10-Q
Orchid Island Capital, Inc. (ORC)
View as plain text
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
☒
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 2021
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________
to ___________
Commission File Number
:
001-35236
Orchid Island Capital, Inc.
(Exact name of registrant as specified in its charter)
Maryland
27-3269228
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
3305 Flamingo Drive
,
Vero Beach
,
Florida
32963
(Address of principal executive offices) (Zip Code)
(
772
)
231-1400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
Title of Each Class
Trading Symbol:
Name of Each Exchange on Which
Registered
Common Stock, $0.01 par value
ORC
New York Stock Exchange
Indicate by check
mark whether the
registrant (1) has filed
all reports required
to be filed
by Section 13 or
15(d) of the
Securities Exchange Act
of
1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such
reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes
☒
No
☐
Indicate by check mark whether
the registrant has submitted electronically
every Interactive Data File required
to be submitted pursuant to
Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required
to submit such
files).
Yes
☒
No
☐
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer,
a non-accelerated filer, a smaller reporting
company, or
an emerging growth company. See the definitions of "large accelerated filer,"
"accelerated filer", "smaller reporting company", and "emerging growth
company" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company,
indicate by check mark if the registrant has elected
not to use the extended transition period for complying with
any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).
Yes
☐
No
☒
Number of shares outstanding at July 30, 2021:
123,060,013
ORCHID ISLAND
CAPITAL, INC.
TABLE OF CONTENTS
PART I. FINANCIAL
INFORMATION
ITEM 1. Financial
Statements
1
Condensed
Balance Sheets
(unaudited)
1
Condensed
Statements
of Operations
(unaudited)
2
Condensed
Statements
of Stockholders’
Equity (unaudited)
3
Condensed
Statements
of Cash Flows
(unaudited)
4
Notes to Condensed
Financial Statements
(unaudited)
5
ITEM 2. Management’s
Discussion
and Analysis
of Financial
Condition
and Results
of Operations
23
ITEM 3. Quantitative
and Qualitative
Disclosures
about Market
Risk
45
ITEM 4. Controls
and Procedures
49
PART II. OTHER INFORMATION
ITEM 1. Legal
Proceedings
50
ITEM 1A.
Risk Factors
50
ITEM 2. Unregistered
Sales of Equity
Securities
and Use of
Proceeds
50
ITEM 3. Defaults
upon Senior
Securities
50
ITEM 4. Mine
Safety Disclosures
50
ITEM 5. Other
Information
50
ITEM 6. Exhibits
51
SIGNATURES
52
1
PART I. FINANCIAL
INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORCHID ISLAND CAPITAL, INC.
CONDENSED BALANCE SHEETS
($ in thousands, except per share data)
(Unaudited)
June 30, 2021
December 31, 2020
ASSETS:
Mortgage-backed securities, at fair value
Pledged to counterparties
$
4,665,578
$
3,719,906
Unpledged
5,661
6,989
Total mortgage
-backed securities
4,671,239
3,726,895
Cash and cash equivalents
272,842
220,143
Restricted cash
106,876
79,363
Accrued interest receivable
12,547
9,721
Derivative assets
43,735
20,999
Receivable for securities sold, pledged to counterparties
-
414
Other assets
688
516
Total Assets
$
5,107,927
$
4,058,051
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements
$
4,514,704
$
3,595,586
Dividends payable
7,663
4,970
Derivative liabilities
16,769
33,227
Accrued interest payable
1,042
1,157
Due to affiliates
794
632
Other liabilities
13,134
7,188
Total Liabilities
4,554,106
3,642,760
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, 2021 and December 31, 2020
-
-
Common Stock, $
0.01
par value;
500,000,000
shares authorized,
117,500,013
shares issued and outstanding as of June 30, 2021 and
76,073,317
shares issued
and outstanding as of December 31, 2020
1,175
761
Additional paid-in capital
616,874
432,524
Accumulated deficit
(64,228)
(17,994)
Total Stockholders' Equity
553,821
415,291
Total Liabilities
and Stockholders' Equity
$
5,107,927
$
4,058,051
See Notes to Financial Statements
2
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS
OF OPERATIONS
(Unaudited)
For the Three and Six Months Ended June 30, 2021 and
2020
($ in thousands, except per share data)
Six Months Ended June 30,
Three Months Ended June 30,
2021
2020
2021
2020
Interest income
$
56,110
$
62,929
$
29,254
$
27,258
Interest expense
(3,497)
(21,002)
(1,556)
(4,479)
Net interest income
52,613
41,927
27,698
22,779
Realized (losses) gains on mortgage-backed securities
(6,045)
(25,020)
1,352
3,360
Unrealized (losses) gains on mortgage-backed securities
(96,147)
37,272
(7,281)
34,240
Gains (losses) on derivative and other hedging instruments
10,557
(91,709)
(34,915)
(8,851)
Net portfolio (loss) income
(39,022)
(37,530)
(13,146)
51,528
Expenses:
Management fees
3,413
2,645
1,792
1,268
Allocated overhead
799
695
395
348
Accrued incentive compensation
625
(275)
261
161
Directors' fees and liability insurance
595
508
323
248
Audit, legal and other professional fees
620
601
302
346
Direct REIT operating expenses
715
446
294
240
Other administrative
445
277
352
145
Total expenses
7,212
4,897
3,719
2,756
Net (loss) income
$
(46,234)
$
(42,427)
$
(16,865)
$
48,772
Basic net (loss) income per share
$
(0.50)
$
(0.65)
$
(0.17)
$
0.74
Diluted net (loss) income per share
$
(0.50)
$
(0.65)
$
(0.17)
$
0.73
Weighted Average Shares Outstanding
92,456,082
65,408,722
99,489,065
66,310,219
Dividends declared per common share
$
0.390
$
0.405
$
0.195
$
0.165
See Notes to Financial Statements
3
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS
OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Three and Six Months Ended June 30, 2021 and
2020
(in thousands)
Additional
Retained
Common Stock
Paid-in
Earnings
Shares
Par Value
Capital
(Deficit)
Total
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
Stock based awards and amortization
4
-
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)
Stock based awards and amortization
4
-
55
-
55
Shares repurchased and retired
(20)
-
(68)
-
(68)
Balances, June 30, 2020
66,221
$
662
$
407,855
$
(62,549)
$
345,968
Balances, January 1, 2021
76,073
$
761
$
432,524
$
(17,994)
$
415,291
Net loss
-
-
-
(29,369)
(29,369)
Cash dividends declared
-
-
(17,226)
-
(17,226)
Issuance of common stock pursuant to public offerings, net
18,248
182
96,726
-
96,908
Stock based awards and amortization
90
1
571
-
572
Balances, March 31, 2021
94,411
$
944
$
512,595
$
(47,363)
$
466,176
Net loss
-
-
-
(16,865)
(16,865)
Cash dividends declared
-
-
(20,416)
-
(20,416)
Issuance of common stock pursuant to public offerings, net
23,087
231
124,515
-
124,746
Stock based awards and amortization
2
-
180
-
180
Balances, June 30, 2021
117,500
$
1,175
$
616,874
$
(64,228)
$
553,821
See Notes to Financial Statements
4
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS
OF CASH FLOWS
(Unaudited)
For the Six Months Ended June 30, 2021 and 2020
($ in thousands)
2021
2020
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss
$
(46,234)
$
(42,427)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Stock based compensation
429
114
Realized and unrealized losses (gains) on mortgage-backed securities
102,192
(12,252)
Realized and unrealized (gains) losses on interest rate swaptions
(4,838)
5,090
Realized and unrealized gains on interest rate floors
(1,384)
-
Realized and unrealized (gains) losses on interest rate swaps
(12,650)
64,357
Realized and unrealized losses on U.S. Treasury securities
-
131
Realized losses on forward settling to-be-announced securities
5,389
5,244
Changes in operating assets and liabilities:
Accrued interest receivable
(2,826)
2,163
Other assets
(172)
(580)
Accrued interest payable
(115)
(10,395)
Other liabilities
(1,305)
671
Due to (from) affiliates
162
(53)
NET CASH PROVIDED BY OPERATING
ACTIVITIES
38,648
12,063
CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases
(2,986,864)
(1,985,756)
Sales
1,680,903
2,023,334
Principal repayments
259,425
260,834
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
(3,077)
(6,888)
Purchase of derivative financial instruments, net of margin cash received
(14,369)
(64,190)
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
(1,063,982)
227,308
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements
13,582,422
20,879,112
Principal payments on repurchase agreements
(12,663,304)
(21,152,479)
Cash dividends
(34,927)
(28,008)
Proceeds from issuance of common stock, net of issuance costs
221,654
19,447
Shares withheld from employee stock awards for payment of taxes
(299)
(68)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
1,105,546
(281,996)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS
AND RESTRICTED CASH
80,212
(42,625)
CASH, CASH EQUIVALENTS AND
RESTRICTED CASH, beginning of the period
299,506
278,655
CASH, CASH EQUIVALENTS AND
RESTRICTED CASH, end of the period
$
379,718
$
236,030
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest
$
3,611
$
31,397
See Notes to Financial Statements
5
ORCHID ISLAND
CAPITAL, INC.
NOTES TO CONDENSED
FINANCIAL
STATEMENTS
(Unaudited)
JUNE 30,
2021
NOTE 1.
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
and Business
Description
Orchid Island
Capital, Inc.
(“Orchid” or
the “Company”),
was incorporated
in Maryland
on August
17, 2010 for
the purpose
of creating
and managing
a leveraged
investment
portfolio
consisting
of residential
mortgage-backed
securities
(“RMBS”).
From incorporation
to
February 20,
2013,
Orchid was
a wholly owned
subsidiary
of Bimini Capital
Management,
Inc. (“Bimini”).
Orchid began
operations
on
November 24,
2010 (the
date of commencement
of operations).
From incorporation
through November
24, 2010,
Orchid’s only
activity
was the issuance
of common stock
to Bimini.
On January 23, 2020, Orchid entered into an equity distribution agreement (the
“January 2020 Equity Distribution Agreement”) with
three sales agents pursuant to which the Company could offer and sell, from time to time, up
to an aggregate amount of $
200,000,000
of shares of the Company’s common stock in transactions that were deemed to be “at the market” offerings and
privately negotiated
transactions.
The Company issued a total of
3,170,727
shares under the January 2020 Equity Distribution Agreement for
aggregate
gross proceeds of
approximately $
19.8
million, and net proceeds of approximately $
19.4
million, after commissions and fees, prior to
its termination in August 2020.
On August 4, 2020, Orchid entered into an equity distribution agreement (the “August 2020
Equity Distribution Agreement”) with
four sales agents pursuant to which the Company could offer and sell, from time to time, up
to an aggregate amount of $
150,000,000
of
shares of the Company’s common stock in transactions that were deemed to be “at the market” offerings and privately
negotiated
transactions.
The Company issued a total of
27,493,650
shares under the August 2020 Equity Distribution Agreement for aggregate
gross proceeds of
approximately $
150.0
million, and net proceeds of approximately $
147.4
million, after commissions and fees, prior to
its termination in June 2021.
On January 20, 2021, Orchid entered into an underwriting agreement (the “January
2021 Underwriting Agreement”) with J.P.
Morgan Securities LLC (“J.P. Morgan”), relating to the offer and sale of
7,600,000
shares of the Company’s common stock. J.P.
Morgan purchased the shares of the Company’s common stock from the Company pursuant
to the January 2021 Underwriting
Agreement at $
5.20
per share. In addition, the Company granted J.P. Morgan a 30-day option to purchase up to an additional
1,140,000
shares of the Company’s common stock on the same terms and conditions, which
J.P.
Morgan exercised in full on January
21, 2021. The closing of the offering of
8,740,000
shares of the Company’s common stock occurred on January 25, 2021, with
proceeds to the Company of approximately $
45.2
million, net of offering expenses.
On March 2, 2021, Orchid entered into an underwriting agreement (the “March 2021
Underwriting Agreement”) with J.P. Morgan,
relating to the offer and sale of
8,000,000
shares of the Company’s common stock. J.P. Morgan purchased the shares of the
Company’s common stock from the Company pursuant to the March 2021 Underwriting
Agreement at $
5.45
per share. In addition, the
Company granted J.P. Morgan a 30-day option to purchase up to an additional
1,200,000
shares of the Company’s common stock on
the same terms and conditions, which J.P. Morgan exercised in full on March 3, 2021. The closing of the offering of
9,200,000
shares
of the Company’s common stock occurred on March 5, 2021, with proceeds to the Company
of approximately $
50.0
million, net of
offering expenses.
On June 22, 2021, Orchid entered into an equity distribution agreement (the “June
2021 Equity Distribution Agreement”) with four
sales agents pursuant to which the Company may offer and sell, from time to time, up to
an aggregate amount of $
250,000,000
of
shares of the Company’s common stock in transactions that are deemed to be “at the market”
offerings and privately negotiated
6
transactions.
Through June 30, 2021, the Company issued a total of
5,750,000
shares under the June 2021 Equity Distribution
Agreement for aggregate gross proceeds of approximately $
31.1
million, and net proceeds of approximately $
30.6
million, after
commissions and fees. Subsequent to June 30, 2021 and through July 30, 2021,
the Company issued a total of
5,560,000
shares
under the June 2021 Equity Distribution Agreement for aggregate gross proceeds
of approximately $
28.6
million, and net proceeds of
approximately $
28.2
million, after commissions and fees.
COVID-19 Impact
Beginning
in mid-March
2020, the
global pandemic
associated
with the novel
coronavirus
(“COVID-19”)
and related
economic
conditions
began to impact
our financial
position and
results of
operations.
As a result
of the economic,
health and
market turmoil
brought
about by COVID-19,
the Agency
RMBS market
experienced
severe dislocations.
This resulted
in falling
prices of our
assets and
increased
margin calls
from our repurchase
agreement
lenders, resulting
in material
adverse effects
on our results
of operations
and to our
financial
condition.
The Agency
RMBS market
largely stabilized
after the
Federal Reserve
announced
on March 23,
2020 that
it would purchase
Agency
RMBS and
U.S. Treasuries
in the amounts
needed to
support smooth
market functioning.
As of June
30, 2021,
we have timely
satisfied all
margin calls.
The RMBS
market continues
to react to
the pandemic
and the various
measures put
in place to
stabilize the
market.
To the
extent the
financial or
mortgage markets
do not respond
favorably to
any of these
actions, or
such actions
do not function
as intended,
our
business, results
of operations
and financial
condition may
continue to
be materially
adversely
affected. Although
the Company
cannot
estimate the
length or
gravity of
the impact
of the COVID-19
pandemic at
this time,
it may have
a material
adverse effect
on the
Company’s results
of future
operations,
financial position,
and liquidity
during 2021.
Basis of
Presentation
and Use of
Estimates
The accompanying
unaudited
financial
statements
have been
prepared in
accordance
with accounting
principles
generally
accepted
in the United
States (“GAAP”)
for interim
financial information
and with the
instructions
to Form 10-Q
and Article
8 of Regulation
S-X.
Accordingly, they
do not include
all of the
information
and footnotes
required by
GAAP for
complete financial
statements.
In the opinion
of
management,
all adjustments
(consisting
of normal
recurring
accruals)
considered
necessary
for a fair
presentation
have been
included.
Operating
results for
the six and
three month
period ended
June 30, 2021
are not necessarily
indicative
of the results
that may
be
expected for
the year ending
December 31,
2021.
The balance
sheet at December
31, 2020 has
been derived
from the audited
financial statements
at that date
but does not
include all
of the information
and footnotes
required by
GAAP for
complete financial
statements.
For further
information,
refer to the
financial
statements
and footnotes
thereto included
in the Company’s
Annual Report
on Form 10-K
for the year
ended December
31, 2020.
The preparation
of financial
statements
in conformity
with GAAP
requires management
to make estimates
and assumptions
that affect
the reported
amounts of
assets and
liabilities
and disclosure
of contingent
assets and
liabilities
at the date
of the financial
statements
and
the reported
amounts of
revenues and
expenses during
the reporting
period. Actual
results could
differ from
those estimates.
The
significant
estimates
affecting the
accompanying
financial
statements
are the fair
values of RMBS
and derivatives.
Management
believes
the estimates
and assumptions
underlying
the financial
statements
are reasonable
based on the
information
available as
of June 30,
2021.
Variable Interest Entities (“VIEs”)
We obtain interests in VIEs through our investments in mortgage-backed securities.
Our interests in these VIEs are passive in
nature and are not expected to result in us obtaining a controlling financial interest in
these VIEs in the future.
As a result, we do not
consolidate these VIEs and we account for our interest in these VIEs as mortgage-backed
securities.
See Note 2 for additional
information regarding our investments in mortgage-backed securities.
Our maximum exposure to loss for these VIEs is the carrying
value of the mortgage-backed securities.
7
Cash and Cash Equivalents and Restricted Cash
Cash and cash
equivalents
include cash
on deposit
with financial
institutions
and highly
liquid investments
with original
maturities
of
three months
or less at
the time
of purchase.
Restricted
cash includes
cash pledged
as collateral
for repurchase
agreements
and other
borrowings,
and interest
rate swaps
and other
derivative
instruments.
The following
table provides
a reconciliation
of cash, cash
equivalents,
and restricted
cash reported
within the
statement
of financial
position that
sum to the
total of the
same such amounts
shown in
the statement
of cash flows.
(in thousands)
June 30, 2021
December 31, 2020
Cash and cash equivalents
$
272,842
$
220,143
Restricted cash
106,876
79,363
Total cash, cash equivalents
and restricted cash
$
379,718
$
299,506
The Company
maintains cash
balances at
three banks
and excess
margin on
account with
two exchange
clearing members.
At times,
balances may
exceed federally
insured limits.
The Company
has not experienced
any losses
related to
these balances.
The Federal
Deposit Insurance
Corporation
insures eligible
accounts up
to $250,000
per depositor
at each financial
institution.
Restricted
cash
balances are
uninsured,
but are held
in separate
customer accounts
that are segregated
from the general
funds of the
counterparty. The
Company limits
uninsured
balances to
only large,
well-known
banks and exchange
clearing members
and believes
that it is
not exposed
to
any significant
credit risk
on cash and
cash equivalents
or restricted
cash balances.
Mortgage-Backed
Securities
The Company
invests primarily
in mortgage
pass-through
(“PT”) residential
mortgage backed
certificates
issued by Freddie
Mac,
Fannie Mae
or Ginnie Mae
(“RMBS”),
collateralized
mortgage obligations
(“CMOs”),
interest-only
(“IO”) securities
and inverse
interest-only
(“IIO”) securities
representing interest in or obligations backed by pools of RMBS.
We refer to RMBS and CMOs as PT RMBS. We refer
to IO and IIO securities as structured RMBS. The Company has elected to account for its
investment in RMBS under the fair value
option. Electing the fair value option requires
the Company to record changes in fair value in the statement of operations,
which, in
management’s view, more appropriately reflects the results of our operations for a particular reporting period and is consistent with the
underlying economics and how the portfolio is managed.
The Company
records RMBS
transactions
on the trade
date. Security
purchases that
have not
settled as
of the balance
sheet date
are included
in the RMBS
balance with
an offsetting
liability recorded,
whereas securities
sold that
have not settled
as of the
balance sheet
date are removed
from the RMBS
balance with
an offsetting
receivable recorded.
Fair value
is defined
as the price
that would
be received
to sell the
asset or paid
to transfer
the liability
in an orderly
transaction
between market
participants
at the measurement
date.
The fair value
measurement
assumes that
the transaction
to sell the
asset or
transfer the
liability either
occurs in
the principal
market for
the asset or
liability, or in
the absence
of a principal
market, occurs
in the most
advantageous
market for
the asset or
liability. Estimated
fair values
for RMBS
are based
on independent
pricing sources
and/or third
party
broker quotes,
when available.
Income on PT
RMBS securities
is based on
the stated
interest rate
of the security.
Premiums or
discounts present
at the date
of
purchase are
not amortized.
Premium lost
and discount
accretion
resulting from
monthly principal
repayments
are reflected
in unrealized
gains (losses)
on RMBS in
the statements
of operations.
For IO securities,
the income
is accrued
based on the
carrying value
and the
effective yield.
The difference
between income
accrued and
the interest
received on
the security
is characterized
as a return
of investment
and serves
to reduce
the asset’s
carrying value.
At each reporting
date, the
effective yield
is adjusted
prospectively
for future
reporting
periods
based on the
new estimate
of prepayments
and the contractual
terms of the
security. For IIO
securities,
effective yield
and income
recognition
calculations
also take
into account
the index value
applicable
to the security.
Changes in
fair value
of RMBS during
each
8
reporting
period are
recorded in
earnings and
reported as
unrealized
gains or losses
on mortgage-backed
securities
in the accompanying
statements
of operations.
Derivative and Other Hedging Instruments
The Company
uses derivative
and other
hedging instruments
to manage
interest rate
risk, facilitate
asset/liability
strategies
and
manage other
exposures,
and it may
continue to
do so in the
future. The
principal instruments
that the Company
has used to
date are
Treasury Note
(“T-Note”),
Fed Funds and
Eurodollar
futures contracts,
short positions
in U.S. Treasury
securities,
interest rate
swaps,
options to
enter in interest
rate swaps
(“interest
rate swaptions”)
and “to-be-announced”
(“TBA”) securities
transactions,
but the Company
may enter
into other
derivative
and other
hedging instruments
in the future.
The Company
accounts for
TBA securities
as derivative
instruments.
Gains and losses
associated
with TBA
securities
transactions
are reported
in gain (loss)
on derivative
instruments
in the accompanying
statements
of operations.
Derivative
and other
hedging instruments
are carried
at fair value,
and changes
in fair value
are recorded
in earnings
for each period.
The Company’s
derivative
financial
instruments
are not designated
as hedge accounting
relationships,
but rather
are used as
economic
hedges of
its portfolio
assets and
liabilities.
Holding derivatives
creates exposure
to credit
risk related
to the potential
for failure
on the part
of counterparties
and exchanges
to
honor their
commitments.
In the event
of default
by a counterparty,
the Company
may have difficulty
recovering
its collateral
and may not
receive payments
provided for
under the
terms of the
agreement.
The Company’s
derivative
agreements
require it
to post or
receive
collateral
to mitigate
such risk.
In addition,
the Company
uses only
registered
central clearing
exchanges and
well-established
commercial
banks as counterparties,
monitors positions
with individual
counterparties
and adjusts
posted collateral
as required.
Financial
Instruments
The fair value
of financial
instruments
for which
it is practicable
to estimate
that value
is disclosed
either in
the body of
the financial
statements
or in the
accompanying
notes. RMBS,
Eurodollar,
Fed Funds
and T-Note
futures contracts,
interest rate
swaps, interest
rate
swaptions
and TBA securities
are accounted
for at fair
value in the
balance sheets.
The methods
and assumptions
used to estimate
fair
value for
these instruments
are presented
in Note 12
of the financial
statements.
The estimated
fair value
of cash and
cash equivalents,
restricted
cash, accrued
interest receivable,
receivable
for securities
sold,
other assets,
due to affiliates,
repurchase
agreements,
payable for
unsettled securities
purchased,
accrued interest
payable and
other
liabilities
generally approximates
their carrying
values as of
June 30,
2021 and December
31, 2020 due
to the short-term
nature of
these
financial instruments.
Repurchase
Agreements
The Company
finances the
acquisition
of the majority
of its RMBS
through the
use of repurchase
agreements
under master
repurchase
agreements.
Repurchase
agreements
are accounted
for as collateralized
financing
transactions,
which are
carried at
their
contractual
amounts, including
accrued interest,
as specified
in the respective
agreements.
Reverse Repurchase
Agreements
and Obligations
to Return Securities
Borrowed under
Reverse Repurchase
Agreements
The Company
borrows
securities
to cover short
sales of U.S.
Treasury securities
through reverse
repurchase
transactions
under our
master repurchase
agreements.
We account for
these as securities
borrowing
transactions
and recognize
an obligation
to return the
borrowed
securities
at fair value
on the balance
sheet based
on the value
of the underlying
borrowed
securities
as of the
reporting
date.
The securities
received as
collateral
in connection
with our reverse
repurchase
agreements
mitigate our
credit risk
exposure to
9
counterparties.
Our reverse
repurchase
agreements
typically
have maturities
of 30 days
or less.
Manager Compensation
The Company
is externally
managed by
Bimini Advisors,
LLC (the
“Manager”
or “Bimini
Advisors”),
a Maryland
limited liability
company and
wholly-owned
subsidiary
of Bimini.
The Company’s
management
agreement
with the
Manager provides
for payment
to the
Manager of
a management
fee and reimbursement
of certain
operating
expenses, which
are accrued
and expensed
during the
period for
which they
are earned
or incurred.
Refer to
Note 13 for
the terms of
the management
agreement.
Earnings
Per Share
Basic earnings
per share
(“EPS”) is
calculated
as net income
or loss attributable
to common stockholders
divided by
the weighted
average number
of shares
of common stock
outstanding
or subscribed
during the
period. Diluted
EPS is calculated
using the treasury
stock or two-class
method, as
applicable,
for common
stock equivalents,
if any. However, the
common stock
equivalents
are not included
in computing
diluted EPS
if the result
is anti-dilutive.
Income Taxes
Orchid has qualified and elected to be taxed as a real estate investment trust (“REIT”) under
the Internal Revenue Code of 1986,
as amended (the “Code”).
REITs are generally not subject to federal income tax on their REIT taxable income provided that they
distribute to their stockholders at least 90% of their REIT taxable income on an annual
basis. In addition, a REIT must meet other
provisions of the Code to retain its tax status.
Orchid assesses the likelihood, based on their technical merit, that uncertain tax positions
will be sustained upon examination
based on the facts, circumstances and information available at the end of each period.
All of Orchid’s tax positions are categorized as
highly certain.
There is no accrual for any tax, interest or penalties related to Orchid’s tax position
assessment.
The measurement of
uncertain tax positions is adjusted when new information is available, or
when an event occurs that requires a change.
Recent
Accounting
Pronouncements
In March 2020, the FASB issued ASU 2020-04 “
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate
Reform on Financial Reporting.
”
ASU 2020-04 provides optional expedients and exceptions to GAAP requirements for
modifications
on debt instruments, leases, derivatives, and other contracts, related to the expected market
transition from the London Interbank
Offered Rate (“LIBOR”), and certain other floating rate benchmark indices, or collectively, IBORs, to alternative reference rates. ASU
2020-04 generally considers contract modifications related to reference rate reform to
be an event that does not require contract
remeasurement at the modification date nor a reassessment of a previous accounting
determination. The guidance in ASU 2020-04 is
optional and may be elected over time, through December 31, 2022, as reference
rate reform activities occur. The Company does not
believe the adoption of this ASU will have a material impact on its consolidated financial
statements.
In January 2021, the FASB issued ASU 2021-01 “Reference Rate Reform (Topic 848). ASU 2021-01 expands the scope of ASC
848 to include all affected derivatives and give market participants the ability to apply certain
aspects of the contract modification and
hedge accounting expedients to derivative contracts affected by the discounting transition. In
addition, ASU 2021-01 adds
implementation guidance to permit a company to apply certain optional expedients
to modifications of interest rate indexes used for
margining, discounting or contract price alignment of certain derivatives as a result
of reference rate reform initiatives and extends
optional expedients to account for a derivative contract modified as a continuation of
the existing contract and to continue hedge
accounting when certain critical terms of a hedging relationship change to modifications
made as part of the discounting transition. The
guidance in ASU 2021-01 is effective immediately and available generally through December
31, 2022, as reference rate reform
activities occur. The Company does not believe the adoption of this ASU will have a material impact on its financial statements.
10
NOTE 2.
MORTGAGE-BACKED
SECURITIES
The following
table presents
the Company’s
RMBS portfolio
as of June
30, 2021 and
December 31,
2020:
(in thousands)
June 30, 2021
December 31, 2020
Pass-Through RMBS Certificates:
Fixed-rate Mortgages
$
4,574,539
$
3,560,746
Fixed-rate CMOs
-
137,453
Total Pass-Through
Certificates
4,574,539
3,698,199
Structured RMBS Certificates:
Interest-Only Securities
92,709
28,696
Inverse Interest-Only Securities
3,991
-
Total Structured
RMBS Certificates
96,700
28,696
Total
$
4,671,239
$
3,726,895
NOTE 3.
REPURCHASE AGREEMENTS
The Company
pledges certain
of its RMBS
as collateral
under repurchase
agreements
with financial
institutions.
Interest rates
are
generally fixed
based on prevailing
rates corresponding
to the terms
of the borrowings,
and interest
is generally
paid at the
termination
of a
borrowing.
If the fair
value of the
pledged securities
declines,
lenders will
typically require
the Company
to post additional
collateral
or pay
down borrowings
to re-establish
agreed upon
collateral
requirements,
referred to
as "margin
calls." Similarly,
if the fair
value of the
pledged
securities
increases,
lenders may
release collateral
back to the
Company. As of June
30, 2021,
the Company
had met all
margin call
requirements.
As of June
30, 2021 and
December 31,
2020, the
Company’s repurchase
agreements
had remaining
maturities
as summarized
below:
($ in thousands)
OVERNIGHT
BETWEEN 2
BETWEEN 31
GREATER
(1 DAY OR
AND
AND
THAN
LESS)
30 DAYS
90 DAYS
90 DAYS
TOTAL
June 30, 2021
Fair market value of securities pledged, including
accrued interest receivable
$
105,929
$
2,988,154
$
1,558,174
$
25,814
$
4,678,071
Repurchase agreement liabilities associated with
these securities
$
101,075
$
2,882,437
$
1,506,293
$
24,899
$
4,514,704
Net weighted average borrowing rate
0.14%
0.13%
0.13%
0.15%
0.13%
December 31, 2020
Fair market value of securities pledged, including
accrued interest receivable
$
-
$
2,112,969
$
1,560,798
$
55,776
$
3,729,543
Repurchase agreement liabilities associated with
these securities
$
-
$
2,047,897
$
1,494,500
$
53,189
$
3,595,586
Net weighted average borrowing rate
-
0.23%
0.22%
0.30%
0.23%
In addition, cash pledged to counterparties for repurchase agreements was approximately
$
79.1
million and $
58.8
million as of
June 30, 2021 and December 31, 2020, respectively.
If, during
the term of
a repurchase
agreement,
a lender files
for bankruptcy,
the Company
might experience
difficulty recovering
its
pledged assets,
which could
result in
an unsecured
claim against
the lender
for the difference
between the
amount loaned
to the Company
plus interest
due to the
counterparty
and the fair
value of the
collateral
pledged to
such lender,
including the accrued interest receivable
11
and cash posted by the Company as collateral. At June
30, 2021,
the Company
had an aggregate
amount at
risk (the difference
between
the amount
loaned to
the Company, including
interest payable
and securities
posted by the
counterparty
(if any),
and the fair
value of
securities
and cash pledged
(if any),
including accrued
interest
on such securities)
with all counterparties
of approximately
$
245.1
million.
The Company
did not have
an amount
at risk with
any individual
counterparty
that was greater
than 10% of
the Company’s
equity at June
30, 2021 and
December 31,
2020.
NOTE 4. DERIVATIVE AND OTHER HEDGING INSTRUMENTS
The table
below summarizes
fair value
information
about our
derivative
and other
hedging instruments
assets and
liabilities
as of June
30, 2021 and
December 31,
2020.
(in thousands)
Derivative and Other Hedging Instruments
Balance Sheet Location
June 30, 2021
December 31, 2020
Assets
Interest rate swaps
Derivative assets, at fair value
$
14,263
$
7
Payer swaptions (long positions)
Derivative assets, at fair value
26,282
17,433
Interest rate floors
Derivative assets, at fair value
2,315
-
TBA securities
Derivative assets, at fair value
875
3,559
Total derivative
assets, at fair value
$
43,735
$
20,999
Liabilities
Interest rate swaps
Derivative liabilities, at fair value
$
6,411
$
24,711
Payer swaptions (short positions)
Derivative liabilities, at fair value
10,358
7,730
TBA securities
Derivative liabilities, at fair value
-
786
Total derivative
liabilities, at fair value
$
16,769
$
33,227
Margin Balances Posted to (from) Counterparties
Futures contracts
Restricted cash
$
2,548
$
489
TBA securities
Restricted cash
-
284
TBA securities
Other liabilities
(773)
(2,520)
Interest rate swaption contracts
Restricted cash
1,115
-
Interest rate swaption contracts
Other liabilities
(11,414)
(3,563)
Interest rate swap contracts
Restricted cash
24,140
19,761
Total margin
balances on derivative contracts
$
15,616
$
14,451
Eurodollar, Fed
Funds and
T-Note futures
are cash settled
futures contracts
on an interest
rate, with
gains and losses
credited
or
charged to
the Company’s
cash accounts
on a daily
basis. A
minimum balance,
or “margin”,
is required
to be maintained
in the account
on
a daily basis.
The tables
below present
information
related to
the Company’s
Eurodollar
and T-Note futures
positions at
June 30, 2021
and
December 31,
2020.
($ in thousands)
June 30, 2021
Average
Weighted
Weighted
Contract
Average
Average
Notional
Entry
Effective
Open
Expiration Year
Amount
Rate
Rate
Equity
(1)
Eurodollar Futures Contracts (Short Positions)
2021
$
50,000
1.00%
0.17%
$
(207)
Treasury Note Futures Contracts (Short
Positions)
(2)
September 2021 5-year T-Note futures
(Sep 2021 - Sep 2026 Hedge Period)
$
269,000
1.08%
1.16%
$
788
September 2021 10-year Ultra futures
(Sep 2021 - Sep 2031 Hedge Period)
$
23,500
1.19%
1.02%
$
(608)
12
($ in thousands)
December 31, 2020
Average
Weighted
Weighted
Contract
Average
Average
Notional
Entry
Effective
Open
Expiration Year
Amount
Rate
Rate
Equity
(1)
Eurodollar Futures Contracts (Short Positions)
2021
$
50,000
1.03%
0.18%
$
(424)
Treasury Note Futures Contracts (Short
Position)
(2)
March 2021 5 year T-Note futures
(Mar 2021 - Mar 2026 Hedge Period)
$
69,000
0.72%
0.67%
$
(186)
(1)
Open equity represents the cumulative gains (losses) recorded on open
futures positions from inception.
(2)
5-Year T-Note
futures contracts were valued at a price of $
123.43
at June 30, 2021 and $
126.16
at December 31, 2020.
The contract values of
the short positions were $
332.0
million and $
87.1
million at June 30, 2021 and December 31, 2020, respectively.
10-Year Ultra futures
contracts
were valued at a price of $
147.20
at June 30, 2021. The contract value of the short position was $
34.6
million at June 30, 2021.
Under our
interest rate
swap agreements,
we typically
pay a fixed
rate and receive
a floating
rate based
on LIBOR ("payer
swaps").
The floating
rate we receive
under our
swap agreements
has the effect
of offsetting
the repricing
characteristics
of our repurchase
agreements
and
cash flows
on such liabilities.
We are typically
required to
post collateral
on our interest
rate swap
agreements.
The table
below presents
information
related to
the Company’s
interest rate
swap positions
at June 30,
2021 and December
31, 2020.
($ in thousands)
Average
Net
Fixed
Average
Estimated
Average
Notional
Pay
Receive
Fair
Maturity
Amount
Rate
Rate
Value
(Years)
June 30, 2021
Expiration > 3 to ≤ 5 years
$
955,000
0.64%
0.16%
$
8,134
4.5
Expiration > 5 years
400,000
1.16%
0.13%
(282)
7.8
$
1,355,000
0.79%
0.15%
$
7,852
5.5
December 31, 2020
Expiration > 3 to ≤ 5 years
$
620,000
1.29%
0.22%
$
(23,760)
3.6
Expiration > 5 years
200,000
0.67%
0.23%
(944)
6.4
$
820,000
1.14%
0.23%
$
(24,704)
4.3
The table
below presents
information
related to
the Company’s
interest rate
floor positions
at June 30,
2021.
($ in thousands)
Net
Strike
Estimated
Notional
Swap
Curve
Fair
Expiration
Amount
Cost
Rate
Spread
Value
February 3, 2023
$
70,000
$
511
0.76%
30Y5Y
$
1,146
February 3, 2023
80,000
504
1.10%
10Y2Y
1,169
$
150,000
$
1,015
0.94%
2,315
The table
below presents
information
related to
the Company’s
interest rate
swaption positions
at June 30,
2021 and
December 31,
2020.
($ in thousands)
Option
Underlying Swap
13
Weighted
Average
Weighted
Average
Average
Adjustable
Average
Fair
Months to
Notional
Fixed
Rate
Term
Expiration
Cost
Value
Expiration
Amount
Rate
(LIBOR)
(Years)
June 30, 2021
Payer Swaptions - long
≤ 1 year
$
4,000
$
1,959
9.2
$
400,000
1.66%
3 Month
5.0
>1 year ≤ 2 years
25,390
24,323
19.1
1,027,200
2.20%
3 Month
15.0
$
29,390
$
26,282
16.3
$
1,427,200
2.05%
3 Month
12.2
Payer Swaptions - short
≤ 1 year
$
(13,400)
$
(10,358)
7.8
$
(1,182,850)
2.10%
3 Month
11.6
December 31, 2020
Payer Swaptions - long
≤ 1 year
$
3,450
$
5
2.5
$
500,000
0.95%
3 Month
4.0
>1 year ≤ 2 years
13,410
17,428
17.4
675,000
1.49%
3 Month
12.8
$
16,860
$
17,433
11.0
$
1,175,000
1.26%
3 Month
9.0
Payer Swaptions - short
≤ 1 year
$
(4,660)
$
(7,730)
5.4
$
(507,700)
1.49%
3 Month
12.8
The following table summarizes our contracts to purchase and sell TBA
securities as of June 30, 2021 and December 31, 2020
.
($ in thousands)
Notional
Net
Amount
Cost
Market
Carrying
Long (Short)
(1)
Basis
(2)
Value
(3)
Value
(4)
June 30, 2021
30-Year TBA securities:
3.0%
$
(400,000)
$
(417,750)
$
(416,875)
$
875
Total
$
(400,000)
$
(417,750)
$
(416,875)
$
875
December 31, 2020
30-Year TBA securities:
2.0%
$
465,000
$
479,531
$
483,090
$
3,559
3.0%
(328,000)
(342,896)
(343,682)
(786)
Total
$
137,000
$
136,635
$
139,408
$
2,773
(1)
Notional amount represents the par value (or principal balance) of the
underlying Agency RMBS.
(2)
Cost basis represents the forward price to be paid (received) for the
underlying Agency RMBS.
(3)
Market value represents the current market value of the TBA securities
(or of the underlying Agency RMBS) as of period-end.
(4)
Net carrying value represents the difference between the market
value and the cost basis of the TBA securities as of period-end
and is reported
in derivative assets (liabilities) at fair value in our balance sheets.
Gain (Loss) From Derivative and Other Hedging Instruments, Net
The table below presents the effect of the Company’s derivative and other hedging instruments on the statements of
operations for the six and three months ended June 30, 2021 and 2020.
(in thousands)
Six Months Ended June 30,
Three Months Ended June 30,
2021
2020
2021
2020
Eurodollar futures contracts (short positions)
$
(7)
$
(8,318)
$
(19)
$
(101)
T-Note futures contracts (short position)
285
(4,724)
(2,191)
(385)
Interest rate swaps
9,446
(68,202)
(17,677)
(7,579)
Payer swaptions (short positions)
1,212
(889)
27,379
(889)
Payer swaptions (long positions)
3,710
(4,201)
(36,360)
(1,612)
14
Interest rate floors
1,300
-
(84)
-
TBA securities (short positions)
3,170
(6,377)
(5,963)
713
TBA securities (long positions)
(8,559)
1,133
-
1,133
U.S. Treasury securities (short positions)
-
(131)
-
(131)
Total
$
10,557
$
(91,709)
$
(34,915)
$
(8,851)
Credit Risk-Related Contingent Features
The use of derivatives and other hedging instruments creates exposure to credit risk relating to potential losses that
could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the
contracts. We minimize this risk by limiting our counterparties for instruments which are not centrally cleared on a registered
exchange to major financial institutions with acceptable credit ratings and monitoring positions with individual counterparties.
In addition, we may be required to pledge assets as collateral for our derivatives, whose amounts vary over time based on
the market value, notional amount and remaining term of the derivative contract. In the event of a default by a counterparty,
we may not receive payments provided for under the terms of our derivative agreements, and may have difficulty obtaining
our assets pledged as collateral for our derivatives. The cash and cash equivalents pledged as collateral for our derivative
instruments are included in restricted cash on our balance sheets.
It is the Company's policy not to offset assets and
liabilities associated with open derivative contracts. However, the Chicago Mercantile Exchange (“CME”) rules characterize
variation margin transfers as settlement payments, as opposed to adjustments to collateral. As a result, derivative assets
and liabilities associated with centrally cleared derivatives for which the CME serves as the central clearing party are
presented as if these derivatives had been settled as of the reporting date.
NOTE 5. PLEDGED ASSETS
Assets Pledged
to Counterparties
The table
below summarizes
our assets
pledged as
collateral
under our
repurchase
agreements
and derivative
agreements
by type,
including securities
pledged related
to securities
sold but not
yet settled,
as of June
30, 2021 and
December 31,
2020.
(in thousands)
June 30, 2021
December 31, 2020
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Counterparties
Agreements
Agreements
Total
Agreements
Agreements
Total
PT RMBS - fair value
$
4,570,053
$
-
$
4,570,053
$
3,692,811
$
-
$
3,692,811
Structured RMBS - fair value
95,525
-
95,525
27,095
-
27,095
Accrued interest on pledged securities
12,493
-
12,493
9,636
-
9,636
Restricted cash
79,073
27,803
106,876
58,829
20,534
79,363
Total
$
4,757,144
$
27,803
$
4,784,947
$
3,788,371
$
20,534
$
3,808,905
Assets Pledged
from Counterparties
The table
below summarizes
assets pledged
to us from
counterparties
under our
repurchase
agreements,
reverse repurchase
agreements
and derivative
agreements
as of June
30, 2021 and
December 31,
2020.
(in thousands)
June 30, 2021
December 31, 2020
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Orchid
Agreements
Agreements
Total
Agreements
Agreements
Total
Cash
$
-
$
12,187
$
12,187
$
120
$
6,083
$
6,203
15
U.S. Treasury securities - fair value
-
-
-
253
-
253
Total
$
-
$
12,187
$
12,187
$
$
373
$
6,083
$
6,456
RMBS and
U.S. Treasury
securities
received as
margin under
our repurchase
agreements
are not recorded
in the balance
sheets
because the
counterparty
retains ownership
of the security.
U.S. Treasury
securities
received from
counterparties
as collateral
under our
reverse repurchase
agreements
are recognized
as obligations
to return
securities
borrowed
under reverse
repurchase
agreements
in the
balance sheet.
Cash received
as margin is
recognized
as cash and
cash equivalents
with a corresponding
amount recognized
as an
increase in
repurchase
agreements
or other liabilities
in the balance
sheets.
NOTE 6. OFFSETTING ASSETS AND LIABILITIES
The Company’s
derivative
agreements
and repurchase
agreements
and reverse
repurchase
agreements
are subject
to underlying
agreements
with master
netting or
similar arrangements,
which provide
for the right
of offset in
the event
of default
or in the event
of
bankruptcy
of either
party to the
transactions.
The Company
reports its
assets and
liabilities
subject to
these arrangements
on a gross
basis.
The following
table presents
information
regarding
those assets
and liabilities
subject to
such arrangements
as if the Company
had
presented
them on a
net basis as
of June 30,
2021 and December
31, 2020.
(in thousands)
Offsetting of Assets
Gross Amount Not
Net Amount
Offset in the Balance Sheet
of Assets
Financial
Gross Amount
Gross Amount
Presented
Instruments
Cash
of Recognized
Offset in the
in the
Received as
Received as
Net
Assets
Balance Sheet
Balance Sheet
Collateral
Collateral
Amount
June 30, 2021
Interest rate swaps
$
14,263
$
-
$
14,263
$
-
$
-
$
14,263
Interest rate swaptions
26,282
-
26,282
-
(11,414)
14,868
Interest rate floors
2,315
-
2,315
-
-
2,315
TBA securities
875
-
875
-
(773)
102
$
43,735
$
-
$
43,735
$
-
$
(12,187)
$
31,548
December 31, 2020
Interest rate swaps
$
7
$
-
$
7
$
-
$
-
$
7
Interest rate swaptions
17,433
-
17,433
-
(3,563)
13,870
TBA securities
3,559
-
3,559
-
(2,520)
1,039
$
20,999
$
-
$
20,999
$
-
$
(6,083)
$
14,916
(in thousands)
Offsetting of Liabilities
Gross Amount Not
Net Amount
Offset in the Balance Sheet
of Liabilities
Financial
Gross Amount
Gross Amount
Presented
Instruments
of Recognized
Offset in the
in the
Posted as
Cash Posted
Net
Liabilities
Balance Sheet
Balance Sheet
Collateral
as Collateral
Amount
June 30, 2021
Repurchase Agreements
$
4,514,704
$
-
$
4,514,704
$
(4,435,631)
$
(79,073)
$
-
Interest rate swaps
6,411
-
6,411
-
(6,411)
-
Interest rate swaptions
10,358
-
10,358
-
(1,115)
9,243
$
4,531,473
$
-
$
4,531,473
$
(4,435,631)
$
(86,599)
$
9,243
December 31, 2020
16
Repurchase Agreements
$
3,595,586
$
-
$
3,595,586
$
(3,536,757)
$
(58,829)
$
-
Interest rate swaps
24,711
-
24,711
-
(19,761)
4,950
Interest rate swaptions
7,730
-
7,730
-
-
7,730
TBA securities
786
-
786
-
(284)
502
$
3,628,813
$
-
$
3,628,813
$
(3,536,757)
$
(78,874)
$
13,182
The amounts
disclosed for
collateral
received by
or posted
to the same
counterparty
up to and
not exceeding
the net amount
of the
asset or liability
presented
in the balance
sheets.
The fair value
of the actual
collateral
received by
or posted
to the same
counterparty
typically exceeds
the amounts
presented.
See Note
5 for a discussion
of collateral
posted or
received against
or for repurchase
obligations
and derivative
and other
hedging instruments.
NOTE 7.
CAPITAL STOCK
Common Stock
Issuances
During the
six months
ended June
30, 2021 and
the year ended
December 31,
2020, the
Company completed
the following
public
offerings of
shares of
its common
stock.
($ in thousands, except per share amounts)
Weighted
Average
Price
Received
Net
Type of Offering
Period
Per Share
(1)
Shares
Proceeds
(2)
2021
At the Market Offering Program
(3)
First Quarter
$
5.10
308,048
$
1,572
Follow-on Offerings
First Quarter
5.31
17,940,000
95,336
At the Market Offering Programs
(3)
Second Quarter
5.40
23,087,089
124,746
Total
41,335,137
$
221,654
2020
At the Market Offering Program
(3)
First Quarter
$
6.13
3,170,727
$
19,447
At the Market Offering Program
(3)
Second Quarter
-
-
-
At the Market Offering Program
(3)
Third Quarter
5.06
3,073,326
15,566
At the Market Offering Program
(3)
Fourth Quarter
5.32
6,775,187
36,037
13,019,240
$
71,050
(1)
Weighted average price received per share is after deducting
the underwriters’ discount, if applicable, and other offering
costs.
(2)
Net proceeds are net of the underwriters’ discount, if applicable, and
other offering costs.
(3)
The Company has entered into nine equity distribution agreements,
eight of which have either been terminated because all shares were sold
or
were replaced with a subsequent agreement.
Stock Repurchase Program
On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to
2,000,000
shares of the Company’s
common stock. On February 8, 2018, the Board of Directors approved an increase
in the stock repurchase program for up to an
additional
4,522,822
shares of the Company's common stock. Coupled with the
783,757
shares remaining from the original
2,000,000
share authorization, the increased authorization brought the total authorization to
5,306,579
shares, representing 10% of the
Company’s then outstanding share count. As part of the stock repurchase program, shares
may be purchased in open market
transactions, block purchases, through privately negotiated transactions, or pursuant
to any trading plan that may be adopted in
accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”).
Open market repurchases
will be made in accordance with Exchange Act Rule 10b-18, which sets certain restrictions
on the method, timing, price and volume of
17
open market stock repurchases. The timing, manner, price and amount of any repurchases will be determined by the Company
in its
discretion and will be subject to economic and market conditions, stock price, applicable
legal requirements and other factors.
The
authorization does not obligate the Company to acquire any particular amount of
common stock and the program may be suspended or
discontinued at the Company’s discretion without prior notice.
From the inception of the stock repurchase program through June 30, 2021, the Company
repurchased a total of
5,685,511
shares
at an aggregate cost of approximately $
40.4
million, including commissions and fees, for a weighted average price of $
7.10
per share.
No shares were repurchased during the six months ended June 30, 2021. During
the six months ended June 30, 2020, the Company
repurchased a total of
19,891
shares at an aggregate cost of approximately $
0.1
million, including commissions and fees, for a
weighted average price of $
3.42
per share. The remaining authorization under the repurchase program as of June 30,
2021 was
837,311
shares.
Cash Dividends
The table below presents the cash dividends declared on the Company’s common stock.
(in thousands, except per share amounts)
Year
Per Share
Amount
Total
2013
$
1.395
$
4,662
2014
2.160
22,643
2015
1.920
38,748
2016
1.680
41,388
2017
1.680
70,717
2018
1.070
55,814
2019
0.960
54,421
2020
0.790
53,570
2021 - YTD
(1)
0.455
45,460
Totals
$
12.110
$
387,423
(1)
On
July 14, 2021
, the Company declared a dividend of $
0.065
per share to be paid on
August 27, 2021
.
The effect of this dividend is included
in the table above but is not reflected in the Company’s financial statements
as of June 30, 2021.
NOTE 8.
STOCK INCENTIVE PLAN
In April 2021, the Company’s Board of Directors adopted, and the stockholders approved, the Orchid Island Capital, Inc.
2021 Equity Incentive Plan (the “2021 Incentive Plan”) to replace the Orchid Island Capital, Inc. 2012 Equity Incentive Plan
(the “2012 Incentive Plan” and together with the 2021 Incentive Plan, the “Incentive Plans”). The 2021 Incentive Plan
provides for the award of stock options, stock appreciation rights, stock award, performance units, other equity-based
awards (and dividend equivalents with respect to awards of performance units and other equity-based awards) and
incentive awards.
The 2021 Incentive Plan is administered by the Compensation Committee of the Company’s Board of
Directors except that the Company’s full Board of Directors will administer awards made to directors who are not employees
of the Company or its affiliates. The 2021 Incentive Plan provides for awards of up to an aggregate of 10% of the issued and
outstanding shares of our common stock (on a fully diluted basis) at the time of the awards, subject to a maximum
aggregate
7,366,623
shares of the Company’s common stock that may be issued under the 2021 Incentive Plan. The 2021
Incentive Plan replaces the 2012 Incentive Plan, and no further grants will be made under the 2012 Incentive Plan.
However, any outstanding awards under the 2012 Incentive Plan will continue in accordance with the terms of the 2012
Incentive Plan and any award agreement executed in connection with such outstanding awards.
Performance Units
18
The Company has issued, and may in the future issue additional, performance units under the Incentive Plans to certain
executive officers and employees of its Manager.
“Performance Units” vest after the end of a defined performance period,
based on satisfaction of the performance conditions set forth in the performance unit agreement.
When earned, each
Performance Unit will be settled by the issuance of one share of the Company’s common stock, at which time the
Performance Unit will be cancelled.
The Performance Units contain dividend equivalent rights, which entitle the Participants
to receive distributions declared by the Company on common stock, but do not include the right to vote the underlying
shares of common stock.
Performance Units are subject to forfeiture should the participant no longer serve as an executive
officer or employee of the Company or the Manager.
Compensation expense for the Performance Units is recognized over
the remaining vesting period once it becomes probable that the performance conditions will be achieved.
The following table presents information related to Performance Units outstanding during the six months ended June
30, 2021 and 2020.
($ in thousands, except per share data)
Six Months Ended June 30,
2021
2020
Weighted
Weighted
Average
Average
Grant Date
Grant Date
Shares
Fair Value
Shares
Fair Value
Unvested, beginning of period
4,554
$
7.45
19,021
$
7.78
Granted
137,897
5.88
-
-
Vested and issued
(4,554)
7.45
(8,305)
8.20
Unvested, end of period
137,897
$
5.88
10,716
$
7.45
Compensation expense during period
$
113
$
25
Unrecognized compensation expense, end of period
$
702
$
17
Intrinsic value, end of period
$
716
$
50
Weighted-average remaining vesting term (in years)
1.9
0.6
The number of shares of common stock issuable upon the vesting of the remaining outstanding Performance Units was
reduced in the third quarter of 2020 as a result of the book value impairment event that occurred pursuant to the Company's
Long Term
Incentive Compensation Plans (the "Plans"). The book value impairment event occurred when the Company's
book value per share declined by more than 15% during the quarter ended March 31, 2020 and the Company's book value
per share decline from January 1, 2020 to June 30, 2020 was more than 10%. The Plans provide that if such a book value
impairment event occurs, then the number of outstanding Performance Units that are outstanding as of the last day of such
two-quarter period shall be reduced by 15%.
Stock Awards
The Company has issued, and may in the future issue additional, immediately vested common stock under the
Incentive Plans to certain executive officers and employees of its Manager. The following table presents information related
to fully vested common stock issued during the six months ended June 30, 2021 and 2020. All of the fully vested shares of
common stock issued during the three months ended June 30, 2021, and the related compensation expense, were granted
with respect to service performed during the previous fiscal year.
($ in thousands, except per share data)
Six Months Ended June 30,
2021
2020
Fully vested shares granted
137,897
-
Weighted average grant date price per share
$
5.88
$
-
Compensation expense related to fully vested shares of common stock awards
(1)
$
811
$
-
19
(1)
The awards issued during the six months ended March 31, 2021 were
granted with respect to service performed in 2020. Approximately
$600,000 of compensation expense related to the 2021 awards was
accrued and recognized in 2020.
Deferred Stock Units
Non-employee directors receive a portion of their compensation in the form of deferred stock unit awards (“DSUs”)
pursuant to the Incentive Plans.
Each DSU represents a right to receive one share of the Company’s common stock. The
DSUs are immediately vested and are settled at a future date based on the election of the individual participant.
The DSUs
contain dividend equivalent rights, which entitle the participant to receive distributions declared by the Company on common
stock.
These dividend equivalent rights are settled in cash or additional DSUs at the participant’s election. The DSUs do not
include the right to vote the underlying shares of common stock.
The following table presents information related to the DSUs outstanding during the six months ended June 30, 2021
and 2020.
($ in thousands, except per share data)
Six Months Ended June 30,
2021
2020
Weighted
Weighted
Average
Average
Grant Date
Grant Date
Shares
Fair Value
Shares
Fair Value
Outstanding, beginning of period
90,946
$
5.44
43,570
$
6.56
Granted and vested
22,528
5.64
25,518
3.99
Issued
-
-
-
-
Outstanding, end of period
113,474
$
5.48
69,088
$
5.61
Compensation expense during period
$
120
$
90
Intrinsic value, end of period
$
589
$
325
NOTE 9.
COMMITMENTS AND CONTINGENCIES
From time to time, the Company may become involved in various claims and
legal actions arising in the ordinary course of
business. Management is not aware of any reported or unreported contingencies
at June 30, 2021.
NOTE 10. INCOME TAXES
The Company will generally not be subject to federal income tax on its REIT taxable
income to the extent it distributes its REIT
taxable income to its stockholders and satisfies the ongoing REIT requirements, including
meeting certain asset, income and stock
ownership tests. A REIT must generally distribute at least 90% of its REIT
taxable income to its stockholders, of which 85% generally
must be distributed within the taxable year, in order to avoid the imposition of an excise tax. The remaining balance
may be distributed
up to the end of the following taxable year, provided the REIT elects to treat such amount as a prior year distribution
and meets certain
other requirements.
NOTE 11.
EARNINGS PER SHARE (EPS)
The Company
had dividend
eligible Performance
Units and
Deferred Stock
Units that
were outstanding
during the
six and three
months ended
June 30, 2021
and 2020.
The basic and
diluted per
share computations
include these
unvested Performance
Units and
Deferred
Stock Units
if there is
income available
to common
stock, as
they have dividend
participation
rights. The
unvested Performance
Units and
Deferred
Stock Units
have no contractual
obligation
to share in
losses. Because
there is
no such obligation,
the unvested
Performance
Units and
Deferred Stock
Units are
not included
in the basic
and diluted
EPS computations
when no income
is available
to
20
common stock
even though
they are considered
participating
securities.
The table
below reconciles
the numerator
and denominator
of EPS for
the six and
three months
ended June
30, 2021 and
2020.
(in thousands, except per share information)
Six Months Ended June 30,
Three Months Ended June 30,
2021
2020
2021
2020
Basic and diluted EPS per common share:
Numerator for basic and diluted EPS per share of common stock:
Net (loss) income - Basic and diluted
$
(46,234)
$
(42,427)
$
(16,865)
$
48,772
Weighted average shares of common stock:
Shares of common stock outstanding at the balance sheet date
117,500
66,221
117,500
66,221
Unvested dividend eligible share based compensation
outstanding at the balance sheet date
-
-
-
80
Effect of weighting
(25,044)
(812)
(18,011)
9
Weighted average shares-basic and diluted
92,456
65,409
99,489
66,310
Net (loss) income per common share:
Basic
$
(0.50)
$
(0.65)
$
(0.17)
$
0.74
Diluted
$
(0.50)
$
(0.65)
$
(0.17)
$
0.73
Anti-dilutive incentive shares not included in calculation.
251
80
251
-
NOTE 12.
FAIR VALUE
The framework
for using
fair value
to measure
assets and
liabilities
defines fair
value as the
price that
would be received
to sell an
asset or paid
to transfer
a liability
(an exit price).
A fair value
measure should
reflect the
assumptions
that market
participants
would use
in
pricing the
asset or liability,
including
the assumptions
about the
risk inherent
in a particular
valuation
technique,
the effect of
a restriction
on the sale
or use of
an asset and
the risk of
non-performance.
Required disclosures
include stratification
of balance
sheet amounts
measured at
fair value
based on
inputs the
Company uses
to derive
fair value
measurements.
These stratifications
are:
●
Level 1 valuations,
where the
valuation
is based on
quoted market
prices for
identical assets
or liabilities
traded in
active markets
(which include
exchanges and
over-the-counter
markets with
sufficient volume),
●
Level 2 valuations,
where the
valuation
is based on
quoted market
prices for
similar instruments
traded in
active markets,
quoted
prices for
identical or
similar instruments
in markets
that are not
active and
model-based
valuation
techniques
for which
all
significant
assumptions
are observable
in the market,
and
●
Level 3 valuations,
where the
valuation
is generated
from model-based
techniques
that use significant
assumptions
not
observable
in the market,
but observable
based on Company-specific
data. These
unobservable
assumptions
reflect the
Company’s own
estimates for
assumptions
that market
participants
would use
in pricing
the asset or
liability. Valuation
techniques
typically
include option
pricing models,
discounted
cash flow
models and
similar techniques,
but may also
include the
use of market
prices of assets
or liabilities
that are not
directly comparable
to the subject
asset or liability.
The Company's
RMBS and
TBA securities
are Level
2 valuations,
and such valuations
currently are
determined
by the Company
based on independent
pricing sources
and/or third
party broker
quotes, when
available.
Because the
price estimates
may vary, the
Company must
make certain
judgments
and assumptions
about the
appropriate
price to use
to calculate
the fair values.
The Company
and
the independent
pricing sources
use various
valuation techniques
to determine
the price
of the Company’s
securities.
These techniques
include observing
the most recent
market for
like or identical
assets (including
security coupon,
maturity, yield,
and prepayment
speeds),
spread pricing
techniques
to determine
market credit
spreads (option
adjusted spread,
zero volatility
spread, spread
to the U.S.
Treasury
curve or spread
to a benchmark
such as a TBA),
and model driven
approaches
(the discounted
cash flow
method, Black
Scholes and
SABR models
which rely
upon observable
market rates
such as the
term structure
of interest
rates and
volatility).
The appropriate
spread
pricing method
used is based
on market
convention.
The pricing
source determines
the spread
of recently
observed trade
activity or
observable
markets for
assets similar
to those being
priced. The
spread is then
adjusted based
on variances
in certain
characteristics
21
between the
market observation
and the asset
being priced.
Those characteristics
include: type
of asset, the
expected life
of the asset,
the
stability and
predictability
of the expected
future cash
flows of the
asset, whether
the coupon
of the asset
is fixed or
adjustable,
the
guarantor
of the security
if applicable,
the coupon,
the maturity, the
issuer, size of
the underlying
loans, year
in which the
underlying
loans
were originated,
loan to value
ratio, state
in which the
underlying
loans reside,
credit score
of the underlying
borrowers
and other
variables
if appropriate.
The fair value
of the security
is determined
by using the
adjusted spread.
The Company’s
futures contracts
are Level
1 valuations,
as they are
exchange-traded
instruments
and quoted
market prices
are
readily available.
Futures contracts
are settled
daily. The Company’s
interest rate
swaps and
interest rate
swaptions
are Level
2
valuations.
The fair value
of interest
rate swaps
is determined
using a discounted
cash flow
approach
using forward
market interest
rates
and discount
rates, which
are observable
inputs. The
fair value
of interest
rate swaptions
is determined
using an option
pricing model.
RMBS (based
on the fair
value option),
derivatives
and TBA securities
were recorded
at fair value
on a recurring
basis during
the six
and three
months ended
June 30, 2021
and 2020.
When determining
fair value
measurements,
the Company
considers the
principal or
most advantageous
market in which
it would transact
and considers
assumptions
that market
participants
would use
when pricing
the
asset. When
possible, the
Company looks
to active and
observable
markets to
price identical
assets.
When identical
assets are
not traded
in active markets,
the Company
looks to market
observable
data for
similar assets.
The following
table presents
financial assets
(liabilities)
measured
at fair value
on a recurring
basis as of
June 30, 2021
and
December 31,
2020.
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, 2021
Mortgage-backed securities
$
-
$
4,671,239
$
-
Interest rate swaps
-
7,851
-
Interest rate swaptions
-
15,925
-
Interest rate floors
-
2,315
-
TBA securities
-
875
-
December 31, 2020
Mortgage-backed securities
$
-
$
3,726,895
$
-
Interest rate swaps
-
(24,704)
-
Interest rate swaptions
-
9,703
-
TBA securities
-
2,773
-
During the six and three months ended June 30, 2021 and 2020, there were
no transfers of financial assets or liabilities between
levels 1, 2 or 3.
NOTE 13. RELATED PARTY
TRANSACTIONS
Management Agreement
The Company is externally managed and advised by Bimini Advisors, LLC (the “Manager”) pursuant to the terms of a
management agreement. The management agreement has been renewed through February 20, 2022 and provides for
automatic one-year extension options thereafter and is subject to certain termination rights.
Under the terms of the
22
management agreement, the Manager is responsible for administering the business activities and day-to-day operations of
the Company.
The Manager receives a monthly management fee in the amount of:
●
One-twelfth of 1.5% of the first $250 million of the Company’s month-end equity,
as defined in the management
agreement,
●
One-twelfth of 1.25% of the Company’s month-end equity that is greater than $250 million and less than or
equal to $500 million, and
●
One-twelfth of 1.00% of the Company’s month-end equity that is greater than $500 million.
The Company is obligated to reimburse the Manager for any direct expenses incurred on its behalf and to pay the
Manager the Company’s pro rata portion of certain overhead costs set forth in the management agreement.
Should the
Company terminate the management agreement without cause, it will pay the Manager a termination fee equal to three
times the average annual management fee, as defined in the management agreement, before or on the last day of the term
of the agreement.
Total
expenses recorded for the management fee and costs incurred were approximately $
4.2
million and $
2.2
million
for the six and three months ended June 30, 2021, respectively, and $
3.3
million and $
1.6
million for the six and three
months ended June 30, 2020, respectively. At June 30, 2021 and December 31, 2020, the net amount due to affiliates
was
approximately $
0.8
million and $
0.6
million, respectively.
Other Relationships with Bimini
Robert Cauley, our Chief Executive Officer and Chairman of our Board of Directors, also serves as Chief Executive Officer and
Chairman of the Board of Directors of Bimini and owns shares of common stock of
Bimini. George H. Haas, IV, our Chief Financial
Officer, Chief Investment Officer, Secretary and a member of our Board of Directors, also serves as the Chief Financial Officer, Chief
Investment Officer and Treasurer of Bimini and owns shares of common stock of Bimini. In addition, as of June
30, 2021, Bimini owned
2,595,357
shares, or
2.2
%, of the Company’s common stock.
23
ITEM 2. MANAGEMENT’S
DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF
OPERATIONS
The following discussion of our financial condition and results of operations should be
read in conjunction with the financial
statements and notes to those statements included in Item 1 of this Form 10-Q. The
discussion may contain certain forward-looking
statements that involve risks and uncertainties. Forward-looking statements are
those that are not historical in nature. As a result of
many factors, such as those set forth under “Risk Factors” in our most recent Annual
Report on Form 10-K, our actual results may
differ materially from those anticipated in such forward-looking statements.
Overview
We are a specialty finance company that invests in residential mortgage-backed securities
(“RMBS”) which are issued and
guaranteed by a federally chartered corporation or agency (“Agency RMBS”). Our
investment strategy focuses on, and our portfolio
consists of, two categories of Agency RMBS: (i) traditional pass-through Agency RMBS,
such as mortgage pass-through certificates
issued by Fannie Mae, Freddie Mac or Ginnie Mae (the “GSEs”) and collateralized
mortgage obligations (“CMOs”) issued by the GSEs
(“PT RMBS”) and (ii) structured Agency RMBS, such as interest-only securities (“IOs”), inverse
interest-only securities (“IIOs”) and
principal only securities (“POs”), among other types of structured Agency RMBS.
We were formed by Bimini in August 2010,
commenced operations on November 24, 2010 and completed our initial public offering (“IPO”)
on February 20, 2013.
We are
externally managed by Bimini Advisors, an investment adviser registered with the Securities
and Exchange Commission (the “SEC”).
Our business objective is to provide attractive risk-adjusted total returns over the long term
through a combination of capital
appreciation and the payment of regular monthly distributions. We intend to achieve this objective
by investing in and strategically
allocating capital between the two categories of Agency RMBS described above. We seek
to generate income from (i) the net interest
margin on our leveraged PT RMBS portfolio and the leveraged portion of our
structured Agency RMBS portfolio, and (ii) the interest
income we generate from the unleveraged portion of our structured Agency RMBS
portfolio. We intend to fund our PT RMBS and
certain of our structured Agency RMBS through short-term borrowings structured
as repurchase agreements. PT RMBS and structured
Agency RMBS typically exhibit materially different sensitivities to movements in interest
rates. Declines in the value of one portfolio
may be offset by appreciation in the other. The percentage of capital that we allocate to our two Agency RMBS asset categories will
vary and will be actively managed in an effort to maintain the level of income generated by the
combined portfolios, the stability of that
income stream and the stability of the value of the combined portfolios. We believe that this
strategy will enhance our liquidity,
earnings, book value stability and asset selection opportunities in various interest
rate environments.
We operate so as to qualify to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue
Code of 1986, as
amended (the “Code”).
We generally will not be subject to U.S. federal income tax to the extent that we currently distribute
all of our
REIT taxable income (as defined in the Code) to our stockholders and maintain
our REIT qualification.
The Company’s common stock trades on the New York Stock Exchange under the symbol “ORC”.
Capital Raising Activities
On January 23, 2020, we entered into an equity distribution agreement (the “January
2020 Equity Distribution Agreement”) with
three sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount
of $200,000,000 of shares
of our common stock in transactions that were deemed to be “at the market” offerings and
privately negotiated transactions.
We issued
a total of 3,170,727 shares under the January 2020 Equity Distribution Agreement for aggregate
gross proceeds of $19.8 million, and
net proceeds of approximately $19.4 million, after commissions and fees, prior to
its termination in August 2020.
On August 4, 2020, we entered into an equity distribution agreement (the “August 2020
Equity Distribution Agreement”) with four
sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount
of $150,000,000 of shares of our
common stock in transactions that were deemed to be “at the market” offerings and privately
negotiated transactions. We issued a total
24
of 27,493,650 shares under the August 2020 Equity Distribution Agreement for
aggregate gross proceeds of approximately $150.0
million, and net proceeds of approximately $147.4 million, after commissions and
fees, prior to its termination in June 2021.
On January 20, 2021, we entered into an underwriting agreement (the “January 2021
Underwriting Agreement”) with J.P. Morgan
Securities LLC (“J.P. Morgan”), relating to the offer and sale of 7,600,000 shares of our common stock. J.P.
Morgan purchased the
shares of our common stock from the Company pursuant to the January 2021 Underwriting
Agreement at $5.20 per share. In addition,
we granted J.P.
Morgan a 30-day option to purchase up to an additional 1,140,000 shares
of our common stock on the same terms and
conditions, which J.P. Morgan exercised in full on January 21, 2021. The closing of the offering of 8,740,000 shares of our common
stock occurred on January 25, 2021, with proceeds to us of approximately $45.2
million, net of offering expenses.
On March 2, 2021, we entered into an underwriting agreement (the “March 2021 Underwriting
Agreement”) with J.P. Morgan,
relating to the offer and sale of 8,000,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from
the Company pursuant to the March 2021 Underwriting Agreement at $5.45 per share.
In addition, we granted J.P. Morgan a 30-day
option to purchase up to an additional 1,200,000 shares of our common stock on the
same terms and conditions, which J.P. Morgan
exercised in full on March 3, 2021. The closing of the offering of 9,200,000 shares of our common stock
occurred on March 5, 2021,
with proceeds to us of approximately $50.0 million, net of offering expenses.
On June 22, 2021, we entered into an equity distribution agreement (the “June 2021
Equity Distribution Agreement”) with four
sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate amount
of $250,000,000 of shares of our
common stock in transactions that are deemed to be “at the market” offerings and privately
negotiated transactions. Through June 30,
2021, we issued a total of 5,750,000 shares under the June 2021 Equity Distribution
Agreement for aggregate gross proceeds of
approximately $31.1 million, and net proceeds of approximately $30.6 million, after commissions
and fees. Subsequent to June 30,
2021 and through July 30, 2021, we issued a total of 5,560,000 shares under the June 2021
Equity Distribution Agreement for
aggregate gross proceeds of approximately $28.6 million, and net proceeds of approximately
$28.2 million, after commissions and
fees.
Stock Repurchase Agreement
On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to 2,000,000
shares of our common stock.
The timing, manner, price and amount of any repurchases is determined by the Company in its discretion and is subject to
economic
and market conditions, stock price, applicable legal requirements and other factors.
The authorization does not obligate the Company
to acquire any particular amount of common stock and the program may be
suspended or discontinued at the Company’s discretion
without prior notice. On February 8, 2018, the Board of Directors approved an increase
in the stock repurchase program for up to an
additional 4,522,822 shares of the Company’s common stock. Coupled with the 783,757 shares
remaining from the original 2,000,000
share authorization, the increased authorization brought the total authorization to 5,306,579
shares, representing 10% of the
Company’s then outstanding share count. This stock repurchase program has no termination
date.
From the inception of the stock repurchase program through June 30, 2021, the Company
repurchased a total of 5,685,511 shares
at an aggregate cost of approximately $40.4
million, including commissions and fees, for a weighted average price of $7.10
per share.
The Company did not repurchase any shares of its common stock during the six and three
months ended June 30, 2021. The
remaining authorization under the repurchase program as of June 30, 2021 was 837,311 shares.
Factors that Affect our Results of Operations and Financial Condition
A variety of industry and economic factors may impact our results of operations and
financial condition. These factors include:
●
interest rate trends;
●
the difference between Agency RMBS yields and our funding and hedging costs;
25
●
competition for, and supply of, investments in Agency RMBS;
●
actions taken by the U.S. government, including the presidential administration, U.S.
Federal Reserve (the “Fed”), the Federal
Housing Financing Agency (the “FHFA”), the Federal Open Market Committee (the “FOMC”) and the U.S. Treasury;
●
prepayment rates on mortgages underlying our Agency RMBS and credit
trends insofar as they affect prepayment rates; and
●
other market developments.
In addition, a variety of factors relating to our business may also impact our results
of operations and financial condition. These
factors include:
●
our degree of leverage;
●
our access to funding and borrowing capacity;
●
our borrowing costs;
●
our hedging activities;
●
the market value of our investments; and
●
the requirements to qualify as a REIT and the requirements to qualify for a
registration exemption under the Investment
Company Act.
Results of
Operations
Described
below are
the Company’s
results of
operations
for the six
and three
months ended
June 30, 2021,
as compared
to the
Company’s results
of operations
for the six
and three
months ended
June 30, 2020.
Net (Loss)
Income Summary
Net loss for
the six months
ended June
30, 2021 was
$46.2 million,
or $0.50 per
share. Net
loss for the
six months
ended June
30,
2020 was $42.4
million, or
$0.65 per
share.
Net loss for
the three months
ended June
30, 2021 was
$16.9 million,
or $0.17 per
share. Net
income for
the three
months ended
June 30, 2020
was $48.8
million, or
$0.74 per
share.
The components
of net (loss)
income for
the six
and three
months ended
June 30, 2021
and 2020,
along with
the changes
in those components
are presented
in the table
below:
(in thousands)
Six Months Ended June 30,
Three Months Ended, June 30,
2021
2020
Change
2021
2020
Change
Interest income
$
56,110
$
62,929
$
(6,819)
$
29,254
$
27,258
$
1,996
Interest expense
(3,497)
(21,002)
17,505
(1,556)
(4,479)
2,923
Net interest income
52,613
41,927
10,686
27,698
22,779
4,919
(Losses) gains on RMBS and derivative contracts
(91,635)
(79,457)
(12,178)
(40,844)
28,749
(69,593)
Net portfolio (loss) income
(39,022)
(37,530)
(1,492)
(13,146)
51,528
(64,674)
Expenses
(7,212)
(4,897)
(2,315)
(3,719)
(2,756)
(963)
Net (loss) income
$
(46,234)
$
(42,427)
$
(3,807)
$
(16,865)
$
48,772
$
(65,637)
GAAP and Non-GAAP Reconciliations
In addition to the results presented in accordance with GAAP,
our results of operations discussed below include certain
non-GAAP financial information, including “Net Earnings Excluding Realized and Unrealized Gains and Losses”, “Economic
Interest Expense” and “Economic Net Interest Income.”
Net Earnings Excluding Realized and Unrealized Gains and Losses
26
We have elected to account for our Agency RMBS under the fair value option. Securities held under the fair value
option are recorded at estimated fair value, with changes in the fair value recorded as unrealized gains or losses through
the statements of operations.
In addition, we have not designated our derivative financial instruments used for hedging purposes as hedges for
accounting purposes, but rather hold them for economic hedging purposes. Changes in fair value of these instruments are
presented in a separate line item in the Company’s statements of operations and are not included in interest expense.
As
such, for financial reporting purposes, interest expense and cost of funds are not impacted by the fluctuation in value of the
derivative instruments.
Presenting net earnings excluding realized and unrealized gains and losses allows management to: (i) isolate the net
interest income and other expenses of the Company over time, free of all fair value adjustments and (ii) assess the
effectiveness of our funding and hedging strategies on our capital allocation decisions and our asset allocation performance.
Our funding and hedging strategies, capital allocation and asset selection are integral to our risk management strategy, and
therefore critical to the management of our portfolio.
We believe that the presentation of our net earnings excluding realized
and unrealized gains is useful to investors because it provides a means of comparing our results of operations to those of
our peers who have not elected the same accounting treatment. Our presentation of net earnings excluding realized and
unrealized gains and losses may not be comparable to similarly-titled measures of other companies, who may use different
calculations. As a result, net earnings excluding realized and unrealized gains and losses should not be considered as a
substitute for our GAAP net income (loss) as a measure of our financial performance or any measure of our liquidity under
GAAP.
The table below presents a reconciliation of our net income (loss) determined in accordance with GAAP and net
earnings excluding realized and unrealized gains and losses.
Net Earnings Excluding Realized and Unrealized Gains and Losses
(in thousands, except per share data)
Per Share
Net Earnings
Net Earnings
Excluding
Excluding
Realized and
Realized and
Realized and
Realized and
Net
Unrealized
Unrealized
Net
Unrealized
Unrealized
Income
Gains and
Gains and
Income
Gains and
Gains and
(GAAP)
Losses
(1)
Losses
(GAAP)
Losses
Losses
Three Months Ended
June 30, 2021
$
(16,865)
$
(40,844)
$
23,979
$
(0.17)
$
(0.41)
$
0.24
March 31, 2021
(29,369)
(50,791)
21,422
(0.34)
(0.60)
0.26
December 31, 2020
16,479
(4,605)
21,084
0.23
(0.07)
0.30
September 30, 2020
28,076
5,745
22,331
0.42
0.09
0.33
June 30, 2020
48,772
28,749
20,023
0.74
0.43
0.31
March 31, 2020
(91,199)
(108,206)
17,007
(1.41)
(1.68)
0.27
Six Months Ended
June 30, 2021
$
(46,234)
$
(91,635)
$
45,401
$
(0.50)
$
(0.99)
$
0.49
June 30, 2020
(42,427)
(79,457)
37,030
(0.65)
(1.21)
0.56
(1)
Includes realized and unrealized gains (losses) on RMBS and derivative financial
instruments, including net interest income or expense on
interest rate swaps
.
Economic Interest Expense and Economic Net Interest Income
We use derivative and other hedging instruments, specifically Eurodollar,
Fed Funds and Treasury Note (“T-Note”)
futures contracts, short positions in U.S. Treasury securities, interest rate swaps and swaptions, to hedge a portion of the
interest rate risk on repurchase agreements in a rising rate environment.
27
We have not elected to designate our derivative holdings for hedge accounting treatment. Changes in fair value of these
instruments are presented in a separate line item in our statements of operations and not included in interest expense. As
such, for financial reporting purposes, interest expense and cost of funds are not impacted by the fluctuation in value of the
derivative instruments.
For the purpose of computing economic net interest income and ratios relating to cost of funds measures, GAAP
interest expense has been adjusted to reflect the realized and unrealized gains or losses on certain derivative instruments
the Company uses, specifically Eurodollar, Fed Funds and U.S. Treasury
futures, and interest rate swaps and swaptions,
that pertain to each period presented. We believe that adjusting our interest expense for the periods presented by the gains
or losses on these derivative instruments would not accurately reflect our economic interest expense for these periods. The
reason is that these derivative instruments may cover periods that extend into the future, not just the current period. Any
realized or unrealized gains or losses on the instruments reflect the change in market value of the instrument caused by
changes in underlying interest rates applicable to the term covered by the instrument, not just the current period. For each
period presented, we have combined the effects of the derivative financial instruments in place for the respective period with
the actual interest expense incurred on borrowings to reflect total economic interest expense for the applicable period.
Interest expense, including the effect of derivative instruments for the period, is referred to as economic interest expense.
Net interest income, when calculated to include the effect of derivative instruments for the period, is referred to as economic
net interest income. This presentation includes gains or losses on all contracts in effect during the reporting period, covering
the current period as well as periods in the future.
The Company may invest in TBAs, which are forward contracts for the purchase or sale of Agency RMBS at a
predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific Agency
RMBS to be delivered into the contract are not known until shortly before the settlement date. We may choose, prior to
settlement, to move the settlement of these securities out to a later date by entering into a dollar roll transaction. The
Agency RMBS purchased or sold for a forward settlement date are typically priced at a discount to equivalent securities
settling in the current month. Consequently, forward purchases of Agency RMBS and dollar roll transactions represent a
form of off-balance sheet financing. These TBAs are accounted for as derivatives and marked to market through the income
statement. Gains or losses on TBAs are included with gains or losses on other derivative contracts and are not included in
interest income for purposes of the discussions below.
We believe that economic interest expense and economic net interest income provide meaningful information to
consider, in addition to the respective amounts prepared in accordance with GAAP.
The non-GAAP measures help
management to evaluate its financial position and performance without the effects of certain transactions and GAAP
adjustments that are not necessarily indicative of our current investment portfolio or operations. The unrealized gains or
losses on derivative instruments presented in our statements of operations are not necessarily representative of the total
interest rate expense that we will ultimately realize. This is because as interest rates move up or down in the future, the
gains or losses we ultimately realize, and which will affect our total interest rate expense in future periods, may differ from
the unrealized gains or losses recognized as of the reporting date.
Our presentation of the economic value of our hedging strategy has important limitations. First, other market
participants may calculate economic interest expense and economic net interest income differently than the way we
calculate them. Second, while we believe that the calculation of the economic value of our hedging strategy described
above helps to present our financial position and performance, it may be of limited usefulness as an analytical tool.
Therefore, the economic value of our investment strategy should not be viewed in isolation and is not a substitute for
interest expense and net interest income computed in accordance with GAAP.
The tables below present a reconciliation of the adjustments to interest expense shown for each period relative to our
derivative instruments, and the income statement line item, gains (losses) on derivative instruments, calculated in
accordance with GAAP for each quarter of 2021 to date and 2020.
Gains (Losses) on Derivative Instruments
28
(in thousands)
Funding Hedges
Recognized in
Attributed to
Attributed to
Income
U.S. Treasury and TBA
Current
Future
Statement
Securities Gain (Loss)
Period
Periods
(GAAP)
(Short Positions)
(Long Positions)
(Non-GAAP)
(Non-GAAP)
Three Months Ended
June 30, 2021
$
(34,915)
$
(5,963)
$
-
$
(5,104)
$
(23,848)
March 31, 2021
45,472
9,133
(8,559)
(4,044)
48,942
December 31, 2020
8,538
(436)
5,480
(5,790)
9,284
September 30, 2020
4,079
131
3,336
(6,900)
7,512
June 30, 2020
(8,851)
582
1,133
(5,751)
(4,815)
March 31, 2020
(82,858)
(7,090)
-
(4,900)
(70,868)
Six Months Ended
June 30, 2021
$
10,557
$
3,170
$
(8,559)
$
(9,148)
$
25,094
June 30, 2020
(91,709)
(6,508)
1,133
(10,651)
(75,683)
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, 2021
$
29,254
$
1,556
$
(5,104)
$
6,660
$
27,698
$
22,594
March 31, 2021
26,856
1,941
(4,044)
5,985
24,915
20,871
December 31, 2020
25,893
2,011
(5,790)
7,801
23,882
18,092
September 30, 2020
27,223
2,043
(6,900)
8,943
25,180
18,280
June 30, 2020
27,258
4,479
(5,751)
10,230
22,779
17,028
March 31, 2020
35,671
16,523
(4,900)
21,423
19,148
14,248
Six Months Ended
June 30, 2021
$
56,110
$
3,497
$
(9,148)
$
12,645
$
52,613
$
43,465
June 30, 2020
62,929
21,002
(10,651)
31,653
41,927
31,276
(1)
Reflects the effect of derivative instrument hedges for only the
period presented.
(2)
Calculated by adding the effect of derivative instrument hedges
attributed to the period presented to GAAP interest expense.
(3)
Calculated by adding the effect of derivative instrument hedges
attributed to the period presented to GAAP net interest income.
Net Interest Income
During the
six months
ended June
30, 2021,
we generated
$52.6 million
of net interest
income, consisting
of $56.1 million
of interest
income from
RMBS assets
offset by $3.5
million of
interest expense
on borrowings.
For the comparable
period ended
June 30, 2020,
we
generated
$41.9 million
of net interest
income, consisting
of $62.9
million of
interest income
from RMBS
assets offset
by $21.0 million
of
interest expense
on borrowings.
The $6.8 million
decrease in
interest
income was
due to a 131
basis point
("bps") decrease
in the yield
on
average RMBS,
partially offset
by a $1,070.5
million increase
in average
RMBS. The
$17.5 million
decrease in
interest expense
was due
to a 120 bps
decrease in
the average
cost of funds,
partially offset
by a $1,057.6
million increase
in average
outstanding
borrowings.
On an economic
basis, our
interest
expense on
borrowings
for the six
months ended
June 30,
2021 and 2020
was $12.6
million and
$31.7 million,
respectively, resulting
in $43.5 million
and $31.3
million of economic
net interest
income, respectively.
29
During the
three months
ended June
30, 2021,
we generated
$27.7 million
of net interest
income, consisting
of $29.3 million
of
interest income
from RMBS
assets offset
by $1.6 million
of interest
expense on
borrowings.
For the three
months ended
June 30, 2020,
we generated
$22.8 million
of net interest
income, consisting
of $27.3
million of
interest income
from RMBS
assets offset
by $4.5 million
of
interest expense
on borrowings.
The $2.0 million
increase in
interest
income was
due to a $1,378.1
million increase
in average
RMBS,
partially offset
by a 89 bps
decrease
in the yield
on average
RMBS. The
$2.9 million
decrease in
interest expense
was due to
a 46 bps
decrease in
the average
cost of funds,
partially offset
by a $1,355.7
million increase
in average
outstanding
borrowings.
On an economic
basis, our
interest
expense on
borrowings
for the three
months ended
June 30, 2021
and 2020 was
$6.7 million
and
$10.2 million,
respectively, resulting
in $22.6 million
and $17.0
million of
economic net
interest
income, respectively.
The tables
below provide
information
on our portfolio
average balances,
interest income,
yield on
assets, average
borrowings,
interest
expense, cost
of funds,
net interest
income and
net interest
spread for
the six months
ended June
30, 2021 and
2020 and each
quarter of
2021 to date
and 2020 on
both a GAAP
and economic
basis.
($ in thousands)
Average
Yield on
Interest Expense
Average Cost of Funds
RMBS
Interest
Average
Average
GAAP
Economic
GAAP
Economic
Held
(1)
Income
RMBS
Borrowings
(1)
Basis
Basis
(2)
Basis
Basis
(3)
Three Months Ended
June 30, 2021
$
4,504,887
$
29,254
2.60%
$
4,348,192
$
1,556
$
6,660
0.14%
0.61%
March 31, 2021
4,032,716
26,856
2.66%
3,888,633
1,941
5,985
0.20%
0.62%
December 31, 2020
3,633,631
25,893
2.85%
3,438,444
2,011
7,801
0.23%
0.91%
September 30, 2020
3,422,564
27,223
3.18%
3,228,021
2,043
8,943
0.25%
1.11%
June 30, 2020
3,126,779
27,258
3.49%
2,992,494
4,479
10,230
0.60%
1.37%
March 31, 2020
3,269,859
35,671
4.36%
3,129,178
16,523
21,423
2.11%
2.74%
Six Months Ended
June 30, 2021
$
4,268,801
$
56,110
2.63%
$
4,118,413
$
3,497
$
12,645
0.17%
0.61%
June 30, 2020
3,198,319
62,929
3.94%
3,060,836
21,002
31,653
1.37%
2.07%
($ in thousands)
Net Interest Income
Net Interest Spread
GAAP
Economic
GAAP
Economic
Basis
Basis
(2)
Basis
Basis
(4)
Three Months Ended
June 30, 2021
$
27,698
$
22,594
2.46%
1.99%
March 31, 2021
24,915
20,871
2.46%
2.04%
December 31, 2020
23,882
18,093
2.62%
1.94%
September 30, 2020
25,180
18,280
2.93%
2.07%
June 30, 2020
22,779
17,028
2.89%
2.12%
March 31, 2020
19,148
14,248
2.25%
1.62%
Six Months Ended
June 30, 2021
$
52,613
$
43,465
2.46%
2.02%
June 30, 2020
41,927
31,276
2.57%
1.87%
(1)
Portfolio yields and costs of borrowings presented in the tables above
and the tables on pages 30 and 31 are calculated based on the
average balances of the underlying investment portfolio/borrowings
balances and are annualized for the periods presented. Average
balances for quarterly periods are calculated using two data points, the
beginning and ending balances.
(2)
Economic interest expense and economic net interest income
presented in the table above and the tables on page 31 includes
the effect
of our derivative instrument hedges for only the periods presented.
(3) Represents
interest cost of our borrowings and the effect of derivative
instrument hedges attributed to the period divided by average
RMBS.
(4) Economic
net interest spread is calculated by subtracting average economic
cost of funds from realized yield on average RMBS.
30
Interest Income and Average Asset Yield
Our interest
income for
the six months
ended June
30, 2021 and
2020 was $56.1
million and
$62.9 million,
respectively.
We had
average RMBS
holdings of
$4,268.8 million
and $3,198.3
million for
the six months
ended June
30, 2021 and
2020, respectively.
The
yield on our
portfolio
was 2.63%
and 3.94%
for the six
months ended
June 30, 2021
and 2020,
respectively. For
the six months
ended
June 30, 2021
as compared
to the six
months ended
June 30, 2020,
there was
a $6.8 million
decrease in
interest income
due to the
131
bps decrease
in the yield
on average
RMBS,
partially offset
by the $1,070.5
million increase
in average
RMBS.
Our interest
income for
the three
months ended
June 30, 2021
and 2020 was
$29.3 million
and $27.3
million, respectively.
We had
average RMBS
holdings of
$4,504.9 million
and $3,126.8
million for
the three
months ended
June 30, 2021
and 2020,
respectively.
The
yield on our
portfolio
was 2.60%
and 3.49%
for the three
months ended
June 30, 2021
and 2020,
respectively. For
the three
months ended
June 30, 2021
as compared
to the three
months ended
June 30, 2020,
there was
a $2.0 million
increase in
interest income
due to
the
$1,378.1 million
increase in
average RMBS,
partially offset
by the 89
bps decrease
in the yield
on average
RMBS.
The table
below presents
the average
portfolio
size, income
and yields
of our respective
sub-portfolios,
consisting
of structured
RMBS
and PT RMBS,
for the six
months ended
June 30, 2021
and 2020,
and for each
quarter of
2021 to date
and 2020.
($ 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, 2021
$
4,436,135
$
68,752
$
4,504,887
$
29,286
$
(32)
$
29,254
2.64%
(0.18)%
2.60%
March 31, 2021
3,997,965
34,751
4,032,716
26,869
(13)
26,856
2.69%
(0.15)%
2.66%
December 31, 2020
3,603,885
29,746
3,633,631
25,933
(40)
25,893
2.88%
(0.53)%
2.85%
September 30, 2020
3,389,037
33,527
3,422,564
27,021
202
27,223
3.19%
2.41%
3.18%
June 30, 2020
3,088,603
38,176
3,126,779
27,004
254
27,258
3.50%
2.67%
3.49%
March 31, 2020
3,207,467
62,392
3,269,859
35,286
385
35,671
4.40%
2.47%
4.36%
Six Months Ended
June 30, 2021
$
4,217,050
$
51,751
$
4,268,801
$
56,155
$
(45)
$
56,110
2.66%
(0.17)%
2.63%
June 30, 2020
3,148,035
50,284
3,198,319
62,290
639
62,929
3.96%
2.54%
3.94%
Interest Expense and the Cost of Funds
We had average
outstanding
borrowings
of $4,118.4 million
and $3,060.8
million and
total interest
expense of
$3.5 million
and $21.0
million for
the six months
ended June
30, 2021 and
2020, respectively.
Our average
cost of funds
was 0.17%
for the six
months ended
June 30, 2021,
compared to
1.37% for
the comparable
period in
2020.
The $17.5
million decrease
in interest
expense was
due to the
120
bps decrease
in the average
cost of funds,
partially offset
by the $1,057.6
million increase
in average
outstanding
borrowings
during the
six months
ended June
30, 2021
as compared
to the six
months ended
June 30, 2020.
Our economic
interest expense
was $12.6
million and
$31.7 million
for the six
months ended
June 30, 2021
and 2020,
respectively.
There was
a 146 bps
decrease in
the average
economic cost
of funds to
0.61% for
the six months
ended June
30, 2021 from
2.07% for
the six months
ended June
30, 2020.
We had average
outstanding
borrowings
of $4,348.2
million and
$2,992.5 million
and total
interest
expense of
$1.6 million
and $4.5
million for
the three
months ended
June 30, 2021
and 2020,
respectively. Our
average cost
of funds was
0.14% and
0.60% for
three
months ended
June 30, 2021
and 2020,
respectively. There
was a 46 bps
decrease in
the average
cost of funds
and a $1,355.7
million
increase in
average outstanding
borrowings
during the
three months
ended June
30, 2021,
compared to
the three
months ended
June 30,
2020.
31
Our economic
interest expense
was $6.7 million
and $10.2
million for
the three
months ended
June 30, 2021
and 2020,
respectively.
There was
a 76 bps decrease
in the average
economic cost
of funds
to 0.61% for
the three
months ended
June 30, 2021
from 1.37%
for
the three
months ended
June 30, 2020.
Since all of
our repurchase
agreements
are short-term,
changes in
market rates
directly affect
our interest
expense. Our
average cost
of funds calculated
on a GAAP
basis was 4
bps above the
average one-month
LIBOR and
4 bps below
the average
six-month
LIBOR for
the quarter
ended June
30, 2021.
Our average
economic cost
of funds was
51 bps above
the average
one-month
LIBOR and
43 bps
above the average
six-month LIBOR
for the quarter
ended June
30, 2021.
The average
term to maturity
of the outstanding
repurchase
agreements
decreased to
29 days at
June 30, 2021
from 31 days
at December
31, 2020.
The tables
below present
the average
balance of
borrowings
outstanding,
interest expense
and average
cost of funds,
and average
one-month
and six-month
LIBOR rates
for the six
months ended
June 30, 2021
and 2020,
and for each
quarter in
2021 to date
and 2020
on both a
GAAP and
economic basis.
($ in thousands)
Average
Interest Expense
Average Cost of Funds
Balance of
GAAP
Economic
GAAP
Economic
Borrowings
Basis
Basis
Basis
Basis
Three Months Ended
June 30, 2021
$
4,348,192
$
1,556
$
6,660
0.14%
0.61%
March 31, 2021
3,888,633
1,941
5,985
0.20%
0.62%
December 31, 2020
3,438,444
2,011
7,801
0.23%
0.91%
September 30, 2020
3,228,021
2,043
8,943
0.25%
1.11%
June 30, 2020
2,992,494
4,479
10,230
0.60%
1.37%
March 31, 2020
3,129,178
16,523
21,423
2.11%
2.74%
Six Months Ended
June 30, 2021
$
4,118,413
$
3,497
$
12,645
0.17%
0.61%
June 30, 2020
3,060,836
21,002
31,653
1.37%
2.07%
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, 2021
0.10%
0.18%
0.04%
(0.04)%
0.51%
0.43%
March 31, 2021
0.13%
0.23%
0.07%
(0.03)%
0.49%
0.39%
December 31, 2020
0.15%
0.27%
0.08%
(0.04)%
0.76%
0.64%
September 30, 2020
0.17%
0.35%
0.08%
(0.10)%
0.94%
0.76%
June 30, 2020
0.55%
0.70%
0.05%
(0.10)%
0.82%
0.67%
March 31, 2020
1.34%
1.43%
0.77%
0.68%
1.40%
1.31%
Six Months Ended
June 30, 2021
0.11%
0.20%
0.06%
(0.03)%
0.50%
0.41%
June 30, 2020
0.94%
1.06%
0.43%
0.31%
1.13%
1.01%
Gains or Losses
The table
below presents
our gains
or losses for
the six and
three months
ended June
30, 2021 and
2020.
(in thousands)
Six Months Ended June 30,
Three Months Ended June 30,
2021
2020
Change
2021
2020
Change
32
Realized (losses) gains on sales of RMBS
$
(6,045)
$
(25,020)
$
18,975
$
1,352
$
3,360
$
(2,008)
Unrealized (losses) gains on RMBS
(96,147)
37,272
(133,419)
(7,282)
34,240
(41,522)
Total (losses)
gains on RMBS
(102,192)
12,252
(114,444)
(5,930)
37,600
(43,530)
Gains (losses) on interest rate futures
278
(13,042)
13,320
(2,210)
(486)
(1,724)
Gains (losses) on interest rate swaps
9,446
(68,202)
77,648
(17,677)
(7,579)
(10,098)
Gains (losses) on payer swaptions (short positions)
1,212
(889)
2,101
27,379
(889)
28,268
Gains (losses) on payer swaptions (long positions)
3,710
(4,201)
7,911
(36,360)
(1,612)
(34,748)
Gains (losses) on interest rate floors
1,300
-
1,300
(84)
-
(84)
Gains (losses) on TBA securities (short positions)
3,170
(6,377)
9,547
(5,963)
713
(6,676)
(Losses) gains on TBA securities (long positions)
(8,559)
1,133
(9,692)
-
1,133
(1,133)
Losses on U.S. Treasury securities (short positions)
-
(131)
131
-
(131)
131
Total (losses)
gains from derivative instruments
10,557
(91,709)
102,266
(34,915)
(8,851)
(26,064)
We invest in
RMBS with
the intent
to earn net
income from
the realized
yield on those
assets over
their related
funding and
hedging
costs, and
not for the
purpose of
making short
term gains
from sales.
However, we have
sold, and may
continue to
sell,
existing assets
to
acquire new
assets, which
our management
believes might
have higher
risk-adjusted
returns in
light of current
or anticipated
interest rates,
federal government
programs or
general economic
conditions
or to manage
our balance
sheet as part
of our asset/liability
management
strategy. During
the six months
ended June
30, 2021 and
2020, we received
proceeds of
$1,680.9 million
and $2,023.3
million,
respectively, from
the sales of
RMBS.
Most of these
sales during
the six months
ended June
30, 2020 occurred
during the
second half
of
March 2020
as we sold
assets in
order to maintain
sufficient cash
and liquidity
and reduce
risk associated
with the market
turmoil brought
about by COVID-19.
During the
three months
ended June
30, 2021 and
2020, we received
proceeds of
$692.4 million
and $214.5
million,
respectively, from
the sales of
RMBS.
Realized and
unrealized
gains and
losses on RMBS
are driven
in part by
changes in
yields
and interest
rates, which
affect the pricing
of the securities
in our portfolio.
The unrealized
gains and losses
on RMBS also
include the
premium lost
as a result
of prepayments
on
the underlying
mortgages,
decreasing
unrealized
gains or increasing
unrealized
losses as
speeds or
premiums increase.
Gains and
losses
on interest
rate futures
contracts are
affected by
changes in
implied forward
rates during
the reporting
period.
The table
below presents
historical
interest rate
data for each
quarter end
during 2021
to date and
2020.
5 Year
10 Year
15 Year
30 Year
Three
U.S. Treasury
U.S. Treasury
Fixed-Rate
Fixed-Rate
Month
Rate
(1)
Rate
(1)
Mortgage Rate
(2)
Mortgage Rate
(2)
LIBOR
(3)
June 30, 2021
0.87%
1.44%
2.27%
2.98%
0.13%
March 31, 2021
0.94%
1.75%
2.39%
3.08%
0.19%
December 31, 2020
0.36%
0.92%
2.22%
2.68%
0.23%
September 30, 2020
0.27%
0.68%
2.39%
2.89%
0.24%
June 30, 2020
0.29%
0.65%
2.60%
3.16%
0.31%
March 31, 2020
0.38%
0.70%
2.89%
3.45%
1.10%
(1)
Historical 5 and 10 Year
U.S. Treasury Rates are obtained from quoted
end of day prices on the Chicago Board Options Exchange.
(2)
Historical 30 Year and
15 Year Fixed
Rate Mortgage Rates are obtained from Freddie Mac’s
Primary Mortgage Market Survey.
(3)
Historical LIBOR is obtained from the Intercontinental Exchange Benchmark
Administration Ltd.
Expenses
For the six
and three months
ended June 30,
2021, the Company’s
total operating
expenses were
approximately
$7.2
million and
$3.7 million,
respectively, compared
to approximately
$4.9 million
and $2.8 million,
respectively, for
the six and
three months
ended June 30,
2020.
The table below
presents a
breakdown of
operating
expenses for
the six and
three
months ended
June 30, 2021
and 2020.
(in thousands)
Six Months Ended June 30,
Three Months Ended June 30,
33
2021
2020
Change
2021
2020
Change
Management fees
$
3,413
$
2,645
$
768
$
1,792
$
1,268
$
524
Overhead allocation
799
695
104
395
348
47
Accrued incentive compensation
625
(275)
900
261
161
100
Directors fees and liability insurance
595
508
87
323
248
75
Audit, legal and other professional fees
620
601
19
302
346
(44)
Direct REIT operating expenses
715
446
269
294
240
54
Other administrative
445
277
168
352
145
207
Total expenses
$
7,212
$
4,897
$
2,315
$
3,719
$
2,756
$
963
We are externally managed and advised by Bimini Advisors, LLC (the “Manager”) pursuant
to the terms of a management
agreement. The management agreement has been renewed through February 20,
2022 and provides for automatic one-year extension
options thereafter and is subject to certain termination rights.
Under the terms of the management agreement, the Manager is
responsible for administering the business activities and day-to-day operations of
the Company.
The Manager receives a monthly
management fee in the amount of:
●
One-twelfth of 1.5% of the first $250 million of the Company’s month end equity, as defined in the management agreement,
●
One-twelfth of 1.25% of the Company’s month end equity that is greater than $250 million
and less than or equal to $500
million, and
●
One-twelfth of 1.00% of the Company’s month end equity that is greater than $500 million.
The Company is obligated to reimburse the Manager for any direct expenses incurred
on its behalf and to pay the Manager the
Company’s pro rata portion of certain overhead costs set forth in the management agreement.
Should the Company terminate the
management agreement without cause, it will pay the Manager a termination
fee equal to three times the average annual management
fee, as defined in the management agreement, before or on the last day of the term of
the agreement.
The following table summarizes the management fee and overhead allocation expenses
for each quarter in 2021 to date and
2020.
($ in thousands)
Average
Average
Advisory Services
Orchid
Orchid
Management
Overhead
Three Months Ended
MBS
Equity
Fee
Allocation
Total
June 30, 2021
$
4,504,887
$
542,679
$
1,792
$
395
$
2,187
March 31, 2021
4,032,716
456,687
1,621
404
2,025
December 31, 2020
3,633,631
387,503
1,384
442
1,826
September 30, 2020
3,422,564
368,588
1,252
377
1,629
June 30, 2020
3,126,779
361,093
1,268
348
1,616
March 31, 2020
3,269,859
376,673
1,377
347
1,724
Six Months Ended
June 30, 2021
$
4,268,801
$
499,683
$
3,413
$
799
$
4,212
June 30, 2020
3,198,319
368,883
2,645
695
3,340
Financial
Condition:
Mortgage-Backed Securities
As of June
30, 2021,
our RMBS portfolio
consisted of
$4,671.2 million
of Agency RMBS
at fair value
and had a
weighted average
coupon on
assets of 3.06%.
During the
six months
ended June
30, 2021,
we received
principal repayments
of $259.4
million compared
to
$260.8 million
for the six
months ended
June 30, 2020.
The average
three month
prepayment
speeds for
the quarters
ended June
30,
2021 and 2020
were 12.9%
and 16.3%,
respectively.
34
The following
table presents
the 3-month constant
prepayment
rate (“CPR”)
experienced on
our structured
and PT RMBS
sub-portfolios,
on an annualized
basis, for
the quarterly
periods presented.
CPR is a method
of expressing
the prepayment
rate for a mortgage
pool that assumes
that a constant
fraction of
the remaining
principal is
prepaid each
month or year.
Specifically, the
CPR in the chart
below represents
the three month
prepayment rate
of the securities
in the respective
asset
category.
Structured
PT RMBS
RMBS
Total
Three Months Ended
Portfolio (%)
Portfolio (%)
Portfolio (%)
June 30, 2021
10.9
29.9
12.9
March 31, 2021
9.9
40.3
12.0
December 31, 2020
16.7
44.3
20.1
September 30, 2020
14.3
40.4
17.0
June 30, 2020
13.9
35.3
16.3
March 31, 2020
9.8
22.9
11.9
The following
tables summarize
certain characteristics
of the Company’s
PT RMBS and
structured
RMBS as of
June 30, 2021
and
December 31,
2020:
($ in thousands)
Weighted
Percentage
Average
of
Weighted
Maturity
Fair
Entire
Average
in
Longest
Asset Category
Value
Portfolio
Coupon
Months
Maturity
June 30, 2021
Fixed Rate RMBS
$
4,574,539
97.9%
2.97%
335
1-Jul-51
Total Mortgage-backed Pass-through
4,574,539
97.9%
2.97%
335
1-Jul-51
Interest-Only Securities
92,709
2.0%
3.63%
290
25-May-51
Inverse Interest-Only Securities
3,991
0.1%
3.79%
307
15-Jun-42
Total Structured RMBS
96,700
2.1%
3.64%
291
25-May-51
Total Mortgage Assets
$
4,671,239
100.0%
3.06%
329
1-Jul-51
December 31, 2020
Fixed Rate RMBS
$
3,560,746
95.5%
3.09%
339
1-Jan-51
Fixed Rate CMOs
137,453
3.7%
4.00%
312
15-Dec-42
Total Mortgage-backed Pass-through
3,698,199
99.2%
3.13%
338
1-Jan-51
Interest-Only Securities
28,696
0.8%
3.98%
268
25-May-50
Total Structured RMBS
28,696
0.8%
3.98%
268
25-May-50
Total Mortgage Assets
$
3,726,895
100.0%
3.19%
333
1-Jan-51
($ in thousands)
June 30, 2021
December 31, 2020
Percentage of
Percentage of
Agency
Fair Value
Entire Portfolio
Fair Value
Entire Portfolio
Fannie Mae
$
3,773,957
80.8%
$
2,733,960
73.4%
Freddie Mac
897,282
19.2%
992,935
26.6%
Total Portfolio
$
4,671,239
100.0%
$
3,726,895
100.0%
June 30, 2021
December 31, 2020
Weighted Average Pass-through Purchase Price
$
107.37
$
107.43
Weighted Average Structured Purchase Price
$
17.88
$
20.06
Weighted Average Pass-through Current Price
$
106.65
$
108.94
35
Weighted Average Structured Current Price
$
14.48
$
10.87
Effective Duration
(1)
3.830
2.360
(1)
Effective duration is the approximate percentage change
in price for a 100 bps change in rates.
An effective duration of 3.830 indicates that an
interest rate increase of 1.0% would be expected to cause a 3.830% decrease in
the value of the RMBS in the Company’s investment
portfolio
at June 30, 2021.
An effective duration of 2.360 indicates that an interest rate
increase of 1.0% would be expected to cause a 2.360%
decrease in the value of the RMBS in the Company’s investment
portfolio at December 31, 2020. These figures include the structured
securities
in the portfolio, but do not include the effect of the Company’s
funding cost hedges.
Effective duration quotes for individual investments are
obtained from The Yield Book, Inc.
The following
table presents
a summary
of portfolio
assets acquired
during the six
months ended
June 30, 2021
and 2020,
including securities
purchased during
the period
that settled
after the end
of the period,
if any.
($ in thousands)
2021
2020
Total Cost
Average
Price
Weighted
Average
Yield
Total Cost
Average
Price
Weighted
Average
Yield
Pass-through RMBS
$
2,910,318
$
107.05
1.54%
$
1,985,756
$
106.59
1.99%
Structured RMBS
76,546
15.42
3.98%
-
-
-
Borrowings
As of June
30, 2021,
we had established
borrowing
facilities
in the repurchase
agreement
market with
a number of
commercial
banks
and other
financial institutions
and had borrowings
in place with
23 of these
counterparties.
None of these
lenders are
affiliated with
the
Company. These borrowings
are secured
by the Company’s
RMBS and
cash, and bear
interest
at prevailing
market rates.
We believe our
established
repurchase
agreement
borrowing
facilities
provide borrowing
capacity in
excess of
our needs.
As of June
30, 2021,
we had obligations
outstanding
under the
repurchase
agreements
of approximately
$4,514.7 million
with a net
weighted average
borrowing
cost of 0.13%.
The remaining
maturity of
our outstanding
repurchase
agreement
obligations
ranged from
1 to
100 days, with
a weighted
average remaining
maturity of
29 days.
Securing the
repurchase
agreement
obligations
as of June
30, 2021
are RMBS
with an estimated
fair value,
including accrued
interest,
of approximately
$4,678.1 million
and a weighted
average maturity
of
339 months,
and cash pledged
to counterparties
of approximately
$79.1 million.
Through July
30, 2021,
we have been
able to maintain
our repurchase
facilities
with comparable
terms to those
that existed
at June 30,
2021 with
maturities
through August
14, 2021.
The table below presents information about our period end, maximum and average balances
of borrowings for each quarter in
2021 to date and 2020.
($ in thousands)
Difference Between Ending
Ending
Maximum
Average
Borrowings and
Balance of
Balance of
Balance of
Average Borrowings
Three Months Ended
Borrowings
Borrowings
Borrowings
Amount
Percent
June 30, 2021
$
4,514,704
$
4,517,953
$
4,348,192
$
166,512
3.83%
March 31, 2021
4,181,680
4,204,935
3,888,633
293,047
7.54%
December 31, 2020
3,595,586
3,597,313
3,438,444
157,142
4.57%
September 30, 2020
3,281,303
3,286,454
3,228,021
53,282
1.65%
June 30, 2020
3,174,739
3,235,370
2,992,494
182,245
6.09%
March 31, 2020
2,810,250
4,297,621
3,129,178
(318,928)
(10.19)%
(1)
36
(1)
The lower ending balance relative to the average balance during the quarter
ended March 31, 2020 reflects the disposal of RMBS pledged as
collateral in order to maintain cash and liquidity in response to the dislocations
in the financial and mortgage markets resulting from the
economic impacts of COVID-19.
During the quarter ended March 31, 2020, the Company’s investment
in RMBS decreased $642.1 million.
Liquidity and Capital Resources
Liquidity is
our ability
to turn non-cash
assets into
cash, purchase
additional
investments,
repay principal
and interest
on borrowings,
fund overhead,
fulfill margin
calls and
pay dividends.
Our principal
immediate sources
of liquidity
include cash
balances, unencumbered
assets and
borrowings
under repurchase
agreements.
Our borrowing
capacity will
vary over time
as the market
value of our
interest
earning assets
varies.
Our balance
sheet also
generates
liquidity
on an on-going
basis through
payments of
principal and
interest
we
receive on
our RMBS
portfolio.
Management
believes that
we currently
have sufficient
liquidity
and capital
resources available
for (a) the
acquisition
of additional
investments
consistent
with the size
and nature
of our existing
RMBS portfolio,
(b) the repayments
on borrowings
and (c) the
payment of
dividends
to the extent
required for
our continued
qualification
as a REIT.
We may also
generate liquidity
from time
to time by
selling our
equity or
debt securities
in public offerings
or private
placements.
Because our
PT RMBS portfolio
consists entirely
of government
and agency
securities,
we do not
anticipate
having difficulty
converting
our assets
to cash should
our liquidity
needs ever
exceed our
immediately
available
sources of cash.
Our structured
RMBS
portfolio
also consists
entirely of
governmental
agency securities,
although they
typically
do not trade
with comparable
bid / ask spreads
as
PT RMBS.
However, we anticipate
that we would
be able to
liquidate such
securities
readily, even in
distressed
markets, although
we
would likely
do so at prices
below where
such securities
could be sold
in a more
stable market.
To enhance our liquidity
even further,
we
may pledge
a portion
of our structured
RMBS as part
of a repurchase
agreement funding,
but retain
the cash in
lieu of acquiring
additional
assets.
In this way
we can, at
a modest cost,
retain higher
levels of
cash on hand
and decrease
the likelihood
we will have
to sell assets
in
a distressed
market in order
to raise cash.
Our strategy
for hedging
our funding
costs typically
involves taking
short positions
in interest
rate futures,
treasury futures,
interest rate
swaps, interest
rate swaptions
or other instruments.
When the market
causes
these short
positions
to decline
in value we
are required
to
meet margin
calls with
cash.
This can reduce
our liquidity
position
to the extent
other securities
in our portfolio
move in price
in such a
way
that we do
not receive
enough cash
via margin
calls to offset
the derivative
related margin
calls. If
this were
to occur in
sufficient
magnitude,
the loss of
liquidity might
force us to
reduce the
size of the
levered portfolio,
pledge additional
structured
securities
to raise
funds or risk
operating
the portfolio
with less liquidity.
Our master
repurchase
agreements
have no stated
expiration,
but can be
terminated
at any time
at our option
or at the
option of
the
counterparty. However,
once a definitive
repurchase
agreement
under a master
repurchase
agreement
has been entered
into, it generally
may not be
terminated
by either
party.
A negotiated
termination
can occur, but
may involve
a fee to
be paid by
the party
seeking to
terminate
the repurchase
agreement
transaction,
as it did during
the three
months ended
March 31,
2020.
Under our
repurchase
agreement funding
arrangements,
we are required
to post margin
at the initiation
of the borrowing.
The margin
posted represents
the haircut,
which is a
percentage
of the market
value of the
collateral
pledged.
To the extent the market
value of the
asset collateralizing
the financing
transaction
declines, the
market value
of our posted
margin will
be insufficient
and we will
be required
to
post additional
collateral.
Conversely, if
the market
value of the
asset pledged
increases in
value, we
would be over
collateralized
and we
would be entitled
to have excess
margin returned
to us by the
counterparty.
Our lenders
typically
value our
pledged securities
daily to
ensure the
adequacy of
our margin
and make margin
calls as needed,
as do we.
Typically, but not always,
the parties
agree to a
minimum
threshold
amount for
margin calls
so as to avoid
the need for
nuisance margin
calls on a
daily basis.
Our master
repurchase
agreements
do not specify
the haircut;
rather haircuts
are determined
on an individual
repurchase
transaction
basis. Throughout
the six months
ended
June 30, 2021,
haircuts on
our pledged
collateral
remained stable
and as of
June 30, 2021,
our weighted
average haircut
was
approximately
5.0% of the
value of our
collateral.
TBAs represent
a form of
off-balance sheet
financing and
are accounted
for as derivative
instruments.
(See Note
4 to our Financial
Statements
in this Form
10-Q
for additional
details on
our TBAs).
Under certain
market conditions,
it may be uneconomical
for us to
roll our
37
TBAs into
future months
and we may
need to take
or make physical
delivery of
the underlying
securities.
If we were
required to
take
physical delivery
to settle a
long TBA,
we would have
to fund our
total purchase
commitment
with cash
or other financing
sources and
our
liquidity position
could be negatively
impacted.
Our TBAs are
also subject
to margin
requirements
governed by
the Mortgage-Backed
Securities
Division ("MBSD")
of the FICC
and
by our master
securities
forward transaction
agreements,
which may
establish margin
levels in
excess of the
MBSD. Such
provisions
require that
we establish
an initial
margin based
on the notional
value of the
TBA, which
is subject
to increase
if the estimated
fair value
of
our TBAs
or the estimated
fair value of
our pledged
collateral
declines. The
MBSD has
the sole discretion
to determine
the value
of our
TBAs and of
the pledged
collateral
securing such
contracts.
In the event
of a margin
call, we must
generally provide
additional
collateral
on
the same business
day.
Settlement
of our TBA
obligations
by taking delivery
of the underlying
securities
as well as
satisfying
margin requirements
could
negatively
impact our
liquidity
position.
However, since
we do not
use TBA dollar
roll transactions
as our primary
source of financing,
we
believe that
we will have
adequate sources
of liquidity
to meet such
obligations.
As discussed
earlier, we invest
a portion
of our capital
in structured
Agency RMBS.
We generally
do not apply
leverage to
this portion
of our portfolio.
The leverage
inherent in
structured
securities
replaces the
leverage obtained
by acquiring
PT securities
and funding
them
in the repurchase
market.
This structured
RMBS strategy
has been a
core element
of the Company’s
overall investment
strategy since
inception.
However, we have
and may continue
to pledge
a portion
of our structured
RMBS in order
to raise our
cash levels,
but generally
will not pledge
these securities
in order to
acquire additional
assets.
The following
table summarizes
the effect on
our liquidity
and cash flows
from contractual
obligations
for repurchase
agreements
and
interest expense
on repurchase
agreements.
(in thousands)
Obligations Maturing
Within One
Year
One to Three
Years
Three to Five
Years
More than
Five Years
Total
Repurchase agreements
$
4,514,704
$
-
$
-
$
-
$
4,514,704
Interest expense on repurchase agreements
(1)
1,516
-
-
-
1,516
Totals
$
4,516,220
$
-
$
-
$
-
$
4,516,220
(1)
Interest expense
on repurchase
agreements is
based on current
interest rates
as of June 30,
2021 and the
remaining term
of the liabilities
existing
at that date.
In future
periods, we
expect to continue
to finance
our activities
in a manner
that is consistent
with our current
operations
through
repurchase
agreements.
As of June
30, 2021,
we had cash
and cash equivalents
of $272.8
million.
We generated
cash flows
of $312.7
million from
principal and
interest
payments on
our RMBS
and had average
repurchase
agreements
outstanding
of $4,118.4 million
during
the six months
ended June
30, 2021.
Stockholders’
Equity
On January 23, 2020, we entered into the January 2020 Equity Distribution Agreement
with three sales agents pursuant to which
we could offer and sell, from time to time, up to an aggregate amount of $200,000,000 of shares
of our common stock in transactions
that were deemed to be “at the market” offerings and privately negotiated transactions.
We issued a total of 3,170,727 shares under
the January 2020 Equity Distribution Agreement for aggregate gross proceeds of $19.8
million, and net proceeds of approximately
$19.4 million, after commissions and fees, prior to its termination in August
2020.
On August 4, 2020, we entered into the August 2020 Equity Distribution Agreement with
four sales agents pursuant to which we
could offer and sell, from time to time, up to an aggregate amount of $150,000,000 of shares
of our common stock in transactions that
38
were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total of 27,493,650
shares under the
August 2020 Equity Distribution Agreement for aggregate gross proceeds of approximately
$150.0 million, and net proceeds of
approximately $147.4 million, after commissions and fees, prior to its termination in June
2021.
On January 20, 2021, we entered into the January 2021 Underwriting Agreement
with J.P.
Morgan Securities LLC (“J.P. Morgan”),
relating to the offer and sale of 7,600,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from
the Company pursuant to the January 2021 Underwriting Agreement at $5.20 per share.
In addition, we granted J.P. Morgan a 30-day
option to purchase up to an additional 1,140,000 shares of our common stock on the
same terms and conditions, which J.P. Morgan
exercised in full on January 21, 2021. The closing of the offering of 8,740,000 shares of our common
stock occurred on January 25,
2021, with proceeds to us of approximately $45.2 million, net of offering expenses.
On March 2, 2021, we entered into the “March 2021 Underwriting Agreement with J.P. Morgan, relating to the offer and sale of
8,000,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from the Company pursuant to the
March 2021 Underwriting Agreement at $5.45 per share. In addition, we granted
J.P.
Morgan a 30-day option to purchase up to an
additional 1,200,000 shares of our common stock on the same terms and conditions,
which J.P. Morgan exercised in full on March 3,
- The closing of the offering of 9,200,000 shares of our common stock occurred on March
5, 2021, with proceeds to us of
approximately $50.0
million, net of offering expenses payable.
On June 22, 2021, we entered into an equity distribution agreement (the “June 2021
Equity Distribution Agreement”) with four
sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate amount
of $250,000,000 of shares of our
common stock in transactions that are deemed to be “at the market” offerings and privately
negotiated transactions. Through June 30,
2021, we issued a total of 5,750,000 shares under the June 2021 Equity Distribution
Agreement for aggregate gross proceeds of
approximately $31.1 million, and net proceeds of approximately $30.6 million, after commissions
and fees. Subsequent to June 30,
2021 and through July 30, 2021, we issued a total of 5,560,000 shares under the June 2021
Equity Distribution Agreement for
aggregate gross proceeds of approximately $28.6 million, and net proceeds of approximately
$28.2 million, after commissions and
fees.
Outlook
Economic Summary
The economy
continued its
strong recovery
from the COVID-19
pandemic during
the second quarter
of 2021.
The surge
in COVID-19
cases that occurred
during the first
quarter of 2021
abated quickly
as inoculations
of the new vaccines
were
widely distributed
throughout the
population –
especially
to those most
susceptible
to the virus.
New COVID-19
cases,
hospitalizations
and deaths from
the virus decreased
dramatically, allowing
the economy
to reopen and
substantial
pent-up
demand on the
part of consumers
to be unleashed.
Additional
fiscal policy
steps taken
by the Biden
administration,
as
described below,
added to the
surge in economic
activity.
The economic
data released
throughout the
second quarter
provided evidence
of the recovery.
Retail sales,
especially
car
sales, air
travel and hotel
demand, surged.
Home sales
grew at a pace
that exceeded
the early 2000s.
Home price
increases
exceeded levels
seen in the early
2000s as well,
eventually leading
to a slow down
in home sales
and price appreciation
in the
early days
of the third
quarter as elevated
home prices
became an impediment
to new sales.
As the demand
for many goods
and services
surged, the
lingering effects
of the pandemic
acted to retard
supply, leading to
price increases.
For example,
the
supply of computer
chips in the
case of autos
and consumer
electronics
could not keep
up with demand.
Shortages
of
commodities
like lumber
in the case of
housing, and
labor generally,
constrained
the economy’s
ability to
meet demand.
Labor
remained constrained
as workers
either were
content to collect
supplemental
unemployment
insurance available
initially under
COVID-19 related
legislation,
where fearful
of excess exposure
to COVID-19
(especially
in the case
of leisure
and hospitality
workers)
or due to the
lack of access
to childcare,
and thus unable
to return to
work.
Gross domestic
product, or
GDP, is
estimated to
have expanded
at an 8.0% annualized
rate during
the second quarter
of 2021.
Importantly, the supply/demand
imbalance mentioned
above, coupled
with an expansion
in the monetary
base driven
by both fiscal
and monetary
policy (the
39
Fed’s monthly
asset purchases),
has driven inflation
higher.
The consumer
price index,
or CPI, has
accelerated
to over 5% on
a year over
year basis
for the first
time since 2008.
The lone disappointment
over the period
has been job
growth, as
mentioned above.
The market
anticipates
this may change
somewhat when
the supplemental
unemployment
benefits lapse
in
early September,
but the rapid
emergence of
the delta variant
of COVID-19
may keep job
growth recovery
below market
expectations
beyond September.
Legislative
Response and
the Federal
Reserve
Congress passed
the CARES Act
quickly in
response to
the pandemic’s
emergence last
spring and followed
with
additional legislation
over the ensuing
months.
However, as certain
provisions
of the CARES
Act expired,
such as
supplemental
unemployment
insurance last
July, there appeared
to be a need
for additional
stimulus for
the economy
to deal
with the surge
in the pandemic
that occurred
as cold weather
set in, particularly
over the Christmas
holiday.
As mentioned
above, the Federal
government eventually
passed an additional
stimulus package
in late December
of 2020 and again
in
March of 2021.
In addition,
the Fed has provided,
and continues
to provide,
as much support
to the markets
and the economy
as it can within
the constraints
of its mandate.
During the third
quarter of 2020,
the Fed unveiled
a new monetary
policy
framework
focused on average
inflation rate
targeting that
allows the
Fed Funds rate
to remain quite
low, even if inflation
is
expected to temporarily
surpass the
2% target level.
Further, the Fed
will look
past the presence
of very tight
labor markets,
should they be
present at
the time.
This marks
a significant
shift from
their prior
policy framework,
which was focused
on the
unemployment
rate as a key
indicator of
impending inflation.
Adherence to
this policy
could steepen
the U.S. Treasury
curve
as short-term
rates could
remain low
for a considerable
period but longer-term
rates could rise
given the Fed’s
intention to
let
inflation potentially
run above 2%
in the future
as the economy
more fully
recovers.
The response of
U.S. Treasury
rates
appeared to follow
this pattern
precisely
during the first
quarter of 2021
but have since
reversed since
early in the
second
quarter 2021.
Interest Rates
As economic
activity and
inflation accelerated
during the second
quarter of 2021,
market participants
anticipated
interest
rates would
continue to rise
as they had done
during the
first quarter
of the year.
This was most
evident in the
open interest
in
the various
U.S. Treasury
futures – namely
the level of
contracts shorted.
However, interest
rates did not
continue to
rise in
the second quarter
of 2021.
In fact, over
the course of
the quarter, longer
term interest
rates declined
slowly – by
27.2 bps in
the case of the
10-year U.S.
Treasury note
and 32.5 bps
in the case
of the 30-year
U.S. Treasury
bond.
Since quarter
end,
rates have accelerated
their decline,
especially
so as the delta
variant of COVID-19
has appeared to
spread at an
accelerating
rate across
both the U.S.
and the globe.
The driver
of the counter-intuitive
movement in
rates was likely
the result of
technical
factors, as
market positioning
was so skewed
to the short
side and there
simply were
few if any
additional sellers.
The
disappointing
job growth
figures have
also been pointed
to as evidence
the market
may have been
overly optimistic
about the
magnitude of
the economic
recovery.
More recently, the
rapid spread
of the delta
variant of
COVID-19 is
causing market
participants
to lower their
near-term growth
estimates –
both for the
U.S. and globally.
The Fed has played
a role in
the evolution
of interest
rates over
the course of
the quarter
as well. The
most significant
development
has been the
Fed’s insistence,
at least from
the FOMC leadership,
that the inflationary
pressures evident
in the
economy will
be transitory.
The Fed argues
that COVID-19
related supply
constraints
are driving
most price pressures,
and
that activity
most related
to the opening
of the economy
– travel, dining
out, housing,
etc. – is causing
price pressures
related
to excessive
demand, demand
that should
subside as the
economy returns
to normal levels
of activity.
Substantial fiscal
stimulus also
played a role
in the Fed’s view
in that direct
payments to
consumers related
to the various
relief measures
passed by Congress
were one time
in nature and
their effect
will fade.
Market pricing,
or the level
of interest
rates, especially
long-term rates,
seems to indicate
the market agrees
with this point
of view.
However, at the conclusion
of the FOMC
meeting
in June, the
market was
surprised to
learn that while
the leadership
of the Fed maintained
this view, not all
members of the
FOMC did.
There were members
of the committee
that believed
inflation may
not be transitory,
and that as a
result the
Fed
would have to
raise interest
rates sooner
than previously
thought and begin
to taper their
asset purchases
sooner as well.
The
market interpreted
these developments
as a hawkish
shift on the
part of the
Fed, although
the leadership
of the
Fed –
especially
Chairman Powell
- has pushed
back against
this interpretation
and insists
the Fed’s stance
has not changed.
40
The Agency RMBS
Market
Performance
for the Agency
RMBS market
for the second
quarter trailed
most other
asset classes,
especially
so in June.
The total return
for the Agency
RMBS sub-index
was 0.33% for
the quarter.
As mentioned
above, at the
conclusion
of the
June FOMC meeting
it was evident
that not all
committee members
shared the view
of the Fed leadership
that the removal
of
accommodation
was still far
off – or that the
recovery was
far from complete.
There were
members who
thought the
Fed
would have to
taper their
asset purchases
and eventually
raise short-term
interest rates
much sooner.
For the Agency
RMBS
market, this
meant Fed purchases
of $40 billion
per month might
be ending sooner
than most market
participants
expected.
The extremely
strong housing
market added
credence to
the notion that
the Fed did
not need to continue
to provide
support to
the market any
longer as well.
Given the length
of time the
Fed has been
supporting
the Agency RMBS
market, coupled
with
banks that are
flush with
deposits that
need to be invested,
price levels
in the Agency
RMBS market
were quite rich
prior to this
development.
While all
sectors of the
financial markets
appear to be
priced at the
high end of
long-term
price ranges,
the
removal of
such a large
buyer of Agency
RMBS likely
would have a negative
effect on their
valuations.
The market
has reacted
to the potential
of lower Fed
purchases of
Agency RMBS,
leading to the
relative under-performance
of the Agency
RMBS
market during
the second quarter
of 2021.
The second driver
of Agency RMBS
performance,
both for the
second quarter
of 2021 and
beyond, is,
as always,
the level
of prepayments.
As the market
has rallied
– especially
long-term rates
– rates available
to borrowers
are now back
to levels
seen last summer,
and burn-out
has yet to develop
in higher
coupon, more
seasoned mortgages.
This has been
supportive
of
specified pool
premiums,
a core holding
of the Company.
Recent Legislative
and Regulatory
Developments
The Fed conducted
large scale
overnight repo
operations
from late
2019 until July
2020 to address
disruptions
in the U.S.
Treasury, Agency debt and
Agency MBS financing
markets. These
operations ceased
in July 2020
after the central
bank
successfully
tamed volatile
funding costs
that had threatened
to cause disruption
across the
financial system.
The Fed has taken
a number
of other actions
to stabilize
markets as
a result of
the impacts of
the COVID-19
pandemic.
In
March of 2020,
the Fed announced
a $700 billion
asset purchase
program to
provide liquidity
to the U.S. Treasury
and Agency
RMBS markets.
The Fed also
lowered the
Fed Funds rate
to a range of
0.0% – 0.25%,
after having
already lowered
the Fed
Funds rate by
50 bps earlier
in the month.
Later that same
month the Fed
announced
a program to
acquire U.S.
Treasuries
and Agency RMBS
in the amounts
needed to support
smooth market
functioning.
With these
purchases, market
conditions
improved substantially.
Currently, the Fed is
committed to
purchasing $80
billion of
U.S. Treasuries
and $40 billion
of Agency
RMBS each month.
Chairman Powell
and the Fed have
reiterated their
commitment
to this level
of asset purchases
at every
meeting since
their meeting
on June 30,
- At the
June 2021 meeting,
the Fed agreed
to begin to
discuss plans
for
adjusting the
path and composition
of asset purchases,
but reiterated
the intention
to provide
notice well
in advance of
an
announcement
to reduce the
pace of such
purchases. Chairman
Powell has
also maintained
that the Fed
expects to
maintain
interest rates
at this level
until the Fed
is confident
that the economy
has weathered
the pandemic
and its impact
on economic
activity and
is on track
to achieve its
maximum employment
and price stability
goals. The Fed
has taken various
other steps
to
support certain
other fixed
income markets,
to support mortgage
servicers
and to implement
various portions
of the
Coronavirus
Aid, Relief,
and Economic
Security (“CARES”)
Act.
The CARES Act
was passed by
Congress and
signed into
law on March
27, 2020.
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
provided an
additional $484
billion of
funding to individuals,
small businesses,
hospitals, health
care providers
and additional
coronavirus
testing efforts.
Various provisions
of the CARES
Act began to
expire in July
2020, including
a moratorium
on evictions,
expanded unemployment
benefits, and
a moratorium
on foreclosures.
On August 8,
2020, President
Trump
issued Executive
Order 13945,
directing the
Department
of Health and
Human Services,
41
the Centers
for Disease
Control and
Prevention (“CDC”),
the Department
of Housing and
Urban Development,
and
Department of
the Treasury to
take measures
to temporarily
halt residential
evictions and
foreclosures,
including through
temporary financial
assistance.
On December
27, 2020, an
additional $900
billion coronavirus
aid package was
signed into
law as part
of the Consolidated
Appropriations
Act of 2021,
providing for
extensions of
many of the
CARES Act policies
and programs
as well as additional
relief. The
package provided
for, among other things,
direct payments
to most Americans
with a gross
income of less
than
$75,000 a year, extension
of unemployment
benefits through
March 14, 2021,
funding for
procurement
of vaccines
and health
providers,
loans to qualified
businesses,
funding for
rental assistance
and funding for
schools. On
January 29,
2021, the CDC
issued guidance
extending eviction
moratoriums
for covered persons
through March
31, 2021, which
has been extended
to
July 31, 2021.
In addition,
on February
9, 2021, the
FHFA announced that
the foreclosure
moratorium
begun under the
CARES Act for
loans backed
by Fannie Mae
and Freddie
Mac and the eviction
moratorium
for real estate
owned by Fannie
Mae and Freddie
Mac were extended
until March
31, 2021, which
has been extended
to July 31,
- On February
16, 2021,
the U.S. Housing
and Urban Development
Department
announced the
extension of
the FHA eviction
and foreclosure
moratorium
to June 30, 2021,
which has been
extended to
July 31, 2021.
On March 11, 2021, the
$1.9 trillion
American Rescue
Plan Act of
2021 was signed
into law.
This stimulus
program
furthered the
Federal government’s
efforts to stabilize
the economy and
provide assistance
to sectors of
the population
still
suffering from
the various
physical and
economic effects
of the pandemic.
In January 2019,
the Trump administration
made statements
of its plans
to work with
Congress to
overhaul Fannie
Mae
and
Freddie Mac
and expectations
to announce
a framework
for the development
of a policy
for comprehensive
housing
finance reform
soon. On September
30, 2019, the
FHFA announced that
Fannie Mae
and Freddie
Mac were allowed
to
increase their
capital buffers
to $25 billion
and $20 billion,
respectively, from
the prior limit
of $3 billion
each. This
step could
ultimately
lead to Fannie
Mae and Freddie
Mac being privatized
and represents
the first
concrete step
on the road
to GSE
reform.
On June 30, 2020,
the FHFA released
a proposed rule
on a new regulatory
framework
for the GSEs
which seeks
to
implement both
a risk-based
capital framework
and minimum leverage
capital requirements.
The final rule
on the new capital
framework
for the GSEs
was published
in the federal
register in
December 2020.
On January 14,
2021, the U.S.
Treasury and
the FHFA executed
letter agreements
allowing the
GSEs to continue
to retain capital
up to their
regulatory
minimums,
including
buffers, as prescribed
in the December
rule.
These letter
agreements provide,
in part, (i)
there will be
no exit from
conservatorship
until all material
litigation is
settled and the
GSE has common
equity Tier
1 capital of
at least 3%
of its assets,
(ii) the GSEs
will comply
with the FHFA’s regulatory
capital framework,
(iii) higher-risk
single-family
mortgage acquisitions
will
be restricted
to current
levels, and (iv)
the U.S. Treasury
and the FHFA will
establish a timeline
and process
for future GSE
reform. However,
no definitive
proposals or
legislation
have been released
or enacted
with respect
to ending the
conservatorship,
unwinding the
GSEs, or materially
reducing the
roles of the
GSEs in the
U.S. mortgage
market. On
June 23,
2021, President
Biden removed
the director
of the FHFA and appointed
an acting
director. With the
leadership
change at
FHFA, some observers
anticipate that
the Biden administration
will be less
likely to focus
on ending the
GSEs’ conservatorship
and that the
January 14,
2021 letter
agreements between
the U.S. Treasury
and the FHFA may
be renegotiated.
In 2017, policymakers
announced that
LIBOR will
be replaced by
December 31,
- The directive
was spurred
by the
fact that banks
are uncomfortable
contributing
to the LIBOR
panel given the
shortage of
underlying transactions
on which
to
base levels
and the liability
associated with
submitting
an unfounded
level. The
ICE Benchmark
Administration,
in its capacity
as administrator
of USD LIBOR,
has confirmed
that it will
cease publication
of (i) the
one-week and
two-month USD
LIBOR
settings immediately
following the
LIBOR publication
on December
31, 2021, and
(ii) the overnight
and one, three,
six and 12-
month USD LIBOR
settings immediately
following the
LIBOR publication
on June 30, 2023.
A joint statement
by key regulatory
authorities
calls on banks
to cease entering
into new contracts
that use USD
LIBOR as a reference
rate by no later
than
December 31,
- The Alternative
Reference Rates
Committee,
a steering committee
comprised of
large U.S.
financial
institutions,
has proposed
replacing USD-LIBOR
with a new SOFR,
a rate based
on U.S. repo
trading. Many
banks believe
that it may
take four to
five years
to complete
the transition
to SOFR, for
certain, despite
the 2021 deadline.
We will monitor
the
emergence of
this new rate
carefully as
it will potentially
become the new
benchmark
for hedges and
a range of
interest rate
investments.
At this time,
however, no consensus
exists as to
what rate or
rates may become
accepted alternatives
to LIBOR.
Effective January
1, 2021, Fannie
Mae, in alignment
with Freddie
Mac, will
extend the timeframe
for its delinquent
loan
42
buyout policy
for Single-Family
Uniform Mortgage-Backed
Securities
(UMBS) and Mortgage-Backed
Securities
(MBS) from
four consecutively
missed monthly
payments to
twenty-four
consecutively
missed monthly
payments (i.e.,
24 months past
due). This
new timeframe
will apply
to outstanding
single-family
pools and newly
issued single-family
pools and was
first
reflected when
January 2021
factors were
released on
the fourth business
day in February
2021.
For Agency RMBS
investors, when
a delinquent
loan is bought
out of a pool
of mortgage
loans, the removal
of the loan
from the pool
is the same
as a total prepayment
of the loan.
The respective
GSEs currently
anticipate,
however, that
delinquent loans
will be repurchased
in most cases
before the 24-month
deadline under
one of the following
exceptions listed
below.
• a
loan that is
paid in full,
or where the
related lien
is released
and/or the
note debt is
satisfied or
forgiven;
• a
loan repurchased
by a seller/servicer
under applicable
selling and
servicing
requirements;
• a
loan entering
a permanent
modification,
which generally
requires it
to be removed
from the MBS.
During any
modification
trial period,
the loan will
remain in the
MBS until the
trial period
ends;
• a
loan subject
to a short sale
or deed-in-lieu
of foreclosure;
or
• a
loan referred
to foreclosure.
Because of these
exceptions,
the GSEs currently
believe based
on prevailing
assumptions
and market conditions
this
change will
have only a
marginal impact
on prepayment
speeds, in aggregate.
Cohort level
impacts may
vary. For example,
more than half
of loans referred
to foreclosure
are historically
referred within
six months of
delinquency. The degree
to which
speeds are affected
depends on
delinquency
levels, borrower
response, and
referral to
foreclosure
timelines.
The scope and
nature of the
actions the
U.S. government
or the Fed will
ultimately
undertake are
unknown and
will
continue to evolve,
especially
in light of
the COVID-19
pandemic, President
Biden’s new administration
and the new
Congress
in the United
States.
Effect on Us
Regulatory
developments,
movements in
interest rates
and prepayment
rates affect
us in many
ways, including
the
following:
Effects on our
Assets
A change in or
elimination
of the guarantee
structure of
Agency RMBS
may increase
our costs (if,
for example,
guarantee
fees increase)
or require
us to change our
investment
strategy altogether.
For example,
the elimination
of the guarantee
structure of
Agency RMBS
may cause us
to change our
investment
strategy to
focus on non-Agency
RMBS, which
in turn
would require
us to significantly
increase our
monitoring of
the credit risks
of our investments
in addition
to interest
rate and
prepayment risks.
Lower long-term
interest rates
can affect the
value of our
Agency RMBS
in a number
of ways. If
prepayment rates
are
relatively
low (due, in
part, to the
refinancing
problems described
above), lower
long-term interest
rates can increase
the value
of higher-coupon
Agency RMBS.
This is because
investors typically
place a premium
on assets with
yields that
are higher than
market yields.
Although lower
long-term interest
rates may increase
asset values
in our portfolio,
we may not
be able to invest
new funds in
similarly-yielding
assets.
If prepayment
levels increase,
the value of
our Agency
RMBS affected
by such prepayments
may decline.
This is because
a principal
prepayment accelerates
the effective
term of an Agency
RMBS, which
would shorten
the period during
which an
investor would
receive above-market
returns (assuming
the yield on
the prepaid
asset is higher
than market
yields). Also,
prepayment proceeds
may not be able
to be reinvested
in similar-yielding
assets. Agency
RMBS backed
by mortgages
with
high interest
rates are more
susceptible
to prepayment
risk because
holders of those
mortgages are
most likely
to refinance
to
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
43
existence of
a principal
balance on the
underlying
mortgages. If
the principal
balance is
eliminated due
to prepayment,
IOs and
IIOs essentially
become
worthless. Although
increased prepayment
rates can negatively
affect the value
of our IOs
and IIOs,
they have the
opposite effect
on POs. Because
POs act like
zero-coupon
bonds, meaning
they are purchased
at a discount
to
their par value
and have an
effective interest
rate based on
the discount
and the term
of the underlying
loan, an increase
in
prepayment rates
would reduce
the effective
term of our
POs and accelerate
the yields
earned on those
assets, which
would
increase our
net income.
Higher long-term
rates can also
affect the value
of our Agency
RMBS.
As long-term
rates rise,
rates available
to
borrowers also
rise.
This tends to
cause prepayment
activity
to slow and
extend the expected
average life
of mortgage
cash
flows.
As the expected
average life
of the mortgage
cash flows
increases,
coupled with
higher discount
rates, the
value of
Agency RMBS
declines.
Some of the instruments
the Company
uses to hedge
our Agency
RMBS assets,
such as interest
rate futures,
swaps and swaptions,
are stable average
life instruments.
This means
that to the extent
we use such
instruments
to hedge our
Agency RMBS
assets, our
hedges may not
adequately protect
us from price
declines, and
therefore may
negatively impact
our book value.
It is for this
reason we use
interest only
securities
in our portfolio.
As interest
rates rise,
the
expected average
life of these
securities
increases, causing
generally positive
price movements
as the number
and size of
the
cash flows
increase the
longer the underlying
mortgages remain
outstanding.
This makes
interest only
securities
desirable
hedge instruments
for pass-through
Agency RMBS.
As described
above, the Agency
RMBS market
began to experience
severe dislocations
in mid-March
2020 as a result
of
the economic,
health and market
turmoil brought
about by COVID-19.
In March of
2020, the Fed
announced that
it would
purchase Agency
RMBS and U.S.
Treasuries in
the amounts needed
to support
smooth market
functioning,
which largely
stabilized
the Agency RMBS
market, a commitment
it reaffirmed
at all subsequent
Fed meetings.
At the June 2021
meeting,
the Fed agreed
to begin to
discuss plans
for adjusting
the path and
composition
of asset purchases,
but reiterated
the intention
to provide notice
well in advance
of an announcement
to reduce the
pace of such
purchases.
If the Fed modifies,
reduces or
suspends its
purchases of
Agency RMBS,
our investment
portfolio could
be negatively
impacted. Further,
the moratoriums
on
foreclosures
and evictions
described above
will likely
delay potential
defaults on loans
that would otherwise
be bought out
of
Agency MBS pools
as described
above.
Depending on
the ultimate
resolution
of the foreclosure
or evictions,
when and if
it
occurs, these
loans may be
removed from
the pool into
which they were
securitized.
If this were
to occur, it would
have the
effect of delaying
a prepayment
on the Company’s
securities
until such time.
As the majority
of the Company’s
Agency RMBS
assets were
acquired at
a premium
to par, this will
tend to increase
the realized
yield on the
asset in question.
Because we base
our investment
decisions on
risk management
principles
rather than
anticipated
movements in
interest
rates, in a
volatile interest
rate environment
we may allocate
more capital
to structured
Agency RMBS
with shorter
durations.
We believe these
securities
have a lower
sensitivity
to changes in
long-term
interest rates
than other asset
classes. We
may
attempt to mitigate
our exposure
to changes in
long-term
interest rates
by investing
in IOs and IIOs,
which typically
have
different sensitivities
to changes in
long-term interest
rates than PT
RMBS, particularly
PT RMBS backed
by fixed-rate
mortgages.
Effects on our
borrowing costs
We leverage our
PT RMBS portfolio
and a portion
of our structured
Agency RMBS
with principal
balances through
the use
of short-term
repurchase agreement
transactions.
The interest
rates on our
debt are determined
by the short
term interest
rate
markets. An
increase in
the Fed Funds
rate or LIBOR
would increase
our borrowing
costs, which
could affect our
interest rate
spread if there
is no corresponding
increase in
the interest
we earn on our
assets. This
would be most
prevalent with
respect to
our Agency RMBS
backed by fixed
rate mortgage
loans because
the interest
rate on a
fixed-rate
mortgage loan
does not
change even though
market rates
may change.
In order to
protect our
net interest
margin against
increases in
short-term
interest rates,
we may enter
into interest
rate
swaps, which
economically
convert our
floating-rate
repurchase agreement
debt to fixed-rate
debt, or utilize
other hedging
instruments
such as Eurodollar,
Fed Funds and
T-Note futures
contracts or
interest rate
swaptions.
44
Summary
In contrast
to the four
quarters
that preceded
the second quarter
of 2021, COVID-19
did not suppress
the performance
of
the markets
and economy
in the second
quarter. The recovery
has been driven
by many factors
– the emergence
and
widespread distribution
of a very effective
vaccine, substantial
government stimulus
and accommodative
monetary policy. The
economy recovered
rapidly as an
effective vaccine
allowed pent-up
demand to lead
to a surge
in demand for
goods and
services,
fueled further
by multiple
rounds of stimulus
checks and numerous
other means
of financial
support provided
by the
government.
Financial markets
are benefiting
from extremely
loose financial
conditions, abundant
liquidity, high risk
tolerance
and an insatiable
demand for
returns.
The constraint
that both limits
the level of
activity and
is a driver
of price pressures
is the
lingering effect
of the pandemic
on labor force
participation
– or lack thereof.
A significant
part of the price
pressure observed
during the second
quarter was
driven by supply
shortages, which
are in turn
driven by under-staffed
producers of
various
goods and services.
This constraint
should be slowly
removed over
the balance of
2021 barring
a resurgence
of the
pandemic.
The economic
data released
during the second
quarter tells
the story quite
well.
GDP is estimated
to have expanded
at an
8.0% annualized
rate.
The housing market
is stronger
than the days
before the financial
crisis in the
late 2000s –
both in terms
of the number
of homes sold
and average prices
– which are
up over 23% year
over year in
June 2021 versus
June 2020 in
the case of existing
home sales.
Price pressures
are evident,
due to the combination
of constrained
supply channels
and
robust demand
– driven by
a strong combination
of pent-up
demand and government
stimulus.
The CPI increased
by well
over 5% year
over year in
June as well.
The Fed has
insisted these
price pressures
are temporary, and
the market
appears to
agree based on
the level of
long-term
U.S. Treasury
rates.
However, not all
members of the
FOMC or market
participants
agree.
Since the disagreement
stems from
the length of
time the price
pressures are
present in the
market, it
will be resolved
by the mere
passage of time.
Returns for the Agency RMBS market trailed most other sectors of the financial markets, both fixed income as well as
equities or high-yield.
The driver was the prospect the Fed would begin to taper their asset purchases as the economy fully
recovers.
This was especially the case in June, after the Fed concluded their FOMC meeting and revealed there was
divergence in views of committee members regarding the timing of this step.
While Fed leadership maintains this step is
still well into the future, the robustness of the housing market coupled with the growing divergence of views within the Fed
was enough for the markets to begin to price in a reduction in Fed asset purchases.
A second factor hurting the sector was
the rally in long-term interest rates that confounded many market participants.
Rates available to borrowers are back to
levels prevalent during the summer of 2020 and refinancing activity has re-accelerated, delaying once more burn-out for
higher coupon, more seasoned loans and driving premiums for specified pools slightly higher.
Critical Accounting Estimates
Our condensed financial statements are prepared in accordance with GAAP.
GAAP requires our management to make
some complex and subjective decisions and assessments. Our most critical accounting estimates involve decisions and
assessments which could significantly affect reported assets, liabilities, revenues and expenses.
There have been no
changes to our critical accounting estimates as discussed in our annual report on Form 10-K for the year ended December
31, 2020.
Capital Expenditures
At June 30, 2021, we had no material commitments for capital expenditures.
Off-Balance Sheet Arrangements
At June 30, 2021, we did not have any off-balance sheet arrangements.
Dividends
45
In addition to other requirements that must be satisfied to qualify as a REIT,
we must pay annual dividends to our
stockholders of at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and
excluding any net capital gains. REIT taxable income (loss) is computed in accordance with the Code, and can be greater
than or less than our financial statement net income (loss) computed in accordance with GAAP.
These book to tax
differences primarily relate to the recognition of interest income on RMBS, unrealized gains and losses on RMBS, and the
amortization of losses on derivative instruments that are treated as funding hedges for tax purposes.
We intend to pay regular monthly dividends to our stockholders and have declared the following dividends since the
completion of our IPO.
(in thousands, except per share amounts)
Year
Per Share
Amount
Total
2013
$
1.395
$
4,662
2014
2.160
22,643
2015
1.920
38,748
2016
1.680
41,388
2017
1.680
70,717
2018
1.070
55,814
2019
0.960
54,421
2020
0.790
53,570
2021 - YTD
(1)
0.455
45,460
Totals
$
12.110
$
387,423
(1)
On July 14, 2021, the Company declared a dividend of $0.065 per share
to be paid on August 27, 2021.
The effect of this dividend is included
in the table above, but is not reflected in the Company’s financial statements
as of June 30, 2021.
Inflation
Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors
influence our performance far more so than does inflation. Changes in interest rates do not necessarily correlate with
inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with GAAP and our
distributions will be determined by our Board of Directors consistent with our obligation to distribute to our stockholders at
least 90% of our REIT taxable income on an annual basis in order to maintain our REIT qualification; in each case, our
activities and balance sheet are measured with reference to historical cost and/or fair market value without considering
inflation.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET
RISK
Market risk is the exposure to loss resulting from changes in market factors such as interest rates, foreign currency
exchange rates, commodity prices and equity prices. The primary market risks that we are exposed to are interest rate risk,
prepayment risk, spread risk, liquidity risk, extension risk and counterparty credit risk.
Interest Rate Risk
Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and
international economic and political considerations and other factors beyond our control.
Changes in the general level of interest rates can affect our net interest income, which is the difference between the
interest income earned on interest-earning assets and the interest expense incurred in connection with our interest-bearing
liabilities, by affecting the spread between our interest-earning assets and interest-bearing liabilities. Changes in the level of
46
interest rates can also affect the rate of prepayments of our securities and the value of the RMBS that constitute our
investment portfolio, which affects our net income, ability to realize gains from the sale of these assets and ability to borrow,
and the amount that we can borrow against these securities.
We may utilize a variety of financial instruments in order to limit the effects of changes in interest rates on our
operations. The principal instruments that we use are futures contracts, interest rate swaps and swaptions. These
instruments are intended to serve as an economic hedge against future interest rate increases on our repurchase
agreement borrowings.
Hedging techniques are partly based on assumed levels of prepayments of our Agency RMBS.
If
prepayments are slower or faster than assumed, the life of the Agency RMBS will be longer or shorter, which would reduce
the effectiveness of any hedging strategies we may use and may cause losses on such transactions.
Hedging strategies
involving the use of derivative securities are highly complex and may produce volatile returns.
Hedging techniques are also
limited by the rules relating to REIT qualification.
In order to preserve our REIT status, we may be forced to terminate a
hedging transaction at a time when the transaction is most needed.
Our profitability and the value of our investment portfolio (including derivatives used for hedging purposes) may be
adversely affected during any period as a result of changing interest rates, including changes in the forward yield curve.
Our portfolio of PT RMBS is typically comprised of adjustable-rate RMBS (“ARMs”),
fixed-rate RMBS and hybrid
adjustable-rate RMBS. We generally seek to acquire low duration assets that offer high levels of protection from mortgage
prepayments provided that they are reasonably priced by the market.
Although the duration of an individual asset can
change as a result of changes in interest rates, we strive to maintain a hedged PT RMBS portfolio with an effective duration
of less than 2.0. The stated contractual final maturity of the mortgage loans underlying our portfolio of PT RMBS generally
ranges up to 30 years. However, the effect of prepayments of the underlying mortgage loans tends to shorten the resulting
cash flows from our investments substantially. Prepayments occur for various reasons, including refinancing of underlying
mortgages and loan payoffs in connection with home sales,
and borrowers paying more than their scheduled loan
payments, which accelerates the amortization of the loans.
The duration of our IO and IIO portfolios will vary greatly depending on the structural features of the securities.
While
prepayment activity will always affect the cash flows associated with the securities, the interest only nature of IOs may
cause their durations to become extremely negative when prepayments are high, and less negative when prepayments are
low.
Prepayments affect the durations of IIOs similarly, but the float
ing rate nature of the coupon of IIOs (which is inversely
related to the level of one month LIBOR) causes
their price movements, and model duration, to be affected by changes in
both prepayments and one month LIBOR, both current and anticipated levels.
As a result, the duration of IIO securities will
also vary greatly.
Prepayments on the loans underlying our RMBS can alter the timing of the cash flows from the underlying loans to us.
As a result, we gauge the interest rate sensitivity of our assets by measuring their effective duration. While modified duration
measures the price sensitivity of a bond to movements in interest rates, effective duration captures both the movement in
interest rates and the fact that cash flows to a mortgage related security are altered when interest rates move. Accordingly,
when the contract interest rate on a mortgage loan is substantially above prevailing interest rates in the market, the effective
duration of securities collateralized by such loans can be quite low because of expected prepayments.
We face the risk that the market value of our PT RMBS assets will increase or decrease at different rates than that of
our structured RMBS or liabilities, including our hedging instruments. Accordingly,
we assess our interest rate risk by
estimating the duration of our assets and the duration of our liabilities. We generally calculate duration using various third
party models.
However, empirical results and various third party models may produce different duration numbers for the
same securities.
The following sensitivity analysis shows the estimated impact on the fair value of our interest rate-sensitive investments
and hedge positions as of June 30, 2021 and December 31, 2020, assuming rates instantaneously fall 200 bps, fall 100
bps, fall 50 bps, rise 50 bps, rise 100 bps and rise 200 bps, adjusted to reflect the impact of convexity, which is the
measure
47
of the sensitivity of our hedge positions and Agency RMBS’ effective duration to movements in interest rates.
All changes in value in the table below are measured as percentage changes from the investment portfolio value and
net asset value at the base interest rate scenario. The base interest rate scenario assumes interest rates and prepayment
projections as of June 30, 2021 and December 31, 2020.
Actual results could differ materially from estimates, especially in the current market environment. To
the extent that
these estimates or other assumptions do not hold true, which is likely in a period of high price volatility, actual results will
likely differ materially from projections and could be larger or smaller than the estimates in the table below. Moreover,
if
different models were employed in the analysis, materially different projections could result. Lastly,
while the table below
reflects the estimated impact of interest rate increases and decreases on a static portfolio, we may from time to time sell any
of our agency securities as a part of the overall management of our investment portfolio.
Interest Rate Sensitivity
(1)
Portfolio
Market
Book
Change in Interest Rate
Value
(2)(3)
Value
(2)(4)
As of June 30, 2021
-200 Basis Points
(0.71)%
(6.01)%
-100 Basis Points
0.27%
2.26%
-50 Basis Points
0.37%
3.12%
+50 Basis Points
(0.96)%
(8.09)%
+100 Basis Points
(2.37)%
(19.96)%
+200 Basis Points
(5.88)%
(49.61)%
As of December 31, 2020
-200 Basis Points
2.43%
21.85%
-100 Basis Points
1.35%
12.08%
-50 Basis Points
0.69%
6.18%
+50 Basis Points
(0.90)%
(8.03)%
+100 Basis Points
(2.39)%
(21.42)%
+200 Basis Points
(6.60)%
(59.22)%
(1)
Interest rate sensitivity is derived from models that are dependent
on inputs and assumptions provided by third parties as well as by our
Manager, and assumes there are no
changes in mortgage spreads and assumes a static portfolio. Actual results could
differ materially from
these estimates.
(2)
Includes the effect of derivatives and other securities used for
hedging purposes.
(3)
Estimated dollar change in investment portfolio value expressed as a
percent of the total fair value of our investment portfolio as of such
date.
(4)
Estimated dollar change in portfolio value expressed as a percent of stockholders'
equity as of such date.
In addition to changes in interest rates, other factors impact the fair value of our interest rate-sensitive investments,
such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions.
Accordingly, in the event of changes in actual interest rates, the change in the fair value of our assets would likely differ
from
that shown above and such difference might be material and adverse to our stockholders.
Prepayment Risk
Because residential borrowers have the option to prepay their mortgage loans at par at any time, we face the risk that
we will experience a return of principal on our investments faster than anticipated. Various factors affect
the rate at which
mortgage prepayments occur, including changes in the level of and directional trends in housing prices, interest rates,
general economic conditions, loan age and size, loan-to-value ratio, the location of the property and social and demographic
conditions. Additionally, changes to government sponsored entity underwriting practices or other governmental programs
could also significantly impact prepayment rates or expectations. Generally, prepayments on Agency
RMBS increase during
periods of falling mortgage interest rates and decrease during periods of rising mortgage interest rates. However, this may
48
not always be the case.
We may reinvest principal repayments at a yield that is lower or higher than the yield on the repaid
investment, thus affecting our net interest income by altering the average yield on our assets.
Spread Risk
When the market spread widens between the yield on our Agency RMBS and benchmark interest rates, our net book
value could decline if the value of our Agency RMBS falls by more than the offsetting fair value increases on our hedging
instruments tied to the underlying benchmark interest rates. We refer to this as "spread risk" or "basis risk." The spread risk
associated with our mortgage assets and the resulting fluctuations in fair value of these securities can occur independent of
changes in benchmark interest rates and may relate to other factors impacting the mortgage and fixed income markets,
such as actual or anticipated monetary policy actions by the Fed, market liquidity, or changes in required rates of return on
different assets. Consequently, while we use futures contracts and
interest rate swaps and swaptions to attempt to protect
against moves in interest rates, such instruments typically will not protect our net book value against spread risk.
Liquidity Risk
The primary liquidity risk for us arises from financing long-term assets with shorter-term borrowings through repurchase
agreements. Our assets that are pledged to secure repurchase agreements are Agency RMBS and cash. As of June 30,
2021, we had unrestricted cash and cash equivalents of $272.8 million and unpledged securities of approximately $5.7
million (not including securities pledged to us) available to meet margin calls on our repurchase agreements and derivative
contracts, and for other corporate purposes. However, should the value of our Agency RMBS pledged as collateral or the
value of our derivative instruments suddenly decrease, margin calls relating to our repurchase and derivative agreements
could increase, causing an adverse change in our liquidity position. Further, there is no assurance that we will always be
able to renew (or roll) our repurchase agreements. In addition, our counterparties have the option to increase our haircuts
(margin requirements) on the assets we pledge against repurchase agreements, thereby reducing the amount that can be
borrowed against an asset even if they agree to renew or roll the repurchase agreement. Significantly higher haircuts can
reduce our ability to leverage our portfolio or even force us to sell assets, especially if correlated with asset price declines or
faster prepayment rates on our assets.
Extension Risk
The projected weighted average life and the duration (or interest rate sensitivity) of our investments is based on our
Manager's assumptions regarding the rate at which the borrowers will prepay the underlying mortgage loans. In general, we
use futures contracts and interest rate swaps and swaptions to help manage our funding cost on our investments in the
event that interest rates rise. These hedging instruments allow us to reduce our funding exposure on the notional amount of
the instrument for a specified period of time.
However, if prepayment rates decrease in a rising interest rate environment, the average life or duration of our fixed-
rate assets or the fixed-rate portion of the ARMs or other assets generally extends. This could have a negative impact on
our results from operations, as our hedging instrument expirations are fixed and will, therefore, cover a smaller percentage
of our funding exposure on our mortgage assets to the extent that their average lives increase due to slower prepayments.
This situation may also cause the market value of our Agency RMBS and CMOs collateralized by fixed rate mortgages or
hybrid ARMs to decline by more than otherwise would be the case while most of our hedging instruments would not receive
any incremental offsetting gains. In extreme situations, we may be forced to sell assets to maintain adequate liquidity,
which
could cause us to incur realized losses.
Counterparty Credit Risk
We are exposed to counterparty credit risk relating to potential losses that could be recognized in the event that the
counterparties to our repurchase agreements and derivative contracts fail to perform their obligations under such
agreements. The amount of assets we pledge as collateral in accordance with our agreements varies over time based on
49
the market value and notional amount of such assets as well as the value of our derivative contracts. In the event of a
default by a counterparty, we may not receive payments provided for
under the terms of our agreements and may have
difficulty obtaining our assets pledged as collateral under such agreements. Our credit risk related to certain derivative
transactions is largely mitigated through daily adjustments to collateral pledged based on changes in market value and we
limit our counterparties to registered central clearing exchanges and major financial institutions with acceptable credit
ratings, monitoring positions with individual counterparties and adjusting collateral posted as required. However, there is no
guarantee our efforts to manage counterparty credit risk will be successful and we could suffer significant losses if
unsuccessful.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report (the “evaluation date”), we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive Officer (the “CEO”) and Chief
Financial Officer (the “CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures, as
defined in Rule 13a-15(e) under the Exchange Act. Based on this evaluation, the CEO and CFO concluded our disclosure
controls and procedures, as designed and implemented, were effective as of the evaluation date (1) in ensuring that
information regarding the Company is accumulated and communicated to our management, including our CEO and CFO,
by our employees, as appropriate to allow timely decisions regarding required disclosure and (2) in providing reasonable
assurance that information we must disclose in our periodic reports under the Exchange Act is recorded, processed,
summarized and reported within the time periods prescribed by the SEC’s rules and forms.
Changes in Internal Controls over Financial Reporting
There were no significant changes in the Company’s internal control over financial reporting that occurred during the
Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
50
PART II. OTHER
INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
We are not party to any material pending legal proceedings as described in Item 103 of Regulation
S-K.
ITEM 1A. RISK FACTORS
A description
of certain
factors that
may affect our
future results
and risk factors
is set forth
in our Annual
Report on Form
10-K
for the year
ended December
31, 2020. As of
June 30, 2021,
there have
been no material
changes in our
risk factors
from those
set forth in
our Annual Report
on Form 10-K
for the year
ended December
31, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The table below
presents the
Company’s share
repurchase activity
for the three
months ended
June 30, 2021.
Shares Purchased
Maximum Number
Total Number
Weighted-Average
as Part of Publicly
of Shares That May Yet
of Shares
Price Paid
Announced
Be Repurchased Under
Repurchased
(1)
Per Share
Programs
(2)
the Authorization
(2)
April 1, 2021 - April 30, 2021
-
$
-
-
837,311
May 1, 2021 - May 31, 2021
-
-
-
837,311
June 1, 2021 - June 30, 2021
311
5.23
-
837,311
Totals / Weighted Average
311
$
5.23
-
837,311
(1)
Includes shares
of the Company’s
common stock
acquired by the
Company in connection
with the satisfaction
of tax withholding
obligations on
vested employment-related
awards under
equity incentive
plans. These repurchases
do not reduce
the number of shares
available under
the stock
repurchase program
authorization.
(2)
On July 29,
2015, the Company's
Board of Directors
authorized the
repurchase of
up to 2,000,000
shares of the
Company's common
stock. On
February 8,
2018, the Board
of Directors
approved an increase
in the stock
repurchase program
for up to an
additional 4,522,822
shares of the
Company's common
stock. Unless
modified or
revoked by the
Board, the authorization
does not expire.
The Company
did not have
any unregistered
sales of its
equity securities
during the three
months ended
June 30, 2021.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.
MINE SAFETY
DISCLOSURES
Not Applicable.
ITEM 5.
OTHER INFORMATION
None.
51
ITEM 6. EXHIBITS
Exhibit No.
3.1
and incorporated herein by reference).
3.2
Report on Form 10-K filed on February 22, 2019 and incorporated herein by reference).
3.3
Report on Form 8-K filed on March 19, 2019 and incorporated herein by reference).
4.1
and incorporated herein by reference).
10.1
Form 8-K filed on June 15, 2021) †
31.1
302 of the Sarbanes-Oxley Act of 2002.*
31.2
32.1
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
32.2
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
Exhibit 101.INS XBRL
Inline XBRL Instance Document – the instance document does not appear in the
Interactive Data File because its XBRL tags are embedded within the Inline XBRL
document.***
Exhibit 101.SCH XBRL
Taxonomy Extension Schema Document ***
Exhibit 101.CAL XBRL
Taxonomy Extension Calculation Linkbase Document***
Exhibit 101.DEF XBRL
Additional Taxonomy Extension Definition Linkbase Document Created***
Exhibit 101.LAB XBRL
Taxonomy Extension Label Linkbase Document ***
Exhibit 101.PRE XBRL
Taxonomy Extension Presentation Linkbase Document ***
Exhibit 104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
* Filed
herewith.
** Furnished herewith.
*** Submitted
electronically herewith.
† Management contract or compensatory plan.
52
Signatures
Pursuant to the requirements of
Section 13 or 15(d) of
the Securities Exchange Act of
1934, as amended, the registrant
has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Orchid Island Capital, Inc
.
Registrant
Date:
July 30, 2021
By:
/s/ Robert E. Cauley
Robert E. Cauley
Chief Executive Officer, President and Chairman of the Board
(Principal Executive Officer)
Date:
July 30, 2021
By:
/s/ George H. Haas, IV
George H. Haas,
IV
Secretary, Chief Financial Officer, Chief Investment Officer and
Director (Principal Financial and Accounting Officer)
orc10q20210630x311
1
Exhibit 31.1
CERTIFICATIONS
I, Robert E. Cauley,
certify that:
1.
I have reviewed this quarterly report on Form 10
-Q of Orchid Island Capital, Inc. (the "registrant");
2.
Based on my knowledge, this report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other
financial information included in this report, fairly
present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for,
the periods
presented in this report;
4.
The registrant's other certifying officer and
I are responsible for establishing and maintaining disclosure
controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined
in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a)
designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries,
is
made known to us by others within those entities, particularly during
the period in which this report is being prepared;
b)
designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c)
evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by this
report based on such evaluation; and
d)
disclosed in this report any change in the registrant’s
internal control over financial reporting that occurred during
the
registrant’s most recent
fiscal quarter (the registrant’s fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant’s internal
control over financial reporting; and
5.
The registrant's other certifying officer and
I have disclosed, based on our most recent evaluation of internal
control over
financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or
persons
performing the equivalent functions):
a)
all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report financial
information; and
b)
any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: July 30, 2021
/s/ Robert E. Cauley
Robert E. Cauley
Chairman of the Board, Chief Executive Officer
and
President
orc10q20210630x312
1
Exhibit 31.2
CERTIFICATIONS
I, George H. Haas, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Orchid Island Capital,
Inc. (the "registrant");
2.
Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances
under which such statements were
made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly
present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and
for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining
disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be
designed under our supervision, to ensure that material information relating
to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in
which this report is being prepared;
b)
designed such internal control over financial reporting, or caused such
internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial
reporting and the preparation of financial statements for external purposes
in accordance with generally
accepted accounting principles;
c)
evaluated the effectiveness of the registrant's disclosure controls and procedures and
presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period
covered by this report based on such evaluation; and
d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most
recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of
the registrant's board of directors (or
persons performing the equivalent functions):
a)
all significant deficiencies and material weaknesses in the design or
operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record,
process, summarize
and report financial information; and
b)
any fraud, whether or not material, that involves management or other
employees who have a significant role in
the registrant's internal control over financial reporting.
2
Date: July 30, 2021
/s/ George H. Haas, IV
George H. Haas, IV
Chief Financial Officer
orc10q20210630x321
1
Exhibit 32.1
CERTIFICATION
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 10 U.S.C. SECTION 1350
In connection with the quarterly report on Form 10-Q of Orchid Island Capital,
Inc. (the “Company”) for the period ended
June 30, 2021 to be filed with the Securities and Exchange Commission on
or about the date hereof (the ”Report”), I,
Robert E. Cauley, Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as
amended; and
2.
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of
operations of the Company at the dates of, and for the periods covered
by, the Report.
It is not intended that this statement be deemed to be filed for purposes of the
Securities Exchange Act of 1934.
July 30, 2021
/s/ Robert E. Cauley
Robert E. Cauley,
Chairman of the Board and
Chief Executive Officer
orc10q20210630x322
1
Exhibit 32.2
CERTIFICATION
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 10 U.S.C. SECTION 1350
In connection with the quarterly report on Form 10-Q of Orchid Island Capital,
Inc. (the “Company”) for the period ended
June 30, 2021 to be filed with the Securities and Exchange Commission on
or about the date hereof (the ”Report”), I,
George H. Haas, Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350, that:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as
amended; and
2.
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of
operations of the Company at the dates of, and for the periods covered
by, the Report.
It is not intended that this statement be deemed to be filed for purposes of the
Securities Exchange Act of 1934.
July 30, 2021
/s/ George H. Haas, IV
George H. Haas, IV
Chief Financial Officer