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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
2021
August 2020.
On January 23,4, 2020, Orchid entered into an equity distribution agreement (the “August 2020Equity Distribution Agreement”) with
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
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 lossesfinancialstatementsare reasonablebased 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 billioninformationavailable asof 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.
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.
On January 1, 2020, we adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss model). The Company’s adoption of this ASU did not have a material effect on its financial statements as its financial assets were already measured at fair value through earnings.
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 ($ 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 If, duringthe term ofa repurchaseagreement,a lender filesfor bankruptcy,the Companymight experiencedifficulty recoveringits20202021 andDecember 31,2020:2019: AND REVERSE REPURCHASE AGREEMENTSRepurchase Agreements2020, 2021,the Companyhad met allmargin calland theCompany’s repurchaseagreementshad remainingmaturitiesas summarized2019, the Company’s repurchase agreements had remaining maturities as summarized below:35.665.920202021 and December 31, 2019,2020, respectively.11,which couldresult inan unsecuredclaim againstthe lenderfor the differencebetween theamount loanedto the Company, including the accrued interest receivable
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
(in thousands) |
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Derivative Instruments and Related Accounts |
| Balance Sheet Location | June 30, 2020 | December 31, 2019 | ||
Assets |
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|
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 | $ | - |
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Liabilities |
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|
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 |
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Margin Balances Posted to (from) Counterparties |
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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) |
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| June 30, 2020 | |||||||
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| Average |
| Weighted |
| Weighted |
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| Contract |
| Average |
| Average |
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| Notional |
| Entry |
| Effective |
|
| Open |
Expiration Year |
| Amount |
| Rate |
| Rate |
|
| Equity(1) | |
Eurodollar Futures Contracts (Short Positions) |
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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) |
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September 2020 5-year T-Note futures |
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| (Sep 2020 - Sep 2025 Hedge Period) | $ | 69,000 |
| 0.81% |
| 0.75% |
| $ | (190) |
($ in thousands) |
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| December 31, 2019 | ||||||||
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| Average |
| Weighted |
| Weighted |
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| Contract |
| Average |
| Average |
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| Notional |
| Entry |
| Effective |
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| Open | |
Expiration Year |
| Amount |
| Rate |
| Rate |
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| Equity(1) | |
Eurodollar Futures Contracts (Short Positions) |
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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) |
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March 2020 5 year T-Note futures |
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| (Mar 2020 - Mar 2025 Hedge Period) | $ | 69,000 |
| 1.96% |
| 2.06% |
| $ | 302 |
Weighted
Under our interest rate swap agreements, we typically pay10-Year Ultra futurescontracts
($ in thousands) |
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| Average |
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| Net |
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| Fixed |
| Average |
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| Estimated |
| Average |
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| Notional |
| Pay |
| Receive |
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| Fair |
| Maturity |
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| Amount |
| Rate |
| Rate |
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| Value |
| (Years) |
June 30, 2020 |
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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 |
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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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| Option |
| Underlying Swap | ||||||||||||
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| Weighted |
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| Average |
| Weighted |
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| Average |
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| Average |
| Adjustable |
| Average |
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| Fair |
| Months to |
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| Notional |
| Fixed |
| Rate |
| Term |
Expiration |
| Cost |
| Value |
| Expiration |
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| Amount |
| Rate |
| (LIBOR) |
| (Years) | |
June 30, 2020 |
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Payer Swaptions - long |
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| ≤ 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 |
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| ≤ 1 year | $ | (2,400) | $ | (3,289) |
| 11.2 |
| $ | 436,200 |
| 1.50% |
| 3 Month |
| 10.0 |
2020
($ in thousands) |
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| Notional |
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| Net | |
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| Amount |
| Cost |
| Market |
| Carrying | |
|
| Long (Short)(1) |
| Basis(2) |
| Value(3) |
| Value(4) | |
June 30, 2020 |
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15-Year TBA securities: |
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| 2.0% | $ | 200,000 | $ | 206,094 | $ | 206,500 | $ | 406 |
Total | $ | 200,000 | $ | 206,094 | $ | 206,500 | $ | 406 | |
December 31, 2019 |
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30-Year TBA securities: |
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| 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) |
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| Face |
| Cost |
| Fair |
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| Amount |
| Basis |
| Value |
Maturity |
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5 Years | $ | (140,000) | $ | (139,712) | $ | (139,843) |
Total | $ | (140,000) | $ | (139,712) | $ | (139,843) |
2020.
14
(in thousands) |
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|
| 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 | |
2020
to Orchid
15
Agreements
The table below summarizes our assets pledged to us from counterparties under our repurchase agreements, reverse repurchase agreements and derivative agreements as of June 30, 2020 and December 31, 2019.
(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 Agreements
(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) $ 7,303 20202021 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 |
2021.
18
appreciation rights, stock award, performance units, other equity-based
The 2021
($ 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 six months ended June 30, 2020 2021
($ 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.
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
92,456
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 |
| - |
| - |
| - | ||
65,409
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 indirectly comparableto 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 subjectasset or liability. Valuation techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability.
21
if applicable,the coupon,the maturity, theissuer, size ofthe underlyingloans, yearin which theunderlyingloans
(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) |
| - |
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 ofafter 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
26
●
Net (Loss) Income Summary
Net loss for the six months ended June 30, 2020 was $42.4 $48.8million, or $0.65$0.74 pershare. Net income for the six months ended June 30, 2019 was $14.1 million, or $0.28 per share. Net income for the three months ended June 30, 2020 was $48.8 million, or $0.74 per share. Net income for the three months ended June 30, 2019 was $3.5 million, or $0.07 per share. The componentsof net (loss)income forthe six
(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
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 Instruments20202021 to date and 2019.
2020.Gains (Losses) on Derivative Instruments(in thousands)U.S. TreasuryFunding HedgesRecognized inandAttributed toAttributed to29
30
3,126,779
was $31.7 million and $37.4 million, respectively, resulting in $31.3 million and $31.5 million of economic net interest income, respectively.
During the three months ended 27,258
On an economic basis, our interest expense on borrowings for the three months ended 2021
The tables below provide information on our portfolio average balances, interest income, yield on assets, average borrowings, interest expense, cost of funds, net interest income and net interest spread for the six months ended
($ 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
Average LIBOR
funds, partially offset by a $38.8 million increase in average outstanding borrowings during the six months ended One-Month
Our economic interest expense was $31.7 million and $37.4 million for the six months ended 2021
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
0.94%
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)% |
1.06%
(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.
(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 |
|
| 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 bearinterestat prevailingmarket rates.We believe our
($ 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 suchsecuritiesreadily, even indistressedmarkets, 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)
2021.
June2021.
of 9,200,000 shares of our common stock occurred on March5, 2021, with proceeds to us of
40
particular has made it clear they will continue to do whatever is necessary to support smooth operations of all financial markets and act as a lender of last resort when needed and appropriate for them to do so.
While the economy gradually reopened and economic activity began to recover, the virus re-emergedMac and the numberevictionmoratoriumfor real estateowned by Fannie
Throughout the second quarter of 2020 and into the third quarter interest rates in the U.S. Treasury market have been fairly stable. The yield firstconcrete stepon the 10-year U.S. Treasury note has remained within a 32.5 bps range, and excluding a brief period in early June, the range has been approximately half that. The equity markets have exhibited substantially more volatility, although they continue roadto recover from the depths of the contraction of March of this year. The backstop to the recovery is a Fed that continuously signals a willingness to provide as much accommodation as needed and the belief in additional stimulus from Washington, although subject to political wrangling that tends to slow the response. Given the uncertainty surrounding the recovery and the timing of when “normal” economic activity may resume, the level of interest rates, especially short term rates, are likely to remain very low and the Fed Funds target range pegged to the effective lower bound of 0%. The Fed has signaled a reluctance to see negative interest rates in the U.S. many times, so their role in maintaining rates at these levels will likely be through forward guidance and/or yield curve control – a practice observed in Japan and Australia.
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.
GSE
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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 and Agency MBS financing markets. These operations ceased in July 2020 after the central bank successfully tamed volatile funding costs that had threatened to cause disruption across the financial system.
The Fed has taken a number of other actions to stabilize markets as a result of the impacts of the COVID-19 pandemic. On Sunday, March 15, 2020, the Fed announced a $700 billion asset purchase program to provide liquidity to the U.S. Treasury and Agency MBS markets. Specifically, the Fed announced that it would purchase at least $500 billion of U.S. Treasuries and at least $200 billion of Agency MBS. The Fed also lowered the Fed Funds rate to a range of 0.0% – 0.25%, after having already lowered the Fed Funds rate by 50 bps on March 3, 2020. On June 30, 2020, Fed Chairman Powell announced expectationsthe FHFA releaseda proposed ruleon a new regulatoryframeworkfor the GSEswhich seeksto
The markets for ending the
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 development of a policy for comprehensive housing finance reform soon. On September 30, 2019, the FHFA announced that Fannie Mae and Freddie Mac were allowed to increase their capital buffers to $25 billion and $20 billion, respectively, from the prior limit of $3 billion each. This step could ultimately lead to Fannie Mae and Freddie Mac being privatized and represents the first concrete step on the road to GSE reform. At this time, however, no decisions have been made on any additional steps to maybe taken as part of the GSE reform plan and the economic impact of COVID-19 may delay GSE reform plans further. Although the Trump administration has made statements of its intentions to reform housing finance and tax policy, many of these potential policy changes will require congressional action.
renegotiated.
At this time,however, no consensusexists as towhat rate orrates may becomeaccepted alternativesto LIBOR.
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following:
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 reinvestedin similar-yieldingassets. AgencyRMBS backedby mortgageswith
44
market. IfJune, after the Fed modifies, reduces or suspends its purchasesconcluded their FOMC meeting and revealed there was
Because we base our investment decisions on risk management principles rather than anticipated movements in interest rates,committee members regarding the timing of this step.While Fed leadership maintains this step is
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 thoughthat confounded many 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 ratesparticipants.Rates available to borrowers could fall well below 3%. Eventually most borrowers will haveare back to
45
opportunity to refinance their mortgagehigher coupon, more seasoned loans 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 RMBSdriving premiums 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, 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 much 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.
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 versus U.S. Treasuries year-to-date. While negative, 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 from the steep contraction during the first quarter of 2020, despite massive intervention by both the Fed and the Trump administration. There remains significant uncertainty surrounding the timing of a full recovery in economic activity and a return to life as it existed before the virus emerged. There is also considerable risk associated with the unprecedented deficits the Federal government has incurred in an effort to stabilize the economy, and such deficits are still expanding rapidly.
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.
slightly higher.
2020.
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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 |
2021.
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policies, domestic and
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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
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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 2021.2019. There2020. As ofJune 30, 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.2020.2020.2020.2021.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)
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