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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
JuneSeptember 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
 
check mark
whether the
 
registrant (1) has filed
 
filed all
reports required
 
to be filed
 
filed by
Section 13 or
 
15(d) of the
 
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
 
the registrant has submitted electronically every
 
every Interactive Data File required
 
to be submitted pursuant to
 
to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
 
(ormonths (or for such shorter period that the registrant was required
 
required to submit such
files).
 
Yes
☒
 
No
☐
Indicate by check mark whether the registrant is a
 
a large accelerated filer, an accelerated filer,
 
an accelerated filer, a non-accelerated filer,
a smaller reporting company,
 
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
 
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,October 28, 2021:
123,060,013
161,157,349
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)
JuneSeptember 30, 2021
December 31,
2021
2020
ASSETS:
Mortgage-backed securities, at fair value (includes pledged assets
Pledged to counterparties
of $
4,665,5785,415,198
and $
3,719,906
Unpledged, respectively)
5,661$
6,9895,601,423
Total mortgage$
3,726,895
U.S. Treasury Notes, at fair value (includes pledged assets of $
29,927
 
-backed securitiesand $0, respectively)
4,671,23937,409
3,726,8950
Cash and cash equivalents
272,842424,133
220,143
Restricted cash
106,87651,111
79,363
Accrued interest receivable
12,54715,241
9,721
Derivative assets
43,73547,383
20,999
Receivable for securities sold, pledged to counterparties
0
414
Other assets
688442
516
Total Assets
$
5,107,9276,177,142
$
4,058,051
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements
$
4,514,7045,213,869
$
3,595,586
Payable for unsettled securities purchased
180,619
0
Dividends payable
7,6639,991
4,970
Derivative liabilities
16,76910,288
33,227
Accrued interest payable
1,042753
1,157
Due to affiliates
794935
632
Other liabilities
13,13430,058
7,188
Total Liabilities
4,554,1065,446,513
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 JuneSeptember 30, 2021 and December 31, 2020
0
0
Common Stock, $
0.01
 
par value;
500,000,000
 
shares authorized,
117,500,013153,318,351
shares issued and outstanding as of JuneSeptember 30, 2021 and
76,073,317
 
shares issued
and outstanding as of December 31, 2020
1,1751,533
761
Additional paid-in capital
616,874767,286
432,524
Accumulated deficit
(64,228)(38,190)
(17,994)
Total Stockholders' Equity
553,821730,629
415,291
Total Liabilities
 
and Stockholders' Equity
$
5,107,9276,177,142
$
4,058,051
See Notes to Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS
 
OF OPERATIONS
(Unaudited)
For the Three and SixNine Months Ended JuneSeptember 30, 2021 and
2020
($ in thousands, except per share data)
SixNine Months Ended JuneSeptember 30,
Three Months Ended JuneSeptember 30,
2021
2020
2021
2020
Interest income
$
56,11090,279
$
62,92990,152
$
29,25434,169
$
27,25827,223
Interest expense
(3,497)(5,067)
(21,002)(23,045)
(1,556)(1,570)
(4,479)(2,043)
Net interest income
52,61385,212
41,92767,107
27,69832,599
22,77925,180
Realized (losses) gains on mortgage-backed securities
(6,045)(3,068)
(25,020)(24,522)
1,3522,977
3,360498
Unrealized (losses) gains on mortgage-backed securities
(96,147)(107,386)
37,27238,440
(7,281)(11,239)
34,2401,168
Gains (losses) on derivative and other hedging instruments
10,55715,932
(91,709)(87,630)
(34,915)5,375
(8,851)4,079
Net portfolio (loss) income
(39,022)(9,310)
(37,530)(6,605)
(13,146)29,712
51,52830,925
Expenses:
Management fees
3,4135,569
2,6453,897
1,7922,156
1,2681,252
Allocated overhead
7991,189
6951,072
395390
348377
Accrued incentive compensation
625884
(275)(117)
261259
161158
Directors' fees and liability insurance
595874
508750
323279
248242
Audit, legal and other professional fees
620832
601841
302212
346240
Direct REIT operating expenses
7151,024
446852
294309
240406
Other administrative
445514
277451
35269
145174
Total expenses
7,21210,886
4,8977,746
3,7193,674
2,7562,849
Net (loss) income
$
(46,234)(20,196)
$
(42,427)(14,351)
$
(16,865)26,038
$
48,77228,076
Basic net (loss) income per share
$
(0.50)(0.19)
$
(0.65)(0.22)
$
(0.17)0.20
$
0.740.42
Diluted net (loss) income per share
$
(0.50)(0.19)
$
(0.65)(0.22)
$
(0.17)0.20
$
0.730.42
Weighted Average Shares Outstanding
92,456,082105,305,772
65,408,72266,014,379
99,489,065128,587,347
66,310,21967,301,901
Dividends declared per common share
$
0.3900.585
$
0.4050.595
$
0.195
$
0.1650.190
See Notes to Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS
 
OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Three and SixNine Months Ended JuneSeptember 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
-
0
0
(91,199)
(91,199)
Cash dividends declared
-
0
(15,670)
0
(15,670)
Issuance of common stock pursuant to public offerings, net
3,171
31
19,416
0
19,447
Stock based awards and amortization
4
0
59
0
59
Balances, March 31, 2020
66,237
$
662
$
418,803
$
(111,321)
$
308,144
Net income
-
0
0
48,772
48,772
Cash dividends declared
-
0
(10,935)
0
(10,935)
Stock based awards and amortization
4
0
55
0
55
Shares repurchased and retired
(20)
0
(68)
0
(68)
Balances, June 30, 2020
66,221
$
662
$
407,855
$
(62,549)
$
345,968
Net income
-
0
0
28,076
28,076
Cash dividends declared
-
0
(12,920)
0
(12,920)
Issuance of common stock pursuant to public offerings, net
3,073
31
15,535
0
15,566
Stock based awards and amortization
2
0
51
0
51
Balances, September 30, 2020
69,296
$
693
$
410,521
$
(34,473)
$
376,741
Balances, January 1, 2021
76,073
$
761
$
432,524
$
(17,994)
$
415,291
Net loss
-
0
0
(29,369)
(29,369)
Cash dividends declared
-
0
(17,226)
0
(17,226)
Issuance of common stock pursuant to public offerings, net
18,248
182
96,726
0
96,908
Stock based awards and amortization
90
1
571
0
572
Balances, March 31, 2021
94,411
$
944
$
512,595
$
(47,363)
$
466,176
Net loss
-
0
0
(16,865)
(16,865)
Cash dividends declared
-
0
(20,416)
0
(20,416)
Issuance of common stock pursuant to public offerings, net
23,087
231
124,515
0
124,746
Stock based awards and amortization
2
0
180
0
180
Balances, June 30, 2021
117,500
$
1,175
$
616,874
$
(64,228)
$
553,821
Net income
-
0
0
26,038
26,038
Cash dividends declared
-
0
(26,420)
0
(26,420)
Issuance of common stock pursuant to public offerings, net
35,818
358
176,649
0
177,007
Stock based awards and amortization
0
0
183
0
183
Balances, September 30, 2021
153,318
$
1,533
$
767,286
$
(38,190)
$
730,629
See Notes to Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS
 
OF CASH FLOWS
(Unaudited)
For the SixNine Months Ended JuneSeptember 30, 2021 and 2020
($ in thousands)
2021
2020
CASH FLOWS FROM OPERATING
 
ACTIVITIES:
Net loss
$
(46,234)(20,196)
$
(42,427)(14,351)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Stock based compensation
429612
114167
Realized and unrealized losses (gains) on mortgage-backed securities
102,192110,423
(12,252)(13,918)
Realized and unrealized (gains)Unrealized losses on interest rate swaptionsU.S. Treasury Notes
(4,838)
5,090
Realized and unrealized gains on interest rate floors
(1,384)31
0
Realized and unrealized (gains) losses on interest rate swapsderivative instruments
(12,650)(22,180)
64,357
Realized and unrealized losses on U.S. Treasury securities
0
131
Realized losses on forward settling to-be-announced securities
5,389
5,24467,744
Changes in operating assets and liabilities:
Accrued interest receivable
(2,826)(5,449)
2,1632,137
Other assets
(172)74
(580)(533)
Accrued interest payable
(115)(404)
(10,395)(10,349)
Other liabilities
(1,305)(2,031)
67116
Due to (from) affiliates
162303
(53)(32)
NET CASH PROVIDED BY OPERATING
 
ACTIVITIES
38,64861,183
12,06330,881
CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases
(2,986,864)(4,816,301)
(1,985,756)(2,898,616)
Sales
1,680,9032,598,893
2,023,3342,692,230
Principal repayments
259,425413,005
260,834384,314
Proceeds fromPurchases of U.S. Treasury securitiesNotes
(37,440)
0
139,712
Net payments on reverse repurchase agreements
0
(139,738)30
Payments on net settlement of to-be-announced securitiesNet proceeds from (payments on) derivative instruments
(3,077)(1,228)
(6,888)
Purchase of derivative financial instruments, net of margin cash received
(14,369)
(64,190)(68,223)
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
(1,063,982)(1,843,071)
227,308109,735
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements
13,582,42222,995,280
20,879,11227,995,556
Principal payments on repurchase agreements
(12,663,304)(21,376,997)
(21,152,479)(28,162,359)
Cash dividends
(34,927)(59,019)
(28,008)(40,065)
Proceeds from issuance of common stock, net of issuance costs
221,654398,661
19,44735,013
Shares withheld from employee stock awards for payment of taxes
(299)
(68)(70)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
1,105,5461,957,626
(281,996)(171,925)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS
 
AND RESTRICTED CASH
80,212175,738
(42,625)(31,309)
CASH, CASH EQUIVALENTS AND
 
AND RESTRICTED CASH, beginning of the period
299,506
278,655
CASH, CASH EQUIVALENTS AND
 
AND RESTRICTED CASH, end of the period
$
379,718475,244
$
236,030247,346
SUPPLEMENTAL DISCLOSURE OF
 
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest
$
3,6115,471
$
31,39733,395
SUPPLEMENTAL DISCLOSURE OF
NONCASH INVESTING ACTIVITIES:
Securities acquired settled in later period
$
180,619
$
113,653
See Notes to Financial Statements
5
ORCHID ISLAND
 
CAPITAL, INC.
NOTES TO CONDENSED
 
FINANCIAL
 
STATEMENTS
(Unaudited)
JUNE 30,SEPTEMBER
 
30, 2021
NOTE 1.
 
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
 
and Business
 
Description
Orchid Island
 
Capital, Inc.
 
(“Inc. (“Orchid” or
 
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,
 
20, 2013,
 
Orchid was
 
a wholly owned
 
owned subsidiary
 
of Bimini Capital
 
Capital Management,
 
Inc. (“Bimini”).
 
Orchid began
 
operations
 
on
November 24,
 
24, 2010 (the
 
(the date
of commencement
 
of operations).
 
From incorporation
 
through November
 
24, 2010,
 
Orchid’s only
 
activity
was the issuance
 
of common stock
 
stock to Bimini.
 
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
 
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
 
2020 Equity Distribution Agreement”) with
four sales agents pursuant to which the Company could offer and sell, from time to time, up
 
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
 
(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 JuneSeptember 30, 2021, the Company issued a total of
5,750,00041,568,338
 
shares under the June 2021 Equity Distribution
Agreement for aggregate gross proceeds of approximately $
31.1211.0
 
million, and net proceeds of approximately $
30.6207.5
 
million, after
commissions and fees. Subsequent to JuneSeptember 30, 2021 and through July 30, 2021,October
 
28, 2021, the Company issued a total of
5,560,0007,838,998
shares
under the June 2021 Equity Distribution Agreement for aggregate
gross proceeds
of approximately $
28.639.0
 
million, and net
proceeds of
approximately $
28.238.4
 
million, after commissions and fees.
COVID-19 Impact
Beginning
 
in mid-March
 
2020, the
 
global pandemic
 
associated
 
with the novel
 
novel coronavirus
 
(“COVID-19”)
 
and related
 
economic
conditions
 
began to impact
 
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
 
our assets and
 
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
 
U.S. Federal Reserve
 
Reserve (the
“Fed”) announced
 
on March 23,
 
23, 2020 that
 
that it would
purchase
 
Agency
RMBS and
 
and U.S. Treasuries
 
Treasuries in
the amounts
 
needed to
 
support smooth
 
market functioning.
 
As of JuneSeptember
 
30, 2021,
 
we
have timely
 
satisfied all
margin calls.
 
The RMBSall margin
 
calls. The
RMBS market
continues
 
to react to
 
to the pandemic
 
and the various
 
various measures put
 
put in place to
 
to
stabilize the
 
the market.
 
To the
extent the
 
financial or
 
or mortgage markets
 
markets do
not respond
 
favorably to
 
to any of
these actions,
or such
 
actions ordo
such actions
do not function
 
as intended,
 
our
business, results
 
results of
operations
 
and financial
 
condition may
 
may continue to
 
to be materially
 
adversely
 
affected.
Although
 
the Company
 
cannot
estimate the
 
the length or
 
or gravity of
 
of the impact
 
of the COVID-19
 
pandemic at
 
this time,
 
it may have
 
a material
adverse effect
 
on the
Company’s results
 
results of future
 
future operations,
 
financial
position,
 
and liquidityliquidity.
 
during 2021.
Basis of
 
Presentation
 
and Use of
 
Estimates
The accompanying
 
unaudited
 
financial
 
statements
 
have been
 
prepared in
 
in accordance
 
with accounting
 
principles
 
generally
 
accepted
in the United
 
States (“GAAP”)
 
for interim
 
financial
information
 
and with the
 
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
 
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 sixnine and
 
three month
 
period ended
 
June September
30, 2021
 
are not necessarily
 
indicative
 
of the results
 
that may
 
be
expected for
 
the year ending
 
ending December 31,
 
31, 2021.
The balance
 
sheet at
December
 
31, 2020 has
 
been derived
 
from the audited
 
audited financial
statements
 
at that date
 
but does not
 
not include
all
of the information
 
and footnotes
 
required by
 
by GAAP for
 
complete financial
 
statements.
 
For further
 
information,
 
refer to the
 
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
 
and expenses during
 
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
 
RMBS and
derivatives.
 
Management
 
believes
the estimates
 
and assumptions
 
underlying
 
the financial
 
statements
 
are reasonable
 
based on the
 
the information
 
available as
 
as of June 30,September
 
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
 
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
 
cash equivalents
 
include cash
 
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
 
cash equivalents,
 
and restricted
 
cash reported
 
within the
 
statement
 
of financial
position that
 
sum to the
 
total of the
 
the same
such amounts
 
shown in
 
the statement
 
of cash flows.
(in thousands)
JuneSeptember 30, 2021
December 31, 2020
Cash and cash equivalents
$
272,842424,133
$
220,143
Restricted cash
106,87651,111
79,363
Total cash, cash equivalents
 
and restricted cash
$
379,718475,244
$
299,506
The Company
 
maintains cash
 
cash balances at
 
at three banks
 
banks and excess
 
excess margin on
 
on account with
 
with two exchange
 
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
 
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
 
general funds
of the counterparty.
 
counterparty. The
Company limits
 
uninsured
 
balances to
 
to only large,
 
well-known
 
banks and exchange
 
exchange clearing members
 
members and believes
 
believes that
it is not
 
not exposed
to
any significant
 
credit risk
 
on cash and
 
cash equivalents
 
or restricted
 
cash balances.
Mortgage-Backed
 
Securities
 
and U.S.
Treasury Notes
The Company
 
invests primarily
 
in mortgage
 
pass-through
 
(“PT”) residential
 
mortgage backed
 
backed (“RMBS”)
and collateralized
mortgage
obligations
(“CMOs”)
certificates
 
issued by Freddie
 
Freddie Mac,
Fannie Mae
 
or Ginnie Mae
 
(“RMBS”),
collateralized
mortgage obligations
(“CMOs”),Mae,
 
interest-only
 
(“IO”) securities
 
and inverse
 
interest-onlyinterest-
only (“IIO”)
securities
 
representing interest in or obligations backed by pools of RMBS.
We refer to RMBS and
CMOs as PT RMBS. We refer
refer to IO and IIO securities as structured RMBS. The Company also invests
in U.S. Treasury Notes, primarily to satisfy collateral
requirements of derivative counterparties. The Company has elected to account
for its
investment in RMBS and U.S. Treasury Notes
under the fair value
option. Electing the fair value option requires the Company
 
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 RMBSsecurities
 
transactions
 
on the trade
 
date. Security
 
purchases
that have
not settled
as of the
balance sheet
date
are included
in the portfolio
balance with
an offsetting
liability
recorded,
whereas securities
sold that
 
have not
 
settled as
 
of the balance
sheet date
 
sheet date
are included
 
in the RMBSremoved from
 
balance with
an offsetting
liability recorded,
whereas securities
sold that
have not settled
as of the
balance sheet
date are removed
from the RMBSportfolio
 
balance with
 
an offsetting
 
receivable recorded.
 
recorded.
Fair value
 
is defined
 
as the price
 
that would
 
be received
 
to sell the
 
asset or paid
 
paid to transfer
 
the liability
 
in an orderly
 
transaction
between market
 
participants
 
at the measurement
 
date.
 
The fair value
 
value measurement
 
assumes that
 
that the
transaction
 
to sell the
 
asset or
transfer the
 
the liability either
 
either occurs in
 
in the principal
 
market for
 
the asset
or liability, or
 
liability, or in
the absence
 
of a principal
 
market, occurs
 
in the most
advantageous
 
market for
 
the asset or
 
or liability. Estimated
 
fair values
 
for RMBS
 
are based
 
on independent
 
pricing sources
 
and/or third
 
party
broker quotes,
 
when available.
 
Estimated
fair values
for U.S.
Treasury Notes
are based
on quoted
prices for
identical
assets in
active
markets.
Income on PT
 
PT RMBS
securities
and U.S.
Treasury Notes
 
is based on
 
the stated
 
interest rate
 
rate of the security.
 
security. Premiums or
 
or discounts
present at
 
at the date
 
of
purchase are
 
are not amortized.
 
Premium lost
 
and discount
 
accretion
 
resulting from
 
from monthly
principal
 
repayments
 
are
reflected
 
in unrealized
gains (losses)
 
on RMBS in
 
in the statements
 
of operations.
 
For IO securities,
 
the income
 
is accrued
 
based on the
 
the
carrying value
 
and the
effective yield.
 
yield. The
difference
 
between income
 
accrued and
 
the interest
 
received on
 
the security
 
is characterized
 
as
8
a return
 
of investment
and serves
 
to reduce
 
the asset’s
 
carrying value.
 
value. At
each reporting
 
date, the
 
effective yield
 
is adjusted
 
prospectively
for future
 
reporting
periods
 
based on the
 
the new estimate
 
of prepayments
 
and the contractual
 
terms of the
 
the security. For IIO
 
IIO securities,
effective yield
 
and income
recognition
 
calculations
 
also take
 
into account
 
the index value
 
value applicable
 
to the security.
 
Changes in
 
fair value
of RMBS
 
of RMBS during each
 
each
8
reporting
 
period are
 
recorded in
 
in earnings and
 
and reported as
 
as unrealized
 
gains or losses
 
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
 
rate risk,
facilitate
 
asset/liability
 
strategies
 
and
manage other
 
exposures,
 
and it may
 
continue to
 
do so in the
 
future. The
 
The principal
instruments
 
that the Company
 
Company has
used to date
 
date are
Treasury Note
 
(“T-Note”),
 
Fed Funds and
 
and Eurodollar
 
futures contracts,
 
short positions
 
in U.S. Treasury
 
Treasury securities,
 
interest rate
 
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
 
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
 
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
 
difficulty recovering
 
its collateral
 
and may not
receive payments
 
provided for
 
for under the
 
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
 
and well-established
 
commercial
banks as counterparties,
 
monitors
positions
 
with individual
 
counterparties
 
and adjusts
 
posted collateral
 
as required.
Financial
 
Instruments
The fair value
 
value of financial
 
instruments
 
for which
 
it is practicable
 
to estimate
 
that value
 
is disclosed
 
either in
 
the body of
 
of the financial
statements
 
or in the
 
accompanying
 
notes. RMBS,
 
Eurodollar,
 
Fed Funds
 
and T-Note futures
 
futures contracts,
 
interest rate
 
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
 
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,of September
 
30, 2021
and December
 
31, 2020 due
 
due to the
short-term
 
nature of
these financial
 
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
 
Reverse Repurchase
 
Agreements
 
and Obligations
 
to Return
Securities
 
Borrowed under
 
under Reverse
Repurchase
 
Agreements
9
The Company
 
borrows
 
securities
 
to cover short
 
short sales
of U.S.
 
Treasury securities
 
through reverse
 
repurchase
 
transactions
 
under our
master repurchase
 
agreements.
 
We account for
 
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
 
reverse repurchase
 
agreements
 
mitigate our
 
our credit risk
 
risk exposure to
 
9to
counterparties.
 
Our reverse
 
repurchase
 
agreements
 
typically
 
have maturities
 
of 30 days
 
or less.
Manager Compensation
The Company
 
is externally
 
managed by
 
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
 
which are accrued
 
accrued and expensed
 
expensed during the
 
the period
for
which they
 
are earned
 
or incurred.
 
Refer to
 
Note 13 for
 
the terms of
 
of the management
 
agreement.
Earnings
 
Per Share
Basic earnings
 
per share
 
(“EPS”) is
 
is calculated
 
as net income
 
or loss attributable
 
to common
stockholders
 
divided by
 
the weighted
average number
 
of shares
 
of common stock
 
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
 
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
 
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
 
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
 
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
0
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
0
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
$
0
$
2,112,969
$
1,560,798
$
55,776
$
3,729,543
Repurchase agreement liabilities associated with
these securities
$
0
$
2,047,897
$
1,494,500
$
53,189
$
3,595,586
Net weighted average borrowing rate
0
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10
optional expedients to account for a derivative contract modified as a continuation
of the existing contract and to continue hedge
accounting when certain critical terms of a hedging relationship change to modifications
made as part of the discounting transition. The
guidance in ASU 2021-01 is effective immediately and available generally through December
31, 2022, as reference rate reform
activities occur. The Company does not believe the adoption of this ASU will have a material impact on its financial statements.
NOTE 2.
MORTGAGE-BACKED SECURITIES
The following
table presents
the Company’s
RMBS portfolio
as of September
30, 2021
and December
31, 2020:
(in thousands)
September 30, 2021
December 31, 2020
Pass-Through RMBS Certificates:
Fixed-rate Mortgages
$
5,458,562
$
3,560,746
Fixed-rate CMOs
0
137,453
Total Pass-Through
Certificates
5,458,562
3,698,199
Structured RMBS Certificates:
Interest-Only Securities
140,078
28,696
Inverse Interest-Only Securities
2,783
0
Total Structured
RMBS Certificates
142,861
28,696
Total
$
5,601,423
$
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
September
30, 2021,
the Company
had met all
margin call
requirements.
As of September
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
September 30, 2021
Fair market value of securities pledged, including
accrued interest receivable
$
3,501
$
3,393,762
$
1,979,011
$
54,045
$
5,430,319
Repurchase agreement liabilities associated with
these securities
$
2,500
$
3,250,133
$
1,909,639
$
51,597
$
5,213,869
Net weighted average borrowing rate
0.63%
0.13%
0.12%
0.15%
0.13%
December 31, 2020
Fair market value of securities pledged, including
accrued interest receivable
$
0
$
2,112,969
$
1,560,798
$
55,776
$
3,729,543
Repurchase agreement liabilities associated with
these securities
$
0
$
2,047,897
$
1,494,500
$
53,189
$
3,595,586
Net weighted average borrowing rate
0
0.23%
0.22%
0.30%
0.23%
In addition, cash pledged to counterparties for repurchase agreements was approximately
$
47.5
million and $
58.8
million as of
September 30, 2021 and December 31, 2020, respectively.
 
 
 
 
 
 
 
 
 
 
 
11
If, during
the term
of a repurchase
agreement,
a lender
files for
bankruptcy, the
Company might
experience
difficulty recovering
its
pledged assets,
which could
result in
an unsecured
claim against
the lender
for the difference
between the
amount loaned
to the Company
plus interest
due to the
counterparty
and the fair
value of the
collateral
pledged to
such lender, including the accrued
interest receivable
and cash posted by the Company as collateral. At JuneSeptember
 
30, 2021,
 
the Company
 
had an aggregate
 
amount at
 
risk (the difference
 
betweendifference
between the amount
 
amount loaned to
 
to the Company,
including
 
interest payable
 
payable and
securities
 
posted by the
 
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
 
$
245.1263.2
million.
 
The Company
 
did not have
 
have an amount
 
at risk with
 
any individual
 
counterparty
 
that was greater
 
greater than
10% of the
 
the Company’s equity
at September
 
equity at June
30, 2021 and
 
and December 31,
 
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
September
30, 2021 and
 
and December 31,
 
31, 2020.
(in thousands)
Derivative and Other Hedging Instruments
Balance Sheet Location
JuneSeptember 30, 2021
December 31, 2020
Assets
Interest rate swaps
Derivative assets, at fair value
$
14,26316,972
$
7
Payer swaptions (long positions)
Derivative assets, at fair value
26,28228,051
17,433
Interest rate floors
Derivative assets, at fair value
2,3152,360
0
TBA securities
Derivative assets, at fair value
8750
3,559
Total derivative
 
assets, at fair value
$
43,73547,383
$
20,999
Liabilities
Interest rate swaps
Derivative liabilities, at fair value
$
6,4112,225
$
24,711
Payer swaptions (short positions)
Derivative liabilities, at fair value
10,3588,063
7,730
TBA securities
Derivative liabilities, at fair value
0
786
Total derivative
 
liabilities, at fair value
$
16,76910,288
$
33,227
Margin Balances Posted to (from) Counterparties
Futures contracts
Restricted cash
$
2,5482,475
$
489
TBA securities
Restricted cash
0
284
TBA securities
Other liabilities
(773)0
(2,520)
Interest rate swaption contracts
Restricted cash
1,1151,099
0
Interest rate swaption contracts
Other liabilities
(11,414)(13,765)
(3,563)
Interest rate swap contracts
Restricted cash
24,1400
19,761
Interest rate swap contracts
U.S. Treasury Notes
29,927
0
Total margin
 
balances on derivative contracts
$
15,61619,736
$
14,451
Eurodollar, Fed
 
Funds and
 
T-Note futures
 
are cash settled
 
settled futures
contracts
 
on an interest
 
rate, with
 
gains and losses
 
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, 2021at September
 
and30,
December 31,2021 and
 
December
31, 2020.
 
($ in thousands)
JuneSeptember 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
2021
$
50,000
1.01%
0.17%
$
(104)
Treasury Note Futures Contracts (Short
Positions)
(2)
December 2021 5-year T-Note futures
(Dec 2021 - Dec 2026 Hedge Period)
$
269,000
1.14%
1.29%
$
1,631
December 2021 10-year Ultra futures
(Dec 2021 - Dec 2031 Hedge Period)
$
23,500
0.97%
1.19%
$
518
($ 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 $
123.43122.74
 
at JuneSeptember 30, 2021 and $
126.16
 
at December 31, 2020.
 
The contract
values of
the short positions were $
332.0330.2
 
million and $
87.1
 
million at JuneSeptember 30, 2021 and December 31, 2020, respectively.
 
10-Year Ultra futures
contracts
futures contracts were valued at a price of $
147.20145.25
 
at JuneSeptember 30, 2021. The contract value of the short position was $
34.634.1
 
million at June
September 30, 2021.
Under our
 
interest rate
 
rate swap
agreements,
 
we typically
 
pay a fixed
 
rate and receive
 
receive a floating
 
floating rate based
 
based on
LIBOR ("payer
 
swaps").
The floating
 
rate we receive
 
receive under our
 
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
 
to post collateral
 
on our interest
 
rate swap
 
agreements.
 
The table
below presents
 
information
 
related to
 
the Company’s
 
interest rate
 
rate swap
positions
 
at June 30,September
 
30, 2021 and
December
 
31, 2020.
($ in thousands)
Average
Net
Fixed
Average
Estimated
Average
Notional
Pay
Receive
Fair
Maturity
Amount
Rate
Rate
Value
(Years)
JuneSeptember 30, 2021
Expiration > 3 to ≤ 5 years
$
955,000
0.64%
0.16%0.13%
$
8,13411,566
4.54.3
Expiration > 5 years
400,000
1.16%
0.13%0.12%
(282)3,181
7.87.5
$
1,355,000
0.79%
0.15%0.13%
$
7,85214,747
5.55.2
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
 
rate floor
positions
 
at June 30,September
 
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
$
1,1461,257
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 Swap1,103
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
13
$
150,000
$
1,015
0.94%
2,360
The table
below presents
information
related to
the Company’s
interest
rate swaption
positions
at September
30, 2021
and
December
31, 2020.
($ in thousands)
Option
Underlying Swap
Weighted
Average
Weighted
Average
Average
Adjustable
Average
Fair
Months to
Notional
Fixed
Rate
Term
Expiration
Cost
Value
Expiration
Amount
Rate
(LIBOR)
(Years)
JuneSeptember 30, 2021
Payer Swaptions - long
≤ 1 year
$
4,000
$
1,9591,421
9.26.2
$
400,000
1.66%
3 Month
5.0
>1 year ≤ 2 years
25,390
24,32326,630
19.116.1
1,027,200
2.20%
3 Month
15.0
$
29,390
$
26,28228,051
16.313.3
$
1,427,200
2.05%
3 Month
12.2
Payer Swaptions - short
≤ 1 year
$
(13,400)
$
(10,358)(8,063)
7.84.8
$
(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
.
 
There
 
were
no
outstanding TBA contracts as of September 30, 2021.
($ 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
 
underlying Agency RMBS.
(2)
Cost basis represents the forward price to be paid (received) for the underlying
 
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
 
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 sixnine and three months ended JuneSeptember 30, 2021 and 2020.
(in thousands)
SixNine Months Ended JuneSeptember 30,
Three Months Ended JuneSeptember 30,
2021
2020
2021
2020
Eurodollar futures contracts (short positions)
$
(14)
$
(8,324)
$
(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)(6)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
14
T-Note futures contracts (short position)
866
(4,837)
581
(113)
Interest rate swaps
12,446
(67,713)
3,000
489
Payer swaptions (short positions)
3,507
(1,561)
2,295
(672)
Payer swaptions (long positions)
5,477
(3,287)
1,767
914
Interest rate floors
1,3001,345
0
(84)45
0
TBA securities (short positions)
3,170864
(6,377)(6,282)
(5,963)(2,306)
71395
TBA securities (long positions)
(8,559)
1,1334,469
0
1,1333,336
U.S. Treasury securities (short positions)
0
(131)(95)
0
(131)36
Total
$
10,55715,932
$
(91,709)(87,630)
$
(34,915)5,375
$
(8,851)4,079
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 JuneSeptember
 
30, 2021 and
 
and December 31,
 
31, 2020.
(in thousands)
JuneSeptember 30, 2021
December 31, 2020
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Counterparties
Agreements
Agreements
Total
Agreements
Agreements
Total
PT RMBS - fair value
$
4,570,0535,273,199
$
0
$
4,570,0535,273,199
$
3,692,811
$
0
$
3,692,811
Structured RMBS - fair value
95,525141,999
0
95,525141,999
27,095
0
27,095
U.S. Treasury Notes
0
29,927
29,927
0
0
0
Accrued interest on pledged securities
12,49315,121
03
12,49315,124
9,636
0
9,636
Restricted cash
79,07347,537
27,8033,574
106,87651,111
58,829
20,534
79,363
Total
$
4,757,1445,477,856
$
27,80333,504
$
4,784,9475,511,360
$
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 JuneSeptember
 
30, 2021 and
 
and December 31,
 
31, 2020.
(in thousands)
JuneSeptember 30, 2021
December 31, 2020
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Orchid
Agreements
Agreements
Total
Agreements
Agreements
Total
Cash
$
0
$
12,187
$
12,187
$
120
$
6,083
$
6,203
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
15
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Orchid
Agreements
Agreements
Total
Agreements
Agreements
Total
Cash
$
4,998
$
13,765
$
18,763
$
120
$
6,083
$
6,203
U.S. Treasury securities - fair value
0
0
0
253
0
253
Total
$
04,998
$
12,18713,765
$
12,18718,763
$
$
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
 
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
 
is recognized
 
as cash and
 
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
 
event of
bankruptcy
 
of either
 
party to the
 
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
 
Company had
presented
 
them on a
 
net basis as
 
as of June 30,September
 
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
JuneSeptember 30, 2021
Interest rate swaps
$
14,26316,972
$
0
$
14,26316,972
$
0
$
0
$
14,26316,972
Interest rate swaptions
26,28228,051
0
26,28228,051
0
(11,414)(13,765)
14,86814,286
Interest rate floors
2,3152,360
0
2,3152,360
0
0
2,315
TBA securities
875
0
875
0
(773)
1022,360
$
43,73547,383
$
0
$
43,73547,383
$
0
$
(12,187)(13,765)
$
31,54833,618
December 31, 2020
Interest rate swaps
$
7
$
0
$
7
$
0
$
0
$
7
Interest rate swaptions
17,433
0
17,433
0
(3,563)
13,870
TBA securities
3,559
0
3,559
0
(2,520)
1,039
$
20,999
$
0
$
20,999
$
0
$
(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
JuneSeptember 30, 2021
Repurchase Agreements
$
4,514,7045,213,869
$
0
$
4,514,7045,213,869
$
(4,435,631)(5,166,332)
$
(79,073)(47,537)
$
0
Interest rate swaps
6,411
0
6,411
0
(6,411)
0
Interest rate swaptions
10,358
0
10,358
0
(1,115)
9,243
$
4,531,473
$
0
$
4,531,473
$
(4,435,631)
$
(86,599)
$
9,243
December 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
16
Interest rate swaps
2,225
0
2,225
(2,225)
0
0
Interest rate swaptions
8,063
0
8,063
0
(1,099)
6,964
$
5,224,157
$
0
$
5,224,157
$
(5,168,557)
$
(48,636)
$
6,964
December 31, 2020
Repurchase Agreements
$
3,595,586
$
0
$
3,595,586
$
(3,536,757)
$
(58,829)
$
0
Interest rate swaps
24,711
0
24,711
0
(19,761)
4,950
Interest rate swaptions
7,730
0
7,730
0
0
7,730
TBA securities
786
0
786
0
(284)
502
$
3,628,813
$
0
$
3,628,813
$
(3,536,757)
$
(78,874)
$
13,182
The amounts
 
disclosed for
 
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
 
value of
the actual
 
collateral
 
received by
 
by or posted
 
to the same
 
counterparty
typically exceeds
 
exceeds the
amounts
 
presented.
 
See Note
 
5 for a discussion
 
of collateral
 
posted or
 
received against
 
against or
for repurchase
 
obligations
and derivative
 
and other
 
hedging
instruments.
NOTE 7.
 
CAPITAL STOCK
Common Stock
 
Issuances
During the
 
sixnine months
 
ended JuneSeptember
 
30, 2021
and the year
ended December
31, 2020,
 
the year endedCompany
 
December 31,
2020, the
Company completed
 
the following
public offerings
 
public
offerings of shares
 
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
At the Market Offering Program
(3)
Third Quarter
4.94
35,818,338
177,007
Total
41,335,13777,153,475
$
221,654398,661
2020
At the Market Offering Program
(3)
First Quarter
$
6.13
3,170,727
$
19,447
At the Market Offering Program
(3)
Second Quarter
0
0
0
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’
 
the underwriters’ discount, if applicable, and other offering
costs.
(2)
Net proceeds are net of the underwriters’ discount, if applicable, and other
 
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
17
Company’s then outstanding share count. As part of the stock repurchase program, shares
 
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
 
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 JuneSeptember 30, 2021, the Company
 
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.
share. No shares were repurchased during the sixnine months ended June September
30, 2021. During
the sixnine months ended JuneSeptember 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 September
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)
0.4550.650
45,46074,045
Totals
$
12.11012.305
$
387,423416,008
(1)
On
July 14,October 12, 2021
, the Company declared a dividend of $
0.065
 
per share to be paid on
August 27,November 26, 2021
.
 
The effect of this dividend is included
included in the table above but is not reflected in the Company’s financial statements
 
statements as of JuneSeptember 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
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
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 sixnine months ended June
September 30, 2021 and 2020.
 
($ in thousands, except per share data)
SixNine Months Ended JuneSeptember 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
0
0
Forfeited
0
0
(1,607)
7.45
Vested and issued
(4,554)
7.45
(8,305)(10,583)
8.208.03
Unvested, end of period
137,897
$
5.88
10,7166,831
$
7.45
Compensation expense during period
$
113222
$
2532
Unrecognized compensation expense, end of period
$
702592
$
178
Intrinsic value, end of period
$
716674
$
5034
Weighted-average remaining vesting term (in years)
1.91.6
0.60.5
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 sixnine months ended JuneSeptember 30, 2021 and 2020. All of the fully vested
shares of
common stock issued during the three months ended JuneSeptember 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
0
Weighted average grant date price per share
$
5.88
$
0
Compensation expense related to fully vested shares of common stock awards
(1)
$
811
$
0
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
19
($ in thousands, except per share data)
Nine Months Ended September 30,
2021
2020
Fully vested shares granted
137,897
0
Weighted average grant date price per share
$
5.88
$
0
Compensation expense related to fully vested shares of common stock awards
(1)
$
811
$
0
(1)
The awards issued during the sixnine months ended March 31,September 30, 2021 were
 
were granted with respect to service performed in 2020. Approximately
$600,000 of compensation expense related to the 2021 awards was accrued
 
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 sixnine months ended JuneSeptember 30, 2021
2021 and 2020.
($ in thousands, except per share data)
SixNine Months Ended JuneSeptember 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
22,52836,684
5.645.46
25,51836,682
3.994.22
Issued
0
0
0
0
Outstanding, end of period
113,474127,630
$
5.485.44
69,08880,252
$
5.615.49
Compensation expense during period
$
120180
$
90135
Intrinsic value, end of period
$
589624
$
325402
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 JuneSeptember 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
 
including meeting certain asset, income and stock
ownership tests. A REIT must generally distribute at least 90% of its REIT taxable
 
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
 
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 stockThe Company
 
even thoughhad dividend
eligible
Performance
Units and
Deferred
Stock Units
that were
outstanding
during the
nine and
three
months ended
September
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 common
stock even
though they
are considered
 
participating
 
securities.
The table
 
below reconciles
 
the numerator
 
and denominator
 
of EPS for
 
the six andnine
 
and three months
 
months ended June
September
 
30, 2021 and
 
and
2020.
(in thousands, except per share information)
SixNine Months Ended JuneSeptember 30,
Three Months Ended June 30,September
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)(20,196)
$
(42,427)(14,351)
$
(16,865)26,038
$
48,77228,076
Weighted average shares of common stock:
Shares of common stock outstanding at the balance sheet date
117,500153,318
66,22169,296
117,500153,318
66,22169,296
Unvested dividend eligible share based compensation
outstanding at the balance sheet date
0
0
0266
8087
Effect of weighting
 
(25,044)(48,012)
(812)(3,282)
(18,011)(24,997)
9(2,081)
Weighted average shares-basic and diluted
92,456105,306
65,40966,014
99,489128,587
66,31067,302
Net (loss) income per common share:
Basic and diluted
$
(0.50)(0.19)
$
(0.65)(0.22)
$
(0.17)0.20
$
0.74
Diluted
$
(0.50)
$
(0.65)
$
(0.17)
$
0.730.42
Anti-dilutive incentive shares not included in calculation.
251266
8087
2510
0
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
 
received to
sell an
asset or paid
 
paid to transfer
 
a liability
 
(an exit price).
 
price). A
fair value
 
measure should
 
reflect the
 
assumptions
 
that market
 
participants
 
would use
 
in
pricing the
 
asset or liability,
 
liability, including
 
the assumptions
 
about the
 
risk inherent
 
in a particular
 
valuation
 
technique,
 
the effect of
 
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
 
assets or
liabilities
 
traded in
 
active markets
(which include
 
exchanges and
 
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
 
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
 
for assumptions
 
that market
 
participants
 
would use
 
in pricing
 
the asset or
 
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
 
assets or
liabilities
 
that are not
 
not directly
comparable
 
to the subject
 
asset or liability.
 
liability.
The Company's
 
RMBS and
 
TBA securities
 
are Level
 
2 valuations,
 
and such valuations
 
currently are
 
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
 
use to calculate
 
the fair values.
 
values. The Company
 
Company and
the independent
 
pricing sources
 
use various
 
valuation
techniques
 
to determine
 
the price
 
of the Company’s
 
securities.
 
These techniques
21
include observing
 
the most recent
 
recent market for
 
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
 
spread to
a benchmark
 
such as a TBA),
 
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
 
trade activity
or
observable
 
markets for
 
assets similar
 
to those being
 
being priced. The
 
The spread
is then adjusted
 
adjusted based on
 
on variances
 
in certain
 
characteristics
21
between the
 
market observation
 
and the asset
 
being priced.
 
Those characteristics
 
include: type
 
type of
asset, the
 
expected life
 
of the asset,
 
the
stability and
 
and predictability
 
of the expected
 
future cash
 
flows of the
 
the asset,
whether
 
the coupon
 
of the asset
 
is fixed or
 
adjustable,
 
the
guarantor
 
of the security
 
if applicable,
 
the coupon,
 
the maturity, the
 
the issuer, size of
 
of the underlying
 
loans, year
 
in which the
 
the underlying
 
loans
were originated,
 
loan to value
 
ratio, state
 
in which the
 
the underlying
 
loans reside,
 
credit score
 
of the underlying
 
borrowers
 
and other
 
variables
if appropriate.
 
The fair value
 
value of the security
 
security is
determined
 
by using the
 
the adjusted
spread.
 
The Company’s
U.S. Treasury
Notes are
based on
quoted prices
for identical
instruments
in active
markets and
are classified
as
Level 1 assets.
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
 
rate swaps and
 
and interest rate
 
rate swaptions
 
are Level
 
2
valuations.
 
The fair value
 
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 sixnine
and three
 
months ended
 
June September
30, 2021
 
and 2020.
 
When determining
 
fair value
 
measurements,
 
the Company
 
considers the
 
the principal or
or most advantageous
 
market in which
 
which it
would transact
 
and considers
 
assumptions
 
that market
 
participants
 
would use
 
when pricing
 
the
asset. When
 
possible, the
 
the Company looks
 
looks to active and
 
and observable
 
markets to
 
price identical
 
assets.
 
When identical
 
assets are
 
not traded
in active markets,
 
markets, the
Company
 
looks to market
 
observable
 
data for
 
similar assets.
The following
 
table presents
 
financial assets
 
assets (liabilities)
 
measured
 
at fair value
 
on a recurring
 
basis as of
 
June September
30, 2021
and
December 31,
 
31, 2020.
 
Derivative
 
contracts are
 
are reported as
 
as a net position
 
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)
JuneSeptember 30, 2021
Mortgage-backed securities
$
0
$
4,671,2395,601,423
$
0
U.S. Treasury Notes
37,409
0
0
Interest rate swaps
0
7,85114,747
0
Interest rate swaptions
0
15,92519,988
0
Interest rate floors
0
2,315
0
TBA securities
0
8752,360
0
December 31, 2020
Mortgage-backed securities
$
0
$
3,726,895
$
0
Interest rate swaps
0
(24,704)
0
Interest rate swaptions
0
9,703
0
TBA securities
0
2,773
0
During the sixnine and three months ended JuneSeptember 30, 2021 and 2020, there were
 
no transfers of financial assets or liabilities between
between levels 1, 2 or 3.
22
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 $
4.26.8
 
million and $
2.22.5
 
million
for the sixnine and three months ended JuneSeptember 30, 2021, respectively, and $
3.35.0
 
million and $
1.6
 
million for the sixnine and three
three months ended JuneSeptember 30, 2020, respectively. At JuneSeptember 30, 2021 and December 31, 2020, the net amount
due to affiliates
was
approximately $
0.80.9
 
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
 
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 JuneSeptember
 
30, 2021, Bimini
owned
2,595,357
 
shares, or
2.21.7
%, 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
 
be read in conjunction with the financial
statements and notes to those statements included in Item 1 of this Form 10-Q. The
 
The discussion may contain certain forward-looking
statements that involve risks and uncertainties. Forward-looking statements are
 
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
 
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
 
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
 
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
 
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
 
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
 
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
 
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
 
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
 
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
 
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
 
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
 
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
September 30,
2021, we issued a total of 5,750,00041,568,338 shares under the June 2021 Equity Distribution
 
Agreement for aggregate gross
proceeds of
approximately $31.1$211.0 million, and net proceeds of approximately $30.6$207.5 million, after commissions and fees.
 
and fees. Subsequent
to JuneSeptember 30,
2021 and through July 30,October 28, 2021, we issued a total of 5,560,000 7,838,998
shares under the June 2021
Equity Distribution
Agreement for
aggregate gross proceeds of approximately $28.6$39.0 million, and net proceeds
of approximately
$28.2 $38.4 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
 
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
 
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 JuneSeptember 30, 2021, the Company
 
Company repurchased a total of 5,685,511 shares
shares at an aggregate cost of approximately $40.4
 
million, including commissions and fees, for a weighted average price
of $7.10
per share.
share. The Company did not repurchase any shares of its common stock during the six
nine and three
months ended JuneSeptember 30, 2021. The
The remaining authorization under the repurchase program as of JuneSeptember 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 Fed, the Federal
Housing Financing
Agency (the “FHFA”), Federal Housing Administration (the “FHA”), 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
 
a registration exemption under the Investment
Company Act.
 
Results of
 
of Operations
Described
 
below are
 
the Company’s
 
results of
 
operations
 
for the six
nine and
three months
ended September
30, 2021,
as compared
to
the Company’s
results of
operations
for the nine
 
and three
 
months ended
 
June 30, 2021,September
 
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 monthsnine
 
months ended June
September
 
30, 2021
was $20.2
million, or
 
$46.2 million,
or $0.500.19 per
 
share. Net
 
loss for the
 
sixnine months
 
ended June
September
 
30, 2020
2020 was $42.4$14.4
 
million, or
 
$0.650.22 per
 
share.
 
Net loss forincome
 
for the three months
 
months ended June
September
 
30, 2021
was $26.0
million, or
 
$16.9 million,
or $0.170.20 per
 
share. Net
income for
 
the three
 
months ended
 
June September
30, 2020
 
was $48.8$28.1
 
million, or
 
$0.740.42 per
 
share.
 
The
components
 
of net (loss)
 
income for
 
the six
nine and three
 
three months ended
 
June ended September
30, 2021
 
and 2020,
 
along with
 
the changes
 
in those
components
 
are presented
 
in the table
 
below:
(in thousands)
SixNine Months Ended JuneSeptember 30,
Three Months Ended, JuneSeptember 30,
2021
2020
Change
2021
2020
Change
Interest income
$
56,11090,279
$
62,92990,152
$
(6,819)127
$
29,25434,169
$
27,25827,223
$
1,9966,946
Interest expense
(3,497)(5,067)
(21,002)(23,045)
17,50517,978
(1,556)(1,570)
(4,479)(2,043)
2,923473
Net interest income
52,61385,212
41,92767,107
10,68618,105
27,69832,599
22,77925,180
4,9197,419
(Losses) gains on RMBS and derivative contracts
(91,635)(94,522)
(79,457)(73,712)
(12,178)(20,810)
(40,844)(2,887)
28,7495,745
(69,593)(8,632)
Net portfolio (loss) income
(39,022)(9,310)
(37,530)(6,605)
(1,492)(2,705)
(13,146)29,712
51,52830,925
(64,674)(1,213)
Expenses
(7,212)(10,886)
(4,897)(7,746)
(2,315)(3,140)
(3,719)(3,674)
(2,756)(2,849)
(963)(825)
Net (loss) income
$
(46,234)(20,196)
$
(42,427)(14,351)
$
(3,807)(5,845)
$
(16,865)26,038
$
48,77228,076
$
(65,637)
(2,038)
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
JuneSeptember 30, 2021
$
(16,865)26,038
$
(40,844)(2,887)
$
23,97928,925
$
(0.17)0.20
$
(0.41)(0.02)
$
0.22
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
SixNine Months Ended
JuneSeptember 30, 2021
$
(46,234)(20,196)
$
(91,635)(94,522)
$
45,40174,326
$
(0.50)(0.19)
$
(0.99)(0.90)
$
0.490.71
JuneSeptember 30, 2020
(42,427)(14,351)
(79,457)(73,712)
37,03059,361
(0.65)(0.22)
(1.21)(1.12)
0.56
0.90
(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.
 
28
Gains (Losses) on Derivative Instruments
(in thousands)
Funding Hedges
Recognized in
Attributed to
Attributed to
Income
U.S. Treasury and TBA
Current
Future
Statement
Securities Gain (Loss)
Period
Periods
(GAAP)
(Short Positions)
(Long Positions)
(Non-GAAP)
(Non-GAAP)
Three Months Ended
September 30, 2021
$
5,375
$
(2,306)
$
-
$
(1,248)
$
8,929
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)
Nine Months Ended
September 30, 2021
$
15,932
$
864
$
(8,559)
$
(10,396)
$
34,023
September 30, 2020
(87,630)
(6,377)
4,469
(17,551)
(68,171)
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
September 30, 2021
$
34,169
$
1,570
$
(1,248)
$
2,818
$
32,599
$
31,351
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
Nine Months Ended
September 30, 2021
$
90,279
$
5,067
$
(10,396)
$
15,463
$
85,212
$
74,816
September 30, 2020
90,152
23,045
(17,551)
40,596
67,107
49,556
(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
nine months
ended September
30, 2021,
we generated
$85.2 million
of net interest
income, consisting
of $90.3
million of
interest
income from
RMBS assets
offset by $5.1
million of
interest
expense on
borrowings.
For the comparable
period ended
September
30, 2020,
we generated
$67.1 million
of net interest
income, consisting
of $90.2
million of
interest
income from
RMBS assets
offset by
$23.0 million
of interest
expense on
borrowings.
The $0.1
million increase
in interest
income was
due to a
$1,284.9
million increase
in
average RMBS,
partially
offset by a
103 basis point
("bps") decrease
in the yield
on average
RMBS. The
$18.0 million
decrease
in interest
expense was
due to a
84 bps decrease
in the average
cost of funds,
partially
offset by a
$1,250.5
million increase
in average
outstanding
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
29
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 sixnine
 
months ended
 
June 30,September
 
30, 2021
and 2020
 
was $12.6$15.5
million and
 
million and
$31.740.6 million,
 
respectively, resulting
 
in $43.5 $74.8
million
 
and $31.3$49.6
 
million of
economic
 
net interest
 
income, respectively.
 
During the
three months
ended September
30, 2021,
we generated
$32.6 million
of net interest
income, consisting
of $34.2
million of
interest
income from
RMBS assets
offset by $1.6
million of
interest
expense on
borrowings.
For the three
months ended
September
30,
2020, we
generated
$25.2 million
of net interest
income, consisting
of $27.2
million of
interest
income from
RMBS assets
offset by $2.0
million of
interest
expense on
borrowings.
The $6.9
million increase
in interest
income was
due to a
$1,713.8
million increase
in average
RMBS,
partially
offset by a
52 bps decrease
in the yield
on average
RMBS. The
$0.5 million
decrease
in interest
expense was
due to a
12
bps decrease
in the average
cost of funds,
partially
offset by
a $1,636.3
million increase
in average
outstanding
borrowings.
On an economic
basis, our
interest
expense on
borrowings
for the three
months ended
September
30, 2021
and 2020
was $2.8
million and
$8.9 million,
respectively, resulting
in $31.4 million
and $18.3
million of
economic
net interest
income, respectively.
The tables
below provide
information
on our portfolio
average balances,
interest
income, yield
on assets,
average borrowings,
interest
expense, cost
of funds,
net interest
income and
net interest
spread for
the nine
months ended
September
30, 2021
and 2020 and
each
quarter of
2021 to date
and 2020 on
both a GAAP
and economic
basis.
($ 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
September 30, 2021
$
5,136,331
$
34,169
2.66%
$
4,864,287
$
1,570
$
2,818
0.13%
0.23%
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%
Nine Months Ended
September 30, 2021
$
4,557,978
$
90,279
2.64%
$
4,367,037
$
5,067
$
15,463
0.15%
0.47%
September 30, 2020
3,273,068
90,152
3.67%
3,116,564
23,045
40,596
0.99%
1.74%
($ in thousands)
Net Interest Income
Net Interest Spread
GAAP
Economic
GAAP
Economic
Basis
Basis
(2)
Basis
Basis
(4)
Three Months Ended
September 30, 2021
$
32,599
$
31,351
2.53%
2.43%
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%
Nine Months Ended
September 30, 2021
$
85,212
$
74,816
2.49%
2.17%
September 30, 2020
67,107
49,556
2.68%
1.93%
(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
30
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.
Interest Income and Average Asset Yield
Our interest
income for
the nine
months ended
September
30, 2021
and 2020
was $90.3
million and
$90.2 million,
respectively.
We
had average
RMBS holdings
of $4,558.0
million and
$3,273.1
million for
the nine
months ended
September
30, 2021
and 2020,
respectively.
The yield
on our portfolio
was 2.64%
and 3.67%
for the nine
months ended
September
30, 2021 and
2020, respectively.
For
the nine
months ended
September
30, 2021
as compared
to the nine
months ended
September
30, 2020,
there was
a $0.1 million
increase in
interest
income due
to the $1,284.9
million increase
in average
RMBS,
partially
offset by the
103 bps decrease
in the yield
on
average RMBS.
Our interest
income for
the three
months ended
September
30, 2021
and 2020
was $34.2
million and
$27.2 million,
respectively.
We
had average
RMBS holdings
of $5,136.3
million and
$3,422.6
million for
the three
months ended
September
30, 2021
and 2020,
respectively.
The yield
on our portfolio
was 2.66%
and 3.18%
for the three
months ended
September
30, 2021
and 2020,
respectively. For
the three
months ended
September
30, 2021
as compared
to the three
months
ended September
30, 2020,
there was
a $6.9 million
increase in
interest
income due
to
the $1,713.8
million increase
in average
RMBS,
partially
offset by the
52 bps decrease
in the yield
on
average RMBS.
The table
below presents
the average
portfolio
size, income
and yields
of our respective
sub-portfolios,
consisting
of structured
RMBS
and PT RMBS,
for the nine
months ended
September
30, 2021
and 2020,
and for each
quarter of
2021 to date
and 2020.
($ 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
September 30, 2021
$
5,016,550
$
119,781
$
5,136,331
$
33,111
$
1,058
$
34,169
2.64%
3.53%
2.66%
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%
Nine Months Ended
September 30, 2021
$
4,483,550
$
74,428
$
4,557,978
$
89,266
$
1,013
$
90,279
2.65%
1.81%
2.64%
September 30, 2020
3,228,369
44,699
3,273,068
89,311
841
90,152
3.69%
2.51%
3.67%
Interest Expense and the Cost of Funds
We had average
outstanding
borrowings
of $4,367.0
million and
$3,116.6 million
and total
interest
expense of
$5.1 million
and $23.0
million for
the nine months
ended September
30, 2021
and 2020,
respectively. Our
average cost
of funds
was 0.15%
for the nine
months
ended September
30, 2021,
compared
to 0.99%
for the comparable
period in
2020.
The $18.0
million decrease
in interest
expense was
due to the
84 bps decrease
in the average
cost of funds,
partially
offset by the
$1,250.5
million increase
in average
outstanding
borrowings
during the
nine months
ended September
30, 2021
as compared
to the nine
months ended
September
30, 2020.
Our economic
interest
expense
was $15.5
million and
$40.6 million
for the nine
months ended
September
30, 2021
and 2020,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31
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 expenserespectively. There
 
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 89127
 
bps decrease
 
in the yield
on average
 
RMBS.
economic
 
The tablecost of funds
 
below presents
the average
portfolio
size, income
and yields
of our respective
sub-portfolios,
consisting
of structured
RMBS
and PT RMBS,to 0.47%
 
for the sixnine
 
months ended
 
June 30, 2021September
 
and 2020,30,
2021 from
 
and1.74% for each
 
quarter ofthe nine
 
2021 to datemonths ended
 
and 2020.September
 
($ 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
2020.
We had average
 
outstanding
 
borrowings
 
of $4,118.4 million$4,864.3
 
million and $3,060.8
$3,228.0
 
million and
 
total interest
 
expense of
 
$3.51.6 million
 
and $21.0$2.0
million for
 
the six monthsthree
 
months ended June
September
 
30, 2021 and
 
and 2020, respectively.
 
respectively. Our
average
 
cost of funds
 
was 0.17%0.13%
and 0.25%
 
for the sixthree
months ended
 
months endedSeptember
June 30, 2021
 
compared toand 2020,
 
1.37% forrespectively. There
 
the comparablewas a 12
 
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 offsetand a $1,636.3
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 JuneSeptember
 
30, 2021,
 
compared to
 
to the three
months
ended September
30, 2020.
Our economic
interest
expense
was $2.8
million and
$8.9 million
for the three
 
months ended
 
June 30,
2020.September
 
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
 
respectively.
There was a 88
 
a 76 bps decrease
 
in the average
 
economic cost
 
cost of funds
 
to 0.61% for0.23%
 
for the
three months
ended September
30,
2021 from
1.11% for the three
 
months ended
 
June 30, 2021September
 
from 1.37%
for
the three
months ended
June 30, 2020.
Since all of
 
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
 
4 bps above the
 
the average
one-month
 
LIBOR and
 
43 bps below
 
the average
 
six-month
 
LIBOR for
the quarter
 
ended JuneSeptember
 
30, 2021.
 
Our average
 
economic cost
 
cost of funds was
 
51was 14 bps above
 
above the average
 
average one-month
 
LIBOR and
 
437 bps
above the average
 
average six-month LIBOR
 
LIBOR for
the quarter
 
ended JuneSeptember
 
30, 2021.
 
The average
 
term to maturity
 
of the outstanding
repurchase
 
repurchase
agreements
 
decreased to
 
29to 30 days at
 
June at September
30, 2021
 
from 31 days
 
at December
 
31, 2020.
The tables
 
below present
 
the average
 
balance of
 
borrowings
 
outstanding,
 
interest expense
 
expense and average
 
average cost
of funds,
 
and average
one-month
 
and six-month
 
LIBOR rates
 
for the sixnine
 
months ended
 
June September
30, 2021
 
and 2020,
 
and for each
 
quarter in
 
2021 to date
 
and 2020
2020 on both a
 
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
JuneSeptember 30, 2021
$
4,348,1924,864,287
$
1,5561,570
$
2,818
0.13%
0.23%
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%
SixNine Months Ended
JuneSeptember 30, 2021
$
4,118,4134,367,037
$
3,4975,067
$
12,64515,463
0.17%0.15%
0.61%0.47%
JuneSeptember 30, 2020
3,060,8363,116,564
21,00223,045
31,65340,596
1.37%0.99%
2.07%
1.74%
Average GAAP Cost of Funds
Average Economic Cost of Funds
Relative to Average
Relative to Average
Average LIBOR
One-Month
Six-Month
One-Month
Six-Month
One-Month
Six-Month
LIBOR
LIBOR
LIBOR
LIBOR
Three Months Ended
September 30, 2021
0.09%
0.16%
0.04%
(0.03)%
0.14%
0.07%
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%
SixNine 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
32
September 30, 2021
0.10%
0.19%
0.05%
(0.04)%
0.37%
0.28%
September 30, 2020
0.68%
0.83%
0.31%
0.16%
1.06%
0.91%
34
Gains or Losses
The followingtable
 
tablebelow presents
our gains
or losses
for the nine
and three
months ended
September
30, 2021
and 2020.
(in thousands)
Nine Months Ended September 30,
Three Months Ended September 30,
2021
2020
Change
2021
2020
Change
Realized (losses) gains on sales of RMBS
$
(3,068)
$
(24,522)
$
21,454
$
2,977
$
498
$
2,479
Unrealized (losses) gains on RMBS
(107,386)
38,440
(145,826)
(11,239)
1,168
(12,407)
Total (losses)
gains on RMBS
(110,454)
13,918
(124,372)
(8,262)
1,666
(9,928)
Gains (losses) on interest rate futures
852
(13,161)
14,013
574
(119)
693
Gains (losses) on interest rate swaps
12,446
(67,713)
80,159
3,000
489
2,511
Gains (losses) on payer swaptions (short positions)
3,507
(1,561)
5,068
2,295
(672)
2,967
Gains (losses) on payer swaptions (long positions)
5,477
(3,287)
8,764
1,767
914
853
Gains (losses) on interest rate floors
1,345
-
1,345
45
-
45
Gains (losses) on TBA securities (short positions)
864
(6,282)
7,146
(2,306)
95
(2,401)
(Losses) gains on TBA securities (long positions)
(8,559)
4,469
(13,028)
-
3,336
(3,336)
(Losses) gains on U.S. Treasury securities (short
-
(95)
95
-
36
(36)
Total (losses)
gains from derivative instruments
15,932
(87,630)
103,562
5,375
4,079
1,296
We invest in
RMBS with
 
the 3-month constantintent
 
prepaymentto earn net
 
rate (“CPR”)income from
 
experiencedthe 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 nine
months ended
September
30, 2021
and 2020,
we received
proceeds
of $2,598.9
million and
$2,692.2
million,
respectively, from
the sales
of RMBS.
Most of these
sales during
the nine
months ended
September
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 September
30, 2021
and 2020,
we received
proceeds
of $918.0
million and
$668.9 million,
respectively, from
the sales
of RMBS.
Realized and
unrealized
gains and
losses on
 
our structuredRMBS are
driven in
part by changes
in yields
 
and PT RMBS
sub-portfolios,interest
 
on an annualizedrates, which
 
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,affect the
 
CPR in the chartpricing
below represents
the three month
prepayment rate
of the securities
 
in the respectiveour portfolio.
 
asset
category.
The unrealized
 
gains and
 
losses on
Structured
RMBS also
include the
premium lost
as a result
of prepayments
on
PT RMBSthe underlying
mortgages,
decreasing
unrealized
gains or
increasing
unrealized
losses as
speeds or
premiums increase.
Gains and
losses
RMBSon interest
rate futures
contracts
are affected
by changes
in implied
forward
rates during
the reporting
period.
TotalThe 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 Months Ended
Portfolio (%)U.S. Treasury
Portfolio (%)U.S. Treasury
Portfolio (%)Fixed-Rate
Fixed-Rate
Month
Rate
(1)
Rate
(1)
Mortgage Rate
(2)
Mortgage Rate
(2)
LIBOR
(3)
September 30, 2021
1.00%
1.53%
2.18%
2.90%
0.12%
June 30, 2021
10.90.87%
29.91.44%
12.92.27%
2.98%
0.13%
March 31, 2021
9.90.94%
40.31.75%
12.02.39%
3.08%
0.19%
December 31, 2020
16.70.36%
44.30.92%
20.12.22%
2.68%
0.23%
September 30, 2020
14.30.27%
40.40.68%
17.02.39%
2.89%
0.24%
June 30, 2020
13.90.29%
35.30.65%
16.32.60%
3.16%
0.31%
March 31, 2020
9.80.38%
22.90.70%
11.92.89%
3.45%
1.10%
(1)
Historical 5 and 10 Year
 
The following
tables summarize
certain characteristicsU.S. Treasury Rates are obtained from quoted end
 
of day prices on the Company’sChicago Board Options Exchange.
(2)
PT RMBS
Historical 30 Year and
 
structured15 Year Fixed
 
RMBS as ofRate Mortgage Rates are obtained from Freddie Mac’s
 
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
TotalPrimary 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
$
108.94Market Survey.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
33
(3)
Historical LIBOR is obtained from the Intercontinental Exchange Benchmark
Administration Ltd.
Expenses
For the nine
and three months
ended September
30, 2021,
the Company’s
total operating
expenses were
approximately
$10.9 million
and $3.7 million,
respectively, compared
to approximately
$7.7 million
and $2.8 million,
respectively, for
the nine
and three months
ended September
30, 2020.
The table
below presents
a breakdown
of operating
expenses for
the nine and
three months
ended September
30, 2021 and
2020.
(in thousands)
Nine Months Ended September 30,
Three Months Ended September 30,
2021
2020
Change
2021
2020
Change
Management fees
$
5,569
$
3,897
$
1,672
$
2,156
$
1,252
$
904
Overhead allocation
1,189
1,072
117
390
377
13
Accrued incentive compensation
884
(117)
1,001
259
158
101
Directors fees and liability insurance
874
750
124
279
242
37
Audit, legal and other professional fees
832
841
(9)
212
240
(28)
Direct REIT operating expenses
1,024
852
172
309
406
(97)
Other administrative
514
451
63
69
174
(105)
Total expenses
$
10,886
$
7,746
$
3,140
$
3,674
$
2,849
$
825
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
September 30, 2021
$
5,136,331
$
672,384
$
2,156
$
390
$
2,546
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
34
Nine Months Ended
September 30, 2021
$
4,557,978
$
557,250
$
5,569
$
1,189
$
6,758
September 30, 2020
3,273,068
368,785
3,897
1,072
4,969
Financial
Condition:
Mortgage-Backed Securities
As of September
30, 2021,
our RMBS
portfolio
consisted
of $5,601.4
million of
Agency RMBS
at fair value
and had a
weighted
average coupon
on assets
of 3.02%.
During the
nine months
ended September
30, 2021,
we received
principal
repayments
of $413.0
million compared
to $384.3
million
for the nine
months ended
September
30, 2020.
The average
three month
prepayment
speeds for
the
quarters
ended September
30, 2021
and 2020
were 12.4%
and 17.0%,
respectively.
The following
table presents
the 3-month
constant prepayment
rate (“CPR”)
experienced
on our structured
and PT RMBS
sub-portfolios,
on an annualized
basis, for
the quarterly
periods presented.
CPR is a method
of expressing
the prepayment
rate for a
mortgage pool
that assumes
that a constant
fraction
of the remaining
principal is
prepaid each
month or year.
Specifically, the
CPR in the
chart below
represents
the three month
prepayment
rate of the
securities
in the respective
asset
category.
Structured
PT RMBS
RMBS
Total
Three Months Ended
Portfolio (%)
Portfolio (%)
Portfolio (%)
September 30, 2021
9.8
25.1
12.4
June 30, 2021
10.9
29.9
12.9
March 31, 2021
9.9
40.3
12.0
December 31, 2020
16.7
44.3
20.1
September 30, 2020
14.3
40.4
17.0
June 30, 2020
13.9
35.3
16.3
March 31, 2020
9.8
22.9
11.9
The following
tables summarize
certain characteristics
of the Company’s
PT RMBS
and structured
RMBS as of
September
30, 2021
and December
31, 2020:
($ in thousands)
Weighted
Percentage
Average
of
Weighted
Maturity
Fair
Entire
Average
in
Longest
Asset Category
Value
Portfolio
Coupon
Months
Maturity
September 30, 2021
Fixed Rate RMBS
$
5,458,562
97.4%
2.96%
342
1-Oct-51
Total Mortgage-backed Pass-through
5,458,562
97.4%
2.96%
342
1-Oct-51
Interest-Only Securities
140,078
2.5%
3.39%
250
25-Aug-51
Inverse Interest-Only Securities
2,783
0.1%
3.75%
304
15-Jun-42
Total Structured RMBS
142,861
2.6%
3.40%
253
25-Aug-51
Total Mortgage Assets
$
5,601,423
100.0%
3.02%
326
1-Oct-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
35
Total Mortgage Assets
$
3,726,895
100.0%
3.19%
333
1-Jan-51
($ in thousands)
September 30, 2021
December 31, 2020
Percentage of
Percentage of
Agency
Fair Value
Entire Portfolio
Fair Value
Entire Portfolio
Fannie Mae
$
4,315,090
77.0%
$
2,733,960
73.4%
Freddie Mac
1,286,333
23.0%
992,935
26.6%
Total Portfolio
$
5,601,423
100.0%
$
3,726,895
100.0%
September 30, 2021
December 31, 2020
Weighted Average Pass-through Purchase Price
$
107.61
$
107.43
Weighted Average Structured Purchase Price
$
15.53
$
20.06
Weighted Average Pass-through Current Price
$
106.88
$
108.94
Weighted Average Structured Current Price
$
14.4813.40
$
10.87
Effective Duration
(1)
3.8303.350
2.360
(1)
Effective duration is the approximate percentage change in price
 
in price for a 100 bps change in rates.
 
An effective duration of 3.8303.350 indicates that an
interest rate increase of 1.0% would be expected to cause a 3.830%3.350% decrease in the value
 
the value of the RMBS in the Company’s investment
portfolio
at JuneSeptember 30, 2021.
 
An effective duration of 2.360 indicates that an interest rate increase
 
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
 
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
 
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
 
nine months ended
 
June ended September
30, 2021
and 2020,
 
and 2020,including
including securities
 
purchased during
 
the period
 
that settled
 
after the end
 
end of the period,
 
period, if any.
 
any.
($ in thousands)
2021
2020
Total Cost
Average
Price
Weighted
Average
Yield
Total Cost
Average
Price
Weighted
Average
Yield
Pass-through RMBS
$
2,910,3184,871,121
$
107.05106.96
1.54%1.56%
$
1,985,7563,012,072
$
106.59107.22
1.99%1.67%
Structured RMBS
76,546125,728
15.4213.04
3.98%3.80%
-
-
-
Borrowings
As of JuneSeptember
 
30, 2021,
 
we had established
 
borrowing
 
facilities
 
in the repurchase
 
agreement
 
market with
 
a number of
 
of commercial
banks and
 
banks
and other financial
 
financial institutions
 
and had borrowings
 
in place with
 
23 of these
 
counterparties.
 
None of these
 
lenders are
 
affiliated with
 
thewith
the Company. These
borrowings
 
are secured
 
by the Company’s
 
RMBS and
 
cash, and bear
 
bear interest
 
at prevailing
 
market rates.
 
We believe our
our established
 
repurchase
 
agreement
 
borrowing
 
facilities
 
provide borrowing
 
capacity in
 
excess of
 
our needs.
As of JuneSeptember
 
30, 2021,
 
we had obligations
 
outstanding
 
under the
 
repurchase
 
agreements
 
of approximately
 
$4,514.7 million5,213.9
 
million with a net
weighted average
 
a
net weighted
average borrowing
 
cost of 0.13%.
 
The remaining
 
maturity of
 
our outstanding
 
repurchase
 
agreement
 
obligations
 
ranged from
1 to 349
 
1 to
100 days, with
 
a weighted
 
average remaining
 
maturity of
 
2930 days.
 
Securing the
 
the repurchase
 
agreement
 
obligations
 
as of JuneSeptember
30, 2021
 
30, 2021
are RMBS
 
with an estimated
 
fair value,
 
including
accrued
 
interest,
 
of approximately
 
$4,678.1 million5,430.3
 
million and
a weighted
 
average
maturity
 
of
339 344 months,
 
and cash pledged
 
pledged to
counterparties
 
of approximately
 
$79.147.5 million.
 
Through July
 
30, 2021,October 28,
 
2021, we
have been
able to maintain
our repurchase
 
facilities
 
with comparable
 
terms to those
 
those that existed
 
existed at June 30,
 
2021 withSeptember
 
30, 2021
with maturities
 
through August
September
 
14, 2021.
2022.
The table below presents information about our period end,
maximum and average balances
of borrowings for each quarter in
36
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
JuneSeptember 30, 2021
$
4,514,7045,213,869
$
4,517,9535,214,254
$
4,348,1924,864,287
$
349,582
7.19%
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
 
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
 
sources of
liquidity
 
include cash
 
balances,
unencumbered
assets and
 
borrowings
 
under repurchase
 
agreements.
 
Our borrowing
 
capacity will
 
vary over time
 
time as the market
 
market value
of our
interest
earning assets
 
varies.
 
Our balance
 
sheet also
 
generates
 
liquidity
 
on an on-going
 
basis through
 
payments of
 
principal and
 
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
 
size and nature
 
nature of
our existing
 
RMBS portfolio,
 
(b) the repayments
 
on borrowings
and (c) the
 
payment of
 
dividends
 
to the extent
 
required for
 
for our continued
 
qualification
 
as a REIT.
 
We may also
 
generate liquidity
 
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
 
of governmental
 
agency securities,
 
although they
 
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
 
in distressed
 
markets, although
 
we
would likely
 
do so at prices
 
prices below where
 
where such
securities
 
could be sold
 
sold in a more
 
more stable
market.
 
To enhance our liquidity
 
even further,
 
we
may pledge
 
a portion
 
of our structured
 
RMBS as part
 
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,
 
cost, retain higher
 
higher levels of
 
of cash on hand
 
hand and
decrease
 
the likelihood
 
we will have
 
to sell assets
 
in
a distressed
 
market in order
 
order to
raise cash.
Our strategy
 
for hedging
 
our funding
 
costs typically
 
involves taking
 
taking short
positions
 
in interest
 
rate futures,
 
treasury
futures,
 
interest
rate
swaps, interest
 
rate swaptions
 
or other
instruments.
 
When the market
 
market causes
 
these short
 
positions
 
to decline
 
in value we
 
are required
 
to
meet margin
 
calls with
 
cash.
 
This can reduce
 
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
 
offset the
derivative
 
related margin
 
calls. If
 
this were
 
to occur in
 
in sufficient
magnitude,
 
the loss of
 
liquidity might
 
might force
us to reduce
 
reduce the size
 
size of the levered
 
levered portfolio,
 
pledge additional
 
structured
 
securities
 
to raise
funds or risk
 
risk operating
 
the portfolio
 
with less liquidity.
 
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
 
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
 
during the three
 
three months ended
 
ended March 31,
 
31, 2020.
 
37
Under our
 
repurchase
 
agreement funding
 
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
 
market value
of the
asset collateralizing
 
the financing
 
transaction
 
declines, the
 
the market value
 
value of our posted
 
posted margin will
 
will be insufficient
 
and we will
 
be required
 
to
post additional
 
collateral.
 
Conversely, if
 
the market
 
value of the
 
asset pledged
 
increases in
 
in value, we
 
we would
be over
collateralized
 
and we
would be entitled
 
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,
 
needed, as
do we.
 
Typically, but not always,
 
always, the parties
 
parties agree
to a
minimum
threshold
 
amount for
 
margin calls
 
so as to avoid
 
the need for
 
for nuisance margin
 
margin calls
on a daily
 
daily basis.
Our master
 
repurchase
 
agreements
do not specify
 
the haircut;
 
rather haircuts
 
are determined
 
on an individual
 
repurchase
 
transaction
 
basis. Throughout
 
the sixnine months
ended September
 
ended
June 30, 2021,
 
haircuts on
 
our pledged
 
collateral
 
remained stable
 
stable and
as of September
 
June 30, 2021,
 
our weighted
 
average
haircut was
 
was
approximately
 
5.0% of the
 
the value
of our collateral.
While we
 
collateral.
did not have
 
any TBAs at
September
30, 2021,
we do acquire
TBAs from
time to time.
TBAs represent
 
a form of
 
off-balance
sheet financing
 
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
 
or make physical
 
delivery of
 
of the underlying
 
securities.
 
If we were
 
required
to take physical
delivery to
 
take
physical deliverysettle a long
 
to settle aTBA, we
 
long TBA,would
have to fund
 
we would haveour total
 
to fund our
total purchase
 
commitment
 
with cash
 
or other
financing
 
sources and
 
our
liquidity position
 
position could
be negatively
 
impacted.
 
Our TBAs are
 
are also subject
 
subject to margin
 
margin requirements
 
governed by
 
by the Mortgage-Backed
 
Securities
 
Division ("MBSD")
 
of the FICC
 
and
by our master
 
securities
 
forward
transaction
 
agreements,
 
which may
 
establish margin
 
margin levels in
 
in excess
of the MBSD.
 
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
 
of our pledged
 
collateral
 
declines. The
 
The MBSD has
 
has the sole
discretion
 
to determine
 
the value
 
of our
TBAs and of
 
of the pledged
 
collateral
 
securing such
 
contracts.
 
In the event
 
of a margin
 
call, we must
 
must generally provide
 
provide additional
 
collateral
 
on
the same business
 
business day.
Settlement
 
of our TBA
 
obligations
 
by taking delivery
 
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
 
sources of
liquidity
 
to meet such
 
such obligations.
As discussed
 
earlier, we invest
 
a portion
 
of our capital
 
in structured
 
Agency RMBS.
 
We generally
 
do not apply
 
leverage to
 
to this portion
of our portfolio.
 
The leverage
 
inherent in
 
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
 
have and may continue
 
continue to pledge
 
pledge a
portion
 
of our structured
 
RMBS in order
 
to raise our
 
our cash levels,
 
but generally
will not pledge
 
pledge these
securities
 
in order to
 
to acquire
additional
 
assets.
The following
 
table summarizes
 
the effect on
 
on our liquidity
 
and cash flows
 
flows from
contractual
 
obligations
 
for repurchase
 
agreements
 
and
interest expense
 
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
$
4,514,7045,213,869
$
-
$
-
$
-
$
4,514,7045,213,869
Interest expense on repurchase agreements
(1)
1,5161,281
-
-
-
1,5161,281
Totals
$
4,516,2205,215,150
$
-
$
-
$
-
$
4,516,220
5,215,150
(1)
Interest expense
 
on repurchase
 
agreements is
 
based on current
 
interest rates
 
as of June 30,September
 
30, 2021 and the
 
the remaining term
 
term of the liabilities
existing at
 
existing
at that date.
In future
 
periods, we
 
we expect
to continue
 
to finance
 
our activities
 
in a manner
 
that is consistent
 
with our current
 
current operations
 
through
38
repurchase
 
agreements.
 
As of JuneSeptember
 
30, 2021,
 
we had cash
 
and cash equivalents
 
of $272.8$424.1
 
million.
 
We generated
 
cash flows
 
of $312.7
$497.8 million from
 
from principal and
 
and interest
 
payments on
 
our RMBS
 
and had average
 
repurchase
 
agreements
 
outstanding
 
of $4,118.4 million$4,367.0
 
duringmillion
during the six
nine months
 
ended JuneSeptember
 
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
 
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
 
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.
 
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
 
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,
 
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 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
 
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
September 30,
2021, we issued a total of 5,750,00041,568,338 shares under the June 2021 Equity Distribution
 
Agreement for aggregate gross
proceeds of
approximately $31.1$211.0 million, and net proceeds of approximately $30.6$207.5 million, after commissions and fees.
 
and fees. Subsequent
to JuneSeptember 30,
2021 and through July 30,October 29, 2021, we issued a total of 5,560,000 7,838,998
shares under the June 2021
Equity Distribution
Agreement for
aggregate gross proceeds of approximately $28.6$39.0 million, and net proceeds
of approximately
$28.2 $38.4 million, after
commissions and
fees.
Outlook
Economic Summary
The economyeffects of
 
COVID-19 continued its
 
strong recoveryto dominate
economic
activity during
the third quarter
of 2021, particularly
the Delta
variant that
first emerged
in earnest during
July.
Daily new infections
 
from the COVID-19Delta
 
pandemicvariant rose
rapidly during
 
the secondsummer
but
appeared to
peak in early
September and
have been slowly
falling since.
COVID related
deaths have
followed a
similar
pattern.
Progress on
vaccinations
has slowed,
and most of
the new cases
were among
the unvaccinated.
This has led
to
39
various measures
by governments
and corporations
to mandate employees
receive vaccinations.
The net effect
of a
spreading virus
and a reluctance
on the part
of many to
get vaccinated
has been subdued
job growth
during the
third quarter
 
of
2021.
This is particularly
true among workers
with high
exposure to
customers,
such as those
in the leisure
and hospitality
industries.
 
The surge
in COVID-19various
 
cases that occurredforms of pandemic
 
duringrelated supplemental
unemployment
insurance
ended in early
September, so job
growth may
accelerate
in the firstfourth
 
quarter of 2021quarter.
 
abated quicklyIn the interim,
 
as inoculationsthe combination
 
of the new vaccines
were
widely distributed
throughout the
population –
especiallya reluctance
 
to those mostreturn to
 
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
demandwork on the
 
part of consumers
many individuals,
 
to be unleashed.coupled with
 
Additionalsufficient income
 
fiscal policyvia unemployment
 
steps takeninsurance,
 
by the Bidenhas resulted
 
administration,in both robust
 
as
described below,demand for
 
added togoods
and services
and shortages
of labor in
many industries.
Coupled with
a demand/supply
imbalance in
favor of demand
for
many commodities
and parts, the
 
surge in economic
activity.
The economic
data released
throughout the
second quarter
provided evidencecombination
 
of the recovery.two
 
Retail sales,forces has
 
especiallyled to severe
 
car
sales, airsupply shortages
 
travel and hotelacross the
 
demand, surged.economy.
 
Home salesThe
supply imbalances
 
grew at a pacefor goods and
 
that exceededservices
have in turn
led to price
pressures
for both, driving
inflation to
multi-decade highs.
The Fed chairman,
among other
members of
 
the early 2000s.Federal
 
Home priceOpen Market
 
increases
exceeded levelsCommittee
 
seen in the early(“FOMC”) have
 
2000s as well,maintained
 
eventually leadingthese
inflationary
forces are
temporary and
will ease once
the effects
of the COVID
pandemic
fade and workers
can return
 
to a slow downwork.
 
in home sales
Yet, as implied by
market pricing
of inflation
linked U.S.
Treasury securities
 
and price appreciationopinions
 
inexpressed by
various market
participants,
inflation
may prove to
be more than
transitory, and
of late even
FOMC members
themselves
have admitted
inflation has
remained high
longer than
they had anticipated.
Over the
early days course
 
of the third
 
quarter as elevatedand
 
home pricesinto the fourth,
 
became an impedimentexpectations
for growth
in the U.S.
economy during
the third
quarter continued
 
to new sales.decline.
 
AsOn October
28, 2021, the demand
advanced read
on gross
domestic product
growth for
the U.S.
economy was
reported to
be 2.0%.
Expectations
 
for manygrowth
during the
quarter were
approximately
4% to 7% at
the beginning
of the quarter. As
noted above,
job growth
has decelerated
and supply
constraints
of goods and
and services
 
surged, theare keeping
 
lingering effectsactivity
levels suppressed.
Over the course
 
of the balance
of the year
it should become
apparent whether
or not the
supply
constraints,
especially
with respect
to labor, are transitory
or not now
that essentially
all forms
of pandemic
 
acted to retardrelated
unemployment
 
supply, leading toinsurance
 
price increases.
For example,have ended and
 
the
supply of computer new cases
 
chips of the Delta
variant of
the COVID
virus are
subsiding. This
in turn
should also
answer the
 
casequestion about
the transitory
nature of autosinflation.
The housing
market remains
robust as evidenced
by sales
of new and existing
homes, as
well as new
home construction.
However, as home
prices have
risen at 10%
– 20% over
the last year
 
and consumersupply
 
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 fearfulshortages
 
of excess exposuregoods and
materials
are
constraining
new home construction,
this trend
may slow.
If this were
 
to COVID-19occur,
 
(especiallyit would be
 
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 basisbeneficial
 
for the firstCompany’s
 
time since 2008.RMBS
portfolio
 
The lone disappointmentas prepayments
 
over the periodrelated to housing
 
has been jobturnover may
 
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.
decelerate.
Legislative
 
Response and
 
the FederalFed
 
Reserve
Congress passed
 
the CARES Act
 
quickly in
 
response to
 
the pandemic’s
 
emergence lastin
 
the spring and
of 2021and followed
 
with
additional
legislation
 
over the ensuing
 
months.
 
However, as certain
 
provisions
 
of the CARES
 
Act expired,
 
such as
supplemental
 
unemployment
 
insurance lastin
 
July of 2021,
there appeared
 
to be a need
 
for additional
 
stimulus for
 
for the economy
 
to deal
deal with the surge
 
surge in the pandemic
 
pandemic that occurred
 
occurred as
cold weather
 
set in, particularly
 
over the Christmas
 
holiday.
 
As mentioned
mentioned above,
the Federal
 
government
eventually
 
passed an additional
 
stimulus package
 
package in late
December of
2020 and
again in March
 
of 2020 and again2021. In
 
in
March of 2021.
In addition,
 
the Fed has
provided,
 
and continues
 
to provide,
 
as much support
 
to the markets
 
and the economy
economy as
it can within
 
the constraints
 
of its mandate.
 
During the third
 
third quarter
of 2020, the
 
the Fed unveiled
 
a new monetary
policy
policy framework
 
focused on average
 
inflation rate
 
rate targeting that
 
that allows the
 
the Fed Funds rate
 
rate to remain quite
 
quite low, even
if inflation
is expected
 
is
expected to temporarily
 
surpass the
 
2% target level.
 
Further, the Fed
 
will lookhas indicated
 
that it will
look past the presence
 
presence of very tight
 
labor markets,very
tight labor
markets, should
they be present
 
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
 
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
 
rise given the
Fed’s intention
 
intention to let inflation
 
let
inflation potentially
 
run above 2%
 
in the future
 
as the economy
 
more fully
 
recovers.
 
The response of
 
of U.S.
Treasury rates
 
rates
appeared to follow
 
follow this pattern
 
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.
Interest Rates
Interest rates
 
In fact, over
across 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.curve and U.S.
 
Sincedollar swap
curve were
little changed
during the
third quarter
 
end,of
rates have accelerated2021.
 
their decline,The only
 
especiallynotable development
 
so aswithin the delta
 
variant of COVID-19rates complex
 
has appeared towas the slight
 
spread at an
accelerating
rate acrossflattening of
 
both curves
between the U.S.
five-
 
and
40
30-year points
as the globe.market
 
The driver
of the counter-intuitive
movement in
rates was likelyanticipates
 
the resulteventual
tapering of
 
technical
factors, asasset purchases
 
market positioningbeginning
 
was so skewedin the fourth
quarter of
2021 and
increases
 
to the shortFed funds
 
side and there
simply were
few if any
additional sellers.
The
disappointing
job growth
figures have
also been pointed
to as evidencerate in either
 
the marketsecond
 
may have beenhalf of 2022
 
overly optimisticor early 2023.
As described
 
aboutabove, the
magnitude of
the economic
recovery.
More recently, the
rapid spread
of the delta Delta
 
variant of
 
COVID-19 isthe COVID virus
 
causing market
participantshas dominated
 
to lower theireconomic
 
near-term growthactivity, both during
 
estimates –the third quarter
 
both for theof
2021 and generally
 
U.S. and globally.
since March
 
The Fed has playedof 2020.
 
a roleHowever, the FOMC
and the Fed
chairman have
looked through
the effects
of the
pandemic and
see the impact
fading.
At the conclusion
of the September
FOMC meeting,
the Fed chairman
was not
ambiguous in
 
the evolutionexpressing
 
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,his view
 
that the inflationaryeconomy
 
pressures evidenthad made “substantial
 
in further progress”
towards achieving
their dual
mandates of
price stability
and full employment.
As a result,
the Fed appeared
to indicate
that it was
close to commencing
the
economy willtapering of
 
be transitory.their asset
purchases.
More specifically,
the Fed chairman
indicated they
are likely
to begin the
tapering of
their
asset purchases
this year
and that they
would likely
complete the
tapering by
mid next year.
 
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 rolereleased their
summary of
 
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,economic projections,
 
or the level“Dot Plot”
 
of interestas it is known,
 
rates, especially
long-term rates,
seems to indicate
the market agrees
with this point
of view.
However, at the conclusion
 
of the meeting
and, as was
the case with
the
June FOMC
 
meetingDot Plot,
the Dot Plot
indicated FOMC
members anticipated
increasing
the Fed Funds
rate sooner
and by a larger
amount than
the market
anticipated.
Nine of the
eighteen
FOMC members,
as evidenced
by the Dot
Plot released
in
September, expect
the Fed to
increase the
funds rate
at least once
in June, 2022.
This surprised
the market,
and the market
pricing
of forward
short-term
rates quickly
adjusted to
reflect these
expectations.
As the fourth
quarter has
unfolded and
inflationary
pressures
have continued
to build,
 
market waspricing
 
surprisedof forward
short-term
rates have
continued to
 
learn that whilereflect additional
increases to
 
the leadershipFed Funds
rate. Further,
as inflation
persists at
higher levels
and
continues to
challenge the
Fed’s assertion
that it will
prove transitory,
longer maturity
rates have moved
higher so far
in the
fourth quarter.
The level
 
of the Fed maintained10-year
 
this view, not allU.S. Treasury
 
members of the
FOMC did.is close to
 
There were members
of the committee
that believed
inflation may
not be transitory,
and that as a
resultmatching the
 
Fed
would have toyear-to-date
 
raise interesthigh yield
 
rates soonerestablished
 
than previously
thought and begin
to taper their
asset purchases
sooner as well.
Theon March 31,
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
2021.
The Agency RMBS
 
Market
Performance
 
for the Agency
 
RMBS market
 
for the secondthird
 
quarter trailedwas
 
most othera modest 0.01%,
 
asset classes,generally in-line
 
especiallywith most
 
so in June.other
asset classes.
 
The excess
return to comparable
duration U.S.
Treasuries and
swaps for
the Agency RMBS
sub-index was
The total return0.1% for both
 
for the Agencyquarter.
 
RMBS sub-indexWithin the
 
was 0.33% forAgency RMBS
sector, higher coupon
fixed rate
securities
outperformed
lower
coupons, specifically
 
the quarter.coupon currently
 
in widespread
production.
Total returns for the
third quarter
for 2.0% and
2.5%
securities
were -0.4%
and 0.00%,
respectively.
For 3.0% and
3.5% coupons
the returns
were 0.6% and
0.5%, respectively.
Thirty-year
and fifteen-year
securities
both returned
0.1% for the
quarter. As mentioned
 
above, at the
 
conclusion
 
of the
JuneSeptember FOMC
meeting the
chairman made
 
it was evidentquite clear
 
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 havelikely to
 
begin to taper their
 
their asset purchases
 
and eventually
raise short-term
interest rates
much sooner.
For the Agency
RMBS
market,purchases this
 
meant Fed purchasesyear
and conclude
 
ofthe $40 billion
 
per month mightpurchases
 
be ending soonerof Agency
 
than most marketRMBS assets
 
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.by mid-2022.
 
Given the length
 
of time the
 
Fed has
been
supporting
 
the Agency RMBS
 
RMBS market, coupled
 
coupled with
banks that are
 
flush with
 
deposits that
 
need to be
invested,
 
price
levels in
 
in the Agency RMBS
 
RMBS market were
 
were quite rich
 
prior to this
development.
 
While alldevelopment,
 
sectors of the
financial markets
appear to be
priced at the
high end of
long-term
price ranges,especially
 
the
removal of coupons
 
such a largethe Fed routinely
purchases,
 
buyer of Agencywhich have
 
RMBS likelybeen the 2.0%
 
would have a negativeand 2.5% coupons
 
effect on theirpredominantly. These
 
valuations.factors are
 
The marketwhat drove
 
has reactedthe relative
to the potentialunderperformance
 
of lower Fedthese two
 
purchases of
Agency RMBS,
leading to the
relative under-performance
of the Agency
RMBS
market duringcoupons for
 
the second quarter
 
of 2021.and has continued
 
to do so into
 
the fourth quarter.
The second driver
 
of Agency RMBS
 
performance,
 
both for the
 
secondthird quarter
 
of 2021 and
 
beyond, is,
 
as always,
 
the level
of
of prepayments.
 
As the marketWith interest
 
has ralliedrates relatively
 
– especiallysteady during
 
long-term rates
– rates available
to borrowers
are now back
to levels
seen last summer,the third quarter
 
and, burn-outafter
 
has yet to developsuch a prolonged
 
inperiod of low
interest
rates prepayment
speeds on higher
 
coupon, morepremium
 
seasoned mortgages.priced securities
were expected
to eventually
slow.
 
This has beenappears
 
supportiveto be
finally happening,
as evidenced
by the August
and September
prepayment
reports, released
in September
and October,
respectively.
As interest
rates
have moved higher
so far in
the fourth quarter,
approaching
levels last
seen at the
conclusion
 
of
specified poolthe first
 
premiums,quarter, market
 
a core holdingparticipants
expect this
trend to continue,
and which
is reflected
in the performance
 
of the Company.these coupons
quarter to
date.
Recent Legislative
 
and Regulatory
 
Developments
The Fed conducted
 
large scale
 
overnight repo
 
operations
 
from late
 
2019 until July
 
July 2020 to address
 
address disruptions
 
in the U.S.
Treasury, Agency debt and
 
and Agency
MBS financing
 
markets. These
 
operations ceased
 
ceased in
July 2020 after
 
after the central
 
bank
successfully
 
tamed volatile
 
funding costs
 
that had threatened
 
to cause disruption
 
across the
 
financial
system.
 
41
The Fed has taken
 
taken a number
 
of other actions
 
to stabilize
 
markets as
 
a result of
 
the impacts of
 
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
 
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
 
by 50 bps earlier
 
in the month.
 
Later that same
 
same month
the Fed
announced
 
a program to
 
acquire U.S.
 
Treasuries
and Agency RMBS
 
RMBS in the amounts
 
amounts needed
to support
 
smooth market
 
functioning.
 
With these
 
purchases, market
 
market conditions
improved substantially.
 
Currently, the Fed is
 
committed to
 
to purchasing $80
 
$80 billion of
 
of U.S. Treasuries
 
and $40 billion
 
of Agency
RMBS each month.
 
Chairman Powell
 
and the Fed have
 
have reiterated their
 
their commitment
 
to this level
 
of asset purchases
 
at every
meeting since
 
their meeting
 
on June 30,
 
2020. At the
 
June September
2021 meeting,
 
the Fed agreedgenerally
assessed that,
provided that
the economic
recovery remained
broadly on
track, a gradual
tapering process
that concluded
around the
middle of
next year
would likely
be appropriate.
The Fed noted
that if a
decision
 
to begin totapering
 
discuss plans
for
adjusting the
path and composition
of asset purchases
 
but reiteratedoccurred at
 
the intentionnext meeting,
 
to providethe
notice well
in advanceprocess of
 
an
announcementtapering could
 
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 weatheredcommence with
 
the pandemicmonthly
 
and its impactpurchase calendars
 
on economic
activity andbeginning in
 
is on trackeither mid-November
 
to achieve itsor mid-
maximum employment
and price stability
goals.December. The Fed
 
has taken various
 
other steps
 
to
support certain
 
certain other fixed
 
fixed income markets,
 
markets, to
support mortgage
servicers
 
and to implement
 
various portions
 
of the
Coronavirus
 
Aid, Relief,
 
and Economic
 
Security (“CARES”)
 
Act.
The CARES Act
 
Act was passed by
 
by Congress and
 
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 months (on
top of state
 
benefits), funding
 
funding to
hospitals
 
and health providers,
 
loans and
investments
 
to businesses,
 
states and municipalities
 
and grants to
 
to the airline
 
industry. On April
 
24, 2020, President
 
Trump
signed an additional
 
funding bill
 
into law that
 
provided an
 
additional $484
 
$484 billion of
 
of funding
to individuals,
 
small businesses,
hospitals, health
 
health care
providers
 
and additional
 
coronavirus
 
testing efforts.
 
Various provisions
 
of the CARES
 
Act began to
expire in July
 
July 2020,
including
 
a moratorium
 
on evictions,
 
expanded unemployment
 
benefits, and
 
and a moratorium
 
on foreclosures.
On August 8,
 
2020, President
 
Trump issued
 
issued Executive Order
 
Order 13945, directing
 
directing the
Department
 
of Health and
 
Human Services,
41
the Centers
 
for Disease
 
Control and
 
Prevention
(“CDC”),
 
the Department
 
of Housing and
 
and Urban Development,
 
and
Department of
 
of the Treasury to
 
to take measures
 
to temporarily
 
halt residential
 
evictions and
 
foreclosures,
 
including
through
temporary
financial
 
assistance.
 
On December
 
27, 2020, an
 
additional $900
 
$900 billion
coronavirus
 
aid package was
 
was signed into
 
into law as part
 
part of the
Consolidated
Appropriations
 
Act of 2021,
 
providing for
 
extensions
of many of
 
many of the CARES Act
 
CARES Act policies and
 
and programs as
 
as well as additional
relief. The
 
package provided
 
for, among other things,
 
things, direct payments
 
payments to
most Americans
 
with a gross
 
income of less
 
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
 
persons through March
 
March 31,
2021, which
 
has beenwas extended
 
to
July 31,
2021. On August
26, 2021, the
U.S. Supreme
Court issued
a decision
ending the
CDC eviction
moratorium.
 
In addition,
 
on
February 9,
 
9, 2021, the FHFA announced
 
FHFA announced that
the foreclosure
 
moratorium
 
begun under
the
CARES Act for
 
for loans backed
 
backed by
Fannie Mae
 
and Freddie
 
Mac and the eviction
 
eviction moratorium
 
for real estate
 
owned by Fannie
Mae and Freddie
 
Mac were
extended until
 
until March 31,
 
31, 2021, which
 
has been extendedwas further
 
to July 31,extended through
 
September
30, 2021. On February
 
16,July 30, 2021,
the FHA
announced an
extension
of the U.S. Housingeviction
moratorium
through September
30, 2021 for
foreclosed
borrowers
 
and Urban Developmentother occupants
Department
announcedand noted the
 
extensionexpiration of
 
the FHA evictionforeclosure
 
and foreclosure
moratorium
 
to June 30, 2021,
which has been
extended to
on July 31, 2021.
On March 11, 2021, the
 
$1.9the $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
 
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
 
their capital
buffers to $25
 
to $25 billion and
 
and $20$20 billion,
 
respectively, from
 
the prior limit
 
of $3 billion
 
each. ThisOn June
 
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
 
for the GSEs which
 
which seeks to implement
 
to
implement both
a risk-based
 
capital framework
 
and
minimum leverage
 
capital requirements.
 
The final rule
 
rule on the
new capital
framework
 
for the GSEs
 
was published
 
in the federal
register in
 
December 2020.
 
On January 14,
 
14, 2021, the U.S.
 
U.S. Treasury
and
the FHFA executed
 
letter agreements
 
allowing the
GSEs to continue
 
to retain capital
 
up to their
 
regulatory
 
minimums,
 
including buffers,
buffers, as prescribed
 
in the December
 
rule.
 
These letter
 
agreements provide,
 
provide, in
part, (i)
 
there will be
 
be no exit
from
conservatorship
 
until all material
 
material litigation is
 
is settled and the
 
and
the GSE has common
 
common equity Tier
 
Tier 1 capital of
at least 3%
 
of at least
3% of its
assets, (ii)
(ii) the GSEs will
 
will comply with
 
with the FHFA’s regulatory
42
capital framework,
 
(iii) higher-risk
 
single-family
 
mortgage acquisitions
 
will
be restricted
 
to current
 
levels, and (iv)
 
(iv) the U.S.
Treasury and the
 
and the FHFA will establish
 
establish a timeline
 
and process
 
for future GSE
reform. However,
 
GSE reform.
However, no definitive
 
proposals or
 
or
legislation
 
have been released
 
or enacted with
 
with respect to
 
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
 
President Biden
removed the
director of
 
the director
of the FHFA and appointed
 
an acting
 
director. WithOn September
14, 2021, the
 
leadershipFHFA suspended
 
change at
FHFA, some observerscertain provisions
 
anticipate thatadded to the
letter
agreements
on January
14, 2021, including
limits on
 
the Biden administrationenterprises'
cash windows,
multifamily
lending, loans
with higher
risk
characteristics,
and second
homes and investment
properties.
The enterprises
 
will be lesscontinue
 
likely to focusbuild capital
 
on endingunder the
continuing
provisions
of the letter
agreements.
Additionally, the
 
GSEs’ conservatorship
and that the
January 14,
2021 letter
agreements betweenFHFA is reviewing
 
the U.S. Treasuryenterprise
 
and the FHFA mayregulatory
 
be renegotiated.capital framework
and expects
to announce
further action
in the near
future.
In 2017, policymakers
 
announced that
 
LIBOR will
 
be replaced by
 
December 31,
 
2021. The directive
 
was spurred
 
by the
fact that banks
 
are uncomfortable
 
contributing
 
to the LIBOR
 
panel given the
 
the shortage of
 
of underlying
transactions
 
on which
to
base levels
 
and the liability
 
associated with
 
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
 
LIBOR settings
immediately
 
following the
 
LIBOR publication
 
on June 30, 2023.
 
2023. A joint statement
 
statement by
key regulatory
authorities
 
calls on banks
 
to cease entering
 
into new contracts
 
that use USD
 
LIBOR as a reference
 
reference rate
by no later
 
than
December 31,
 
2021. The Alternative
 
Reference Rates
 
Committee,
 
a steering committee
 
committee comprised of
 
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
 
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
 
to what rate or
 
or rates may become
 
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
 
RMBS investors, when
 
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
 
a loan that is
 
is paid in full,
 
full, or where the
 
the related lien
 
lien is released
 
and/or the
 
note debt is
 
satisfied or
 
or forgiven;
• a
 
a loan repurchased
 
by a seller/servicer
 
under applicable
 
selling and
 
servicing
 
requirements;
• a
 
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
 
the trial period
 
period ends;
• a
 
a loan subject
 
to a short sale
 
sale or deed-in-lieu
 
of foreclosure;
 
or
• a
 
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
 
affected depends on
 
on delinquency
 
levels, borrower
 
response, and
 
referral to
 
to foreclosure
 
timelines.
The scope and
 
nature of the
 
the actions the
 
the U.S. government
 
or the Fed will
 
will ultimately
 
undertake are
 
unknown and
 
will
continue to evolve,
 
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
43
Regulatory
 
developments,
 
movements in
 
in interest rates
 
rates and prepayment
 
rates affect
 
us in many
 
ways, including
 
the
following:
Effects on our
 
Assets
A change in or
 
or elimination
 
of the guarantee
 
structure of
 
of Agency RMBS
 
RMBS may increase
 
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
 
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
 
the credit risks
of our investments
 
in addition
 
to interest
 
rate and
prepayment risks.
 
risks.
Lower long-term
 
interest rates
 
can affect the
 
value of our
 
Agency RMBS
 
in a number
 
of ways. If
 
prepayment rates
 
rates are
relatively
 
low (due, in
 
in part, to the
 
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
 
Agency RMBS, which
 
which would shorten
 
shorten the
period during
 
which an
investor would
 
receive above-market
 
returns (assuming
 
the yield on
 
the prepaid
 
asset is higher
 
than market
 
market yields).
Also,
prepayment proceeds
 
proceeds may
not be able
 
to be reinvested
 
in similar-yielding
 
assets. Agency
 
RMBS backed
 
by mortgages
 
with
high interest
 
rates are more
 
more susceptible
 
to prepayment
 
risk because
 
holders of those
 
those mortgages are
 
are most likely
 
to refinance
 
to
a lower rate.
 
IOs and IIOs,
 
however, may be the
 
the types of Agency
 
Agency RMBS most
 
most sensitive to
 
to increased
prepayment
 
rates.
Because the holder
 
holder of
an IO or IIO
 
IIO receives no
 
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
 
If the principal
 
balance is
 
eliminated due
 
to prepayment,
 
IOs and
IIOs essentially
 
become worthless.
 
worthless. Although increased
 
increased prepayment
 
rates can negatively
 
affect the value
 
of our IOs
 
and IIOs,
they have the
 
the opposite effect
 
effect on POs. Because
 
Because POs
act like
 
zero-coupon
 
bonds, meaning
 
they are purchased
 
at a discount
 
to
their par value
 
value and have an
 
an effective interest
 
interest rate
based on the
 
the discount and
 
and the term
 
of the underlying
 
loan, an increase
 
in
prepayment rates
 
rates would reduce
 
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
 
also rise.
 
This tends to
 
cause prepayment
 
activity
 
to slow and
 
extend the expected
 
expected average life
 
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
 
average life
instruments.
 
This means
 
that to the extent
 
extent we use such
 
such instruments
to hedge our
 
Agency RMBS
 
assets, our
 
hedges may not
 
not adequately protect
 
protect us
from price
 
declines, and
 
therefore may
negatively impact
 
impact our
book value.
 
It is for this
 
this reason
we use interest
 
interest only
securities
 
in our portfolio.
 
As interest
 
rates rise,
 
the
expected average
 
life of these
 
securities
 
increases, causing
 
causing generally positive
 
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
 
market turmoil brought
 
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 2021September
 
meeting,2021
meeting, the
Fed generally
assessed that,
provided that
the economic
recovery remained
broadly on
track, a gradual
tapering
process that
concluded around
the middle
of next year
would likely
be appropriate.
The Fed agreednoted
that if a decision
 
to begin to
tapering purchases
 
discuss plans
for adjustingoccurred at
 
the path andnext meeting,
 
compositionthe process
 
of asset purchases,tapering
 
but reiteratedcould commence
 
with the intention
to provide noticemonthly
 
well in advancepurchase
calendars beginning
 
of an announcementin either
 
to reduce themid-November
 
pace of suchor mid-December. If
 
purchases.
If the Fed modifies,
 
reduces or
suspends its
 
its purchases of
 
of
Agency RMBS,
 
our investment
 
portfolio could
 
be negatively
 
impacted. Further,
 
the moratoriums
 
on
foreclosures
 
and evictionsdescribed
44
above will
 
described abovelikely delay
 
will likelypotential defaults
 
delay potentialon loans that
 
defaults on loans
that would otherwise
 
be bought out
 
of
Agency MBS pools
 
pools as described
above.
 
Depending on
 
on the ultimate
 
resolution
 
of the foreclosure
or evictions,foreclosures,
 
when and if
 
it
occurs, these
 
these loans
may be removed
 
removed from the
pool into which
 
the pool into
which they were
securitized.
 
If this were
 
to occur, it would
 
have the effect
effect of delaying
 
a prepayment
 
on the Company’s
securities
 
until such time.
 
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
 
base our investment
 
decisions on
 
on risk management
 
principles
 
rather than
 
anticipated
 
movements in
 
in interest
rates, in a
 
a volatile interest
 
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
 
asset classes. We
 
We may
attempt to mitigate
 
mitigate our exposure
 
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
 
interest rates
than PT RMBS,
 
RMBS, particularly
 
PT RMBS backed
 
by fixed-rate
mortgages.
Effects on our
 
borrowing costs
 
costs
We leverage our
 
our PT RMBS portfolio
 
portfolio and
a portion of
 
of our structured
 
Agency RMBS
 
with principal
 
balances through
 
the use
of short-term
 
repurchase agreement
 
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
 
our interest
rate
spread if there
 
is no corresponding
 
increase in
 
the interest
 
we earn on our
 
our assets. This
 
This would
be most prevalent
 
prevalent with respect
 
respect to
our Agency RMBS
 
RMBS backed
by fixed rate
 
rate mortgage loans
 
loans because the
 
the interest rate
 
rate on a
fixed-rate
 
mortgage loan
 
does not
change even though
 
though market rates
 
rates may change.
 
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
 
agreement debt
to fixed-rate
 
debt, or utilize
 
other hedging
instruments
 
such as Eurodollar,
 
Fed Funds and
 
T-Note futures
 
contracts or
 
or interest rate
 
rate swaptions.
Summary
Once again COVID-19
dominated economic
activity
this quarter.
However, we may
be at a crossroads
as the effects
of
the Delta variant
appears to
be waning and
the number
of people with
either a vaccination
and/or prior
infections
of the virus
grow.
Pandemic related
relief measures
such as supplemental
unemployment
insurance payments
and foreclosure
moratoriums
are essentially
over.
Hopefully
the combination
of all of these
factors will
lead to surging
job growth
and act to
quickly lessen
the severe
supply shortage
of goods and
labor.
This in turn
should slow
the stubbornly
high inflation
the
economy has
suffered.
If these events
come to pass,
the economy
appears to
be positioned
to perform
very well,
and the Fed
has stated that
it will
slowly remove
the considerable
accommodation
they have provided
the market
via a tapering
of their
asset purchases
and eventually
increases
to the Fed Funds
rate. If these
events do
not unfold and
the supply
shortages of
goods and labor
remain, the
economy will
likely continue
to suffer from
elevated levels
of inflation.
Under this
scenario the
path of economic
growth is
less certain,
and the path
of monetary
policy could
prove to be
quite challenging
for the Fed.
The performance
of the Agency
RMBS market
was very modest
in absolute
returns, at
0.0% and 0.1%
versus comparable
duration interest
rates and swaps.
Performance
for the sector
was generally
in line with
other sectors
of the fixed
income
markets.
Within the
Agency RMBS
universe,
performance
was skewed
towards higher
coupons and
away from
lower coupons
that comprise
the bulk of
recent production
and Fed purchases.
This has continued
into the fourth
quarter, in large
part
because the Fed
has made it
quite clear
the hurdle
needed for
them to begin
to taper
their asset
purchases has
been met and
they plan to
commence doing
so this year, likely
ending in mid-2022.
Prepayment
speeds, particularly
on high coupon
securities,
have moderated
and are likely
to do so even
more with
rates higher
so far in the
fourth quarter
and the typical
seasonal slow
down as we
approach the
winter months.
Critical Accounting Estimates
 
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
 
 
45
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 JuneSeptember 30, 2021, we had no material commitments for capital expenditures.
Off-Balance Sheet Arrangements
 
At JuneSeptember 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)
0.4550.650
45,46074,045
Totals
$
12.11012.305
$
387,423
416,008
(1)
On July 14,October 12, 2021, the Company declared a dividend of $0.065 per share
 
share to be paid on August 27,November 26, 2021.
 
The effect of this dividend is included
included in the table above, but is not reflected in the Company’s financial statements
 
statements as of JuneSeptember 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.
46
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
ingfloating 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.
47
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 JuneSeptember 30, 2021 and December 31, 2020, assuming rates instantaneously fall 200 bps, fall 100
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
measure of the sensitivity of our hedge positions and Agency RMBS’ effective duration to movements in interest rates.
All changes in value in the table below are measured as percentage changes from the investment portfolio value and
net asset value at the base interest rate scenario. The base interest rate scenario assumes interest rates and prepayment
projections as of JuneSeptember 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 JuneSeptember 30, 2021
-200 Basis Points
(0.71)(1.30)%
(6.01)(9.94)%
-100 Basis Points
0.27%(0.07)%
2.26%(0.50)%
-50 Basis Points
0.37%0.26%
3.12%1.99%
+50 Basis Points
(0.96)(1.40)%
(8.09)(10.70)%
+100 Basis Points
(2.37)(2.89)%
(19.96)(22.14)%
+200 Basis Points
(5.88)(7.37)%
(49.61)(56.54)%
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
 
on inputs and assumptions provided by third parties as well as by our
Manager, and assumes there are no changes
 
changes in mortgage spreads and assumes a static portfolio. Actual results could differ
 
differ materially from
these estimates.
 
(2)
Includes the effect of derivatives and other securities used for hedging
 
hedging purposes.
 
(3)
Estimated dollar change in investment portfolio value expressed as a percent
 
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
 
equity as of such date.
 
48
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,September
30, 2021, we had unrestricted cash and cash equivalents of $272.8$424.1 million and unpledged securities of approximately $5.7$5.4
million (not including unsettled securities purchases or 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 (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.
49
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
 
for the year
ended December
 
31, 2020. As of
 
June of September
30, 2021, there
 
there have been no
 
been no material
 
changes in our
risk factors
from those
set forth in
 
our Annual Reportrisk
factors from
 
those set forth
in our Annual
Report on Form 10-K
 
10-K for the year
 
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
 
the repurchase of
 
of up to 2,000,000
 
shares of the
Company's
 
Company's common stock.
 
stock. On
February 8,
 
8, 2018, the Board
 
Board of Directors
 
approved an increase
 
increase in
the stock repurchase
program for
up to an additional
4,522,822 shares
of the Company's
common stock.
The Company
did not repurchase
any
shares of its
common stock
 
repurchase program
for up to an
additional 4,522,822
shares of the
Company's common
stock. Unless
modified or
revoked byduring the
 
three months
ended September
30, 2021. As
of September
30, 2021, the
maximum
remaining
number of shares
that may be
repurchased
under this
authorization
is 837,311 shares.
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
 
three months ended
 
June ended September
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
3.2
3.3
4.1
10.1
31.1
31.2
32.1
32.2
Exhibit 101.INS XBRL
Inline XBRL Instance Document – the instance document does not appear
in the
Interactive Data File because its XBRL tags are embedded within the Inline XBRL
document.***
Exhibit 101.SCH XBRL
Taxonomy Extension Schema Document ***
Exhibit 101.CAL XBRL
Taxonomy Extension Calculation Linkbase Document***
Exhibit 101.DEF XBRL
Additional Taxonomy Extension Definition Linkbase Document Created***
Exhibit 101.LAB XBRL
Taxonomy Extension Label Linkbase Document ***
Exhibit 101.PRE XBRL
Taxonomy Extension Presentation Linkbase Document ***
Exhibit 104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
* Filed
 
Filed herewith.
**
Furnished herewith.
*** Submitted
 
Submitted electronically herewith.
†
Management contract or compensatory plan.
 
 
52
Signatures
Pursuant to the requirements of
 
of Section 13 or 15(d)
of the Securities Exchange
Act of 1934, as amended,
 
the Securities Exchange Act ofregistrant has duly
 
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,October 29, 2021
By:
/s/ Robert E. Cauley
Robert E. Cauley
Chief Executive Officer, President and Chairman of the Board
(Principal Executive Officer)
Date:
 
July 30,October 29, 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)