30, 2020 |
| December 31, 2019 | ||||||||||
|
| Repurchase | Derivative |
|
| Repurchase | Derivative |
| ||||||
Assets Pledged to Counterparties | Agreements | Agreements | Total |
| Agreements | Agreements | Total | |||||||
PT RMBS - fair value | $ | 3,260,143 | $ | - | $ | 3,260,143 |
| $ | 3,500,394 | $ | - | $ | 3,500,394 | |
Structured RMBS - fair value |
| 33,899 |
| - |
| 33,899 |
|
| 83,960 |
| - |
| 83,960 | |
Accrued interest on pledged securities |
| 10,127 |
| - |
| 10,127 |
|
| 12,367 |
| - |
| 12,367 | |
Restricted cash |
| 35,609 |
| 25,152 |
| 60,761 |
|
| 65,851 |
| 19,034 |
| 84,885 | |
Total | $ | 3,339,778 | $ | 25,152 | $ | 3,364,930 |
| $ | 3,662,572 | $ | 19,034 | $ | 3,681,606 | |
Assets Pledged from Counterparties
15
The table below summarizes our assets pledged tous from counterpartiesunder ourrepurchaseagreements,reverse repurchase
(in thousands) |
|
|
|
|
|
|
|
|
|
| Reverse |
|
| ||||
| Repurchase | Repurchase | Derivative |
| ||||
Assets Pledged to Orchid | Agreements | Agreements | Agreements | Total | ||||
June 30, 2020 | ||||||||
Cash | $ | 10,920 | $ | - | $ | 730 | $ | 11,650 |
U.S. Treasury securities - fair value |
| - |
| 139,843 |
| 522 |
| 140,365 |
Total | $ | 10,920 | $ | 139,843 | $ | 1,252 | $ | 152,015 |
December 31, 2019 | ||||||||
Cash | $ | 1,418 | $ | - | $ | - | $ | 1,418 |
Total | $ | 1,418 | $ | - | $ | - | $ | 1,418 |
RMBS and 2020
(in thousands) Offsetting of Assets Gross Amount Not Net Amount Offset in the Balance Sheet of Assets Financial Gross Amount Gross Amount Presented Instruments Cash of Recognized Offset in the in the Received as Received as Net Assets Balance Sheet Balance Sheet Collateral Collateral Amount June 30, 2020 Interest rate swaptions $ 7,825 $ - $ 7,825 $ (522) $ - $ 7,303 TBA securities 406 - 406 - (406) - Reverse repurchase agreements 139,738 - 139,738 (139,738) - - $ 147,969 $ - $ 147,969 $ (140,260) $ (406) $ 7,303June 30, 2020March 31,2021 and December31, 2019.
2020.(in thousands)Offsetting of LiabilitiesGross Amount NotNet AmountOffset in the Balance Sheet
16
|
|
| of Liabilities | Financial |
|
| ||||||
| Gross Amount | Gross Amount | Presented | Instruments |
|
| ||||||
| of Recognized | Offset in the | in the | Posted as | Cash Posted | Net | ||||||
| Liabilities | Balance Sheet | Balance Sheet | Collateral | as Collateral | Amount | ||||||
June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase Agreements | $ | 3,174,739 | $ | - | $ | 3,174,739 | $ | (3,139,130) | $ | (35,609) | $ | - |
Interest rate swaps |
| 29,940 |
| - |
| 29,940 |
| - |
| (23,149) |
| 6,791 |
Interest rate swaptions |
| 3,289 |
| - |
| 3,289 |
| - |
| (1,348) |
| 1,941 |
| $ | 3,207,968 | $ | - | $ | 3,207,968 | $ | (3,139,130) | $ | (60,106) | $ | 8,732 |
December 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase Agreements | $ | 3,448,106 | $ | - | $ | 3,448,106 | $ | (3,382,255) | $ | (65,851) | $ | - |
Interest rate swaps |
| 20,146 |
| - |
| 20,146 |
| - |
| (17,450) |
| 2,696 |
TBA securities |
| 512 |
| - |
| 512 |
| - |
| (246) |
| 266 |
| $ | 3,468,764 | $ | - | $ | 3,468,764 | $ | (3,382,255) | $ | (83,547) | $ | 2,962 |
($ in thousands, except per share amounts) |
|
|
|
|
|
| |
|
|
| Weighted |
|
|
|
|
|
|
| Average |
|
|
|
|
|
|
| Price |
|
|
|
|
|
|
| Received |
|
|
| Net |
Type of Offering | Period |
| Per Share(1) |
| Shares |
| Proceeds(2) |
2020 |
|
|
|
|
|
|
|
At the Market Offering Program(3) | First Quarter | $ | 6.23 |
| 3,170,727 | $ | 19,447 |
Total |
|
|
|
| 3,170,727 | $ | 19,447 |
2019 |
|
|
|
|
|
|
|
At the Market Offering Program(3) | First Quarter | $ | 6.84 |
| 1,267,894 | $ | 8,503 |
At the Market Offering Program(3) | Second Quarter |
| 6.70 |
| 4,337,931 |
| 28,495 |
At the Market Offering Program(3) | Third Quarter |
| 6.37 |
| 1,771,301 |
| 11,098 |
Follow-on Offering | Third Quarter |
| 6.35 |
| 7,000,000 |
| 44,218 |
|
|
|
|
| 14,377,126 | $ | 92,314 |
17
On July 29, 2015,, the Company’s Board of Directors authorized the repurchase of up to
(in thousands, except per share amounts) | ||||||
Year |
|
|
| Per Share Amount |
| Total |
2013 |
|
| $ | 1.395 | $ | 4,662 |
2014 |
|
|
| 2.160 |
| 22,643 |
2015 |
|
|
| 1.920 |
| 38,748 |
2016 |
|
|
| 1.680 |
| 41,388 |
2017 |
|
|
| 1.680 |
| 70,717 |
2018 |
|
|
| 1.070 |
| 55,814 |
2019 |
|
|
| 0.960 |
| 54,421 |
2020 - YTD(1) |
|
|
| 0.465 |
| 30,595 |
Totals |
|
| $ | 11.330 | $ | 318,988 |
March 31, 2021.
18
appreciation rights, stock award, performance units, other equity-based awards (and
($ in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, | ||||||||
|
|
| 2020 |
| 2019 | ||||||
|
|
|
|
|
| Weighted |
|
|
|
| Weighted |
|
|
|
|
|
| Average |
|
|
|
| Average |
|
|
|
|
|
| Grant Date |
|
|
|
| Grant Date |
|
|
| Shares |
|
| Fair Value |
| Shares |
|
| Fair Value |
Unvested, beginning of period |
|
| 19,021 |
| $ | 7.78 |
| 43,672 |
| $ | 8.34 |
Vested and issued |
|
| (8,305) |
|
| 8.20 |
| (16,345) |
|
| 9.08 |
Unvested, end of period |
|
| 10,716 |
| $ | 7.45 |
| 27,327 |
| $ | 7.90 |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense during period |
|
|
|
| $ | 25 |
|
|
| $ | 74 |
Unrecognized compensation expense, end of period |
|
|
|
| $ | 17 |
|
|
| $ | 83 |
Intrinsic value, end of period |
|
|
|
| $ | 50 |
|
|
| $ | 174 |
Weighted-average remaining vesting term (in years) |
|
|
|
|
| 0.6 |
|
|
|
| 1.0 |
may in the future issue additional, immediately vested common stock under the
19
The following table presents information related to the DSUs outstanding during the sixthree months ended June 30, 2020March 31,
($ in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, | ||||||||
| 2020 |
| 2019 | ||||||
|
|
|
| Weighted |
|
|
|
| Weighted |
|
|
|
| Average |
|
|
|
| Average |
|
|
|
| Grant Date |
|
|
|
| Grant Date |
| Shares |
|
| Fair Value |
| Shares |
|
| Fair Value |
Outstanding, beginning of period | 43,570 |
| $ | 6.56 |
| 12,434 |
| $ | 7.37 |
Granted and vested | 25,518 |
|
| 3.99 |
| 14,662 |
|
| 6.48 |
Issued | - |
|
| - |
| - |
|
| - |
Outstanding, end of period | 69,088 |
| $ | 5.61 |
| 27,096 |
| $ | 6.89 |
|
|
|
|
|
|
|
|
|
|
Compensation expense during period |
|
| $ | 90 |
|
|
| $ | 90 |
Intrinsic value, end of period |
|
| $ | 325 |
|
|
| $ | 172 |
2020.
March 31, 2021.
The table below reconcilesoutstanding at the numeratorbalance sheet date
(in thousands, except per share information) |
|
|
|
|
|
|
|
| ||
|
|
|
| Six Months Ended June 30, |
| Three Months Ended June 30, | ||||
|
|
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
20
$
Basic and diluted EPS per common share: |
|
|
|
|
|
|
|
| ||
Numerator for basic and diluted EPS per share of common stock: |
|
|
|
|
|
|
|
| ||
| Net (loss) income - Basic and diluted | $ | (42,426) | $ | 14,130 | $ | 48,773 | $ | 3,533 | |
Weighted average shares of common stock: |
|
|
|
|
|
|
|
| ||
| Shares of common stock outstanding at the balance sheet date | 66,221 |
| 54,283 |
| 66,221 |
| 54,283 | ||
| Unvested dividend eligible share based compensation |
|
|
|
|
|
|
|
| |
|
| outstanding at the balance sheet date |
| - |
| 54 |
| 80 |
| 54 |
| Effect of weighting |
| (812) |
| (3,574) |
| 9 |
| (1,736) | |
Weighted average shares-basic and diluted |
| 65,409 |
| 50,763 |
| 66,310 |
| 52,601 | ||
Net (loss) income per common share: |
|
|
|
|
|
|
|
| ||
| Basic | $ | (0.65) | $ | 0.28 | $ | 0.74 | $ | 0.07 | |
| Diluted | $ | (0.65) | $ | 0.28 | $ | 0.73 | $ | 0.07 | |
Anti-dilutive incentive shares not included in calculation. |
| 80 |
| - |
| - |
| - | ||
(0.34)
Level 1 valuations, where the valuation is based on quoted market prices for identical assetsor liabilities traded in active markets (which include exchanges and over-the-counter markets with sufficient volume),
Level 2 valuations, where the valuation is based on quoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market, and
Level 3 valuations, where the valuation is generated from model-based techniques that use significant assumptions not observable in the market, but observable based on Company-specific data. These unobservable assumptions reflect the Company’s own estimates for assumptions that market participants would use in pricing the asset or liability. Valuation techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparableto the subjectasset orliability.
21
if applicable,the coupon,the maturity, theissuer, size ofthe underlyingloans, yearin which theunderlyingloans
The following table presents financial assets (liabilities) measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019.Derivative contracts are reported as a net position by contract type, and not based on master netting arrangements.
(in thousands) |
|
|
|
|
|
|
|
| Quoted Prices |
|
|
|
|
|
| in Active |
| Significant |
|
|
|
| Markets for |
| Other |
| Significant |
|
| Identical |
| Observable |
| Unobservable |
|
| Assets |
| Inputs |
| Inputs |
|
| (Level 1) |
| (Level 2) |
| (Level 3) |
June 30, 2020 |
|
|
|
|
|
|
Mortgage-backed securities | $ | - | $ | 3,304,761 | $ | - |
Interest rate swaps |
| - |
| (29,940) |
| - |
Interest rate swaptions |
| - |
| 4,535 |
| - |
TBA securities |
| - |
| 406 |
| - |
Obligation to return securities borrowed under reverse repurchase agreements |
| - |
| 139,843 |
| - |
December 31, 2019 |
|
|
|
|
|
|
Mortgage-backed securities | $ | - | $ | 3,590,921 | $ | - |
Interest rate swaps |
| - |
| (20,146) |
| - |
TBA securities |
| - |
| (512) |
| - |
During the six and three months ended June 30, 2020 and 2019, there were no transfersof financial assets or liabilities between levels 1,
22
●
23
Capital Raising Activities August 2020. On and our quarterly reports on Form 10-Q, our actual results may (“Impact of the COVID-19 Pandemic24Beginning in March 2020, the global pandemic associated with the novel coronavirus COVID-19 (“COVID-19”) and related economic conditions began to impact our financial position and results of operations. As a result of the economic, health and market turmoil brought about by COVID-19, the Agency RMBS market experienced severe dislocations. This resulted in falling prices of our assets and increased margin calls from our repurchase agreement lenders. Further, as interest rates declined, we faced additional margin calls related to our various hedge positions. In order to maintain sufficient cash and liquidity, reduce risk and satisfy margin calls, we were forced to sell assets at levels significantly below their carrying values and closed several of our hedge positions. The Agency RMBS market largely stabilized after the Federal Reserve (the “Fed”) announced on March 23, 2020 that it would purchase Agency RMBS and U.S. Treasuries in the amounts needed to support smooth market functioning. As of June 30, 2020, we had timely satisfied all margin calls. The following summarizes the impact COVID-19 has had on our financial position and results of operations through June 30, 2020. We sold approximately $2.0 billion of RMBS during the six months ended June 30, 2020, realizing losses of approximately $25.0 million. Approximately $1.1 billion of these sales were executed on March 19th and March 20th and resulted in losses of approximately $31.4 million. The losses sustained on these two days were a direct result of the adverse RMBS market conditions associated with COVID-19. We terminated interest rate swap positions with an aggregate notional value of $1.2 billion and incurred approximately $54.5 million in mark to market losses on the positions through the date of the respective terminations. Approximately $45.0 million of these losses occurred during the three months ended March 31, 2020.Our RMBS portfolio had a fair market value of approximately $3.3 billion as of June 30, 2020, compared to $3.6 billion as of December 31, 2019. The June 30, 2020 balance represents an increase from the $2.9 billion balance as of March 31, 2020. Our outstanding balances under our repurchase agreement borrowings as of June 30, 2020 were approximately $3.2 billion, compared to $3.4 billion as of December 31, 2019 and $2.8 billion as of March 31, 2020. Our stockholders’ equity was $346.0 million as of June 30, 2020, compared to $395.5 million as of December 31, 2019 and $308.1 million as of March 31, 2020. Largely as a result of actions taken by the Fed in late March, Agency RMBS valuations have increased and the market for these assets has stabilized.Bimini Advisors, LLC (our “Manager”) has invoked its Disaster Recovery Plan and its employees are working remotely. Prior planning resulted in the successful implementation of this plan and key operational team members maintain daily communication. We do not anticipate incurring additional material costs, nor have we identified any operational or internal control issues related to this remote working plan.August 2, 2017,January 23, 2020, we entered into an equity distribution agreement (the “August 2017“January2020 Equity Distribution Agreement”) with two$125,000,000$200,000,000 of shares15,123,1783,170,727 shares under the August 2017January 2020 Equity Distribution Agreement for aggregategross proceeds of $125.0$19.8 million, and$123.1$19.4 million, net of commissions and fees, prior toits termination in July 2019.25July 30, 2019, we entered into an underwriting agreement (the “Underwriting Agreement”) with Morgan Stanley & Co. LLC, Citigroup Global Markets Inc. and J.P. Morgan Securities LLC, as representatives of the underwriters named therein, relating to the offer and sale of 7,000,000 shares of our common stock at a price to the public of $6.55 per share. The underwriters purchased the shares pursuant to the Underwriting Agreement at a price of $6.3535 per share. The closing of the offering of 7,000,000 shares of common stock occurred on August 2, 2019, with net proceeds to us of approximately $44.2 million after deduction of underwriting discounts and commissions and other estimated offering expenses.On January 23,4, 2020, we entered into an equity distribution agreement (the “January“August 2020Equity Distribution Agreement”) with three four$200,000,000$150,000,000 of shares of ourJune 30, 2020,March 31,
26
●
March 31,2020.
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, |
| Three Months Ended, June 30, | ||||||||
|
| 2020 |
| 2019 |
| Change |
| 2020 |
| 2019 |
| Change |
Interest income | $ | 62,929 | $ | 68,888 | $ | (5,959) | $ | 27,258 | $ | 36,455 | $ | (9,197) |
Interest expense |
| (21,002) |
| (41,323) |
| 20,321 |
| (4,479) |
| (22,431) |
| 17,952 |
Net interest income |
| 41,927 |
| 27,565 |
| 14,362 |
| 22,779 |
| 14,024 |
| 8,755 |
(Losses) gains on RMBS and derivative contracts |
| (79,457) |
| (8,418) |
| (71,039) |
| 28,749 |
| (7,670) |
| 36,419 |
Net portfolio (loss) income |
| (37,530) |
| 19,147 |
| (56,677) |
| 51,528 |
| 6,354 |
| 45,174 |
Expenses |
| (4,897) |
| (5,017) |
| 120 |
| (2,756) |
| (2,821) |
| 65 |
Net (loss) income | $ | (42,427) | $ | 14,130 | $ | (56,557) | $ | 48,772 | $ | 3,533 | $ | 45,239 |
27
In addition, we have not designated our derivative financial instruments in hedge used for hedging purposes as hedges for
Net Earnings Excluding Realized and Unrealized Gains and Losses | ||||||||||||
(in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Per Share | ||||
|
|
|
|
|
| Net Earnings |
|
|
|
|
| Net Earnings |
|
|
|
|
|
| Excluding |
|
|
|
|
| Excluding |
|
|
|
| Realized and |
| Realized and |
|
|
| Realized and |
| Realized and |
|
| Net |
| Unrealized |
| Unrealized |
| Net |
| Unrealized |
| Unrealized |
|
| Income |
| Gains and |
| Gains and |
| Income |
| Gains and |
| Gains and |
|
| (GAAP) |
| Losses(1) |
| Losses |
| (GAAP) |
| Losses |
| Losses |
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020 | $ | 48,772 | $ | 28,749 | $ | 20,023 | $ | 0.74 | $ | 0.43 |
| 0.31 |
March 31, 2020 |
| (91,199) |
| (108,206) |
| 17,007 |
| (1.41) |
| (1.68) |
| 0.27 |
December 31, 2019 | �� | 18,612 |
| 3,840 |
| 14,772 |
| 0.29 |
| 0.06 |
| 0.23 |
September 30, 2019 |
| (8,477) |
| (19,428) |
| 10,951 |
| (0.14) |
| (0.32) |
| 0.18 |
June 30, 2019 |
| 3,533 |
| (7,670) |
| 11,203 |
| 0.07 |
| (0.15) |
| 0.22 |
March 31, 2019 |
| 10,597 |
| (748) |
| 11,345 |
| 0.22 |
| (0.02) |
| 0.24 |
Six Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020 | $ | (42,427) | $ | (79,457) | $ | 37,030 | $ | (0.65) | $ | (1.21) | $ | 0.56 |
June 30, 2019 |
| 14,130 |
| (8,418) |
| 22,548 |
| 0.28 |
| (0.17) |
| 0.45 |
28
We have not elected to designate our derivative holdings for hedge accounting treatment. Changes in fair value of these
| |||||||||
| |||||||||
|
| ||||||||
|
|
|
| ||||||
29
|
|
| Income |
| TBA |
| Current |
| Future |
|
|
| Statement |
| Securities |
| Period |
| Periods |
|
|
| (GAAP) |
| Income (Loss) |
| (Non-GAAP) |
| (Non-GAAP) |
Three Months Ended |
|
|
|
|
|
|
|
|
|
June 30, 2020 |
| $ | (8,851) | $ | 1,715 | $ | (5,751) | $ | (4,815) |
March 31, 2020 |
|
| (82,858) |
| (7,090) |
| (4,900) |
| (70,868) |
December 31, 2019 |
|
| 10,792 |
| (512) |
| 3,823 |
| 7,481 |
September 30, 2019 |
|
| (8,648) |
| 2,479 |
| 1,244 |
| (12,371) |
June 30, 2019 |
|
| (34,288) |
| (1,684) |
| 1,464 |
| (34,068) |
March 31, 2019 |
|
| (19,032) |
| (4,641) |
| 2,427 |
| (16,818) |
Six Months Ended |
|
|
|
|
|
|
|
|
|
June 30, 2020 |
| $ | (91,709) | $ | (5,375) | $ | (10,651) | $ | (75,683) |
June 30, 2019 |
|
| (53,320) |
| (6,325) |
| 3,891 |
| (50,886) |
Economic Interest Expense and Economic Net Interest Income | ||||||||||||
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest Expense on Borrowings |
|
|
|
| ||||
|
|
|
|
|
| Gains |
|
|
|
| ||
|
|
|
|
|
| (Losses) on |
|
|
|
|
|
|
|
|
|
|
|
| Derivative |
|
|
|
|
|
|
|
|
|
|
|
| Instruments |
|
|
| Net Interest Income | ||
|
|
|
| GAAP |
| Attributed |
| Economic |
| GAAP |
| Economic |
|
| Interest |
| Interest |
| to Current |
| Interest |
| Net Interest |
| Net Interest |
|
| Income |
| Expense |
| Period(1) |
| Expense(2) |
| Income |
| Income(3) |
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020 | $ | 27,258 | $ | 4,479 | $ | (5,751) | $ | 10,230 | $ | 22,779 |
| 17,028 |
March 31, 2020 |
| 35,671 |
| 16,523 |
| (4,900) |
| 21,423 |
| 19,148 |
| 14,248 |
December 31, 2019 |
| 37,529 |
| 20,022 |
| 3,823 |
| 16,199 |
| 17,507 |
| 21,330 |
September 30, 2019 |
| 35,907 |
| 22,321 |
| 1,244 |
| 21,077 |
| 13,586 |
| 14,830 |
June 30, 2019 |
| 36,455 |
| 22,431 |
| 1,464 |
| 20,967 |
| 14,024 |
| 15,488 |
March 31, 2019 |
| 32,433 |
| 18,892 |
| 2,427 |
| 16,465 |
| 13,541 |
| 15,968 |
Six Months Ended |
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020 | $ | 62,929 | $ | 21,002 | $ | (10,651) | $ | 31,653 | $ | 41,927 | $ | 31,276 |
June 30, 2019 |
| 68,888 |
| 41,323 |
| 3,891 |
| 37,432 |
| 27,565 |
| 31,456 |
Gains (Losses) on Derivative Instruments
We had moreaverage assetsand borrowingsduring thefirst quarterof 2021 comparedto the firstquarter of2020 as we
30
3,126,779
was $31.7 million and $37.4 million, respectively, resulting27,258
During the three months ended thousands)
On an economic basis, our interest expense on borrowings for the three months ended June 30,
The tables below provide information on our portfolio average balances, interest income, yield on assets, average borrowings, interest expense, cost of funds, net interest income and net interest spread for the six months ended June 30, 2020 and 2019 and each quarter of 2020 to date and 2019 on both a GAAP and economic basis.
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average |
|
| Yield on |
|
|
| Interest Expense |
| Average Cost of Funds | |||
|
| RMBS |
| Interest | Average |
| Average |
| GAAP |
| Economic |
| GAAP | Economic |
|
| Held(1) |
| Income | RMBS |
| Borrowings(1) |
| Basis |
| Basis(2) |
| Basis | Basis(3) |
Three Months Ended | ||||||||||||||
June 30, 2020 | $ | 3,126,779 | $ | 27,258 | 3.49% | $ | 2,992,494 | $ | 4,479 | $ | 10,230 |
| 0.60% | 1.37% |
March 31, 2020 |
| 3,269,859 |
| 35,671 | 4.36% |
| 3,129,178 |
| 16,523 |
| 21,423 |
| 2.11% | 2.74% |
December 31, 2019 |
| 3,705,920 |
| 37,529 | 4.05% |
| 3,631,042 |
| 20,022 |
| 16,199 |
| 2.21% | 1.78% |
September 30, 2019 |
| 3,674,087 |
| 35,907 | 3.91% |
| 3,571,752 |
| 22,321 |
| 21,077 |
| 2.50% | 2.36% |
June 30, 2019 |
| 3,307,885 |
| 36,455 | 4.41% |
| 3,098,133 |
| 22,431 |
| 20,967 |
| 2.90% | 2.71% |
March 31, 2019 |
| 3,051,509 |
| 32,433 | 4.25% |
| 2,945,895 |
| 18,892 |
| 16,465 |
| 2.57% | 2.24% |
Six Months Ended | ||||||||||||||
June 30, 2020 | $ | 3,198,319 | $ | 62,929 | 3.94% | $ | 3,060,836 | $ | 21,002 | $ | 31,653 |
| 1.37% | 2.07% |
June 30, 2019 |
| 3,179,697 |
| 68,888 | 4.33% |
| 3,022,014 |
| 41,323 |
| 37,432 |
| 2.73% | 2.48% |
($ in thousands) |
|
|
|
|
|
|
|
|
| Net Interest Income |
| Net Interest Spread | |||
|
| GAAP |
| Economic |
| GAAP | Economic |
|
| Basis |
| Basis(2) |
| Basis | Basis(4) |
Three Months Ended | |||||||
June 30, 2020 | $ | 22,779 | $ | 17,028 |
| 2.89% | 2.12% |
March 31, 2020 |
| 19,148 |
| 14,248 |
| 2.25% | 1.62% |
December 31, 2019 |
| 17,507 |
| 21,330 |
| 1.84% | 2.27% |
September 30, 2019 |
| 13,586 |
| 14,830 |
| 1.41% | 1.55% |
June 30, 2019 |
| 14,024 |
| 15,488 |
| 1.51% | 1.70% |
March 31, 2019 |
| 13,541 |
| 15,968 |
| 1.68% | 2.01% |
Six Months Ended | |||||||
June 30, 2020 | $ | 41,927 | $ | 31,276 |
| 2.57% | 1.87% |
June 30, 2019 |
| 27,565 |
| 31,456 |
| 1.60% | 1.85% |
31
calculated based on the
Our interest income for the three months ended June 30, 2020 and 2019 was $27.3 million and $36.5 million, respectively. We had average RMBS holdings of $3,126.8 million and $3,307.9 million for the three months ended June 30, 2020 and 2019, respectively. The yield on our portfolio was 3.49% and 4.41% for the three months ended June 30, 2020 and 2019, respectively. For the three months ended June 30, 2020 as compared to the three months ended June 30, 2019, there was a $9.2 million decrease in interest income due to the 92 bps decrease in the yield on average RMBS, combined with the $181.1 million decrease in average RMBS.
The table below presents the average portfolio size, income and yields of our respective sub-portfolios, consisting of structured RMBS and PT RMBS, for the six months ended June 30, 2020 and 2019, and for each quarter of 2020 to date and 2019.
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average RMBS Held |
| Interest Income |
| Realized Yield on Average RMBS | ||||||||||
|
| PT |
| Structured |
|
|
| PT |
| Structured |
|
|
| PT | Structured |
|
|
| RMBS |
| RMBS |
| Total |
| RMBS |
| RMBS |
| Total |
| RMBS | RMBS | Total |
Three Months Ended | ||||||||||||||||
June 30, 2020 | $ | 3,088,603 | $ | 38,176 | $ | 3,126,779 | $ | 27,004 | $ | 254 | $ | 27,258 |
| 3.50% | 2.67% | 3.49% |
March 31, 2020 |
| 3,207,467 |
| 62,392 |
| 3,269,859 |
| 35,286 |
| 385 |
| 35,671 |
| 4.40% | 2.47% | 4.36% |
December 31, 2019 |
| 3,611,461 |
| 94,459 |
| 3,705,920 |
| 36,600 |
| 929 |
| 37,529 |
| 4.05% | 3.93% | 4.05% |
September 30, 2019 |
| 3,558,075 |
| 116,012 |
| 3,674,087 |
| 36,332 |
| (425) |
| 35,907 |
| 4.08% | (1.47)% | 3.91% |
June 30, 2019 |
| 3,181,976 |
| 125,909 |
| 3,307,885 |
| 34,992 |
| 1,463 |
| 36,455 |
| 4.40% | 4.65% | 4.41% |
March 31, 2019 |
| 2,919,415 |
| 132,094 |
| 3,051,509 |
| 30,328 |
| 2,105 |
| 32,433 |
| 4.16% | 6.37% | 4.25% |
Six Months Ended | ||||||||||||||||
June 30, 2020 | $ | 3,148,035 | $ | 50,284 | $ | 3,198,319 | $ | 62,290 | $ | 639 | $ | 62,929 |
| 3.96% | 2.54% | 3.94% |
June 30, 2019 |
| 3,050,695 |
| 129,002 |
| 3,179,697 |
| 65,320 |
| 3,568 |
| 68,888 |
| 4.28% | 5.53% | 4.33% |
32
0.55%
funds, partially offset by a $38.8 million increase in average outstanding borrowings during the six months ended June 30,0.70%
Our economic interest expense was $31.7 million and $37.4 million for the six months ended June 30, 2020 and 2019, respectively. There was a 41 bps decrease in the average economic cost of funds to 2.07% for the six months ended June 30, 2020 from 2.48% for the six months ended June 30, 2019.
We had average outstanding borrowings of $2,992.5 million and $3,098.1 million and total interest expense of $4.5 million and $22.4 million for the three months ended June 30, 2020 and 2019, respectively. Our average cost of funds was 0.60% and 2.90% for three months ended June 30, 2020 and 2019, respectively. There was a 230 bps decrease in the average cost of funds and a $105.6 million decrease in average outstanding borrowings during the three months ended June 30, 2020, compared to the three months ended June 30, 2019.
Our economic interest expense was $10.2 million and $21.0 million for the three months ended June 30, 2020 and 2019, respectively. There was a 134 bps decrease in the average economic cost of funds to 1.37% for the three months ended June 30, 2020 from 2.71% for the three months ended June 30, 2019.
Since all of our repurchase agreements are short-term, changes in market rates directly affect our interest expense. Our average cost of funds calculated on a GAAP basis was 5 bps above the average one-month LIBOR and 10 bps below the average six-month LIBOR for the quarter ended June 30, 2020. Our average economic cost of funds was 82 bps above the average one-month LIBOR and 67 bps above the average six-month LIBOR for the quarter ended June 30, 2020. The average term to maturity of the outstanding repurchase agreements increased to 30 days at June 30, 2020 from 25 days at December 31, 2019.
The tables below present the average balance of borrowings outstanding, interest expense and average cost of funds, and average one-month and six-month LIBOR rates for the six months ended June 30, 2020 and 2019, and for each quarter in 2020 to date and 2019 on both a GAAP and economic basis.
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
| Average |
| Interest Expense |
| Average Cost of Funds | |||
|
| Balance of |
| GAAP |
| Economic |
| GAAP | Economic |
|
| Borrowings |
| Basis |
| Basis |
| Basis | Basis |
Three Months Ended |
|
|
|
|
|
|
|
|
|
June 30, 2020 | $ | 2,992,494 | $ | 4,479 | $ | 10,230 |
| 0.60% | 1.37% |
March 31, 2020 |
| 3,129,178 |
| 16,523 |
| 21,423 |
| 2.11% | 2.74% |
December 31, 2019 |
| 3,631,042 |
| 20,022 |
| 16,199 |
| 2.21% | 1.78% |
September 30, 2019 |
| 3,571,752 |
| 22,321 |
| 21,077 |
| 2.50% | 2.36% |
June 30, 2019 |
| 3,098,133 |
| 22,431 |
| 20,967 |
| 2.90% | 2.71% |
March 31, 2019 |
| 2,945,895 |
| 18,892 |
| 16,465 |
| 2.57% | 2.24% |
Six Months Ended |
|
|
|
|
|
|
|
|
|
June 30, 2020 | $ | 3,060,836 | $ | 21,002 | $ | 31,653 |
| 1.37% | 2.07% |
June 30, 2019 |
| 3,022,014 |
| 41,323 |
| 37,432 |
| 2.73% | 2.48% |
|
|
|
| Average GAAP Cost of Funds |
| Average Economic Cost of Funds | ||
|
|
|
| Relative to Average |
| Relative to Average | ||
| Average LIBOR |
| One-Month | Six-Month |
| One-Month | Six-Month | |
| One-Month | Six-Month |
| LIBOR | LIBOR |
| LIBOR | LIBOR |
Three Months Ended |
|
|
|
|
|
|
|
|
June 30, 2020 | 0.55% | 0.70% |
| 0.05% | (0.10)% |
| 0.82% | 0.67% |
March 31, 2020 | 1.34% | 1.43% |
| 0.77% | 0.68% |
| 1.40% | 1.31% |
December 31, 2019 | 1.90% | 1.98% |
| 0.31% | 0.23% |
| (0.12)% | (0.20)% |
33
1.34%
September 30, 2019 | 2.22% | 2.18% |
| 0.28% | 0.32% |
| 0.14% | 0.18% |
June 30, 2019 | 2.45% | 2.49% |
| 0.45% | 0.41% |
| 0.26% | 0.22% |
March 31, 2019 | 2.51% | 2.77% |
| 0.06% | (0.20)% |
| (0.27)% | (0.53)% |
Six Months Ended |
|
|
|
|
|
|
|
|
June 30, 2020 | 0.94% | 1.06% |
| 0.43% | 0.31% |
| 1.13% | 1.01% |
June 30, 2019 | 2.48% | 2.63% |
| 0.25% | 0.10% |
| 0.00% | (0.15)% |
1.43%
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| Six Months Ended June 30, |
| Three Months Ended June 30, | ||||||||
|
|
| 2020 |
| 2019 |
| Change |
| 2020 |
| 2019 |
| Change |
Realized (losses) gains on sales of RMBS | $ | (25,020) | $ | 355 | $ | (25,375) | $ | 3,360 | $ | 112 | $ | 3,248 | |
Unrealized gains on RMBS |
| 37,272 |
| 44,547 |
| (7,275) |
| 34,240 |
| 26,506 |
| 7,734 | |
Total gains on RMBS |
| 12,252 |
| 44,902 |
| (32,650) |
| 37,600 |
| 26,618 |
| 10,982 | |
Losses on interest rate futures |
| (13,042) |
| (19,528) |
| 6,486 |
| (486) |
| (7,810) |
| 7,324 | |
Losses on interest rate swaps |
| (68,202) |
| (26,404) |
| (41,798) |
| (7,579) |
| (24,109) |
| 16,530 | |
Losses on payer swaptions |
| (5,090) |
| (1,063) |
| (4,027) |
| (2,501) |
| (685) |
| (1,816) | |
Losses on TBA securities |
| (5,244) |
| (6,325) |
| 1,081 |
| 1,846 |
| (1,684) |
| 3,530 | |
Losses on U.S. Treasury securities - short |
| (131) |
| - |
| (131) |
| (131) |
| - |
| (131) | |
Total (losses) gains from derivative instruments |
| (91,709) |
| (53,320) |
| (38,258) |
| (8,851) |
| (34,288) |
| 25,568 | |
We invest 2020.
Realized and unrealizedRMBS
| 5 Year | 10 Year | 15 Year | 30 Year | Three |
| U.S. Treasury | U.S. Treasury | Fixed-Rate | Fixed-Rate | Month |
| Rate(1) | Rate(1) | Mortgage Rate(2) | Mortgage Rate(2) | LIBOR(3) |
June 30, 2020 | 0.29% | 0.65% | 2.60% | 3.16% | 0.31% |
March 31, 2020 | 0.38% | 0.70% | 2.89% | 3.45% | 1.10% |
December 31, 2019 | 1.69% | 1.92% | 3.18% | 3.72% | 1.91% |
September 30, 2019 | 1.55% | 1.68% | 3.12% | 3.61% | 2.13% |
June 30, 2019 | 1.76% | 2.00% | 3.24% | 3.80% | 2.40% |
March 31, 2019 | 2.24% | 2.41% | 3.72% | 4.27% | 2.61% |
2020.
34
Options Exchange.
For the six and three months ended June 30, 2020, the Company’s total
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, |
| Three Months Ended June 30, | ||||||||
|
| 2020 |
| 2019 |
| Change |
| 2020 |
| 2019 |
| Change |
Management fees | $ | 2,645 | $ | 2,611 | $ | 34 | $ | 1,268 | $ | 1,326 | $ | (58) |
Overhead allocation |
| 695 |
| 650 |
| 45 |
| 348 |
| 327 |
| 21 |
Accrued incentive compensation |
| (275) |
| (226) |
| (49) |
| 161 |
| 182 |
| (21) |
Directors fees and liability insurance |
| 508 |
| 490 |
| 18 |
| 248 |
| 237 |
| 11 |
Audit, legal and other professional fees |
| 601 |
| 665 |
| (64) |
| 346 |
| 364 |
| (18) |
Direct REIT operating expenses |
| 446 |
| 660 |
| (214) |
| 240 |
| 285 |
| (45) |
Other administrative |
| 277 |
| 167 |
| 110 |
| 145 |
| 100 |
| 45 |
Total expenses | $ | 4,897 | $ | 5,017 | $ | (120) | $ | 2,756 | $ | 2,821 | $ | (65) |
2020.
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
| Average |
| Average | Advisory Services | |||||
|
| Orchid |
| Orchid |
| Management |
| Overhead |
|
|
Three Months Ended |
| MBS |
| Equity |
| Fee |
| Allocation |
| Total |
June 30, 2020 | $ | 3,126,779 | $ | 361,093 | $ | 1,268 | $ | 348 | $ | 1,616 |
35
2020.
March 31, 2020 |
| 3,269,859 |
| 376,673 |
| 1,377 |
| 347 |
| 1,724 |
December 31, 2019 |
| 3,705,920 |
| 414,018 |
| 1,477 |
| 379 |
| 1,856 |
September 30, 2019 |
| 3,674,087 |
| 394,788 |
| 1,440 |
| 351 |
| 1,791 |
June 30, 2019 |
| 3,307,885 |
| 363,961 |
| 1,326 |
| 327 |
| 1,653 |
March 31, 2019 |
| 3,051,509 |
| 363,204 |
| 1,285 |
| 323 |
| 1,608 |
Six Months Ended |
|
|
|
|
|
|
|
|
|
|
June 30, 2020 | $ | 3,198,319 | $ | 368,883 | $ | 2,645 | $ | 695 | $ | 3,340 |
June 30, 2019 |
| 3,179,697 |
| 363,582 |
| 2,611 |
| 650 |
| 3,261 |
Financial Condition:
Mortgage-Backed Securities
As of
|
| Structured |
|
| PT RMBS | RMBS | Total |
Three Months Ended | Portfolio (%) | Portfolio (%) | Portfolio (%) |
June 30, 2020 | 13.9 | 35.3 | 16.3 |
March 31, 2020 | 9.8 | 22.9 | 11.9 |
December 31, 2019 | 14.3 | 23.4 | 16.0 |
September 30, 2019 | 15.5 | 19.3 | 16.4 |
June 30, 2019 | 10.9 | 12.7 | 11.4 |
March 31, 2019 | 9.5 | 8.4 | 9.2 |
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
| Percentage |
| Average |
|
|
|
| of | Weighted | Maturity |
|
|
| Fair | Entire | Average | in | Longest |
Asset Category |
| Value | Portfolio | Coupon | Months | Maturity |
June 30, 2020 |
|
|
|
|
|
|
Adjustable Rate RMBS | $ | 957 | 0.0% | 4.51% | 170 | 1-Sep-35 |
Fixed Rate RMBS |
| 3,105,028 | 94.0% | 3.62% | 346 | 1-Jun-50 |
Fixed Rate CMOs |
| 162,517 | 4.9% | 4.00% | 320 | 15-Dec-42 |
Total Mortgage-backed Pass-through |
| 3,268,502 | 98.9% | 3.64% | 344 | 1-Jun-50 |
36
Fixed Rate RMBS
Interest-Only Securities |
| 36,259 | 1.1% | 4.00% | 274 | 25-Jul-48 |
Total Structured RMBS |
| 36,259 | 1.1% | 4.00% | 274 | 25-Jul-48 |
Total Mortgage Assets | $ | 3,304,761 | 100.0% | 3.68% | 337 | 1-Jun-50 |
December 31, 2019 |
|
|
|
|
|
|
Adjustable Rate RMBS | $ | 1,014 | 0.0% | 4.51% | 176 | 1-Sep-35 |
Fixed Rate RMBS |
| 3,206,013 | 89.3% | 3.90% | 342 | 1-Dec-49 |
Fixed Rate CMOs |
| 299,205 | 8.3% | 4.20% | 331 | 15-Oct-44 |
Total Mortgage-backed Pass-through |
| 3,506,232 | 97.6% | 3.92% | 341 | 1-Dec-49 |
Interest-Only Securities |
| 60,986 | 1.7% | 3.99% | 280 | 25-Jul-48 |
Inverse Interest-Only Securities |
| 23,703 | 0.7% | 3.34% | 285 | 15-Jul-47 |
Total Structured RMBS |
| 84,689 | 2.4% | 3.79% | 281 | 25-Jul-48 |
Total Mortgage Assets | $ | 3,590,921 | 100.0% | 3.90% | 331 | 1-Dec-49 |
($ in thousands) |
|
|
|
|
|
|
|
|
|
| June 30, 2020 |
| December 31, 2019 | ||||
|
|
|
| Percentage of |
|
|
| Percentage of |
Agency |
| Fair Value |
| Entire Portfolio |
| Fair Value |
| Entire Portfolio |
Fannie Mae | $ | 2,129,745 |
| 64.4% | $ | 2,170,668 |
| 60.4% |
Freddie Mac |
| 1,175,016 |
| 35.6% |
| 1,420,253 |
| 39.6% |
Total Portfolio | $ | 3,304,761 |
| 100.0% | $ | 3,590,921 |
| 100.0% |
|
| June 30, 2020 |
| December 31, 2019 |
Weighted Average Pass-through Purchase Price | $ | 106.37 | $ | 105.16 |
Weighted Average Structured Purchase Price | $ | 20.14 | $ | 18.15 |
Weighted Average Pass-through Current Price | $ | 109.20 | $ | 106.26 |
Weighted Average Structured Current Price | $ | 10.51 | $ | 13.85 |
Effective Duration (1) |
| 2.010 |
| 2.780 |
$
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
| 2020 |
| 2019 | ||||||||
|
| Total Cost |
| Average Price | Weighted Average Yield |
|
| Total Cost |
| Average Price | Weighted Average Yield |
Pass-through RMBS | $ | 1,985,756 | $ | 106.59 | 1.99% |
| $ | 2,151,829 | $ | 104.63 | 3.25% |
Structured RMBS |
| - |
| - | - |
|
| 12,265 |
| 18.06 | 7.82% |
37
Company’s RMBS andcash, and bearinterest atprevailingmarket rates.We believe
($ in thousands) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| Difference Between Ending | |
|
|
| Ending |
|
| Maximum |
|
| Average |
|
| Borrowings and | |
|
|
| Balance of |
|
| Balance of |
|
| Balance of |
|
| Average Borrowings | |
Three Months Ended |
|
| Borrowings |
|
| Borrowings |
|
| Borrowings |
|
| Amount | Percent |
June 30, 2020 |
| $ | 3,174,739 |
| $ | 3,235,370 |
| $ | 2,992,494 |
| $ | 182,245 | 6.09% |
March 31, 2020 |
|
| 2,810,250 |
|
| 4,297,621 |
|
| 3,129,178 |
|
| (318,928) | (10.19)%(1) |
December 31, 2019 |
|
| 3,448,106 |
|
| 3,986,919 |
|
| 3,631,042 |
|
| (182,936) | (5.04)% |
September 30, 2019 |
|
| 3,813,977 |
|
| 3,847,417 |
|
| 3,571,752 |
|
| 242,225 | 6.78% |
June 30, 2019 |
|
| 3,329,527 |
|
| 3,730,460 |
|
| 3,098,133 |
|
| 231,394 | 7.47% |
March 31, 2019 |
|
| 2,866,738 |
|
| 3,022,771 |
|
| 2,945,895 |
|
| (79,157) | (2.69)% |
2020.
38
we wouldbe able toliquidate suchsecurities readily,even in distressedmarkets, althoughwe
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
| Obligations Maturing | ||||||||
|
| Within One Year |
| One to Three Years |
| Three to Five Years |
| More than Five Years |
| Total |
Repurchase agreements | $ | 3,174,739 | $ | - | $ | - | $ | - | $ | 3,174,739 |
Interest expense on repurchase agreements(1) |
| 1,408 |
| - |
| - |
| - |
| 1,408 |
39
|
|
|
|
|
|
|
|
|
|
|
(1)(in thousands)
March 31,2021.
On August 2, 2017, we entered into an equity distribution agreement (the “August 2017 Equity Distribution Agreement”) with two sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $125,000,000 of shares of our common stock in transactions that were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total of 15,123,178 shares under the August 2017 Equity Distribution Agreement for aggregate gross proceeds of $125.0 million, and net proceeds of approximately $123.1 million, net of commissions and fees, prior to its termination in July 2019.
On July 30, 2019, we entered into an underwriting agreement (the “Underwriting Agreement”) with Morgan Stanley & Co. LLC, Citigroup Global Markets Inc. and J.P. Morgan Securities LLC, as representatives of the underwriters named therein, relating to the offer and sale of 7,000,000 shares of our common stock at a price to the public of $6.55 per share. The underwriters purchased the shares pursuant to the Underwriting Agreement at a price of $6.3535 per share. The closing of the offering of 7,000,000 shares of common stock occurred on August 2, 2019, with net proceeds to us of approximately $44.2 million after deduction of underwriting discounts and commissions and other estimated offering expenses.
Outlook
The COVID-19 coronavirus that emerged in China in late 2019 and spread
40
particular has made it clear they will continue to do whatever is necessary to support smooth operations of all financial markets and act asbe a lender of last resort when needed and appropriate needfor them to do so.
While additionalstimulus forthe economy gradually reopened and economic activity began to recover,deal
Throughout the second quarter late Decemberof 2020 and intoagainin
Given the current level of rates and the likelihood rates will remain low means that prepayment speeds will likely remain elevated. During the depths of the virus outbreak when social distancing, shelter-in-place and very low levels of any kind of activity in general were constraining the refinancing of mortgages, it seemed prepayment activity would not be as responsive to low rates as feared. This has not turned out to be the case. Starting in April, prepayment reports have consistently surprised the market to the upside. They would be higher still if originators were not capacity constrained. The primary/secondary spread, or the spread between the current coupon mortgage security (priced at par) and rates available to borrowers is very high – reflecting capacity constraints primarily. Over time it is assumed this spread will narrow as originators add capacity, There is room for rates available to borrowers to decline well below 3% if the primary/secondary spread were to return to historical norms. As a result, refinancing activity is likely to remain very elevated for the foreseeable future. We expect that eventually most borrowers that can will refinance their mortgage. At that point, prepayment speeds will moderate, perhaps meaningfully so. To the extent rates eventually move higher, we expect that prepayment activity would plummet. That day, if it ever comes, does not appear to be near. Such an event will require a return to sustained economic growth. That in turn is predicated on the evolution of the virus and the emergence of an effective, widely available vaccine, if one is to be found.
41
The Agency MBS sector performance for the second quarter of 2020 was not as robust as the first quarter, but still positive at 0.8% for the second quarter, and 3.6% year-to-date. On an absolute return basis for the quarter, Agency MBS trailed most credit sectors – both corporate and non-Agency RMBS/CMBS, as well as Agency CMBS. As the economy recovered, supported by substantial interventions from the Fed and Congress, most sectors of the fixed income markets recovered. For most, while returns were strong for the second quarter – in the high single digits and low double digits in the case of corporate debt and non-Agency RMBS, respectively, year-to-date returns are more modest and in all but a few cases negative year-to-date versus comparable duration U.S. Treasuries. Agency RMBS have generated a -0.8% excess return year-to-date. While negative, this return still exceeds those of most of the fixed income markets.
In the current environment prepayment speeds are expected to remain high. Further, for the month of July the Fed purchased over $100 billion of Agency RMBS. The Fed generally purchases between $40 and $45 billion per month as part of their quantitative easing program plus reinvest prepayments on their existing portfolio. The latter figure was approximately $57 billion in July. The Fed tends to purchase the coupons currently in production. As they appear to be an indiscriminate buyer, they remove most of the worst securities in terms of prepayments behavior from the market. This is the case for the coupons they purchase. For those coupons they do not purchase, the market must absorb all that are produced. As a result, the coupons the Fed purchases tend to outperform those not purchased by the Fed. For the latter coupons, specified pools, with favorable prepayment characteristics, become more valuable to investors. Current premiums charged for such securities are at the highest levels ever observed. This is likely to be the case as long as current conditions persist.
Recent Legislative and Regulatory Developments
The Fed conducted large scale overnight repo operations from late 2019 until July 2020 to address disruptions in the U.S. Treasury, Agency debt andAgency MBS financingmarkets. Theseoperations ceasedin July 2020after the centralbank
The markets for U.S. Treasuries,
42
foster the effective transmission of monetary policy to broader financial conditions. Since March, the Fed has taken various other steps to support certain other fixed income markets, to support mortgage servicers and to implement various portions of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.
Congress and President Trump have adopted several pieces of legislation in response to the public health and economic impacts resulting from the COVID-19 pandemic. The first two pieces of legislation provided, among other things, emergency funding to develop a vaccine for COVID-19, medical supplies, grants for public health agencies, small business loans, assistance for health systems in other countries, expanded coronavirus testing, paid leave, enhanced unemployment insurance, expanded food security initiatives and increased federal Medicaid funding.
The CARES Act was passed by Congress and signed into law by President Trump on March 27, 2020. The CARES Act provides many forms of direct support to individuals and small businesses in order to stem the steep decline in economic activity. This over $2 trillion COVID-19 relief bill, among other things, provided for direct payments to each American making up to $75,000 a year, increased unemployment benefits for up to four months (on top of state benefits), funding to hospitals and health providers, loans and investments to businesses, states and municipalities and grants to the airline industry. On April 24, 2020, President Trump signed an additional funding bill into law that provides an additional $484 billion of funding to individuals, small businesses, hospitals, health care providers and additional coronavirus testing efforts.
In January 2019, the Trump administration made statements of its plans to work with Congress to overhaul Fannie Mae and Freddie Mac and expectations to announce a framework for the developmentfirstquarter of a policy 2021of -1.2% and-0.3%, respectively(both vs
In 2017, policymakers announced that LIBOR will be replaced by 2021. The directive was spurred by the fact that banks 1.5%through 2.5%,are uncomfortable contributing to the LIBOR panel given the shortage of underlying transactions on which to base levels and the liability associated with submitting an unfounded level. LIBOR will be replaced with a new SOFR, a rate based on U.S. repo trading. The new benchmark rate will be based on overnight Treasury General Collateral repo rates. The rate-setting process will be managed and published purchasedby the Fed andbenefit from
The scope and nature of the actions the U.S. government or the Fed will ultimately undertake are unknown and will continue to evolve, especially in light of the COVID-19 pandemic and the upcoming presidential and Congressional elections attractiveTBA dollarroll drops.Higher couponsin the United States.
Effect on Us
Regulatory developments, movements in interest rates and prepayment rates affect us in many ways, including the following:
43
Effects on our Assets
A change in or elimination of the guarantee structure of Agency RMBS may increase our costs (if, for example, guarantee fees increase) or require us to change our investment strategy altogether. For example, the elimination of the guarantee structure of Agency RMBS may cause us to change our investment strategy to focus on non-Agency RMBS, which in turn would require us to significantly increase our monitoring of the credit risks of our investments in addition to interest rate and prepayment risks.
Lower long-term interest rates can affect the value of our Agency RMBS in a number of ways. If prepayment rates are relatively low (due, in part, to the refinancing problems described above), lower long-term interest rates can increase the value of higher-coupon Agency RMBS. This is because investors typically place a premium on assets with yields that are higher than market yields. Although lower long-term interest rates may increase asset values in our portfolio, we may not be able to invest new funds in similarly-yielding assets.
If prepayment levels increase, the value of our Agency RMBS affected by such prepayments may decline. This is because a principal prepayment accelerates the effective term of an Agency RMBS, which would shorten the period during which an investor would receive above-market returns (assuming the yield on the prepaid asset is higher than market yields). Also, prepayment proceeds may not be able to be reinvested in similar-yielding assets. Agency RMBS backed by mortgages with high interest rates are more susceptible to prepayment risk because holders of those mortgages are most likely to refinance to a lower rate. IOs and IIOs, however, may be the types of Agency RMBS most sensitive to increased prepayment rates. Because the holder of an IO or IIO receives no principal payments, the values of IOs and IIOs are entirely dependent on the existence of a principal balance on the underlying mortgages. If the principal balance is eliminated due to prepayment, IOs and IIOs essentially become worthless. Although increased prepayment rates can negatively affect the value of our IOs and IIOs, they have the opposite effect on POs. Because POs act like zero-coupon bonds, meaning they are purchased at a discount to their par value and have an effective interest rate based on the discount and the term of the underlying loan, an increase in prepayment rates would reduce the effective term of our POs and accelerate the yields earned on those assets, which would increase our net income.
Higher long-term rates can also affect the value of our Agency RMBS. As long-term rates rise, rates available to borrowers also rise. This tends to cause prepayment activity to slow and extend the expected average life of mortgage cash flows. As the expected average life of the mortgage cash flows increases, coupled with higher discount rates, the value of Agency RMBS declines. Some of the instruments the Company uses to hedge our Agency RMBS assets, such as interest rate futures, swaps and swaptions, are stable average life instruments. This means that to the extent we use such instruments to hedge our Agency RMBS assets, our hedges may not adequately protect us from price declines, and therefore may negatively impact our book value. It is for this reason we use interest only securities in our portfolio. As interest rates rise, the expected average life of these securities increases, causing generally positive price movements as the number and size of the cash flows increase the longer the underlying mortgages remain outstanding. This makes interest only securities desirable hedge instruments for pass-through Agency RMBS.
As described above, the Agency RMBS market began to experience severe dislocations in mid-March 2020 as a result of the economic, health and market turmoil brought about by COVID-19. On March 23, 2020, the Fed announced that it would purchase Agency RMBS and U.S. Treasuries in the amounts needed to support smooth market functioning, which largely stabilized the Agency RMBS
44
market. If the Fed modifies, reduces or suspends its purchases of Agency RMBS, our investment portfolio could be negatively impacted.
Because we base our investment decisions on risk management principles rather than anticipated movements in interest rates, in a volatile interest rate environment we may allocate more capital to structured Agency RMBS with shorter durations. We believe these securities have a lower sensitivity to changes in long-term interest rates than other asset classes. We may attempt to mitigate our exposure to changes in long-term interest rates by investing in IOs and IIOs, which typically have different sensitivities to changes in long-term interest rates than PT RMBS, particularly PT RMBS backed by fixed-rate mortgages.
Effects on our borrowing costs
We leverage our PT RMBS portfolio and a portion of our structured Agency RMBS with principal balances through the use of short-term repurchase agreement transactions. The interest rates on our debt are determined by the short term interest rate markets. An increase in the Fed Funds rate or LIBOR would increase our borrowing costs, which could affect our interest rate spread if there is no corresponding increase in the interest we earn on our assets. This would be most prevalent with respect to our Agency RMBS backed by fixed rate mortgage loans because the interest rate on a fixed-rate mortgage loan does not change even though market rates may change.
In order to protect our net interest margin against increases in short-term interest rates, we may enter into interest rate swaps, which economically convert our floating-rate repurchase agreement debt to fixed-rate debt, or utilize other hedging instruments such as Eurodollar, Fed Funds and T-Note futures contracts or interest rate swaptions.
Summary
After suffering through arguably the most dramatic contraction of economic activity and financial market turmoil ever witnessed during the first quarter of 2020, the second quarter was one of recovery – or so it appeared until mid-June. As the economy slowly reopened from a near complete shut-down caused by the pervasive safety precautions taken as the COVID-19 virus spread throughout the U.S., economic activity rebounded. However, as life returned to normal, and people could resume their lives as they existed prior to the outbreak, the virus spread again and reported cases surged, starting in mid-June. Safety precautions are being re-implemented to stem the spread of the virus once more. Economic activity is generally reported with a lag, so we will not know the extent of the slowdown in economic activity caused by the re-emergence of the virus until a later date.
The financial markets are generally functioning properly, in large part because of the substantial intervention by the Fed. The Fed has undertaken a quantitative easing program whereby they buy U.S. Treasuries and Agency RMBS securities regularly throughout the week. In addition, they have provided financing to essentially all aspects of the markets – from municipal securities to small and large corporations, as well as foreign central banks. Interest rates remain at or near the lowest levels ever across the U.S. Treasury curve, and are likely to remain so until the economy is well on the road to recovery and inflation is nearing the Fed’s target level of 2%. Given the excess capacity in the economy caused by the demand shock resulting from the virus, this could take several years.
With rates at such low levels refinancing activity is robust and likely to become even more so as originators add capacity. This is in spite of the virus and various measures of social distancing and shelter-in-place prevalent throughout the economy. As originators add capacity, prevailing mortgage rates available to borrowers could fall well below 3%. Eventually most borrowers will have the
45
opportunity to refinance their mortgage and the effect of such low rates will diminish. Another factor affecting the Agency RMBS market is the quantitative easing on the part of the Fed. During the month of July 2020 the Fed purchased over $100 billion of Agency RMBS. The Fed generally purchases between $40 and $45 billion per month as part of their quantitative easing program plus reinvests prepayments on their existing portfolio. The latter figure was approximately $57 billion in July. Gross supply of Agency RMBS for the month of July is anticipated to be between $135 billion and $150 billion. The Fed tends to purchase the coupons currently in production. As they are an indiscriminate buyer, they remove most of the worst securities in terms of prepayments behavior from the market. This is the case for the coupons they purchase. For those coupons they do not purchase,havethe benefit
The Agency MBS sector performance for the second quarter of 2020 was not as robust as the first quarter, but still positive at 0.8% for the second quarter, and 3.6% year-to-date. On an absolute return basis for the quarter, Agency MBS trailed most credit sectors – both corporate and non-Agency RMBS/CMBS, as well as Agency CMBS. As the economy recovered, supported by substantial interventions from the Fed and Congress, most sectors of the fixed income markets recovered. For most, while returns were strong for the second quarter –“burnout” sets in, the high single digits and low double digits in the case of corporate debt and non-Agency RMBS, respectively, year-to-date returns are more modest and in all but a few cases negative year-to-date versus comparable duration U.S. Treasuries. Agency RMBS have generated a -0.8% excess return versus U.S. Treasuries year-to-date. While negative,although this return still exceeds those of most of the fixed income markets.
With respect to the outlook going forward, the economy has yet to fully recover occur.One final elementto poor MBSperformancefor the quarterwas
As of the date of this report, the Company has not utilized any of the funding provided by the CARES Act or by any other legislation adopted by Congress.
inflationgenerally.
2020.
46
Dividends
(in thousands, except per share amounts) | ||||||
Year |
|
|
| Per Share Amount |
| Total |
2013 |
|
| $ | 1.395 | $ | 4,662 |
2014 |
|
|
| 2.160 |
| 22,643 |
2015 |
|
|
| 1.920 |
| 38,748 |
2016 |
|
|
| 1.680 |
| 41,388 |
2017 |
|
|
| 1.680 |
| 70,717 |
2018 |
|
|
| 1.070 |
| 55,814 |
2019 |
|
|
| 0.960 |
| 54,421 |
2020 - YTD(1) |
|
|
| 0.465 |
| 30,595 |
Totals |
|
| $ | 11.330 | $ | 318,988 |
March 31, 2021.
47
policies, domestic and
48
movements in interest rates, effective duration captures both the movement in
2020.
Interest Rate Sensitivity(1) | ||||||
|
|
|
| Portfolio |
|
|
|
|
|
| Market |
| Book |
Change in Interest Rate |
|
|
| Value(2)(3) |
| Value(2)(4) |
As of June 30, 2020 |
|
|
|
|
|
|
-200 Basis Points |
|
|
| 1.46% |
| 13.95% |
-100 Basis Points |
|
|
| 0.69% |
| 6.60% |
-50 Basis Points |
|
|
| 0.20% |
| 1.90% |
+50 Basis Points |
|
|
| (0.32)% |
| (3.02)% |
+100 Basis Points |
|
|
| (0.97)% |
| (9.26)% |
+200 Basis Points |
|
|
| (3.41)% |
| (32.62)% |
As of December 31, 2019 |
|
|
|
|
|
|
-200 Basis Points |
|
|
| (0.07)% |
| (0.63)% |
-100 Basis Points |
|
|
| 0.27% |
| 2.43% |
-50 Basis Points |
|
|
| 0.27% |
| 2.49% |
+50 Basis Points |
|
|
| (0.74)% |
| (6.73)% |
+100 Basis Points |
|
|
| (1.88)% |
| (17.09)% |
+200 Basis Points |
|
|
| (5.14)% |
| (46.66)% |
49
(2)
(2)
50
Significantly higher haircuts can
we must disclose in our periodic reports under the Exchange Act is recorded, processed,51
52
Shares Purchased Maximum Number Total Number Weighted-Average as Part of Publicly of Shares That May Yet of Shares Price Paid Announced Be Repurchased Under Repurchased(1) Per Share Programs(2) the Authorization(2) April 1, 2020 - April 30, 2020 - $ - - 857,202 May 1, 2020 - May 31, 2020 19,891 3.42 19,891 837,311 June 1, 2020 - June 30, 2020 235 4.70 - 837,311 Totals / Weighted Average 20,126 $ 3.43 19,891 837,311 March 31, 2021.2019. There2020. As ofMarch 31, 2021,there havebeen no materialchanges toin ourrisk factors factors for the three months ended June 30, 2020, other than as set forth inour QuarterlyAnnual Reporton Form 10-Q 10-Kfor the quarter yearended March December31, 2020, and such risk factors are incorporated by reference herein.2020. June 30, 2020. June 30, 2020.March 31,2021.None.53
to the Company’s Current Exhibit 4.1 to the Company’s3.13.23.34.131.131.232.132.2Exhibit 101.INS XBRLInline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.***Exhibit 101.SCH XBRLTaxonomy Extension Schema Document ***Exhibit 101.CAL XBRLTaxonomy Extension Calculation Linkbase Document***Exhibit 101.DEF XBRLAdditional Taxonomy Extension Definition Linkbase Document Created***Exhibit 101.LAB XBRLTaxonomy Extension Label Linkbase Document ***Exhibit 101.PRE XBRLTaxonomy Extension Presentation Linkbase Document ***Exhibit 104Cover Page Interactive Data File (embedded within the Inline XBRL document)
54
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