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
March 31, 2021
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number
:
001-35236
Orchid Island Capital, Inc.
(Exact name of registrant as specified in its charter)
Maryland
27-3269228
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
3305 Flamingo Drive
,
Vero Beach
,
Florida
32963
(Address of principal executive offices) (Zip Code)
(
772
)
231-1400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol:
Name of Each Exchange on Which
Registered
Common Stock, $0.01 par value
ORC
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes
☒
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files).
Yes
☒
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company", and "emerging growth
company" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
☐
☒
Number of shares outstanding at April 30, 2021:
94,410,960
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
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
44
ITEM 4. Controls and Procedures
47
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
48
ITEM 1A. Risk Factors
48
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
48
ITEM 3. Defaults upon Senior Securities
48
ITEM 4. Mine Safety Disclosures
48
ITEM 5. Other Information
48
ITEM 6. Exhibits
49
SIGNATURES
50
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORCHID ISLAND CAPITAL, INC.
CONDENSED BALANCE SHEETS
($ in thousands, except per share data)
(Unaudited)
March 31, 2021
December 31, 2020
ASSETS:
Mortgage-backed securities, at fair value
Pledged to counterparties
$
4,120,500
$
3,719,906
Unpledged
218,036
6,989
Total mortgage -backed securities
4,338,536
3,726,895
Cash and cash equivalents
211,436
220,143
Restricted cash
117,155
79,363
Accrued interest receivable
10,852
9,721
Derivative assets, at fair value
95,752
20,999
Receivable for securities sold, pledged to counterparties
154,977
414
Other assets
2,058
516
Total Assets
$
4,930,766
$
4,058,051
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements
$
4,181,680
$
3,595,586
Payable for unsettled securities purchased
217,758
0
Dividends payable
6,156
4,970
Derivative liabilities, at fair value
35,057
33,227
Accrued interest payable
921
1,157
Due to affiliates
712
632
Other liabilities
22,306
7,188
Total Liabilities
4,464,590
3,642,760
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $
0.01
100,000,000
and outstanding as of March 31, 2021 and December 31, 2020
0
0
Common Stock, $
0.01
500,000,000
94,410,960
shares issued and outstanding as of March 31, 2021 and
76,073,317
and outstanding as of December 31, 2020
944
761
Additional paid-in capital
512,595
432,524
Accumulated deficit
(47,363)
(17,994)
Total Stockholders' Equity
466,176
415,291
Total Liabilities and Stockholders' Equity
$
4,930,766
$
4,058,051
See Notes to Financial Statements
2
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended March 31, 2021 and 2020
($ in thousands, except per share data)
Three Months Ended March 31,
2021
2020
Interest income
$
26,856
$
35,671
Interest expense
(1,941)
(16,523)
Net interest income
24,915
19,148
Realized losses on mortgage-backed securities
(7,397)
(28,380)
Unrealized (losses) gains on mortgage-backed securities
(88,866)
3,032
Gains (losses) on derivative and other hedging instruments
45,472
(82,858)
Net portfolio loss
(25,876)
(89,058)
Expenses:
Management fees
1,621
1,377
Allocated overhead
404
347
Accrued incentive compensation
364
(436)
Directors' fees and liability insurance
272
260
Audit, legal and other professional fees
318
255
Direct REIT operating expenses
421
206
Other administrative
93
132
Total expenses
3,493
2,141
Net loss
$
(29,369)
$
(91,199)
Basic net loss per share
$
(0.34)
$
(1.41)
Diluted net loss per share
$
(0.34)
$
(1.41)
Weighted Average Shares Outstanding
85,344,954
64,590,205
Dividends declared per common share
$
0.195
$
0.240
See Notes to Financial Statements
3
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Three Months Ended March 31, 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
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
See Notes to Financial Statements
4
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended March 31, 2021 and 2020
($ in thousands)
2021
2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
$
(29,369)
$
(91,199)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Stock based compensation
259
59
Realized and unrealized losses on mortgage-backed securities
96,263
25,348
Realized and unrealized (gains) losses on interest rate swaptions
(13,903)
2,589
Realized and unrealized gains on interest rate floors
(1,384)
0
Realized and unrealized (gains) losses on interest rate swaps
(30,053)
54,934
Realized (gains) losses on forward settling to-be-announced securities
(574)
7,090
Changes in operating assets and liabilities:
Accrued interest receivable
(1,050)
2,350
Other assets
(588)
(655)
Accrued interest payable
(236)
(7,287)
Other liabilities
5,318
(223)
Due to (from) affiliates
80
(102)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
24,763
(7,096)
CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases
(1,764,082)
(1,334,350)
Sales
988,523
1,808,867
Principal repayments
123,880
142,259
Payments on net settlement of to-be-announced securities
(3,289)
(7,602)
Purchase of derivative financial instruments, net of margin cash received
(7,385)
(45,458)
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
(662,353)
563,716
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements
7,517,156
13,602,710
Principal payments on repurchase agreements
(6,931,062)
(14,240,566)
Cash dividends
(16,030)
(15,416)
Proceeds from issuance of common stock, net of issuance costs
96,908
19,447
Shares withheld from employee stock awards for payment of taxes
(297)
0
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
666,675
(633,825)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
29,085
(77,205)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the period
299,506
278,655
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the period
$
328,591
$
201,450
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest
$
2,176
$
23,809
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Securities acquired settled in later period
$
217,758
$
3,450
Securities sold settled in later period
154,977
0
See Notes to Financial Statements
5
ORCHID ISLAND CAPITAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
MARCH 31, 2021
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Description
Orchid Island Capital, Inc. (“Orchid” or the “Company”), was incorporated in Maryland on August 17, 2010 for the purpose of creating
and managing a leveraged investment portfolio consisting of residential mortgage-backed securities (“RMBS”). From incorporation to
February 20, 2013, Orchid was a wholly owned subsidiary of Bimini Capital Management, Inc. (“Bimini”). Orchid began operations on
November 24, 2010 (the date of commencement of operations). From incorporation through November 24, 2010, Orchid’s only activity
was the issuance of common stock to Bimini.
On January 23, 2020, Orchid entered into an equity distribution agreement (the “January 2020 Equity Distribution Agreement”) with
three sales agents pursuant to which the Company could offer and sell, from time to time, up to an aggregate amount of $
200,000,000
of shares of the Company’s common stock in transactions that were deemed to be “at the market” offerings and privately negotiated
transactions. The Company issued a total of
3,170,727
gross proceeds of
approximately $
19.8
19.4
its termination in August 2020.
On August 4, 2020, Orchid entered into an equity distribution agreement (the “August 2020 Equity Distribution Agreement”) with
four sales agents pursuant to which the Company may offer and sell, from time to time, up to an aggregate amount of $
150,000,000
shares of the Company’s common stock in transactions that are deemed to be “at the market” offerings and privately negotiated
transactions. Through March 31, 2021, the Company issued a total of
10,156,561
Agreement for aggregate gross proceeds of
approximately $
54.1
53.2
commissions and fees.
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
Morgan purchased the shares of the Company’s common stock from the Company pursuant to the January 2021 Underwriting
Agreement at $
5.20
1,140,000
21, 2021. The closing of the offering of
8,740,000
proceeds to the Company of approximately $
45.2
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
Company’s common stock from the Company pursuant to the March 2021 Underwriting Agreement at $
5.45
Company granted J.P. Morgan a 30-day option to purchase up to an additional
1,200,000
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
of the Company’s common stock occurred on March 5, 2021, with net proceeds to the Company of approximately $
50.1
offering expenses.
COVID-19 Impact
Beginning in mid-March 2020, the global pandemic associated with the novel coronavirus (“COVID-19”) and related economic
conditions began to impact our financial position and results of operations. As a result of the economic, health and market turmoil brought
6
about by COVID-19, the Agency RMBS market experienced severe dislocations. This resulted in falling prices of our assets and increased
margin calls from our repurchase agreement lenders, resulting in material adverse effects on our results of operations and to our financial
condition.
The Agency RMBS market largely stabilized after the Federal Reserve announced on March 23, 2020 that it would purchase Agency
RMBS and U.S. Treasuries in the amounts needed to support smooth market functioning. As of March 31, 2021, we have timely satisfied
all margin calls. The RMBS market continues to react to the pandemic and the various measures put in place to stabilize the market. To
the extent the financial or mortgage markets do not respond favorably to any of these actions, or such actions do not function as intended,
our business, results of operations and financial condition may continue to be materially adversely affected. Although the Company cannot
estimate the length or gravity of the impact of the COVID-19 pandemic at this time, if the pandemic continues, it may continue to have
materially adverse effects on the Company’s results of future operations, financial position, and liquidity during 2021.
Basis of Presentation and Use of Estimates
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted
in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 2021 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2021.
The balance sheet at December 31, 2020 has been derived from the audited financial statements at that date but does not include all
of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the financial
statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The
significant estimates affecting the accompanying financial statements are the fair values of RMBS and derivatives. Management believes
the estimates and assumptions underlying the financial statements are reasonable based on the information available as of March 31,
2021.
Variable Interest Entities (“VIEs”)
We obtain interests in VIEs through our investments in mortgage-backed securities. Our interests in these VIEs are passive in
nature and are not expected to result in us obtaining a controlling financial interest in these VIEs in the future. As a result, we do not
consolidate these VIEs and we account for our interest in these VIEs as mortgage-backed securities. See Note 2 for additional
information regarding our investments in mortgage-backed securities. Our maximum exposure to loss for these VIEs is the carrying
value of the mortgage-backed securities.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash on deposit with financial institutions and highly liquid investments with original maturities of
three months or less at the time of purchase. Restricted cash includes cash pledged as collateral for repurchase agreements and other
borrowings, and interest rate swaps and other derivative instruments.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial
position that sum to the total of the same such amounts shown in the statement of cash flows.
7
(in thousands)
March 31, 2021
December 31, 2020
Cash and cash equivalents
$
211,436
$
220,143
Restricted cash
117,155
79,363
Total cash, cash equivalents and restricted cash
$
328,591
$
299,506
The Company maintains cash balances at three banks and excess margin on account with two exchange clearing members. At times,
balances may exceed federally insured limits. The Company has not experienced any losses related to these balances. The Federal
Deposit Insurance Corporation insures eligible accounts up to $250,000 per depositor at each financial institution. Restricted cash
balances are uninsured, but are held in separate customer accounts that are segregated from the general funds of the counterparty. The
Company limits uninsured balances to only large, well-known banks and exchange clearing members and believes that it is not exposed to
any significant credit risk on cash and cash equivalents or restricted cash balances.
Mortgage-Backed Securities
The Company invests primarily in mortgage pass-through (“PT”) residential mortgage backed certificates issued by Freddie Mac,
Fannie Mae or Ginnie Mae (“RMBS”), collateralized mortgage obligations (“CMOs”), interest-only (“IO”) securities and inverse interest-only
(“IIO”) securities representing interest in or obligations backed by pools of RMBS. We refer to RMBS and CMOs as PT RMBS. We refer
to IO and IIO securities as structured RMBS. The Company has elected to account for its investment in RMBS under the fair value
option. Electing the fair value option requires the Company to record changes in fair value in the statement of operations, which, in
management’s view, more appropriately reflects the results of our operations for a particular reporting period and is consistent with the
underlying economics and how the portfolio is managed.
The Company records RMBS transactions on the trade date. Security purchases that have not settled as of the balance sheet date
are included in the RMBS balance with an offsetting liability recorded, whereas securities sold that have not settled as of the balance sheet
date are removed from the RMBS balance with an offsetting receivable recorded.
Fair value is defined as the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction
between market participants at the measurement date. The fair value measurement assumes that the transaction to sell the asset or
transfer the liability either occurs in the principal market for the asset or liability, or in the absence of a principal market, occurs in the most
advantageous market for the asset or liability. Estimated fair values for RMBS are based on independent pricing sources and/or third party
broker quotes, when available.
Income on PT RMBS securities is based on the stated interest rate of the security. Premiums or discounts present at the date of
purchase are not amortized. Premium lost and discount accretion resulting from monthly principal repayments are reflected in unrealized
gains (losses) on RMBS in the statements of operations. For IO securities, the income is accrued based on the carrying value and the
effective yield. The difference between income accrued and the interest received on the security is characterized as a return of investment
and serves to reduce the asset’s carrying value. At each reporting date, the effective yield is adjusted prospectively for future reporting
periods based on the new estimate of prepayments and the contractual terms of the security. For IIO securities, effective yield and income
recognition calculations also take into account the index value applicable to the security. Changes in fair value of RMBS during each
reporting period are recorded in earnings and reported as unrealized gains or losses on mortgage-backed securities in the accompanying
statements of operations.
Derivative and Other Hedging Instruments
The Company uses derivative and other hedging instruments to manage interest rate risk, facilitate asset/liability strategies and
manage other exposures, and it may continue to do so in the future. The principal instruments that the Company has used to date are
Treasury Note (“T-Note”), Fed Funds and Eurodollar futures contracts, short positions in U.S. Treasury securities, interest rate swaps,
8
options to enter in interest rate swaps (“interest rate swaptions”) and “to-be-announced” (“TBA”) securities transactions, but the Company
may enter into other derivative and other hedging instruments in the future.
The Company accounts for TBA securities as derivative instruments. Gains and losses associated with TBA securities transactions
are reported in gain (loss) on derivative instruments in the accompanying statements of operations.
Derivative and other hedging instruments are carried at fair value, and changes in fair value are recorded in earnings for each period.
The Company’s derivative financial instruments are not designated as hedge accounting relationships, but rather are used as economic
hedges of its portfolio assets and liabilities.
Holding derivatives creates exposure to credit risk related to the potential for failure on the part of counterparties and exchanges to
honor their commitments. In the event of default by a counterparty, the Company may have difficulty recovering its collateral and may not
receive payments provided for under the terms of the agreement. The Company’s derivative agreements require it to post or receive
collateral to mitigate such risk. In addition, the Company uses only registered central clearing exchanges and well-established commercial
banks as counterparties, monitors positions with individual counterparties and adjusts posted collateral as required.
Financial Instruments
The fair value of financial instruments for which it is practicable to estimate that value is disclosed either in the body of the financial
statements or in the accompanying notes. RMBS, Eurodollar, Fed Funds and T-Note futures contracts, interest rate swaps, interest rate
swaptions and TBA securities are accounted for at fair value in the balance sheets. The methods and assumptions used to estimate fair
value for these instruments are presented in Note 12 of the financial statements.
The estimated fair value of cash and cash equivalents, restricted cash, accrued interest receivable, receivable for securities sold,
other assets, due to affiliates, repurchase agreements, payable for unsettled securities purchased, accrued interest payable and other
liabilities generally approximates their carrying values as of March 31, 2021 and December 31, 2020 due to the short-term nature of these
financial instruments.
Repurchase Agreements
The Company finances the acquisition of the majority of its RMBS through the use of repurchase agreements under master
repurchase agreements. Repurchase agreements are accounted for as collateralized financing transactions, which are carried at their
contractual amounts, including accrued interest, as specified in the respective agreements.
Reverse Repurchase Agreements and Obligations to Return Securities Borrowed under Reverse Repurchase Agreements
The Company borrows securities to cover short sales of U.S. Treasury securities through reverse repurchase transactions under our
master repurchase agreements. We account for these as securities borrowing transactions and recognize an obligation to return the
borrowed securities at fair value on the balance sheet based on the value of the underlying borrowed securities as of the reporting date.
The securities received as collateral in connection with our reverse repurchase agreements mitigate our credit risk exposure to
counterparties. Our reverse repurchase agreements typically have maturities of 30 days or less.
Manager Compensation
The Company is externally managed by Bimini Advisors, LLC (the “Manager” or “Bimini Advisors”), a Maryland limited liability
company and wholly-owned subsidiary of Bimini. The Company’s management agreement with the Manager provides for payment to the
Manager of a management fee and reimbursement of certain operating expenses, which are accrued and expensed during the period for
which they are earned or incurred. Refer to Note 13 for the terms of the management agreement.
9
Earnings Per Share
Basic earnings per share (“EPS”) is calculated as net income or loss attributable to common stockholders divided by the weighted
average number of shares of common stock outstanding or subscribed during the period. Diluted EPS is calculated using the treasury
stock or two-class method, as applicable, for common stock equivalents, if any. However, the common stock equivalents are not included
in computing diluted EPS if the result is anti-dilutive.
Income Taxes
Orchid has qualified and elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986,
as amended (the “Code”). REITs are generally not subject to federal income tax on their REIT taxable income provided that they
distribute to their stockholders at least 90% of their REIT taxable income on an annual basis. In addition, a REIT must meet other
provisions of the Code to retain its tax status.
Orchid assesses the likelihood, based on their technical merit, that uncertain tax positions will be sustained upon examination
based on the facts, circumstances and information available at the end of each period. All of Orchid’s tax positions are categorized as
highly certain. There is no accrual for any tax, interest or penalties related to Orchid’s tax position assessment. The measurement of
uncertain tax positions is adjusted when new information is available, or when an event occurs that requires a change.
Recent Accounting Pronouncements
On January 1, 2020, we adopted Accounting Standards Update (“ASU”) 2016-13,
Financial Instruments – Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments.
ASU 2016-13 requires credit losses on most financial assets measured
at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current
expected credit loss model). The Company’s adoption of this ASU did not have a material effect on its financial statements as its
financial assets were already measured at fair value through earnings.
In March 2020, the FASB issued ASU 2020-04 “
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate
Reform on Financial Reporting.
” ASU 2020-04 provides optional expedients and exceptions to GAAP requirements for modifications
on debt instruments, leases, derivatives, and other contracts, related to the expected market transition from the London Interbank
Offered Rate (“LIBOR”), and certain other floating rate benchmark indices, or collectively, IBORs, to alternative reference rates. ASU
2020-04 generally considers contract modifications related to reference rate reform to be an event that does not require contract
remeasurement at the modification date nor a reassessment of a previous accounting determination. The guidance in ASU 2020-04 is
optional and may be elected over time, through December 31, 2022, as reference rate reform activities occur. The Company does not
believe the adoption of this ASU will have a material impact on its consolidated financial statements.
In January 2021, the FASB issued ASU 2021-01 “Reference Rate Reform (Topic 848). ASU 2021-01 expands the scope of ASC
848 to include all affected derivatives and give market participants the ability to apply certain aspects of the contract modification and
hedge accounting expedients to derivative contracts affected by the discounting transition. In addition, ASU 2021-01 adds
implementation guidance to permit a company to apply certain optional expedients to modifications of interest rate indexes used for
margining, discounting or contract price alignment of certain derivatives as a result of reference rate reform initiatives and extends
optional expedients to account for a derivative contract modified as a continuation of the existing contract and to continue hedge
accounting when certain critical terms of a hedging relationship change to modifications made as part of the discounting transition. The
guidance in ASU 2021-01 is effective immediately and available generally through December 31, 2022, as reference rate reform
activities occur. The Company does not believe the adoption of this ASU will have a material impact on its financial statements.
NOTE 2. MORTGAGE-BACKED SECURITIES
10
The following table presents the Company’s RMBS portfolio as of March 31, 2021 and December 31, 2020:
(in thousands)
March 31, 2021
December 31, 2020
Pass-Through RMBS Certificates:
Fixed-rate Mortgages
$
4,297,731
$
3,560,746
Fixed-rate CMOs
0
137,453
Total Pass-Through Certificates
4,297,731
3,698,199
Structured RMBS Certificates:
Interest-Only Securities
35,521
28,696
Inverse Interest-Only Securities
5,284
0
Total Structured RMBS Certificates
40,805
28,696
Total
$
4,338,536
$
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 March 31, 2021, the Company had met all margin call
requirements.
As of March 31, 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
March 31, 2021
Fair market value of securities pledged, including
accrued interest receivable
$
58,219
$
2,288,135
$
1,316,896
$
622,666
$
4,285,916
Repurchase agreement liabilities associated with
these securities
$
53,526
$
2,233,561
$
1,289,617
$
604,976
$
4,181,680
Net weighted average borrowing rate
0.24%
0.18%
0.18%
0.18%
0.18%
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 $
102.6
58.8
March 31, 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
and cash posted by the Company as collateral. At March 31, 2021, the Company had an aggregate amount at risk (the difference
between the amount loaned to the Company, including interest payable and securities posted by the counterparty (if any), and the fair
value of securities and cash pledged (if any), including accrued interest on such securities) with all counterparties of approximately $
205.9
11
million. The Company did not have an amount at risk with any individual counterparty greater than 10% of the Company’s equity at March
31, 2021 and December 31, 2020.
NOTE 4. DERIVATIVE AND OTHER HEDGING INSTRUMENTS
The table below summarizes fair value information about our derivative and other hedging instruments assets and liabilities as of
March 31, 2021 and December 31, 2020.
(in thousands)
Derivative and Other Hedging Instruments
Balance Sheet Location
March 31, 2021
December 31, 2020
Assets
Interest rate swaps
Derivative assets, at fair value
$
25,254
$
7
Payer swaptions (long positions)
Derivative assets, at fair value
58,643
17,433
Interest rate floors
Derivative assets, at fair value
2,399
0
TBA securities
Derivative assets, at fair value
9,456
3,559
Total derivative assets, at fair value
$
95,752
$
20,999
Liabilities
Interest rate swaps
Derivative liabilities, at fair value
$
0
$
24,711
Payer swaptions (short positions)
Derivative liabilities, at fair value
35,057
7,730
TBA securities
Derivative liabilities, at fair value
0
786
Total derivative liabilities, at fair value
$
35,057
$
33,227
Margin Balances Posted to (from) Counterparties
Futures contracts
Restricted cash
$
585
$
489
TBA securities
Restricted cash
1,781
284
TBA securities
Other liabilities
(7,407)
(2,520)
Interest rate swaption contracts
Other liabilities
(13,962)
(3,563)
Interest rate swap contracts
Restricted cash
12,214
19,761
Total margin balances on derivative contracts
$
(6,789)
$
14,451
Eurodollar, Fed Funds and T-Note futures are cash settled futures contracts on an interest rate, with gains and losses credited or
charged to the Company’s cash accounts on a daily basis. A minimum balance, or “margin”, is required to be maintained in the account on
a daily basis. The tables below present information related to the Company’s Eurodollar and T-Note futures positions at March 31, 2021
and December 31, 2020.
($ in thousands)
March 31, 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
1.01%
0.21%
$
(301)
Treasury Note Futures Contracts (Short Position)
(2)
June 2021 5-year T-Note futures
(Jun 2021 - Jun 2026 Hedge Period)
$
69,000
0.88%
1.17%
$
1,036
($ in thousands)
December 31, 2020
Average
Weighted
Weighted
Contract
Average
Average
Notional
Entry
Effective
Open
12
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)
T-Note futures contracts were valued at a price of $
123.40
126.16
short positions were $
85.1
87.1
Under our interest rate swap agreements, we typically pay a fixed rate and receive a floating rate based on LIBOR ("payer swaps").
The floating rate we receive under our swap agreements has the effect of offsetting the repricing characteristics of our repurchase
agreements and cash flows on such liabilities. We are typically required to post collateral on our interest rate swap agreements. The table
below presents information related to the Company’s interest rate swap positions at March 31, 2021 and December 31, 2020.
($ in thousands)
Average
Net
Fixed
Average
Estimated
Average
Notional
Pay
Receive
Fair
Maturity
Amount
Rate
Rate
Value
(Years)
March 31, 2021
Expiration > 3 to ≤ 5 years
$
955,000
0.64%
0.21%
$
15,286
4.8
Expiration > 5 years
400,000
1.16%
0.18%
9,968
8.1
$
1,355,000
0.79%
0.20%
$
25,254
5.7
December 31, 2020
Expiration > 3 to ≤ 5 years
$
620,000
1.29%
0.22%
$
(23,760)
3.6
Expiration > 5 years
200,000
0.67%
0.23%
(944)
6.4
$
820,000
1.14%
0.23%
$
(24,704)
4.3
The table below presents information related to the Company’s interest rate floor positions at March 31, 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
$
1,435
February 3, 2023
80,000
504
1.10%
10Y2Y
964
$
150,000
$
1,015
0.94%
2,399
The table below presents information related to the Company’s interest rate swaption positions at March 31, 2021 and
2020.
($ in thousands)
Option
Underlying Swap
Weighted
Average
Weighted
Average
Average
Adjustabl
e
Average
Fair
Months to
Notional
Fixed
Rate
Term
Expiration
Cost
Value
Expiration
Amount
Rate
(LIBOR)
(Years)
March 31, 2021
Payer Swaptions - long
>1 year ≤ 2 years
$
25,390
$
58,643
22.1
$
1,027,200
2.20%
3 Month
15.0
13
Payer Swaptions - short
≤ 1 year
$
(10,720)
$
(35,057)
10.1
$
(782,850)
2.20%
3 Month
15.0
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 March 31, 2021 and December 31, 2020
.
($ in thousands)
Notional
Net
Amount
Cost
Market
Carrying
Long (Short)
(1)
Basis
(2)
Value
(3)
Value
(4)
March 31, 2021
30-Year TBA securities:
2.5%
$
(250,000)
$
(257,188)
$
(256,270)
$
918
3.0%
(1,062,000)
(1,114,345)
(1,105,807)
8,538
Total
$
(1,312,000)
$
(1,371,533)
$
(1,362,077)
$
9,456
December 31, 2020
30-Year TBA securities:
2.0%
$
465,000
$
479,531
$
483,090
$
3,559
3.0%
(328,000)
(342,896)
(343,682)
(786)
Total
$
137,000
$
136,635
$
139,408
$
2,773
(1)
Notional amount represents the par value (or principal balance) of the underlying Agency RMBS.
(2)
Cost basis represents the forward price to be paid (received) for the underlying Agency RMBS.
(3)
Market value represents the current market value of the TBA securities (or of the underlying Agency RMBS) as of period-end.
(4)
Net carrying value represents the difference between the market value and the cost basis of the TBA securities as of period-end and is reported
in derivative assets (liabilities) at fair value in our balance sheets.
Gain (Loss) From Derivative and Other Hedging Instruments, Net
The table below presents the effect of the Company’s derivative and other hedging instruments on the statements of
operations for the three months ended March 31, 2021 and 2020.
(in thousands)
Three Months Ended March 31,
2021
2020
Eurodollar futures contracts (short positions)
$
12
$
(8,217)
T-Note futures contracts (short position)
2,476
(4,339)
Interest rate swaps
27,123
(60,623)
Payer swaptions (short positions)
(26,167)
0
Payer swaptions (long positions)
40,070
(2,589)
Interest rate floors
1,384
0
TBA securities (short positions)
9,133
(7,090)
TBA securities (long positions)
(8,559)
0
Total
$
45,472
$
(82,858)
Credit Risk-Related Contingent Features
14
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 March 31, 2021 and December 31, 2020.
(in thousands)
March 31, 2021
December 31, 2020
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Counterparties
Agreements
Agreements
Total
Agreements
Agreements
Total
PT RMBS - fair value
$
4,081,596
$
0
$
4,081,596
$
3,692,811
$
0
$
3,692,811
Structured RMBS - fair value
38,904
0
38,904
27,095
0
27,095
Accrued interest on pledged securities
10,572
0
10,572
9,636
0
9,636
Receivable for securities sold
154,977
0
154,977
0
0
0
Restricted cash
102,575
14,580
117,155
58,829
20,534
79,363
Total
$
4,388,624
$
14,580
$
4,403,204
$
3,788,371
$
20,534
$
3,808,905
Assets Pledged from Counterparties
The table below summarizes our assets pledged to us from counterparties under our repurchase agreements, reverse repurchase
agreements and derivative agreements as of March 31, 2021 and December 31, 2020.
(in thousands)
March 31, 2021
December 31, 2020
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Orchid
Agreements
Agreements
Total
Agreements
Agreements
Total
Cash
$
99
$
21,369
$
21,468
$
120
$
6,083
$
6,203
U.S. Treasury securities - fair value
737
0
737
253
0
253
Total
$
836
$
21,369
$
22,205
$
$
373
$
6,083
$
6,456
RMBS and U.S. Treasury securities received as margin under our repurchase agreements are not recorded in the balance sheets
because the counterparty retains ownership of the security. U.S. Treasury securities received from counterparties as collateral under our
reverse repurchase agreements are recognized as obligations to return securities borrowed under reverse repurchase agreements in the
balance sheet. Cash received as margin is recognized as cash and cash equivalents with a corresponding amount recognized as an
15
increase in repurchase agreements or other liabilities in the balance sheets.
NOTE 6. OFFSETTING ASSETS AND LIABILITIES
The Company’s derivative agreements and repurchase agreements and reverse repurchase agreements are subject to underlying
agreements with master netting or similar arrangements, which provide for the right of offset in the event of default or in the event of
bankruptcy of either party to the transactions. The Company reports its assets and liabilities subject to these arrangements on a gross
basis.
The following table presents information regarding those assets and liabilities subject to such arrangements as if the Company had
presented them on a net basis as of March 31, 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
March 31, 2021
Interest rate swaps
$
25,254
$
0
$
25,254
$
0
$
0
$
25,254
Interest rate swaptions
58,643
0
58,643
0
(13,962)
44,681
Interest rate floors
2,399
0
2,399
0
0
2,399
TBA securities
9,456
0
9,456
0
(7,407)
2,049
$
95,752
$
0
$
95,752
$
0
$
(21,369)
$
74,383
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
March 31, 2021
Repurchase Agreements
$
4,181,680
$
0
$
4,181,680
$
(4,079,105)
$
(102,575)
$
0
Interest rate swaptions
35,057
0
35,057
0
0
35,057
$
4,216,737
$
0
$
4,216,737
$
(4,079,105)
$
(102,575)
$
35,057
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 collateral received by or posted to the same counterparty up to and not exceeding the net amount of the
asset or liability presented in the balance sheets. The fair value of the actual collateral received by or posted to the same counterparty
16
typically exceeds the amounts presented. See Note 5 for a discussion of collateral posted or received against or for repurchase obligations
and derivative and other hedging instruments.
NOTE 7. CAPITAL STOCK
Common Stock Issuances
During the three months ended March 31, 2021 and the year ended December 31, 2020, the Company completed the following public
offerings of shares of its common stock.
($ in thousands, except per share amounts)
Weighted
Average
Price
Received
Net
Type of Offering
Period
Per Share
(1)
Shares
Proceeds
(2)
2021
At the Market Offering Program
(3)
First Quarter
$
5.10
308,048
$
1,572
Follow-on Offerings
First Quarter
5.31
17,940,000
95,336
Total
18,248,048
$
96,908
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’ discount, if applicable, and other offering costs.
(2)
Net proceeds are net of the underwriters’ discount, if applicable, and other offering costs.
(3)
The Company has entered into eight equity distribution agreements, seven 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
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
783,757
2,000,000
share authorization, the increased authorization brought the total authorization to
5,306,579
Company’s then outstanding share count. As part of the stock repurchase program, shares may be purchased in open market
transactions, block purchases, through privately negotiated transactions, or pursuant to any trading plan that may be adopted in
accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Open market repurchases
will be made in accordance with Exchange Act Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of
open market stock repurchases. The timing, manner, price and amount of any repurchases will be determined by the Company in its
discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The
authorization does not obligate the Company to acquire any particular amount of common stock and the program may be suspended or
discontinued at the Company’s discretion without prior notice.
From the inception of the stock repurchase program through March 31, 2021, the Company repurchased a total of
5,685,511
shares at an aggregate cost of approximately $
40.4
7.10
share. No shares were repurchased during the three months ended March 31, 2021 and 2020. The remaining authorization under the
repurchase program as of March 31, 2021 was
837,311
17
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)
0.260
23,374
Totals
$
11.915
$
365,337
(1)
On
April 14, 2021
, the Company declared a dividend of $
0.065
May 26, 2021
. The effect of this dividend is included in
the table above but is not reflected in the Company’s financial statements as of March 31, 2021.
NOTE 8. STOCK INCENTIVE PLAN
In October 2012, the Company’s Board of Directors adopted and Bimini, then the Company’s sole stockholder,
approved, the Orchid Island Capital, Inc. 2012 Equity Incentive Plan (the “Incentive Plan”) to recruit and retain employees,
directors and other service providers, including employees of the Manager and other affiliates. The 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 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 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
4,000,000
Company’s common stock that may be issued under the Incentive Plan.
Performance Units
The Company has issued, and may in the future issue additional, performance units under the Incentive Plan 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 three months ended
March 31, 2021 and 2020.
($ in thousands, except per share data)
Three Months Ended March 31,
18
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
Vested and issued
(2,277)
7.45
(4,153)
8.20
Unvested, end of period
140,174
$
5.91
14,868
$
7.66
Compensation expense during period
$
3
$
14
Unrecognized compensation expense, end of period
$
812
$
27
Intrinsic value, end of period
$
842
$
44
Weighted-average remaining vesting term (in years)
2.1
0.7
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 Plan to certain executive officers and employees of its Manager. The following table presents information related
to fully vested common stock issued during the three months ended March 31, 2021 and 2020. All of the fully vested shares
of common stock issued during the three months ended March 31, 2021, and the related compensation expense, were
granted with respect to service performed during the previous fiscal year.
($ in thousands, except per share data)
Three Months Ended March 31,
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 three months ended March 31, 2021 were granted with respect to service performed in 2020. Approximately
$600,000 of compensation expense related to the 2021 awards was accrued and recognized in 2020.
Deferred Stock Units
Non-employee directors began to receive a portion of their compensation in the form of deferred stock unit awards
(“DSUs”) pursuant to the Incentive Plan beginning with the awards for the second quarter of 2018. Each DSU represents a
right to receive one share of the Company’s common stock. The DSUs are immediately vested and are settled at a future
date based on the election of the individual participant. The DSUs contain dividend equivalent rights, which entitle the
participant to receive distributions declared by the Company on common stock. These dividend equivalent rights are settled
in cash or additional DSUs at the participant’s election. The DSUs do not include the right to vote the underlying shares of
common stock.
The following table presents information related to the DSUs outstanding during the three months ended March 31,
2021 and 2020.
19
($ in thousands, except per share data)
Three Months Ended March 31,
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
10,422
5.31
9,008
5.69
Issued
0
0
0
0
Outstanding, end of period
101,368
$
5.43
52,578
$
6.41
Compensation expense during period
$
45
$
45
Intrinsic value, end of period
$
609
$
155
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 March 31, 2021.
NOTE 10. INCOME TAXES
The Company will generally not be subject to federal income tax on its REIT taxable income to the extent it distributes its REIT
taxable income to its stockholders and satisfies the ongoing REIT requirements, including meeting certain asset, income and stock
ownership tests. A REIT must generally distribute at least 90% of its REIT taxable income to its stockholders, of which 85% generally
must be distributed within the taxable year, in order to avoid the imposition of an excise tax. The remaining balance may be distributed
up to the end of the following taxable year, provided the REIT elects to treat such amount as a prior year distribution and meets certain
other requirements.
NOTE 11. EARNINGS PER SHARE (EPS)
The Company had dividend eligible Performance Units and Deferred Stock Units that were outstanding during the three months
ended March 31, 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 three months ended March 31, 2021 and 2020.
(in thousands, except per share information)
Three Months Ended March 31,
2021
2020
Basic and diluted EPS per common share:
Numerator for basic and diluted EPS per share of common stock:
Net loss - Basic and diluted
$
(29,369)
$
(91,199)
Weighted average shares of common stock:
Shares of common stock outstanding at the balance sheet date
94,411
66,237
Effect of weighting
(9,066)
(1,647)
Weighted average shares-basic and diluted
85,345
64,590
Net loss per common share:
20
Basic and diluted
$
(0.34)
$
(1.41)
Anti-dilutive incentive shares not included in calculation.
242
67
NOTE 12. FAIR VALUE
The framework for using fair value to measure assets and liabilities defines fair value as the price that would be received to sell an
asset or paid to transfer a liability (an exit price). A fair value measure should reflect the assumptions that market participants would use in
pricing the asset or liability, including the assumptions about the risk inherent in a particular valuation technique, the effect of a restriction
on the sale or use of an asset and the risk of non-performance. Required disclosures include stratification of balance sheet amounts
measured at fair value based on inputs the Company uses to derive fair value measurements. These stratifications are:
●
Level 1 valuations, where the valuation is based on quoted market prices for identical assets or liabilities traded in active markets
(which include exchanges and over-the-counter markets with sufficient volume),
●
Level 2 valuations, where the valuation is based on quoted market prices for similar instruments traded in active markets, quoted
prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all
significant assumptions are observable in the market, and
●
Level 3 valuations, where the valuation is generated from model-based techniques that use significant assumptions not
observable in the market, but observable based on Company-specific data. These unobservable assumptions reflect the
Company’s own estimates for assumptions that market participants would use in pricing the asset or liability. Valuation
techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the
use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability.
The Company's RMBS and TBA securities are Level 2 valuations, and such valuations currently are determined by the Company
based on independent pricing sources and/or third party broker quotes, when available. Because the price estimates may vary, the
Company must make certain judgments and assumptions about the appropriate price to use to calculate the fair values. The Company and
the independent pricing sources use various valuation techniques to determine the price of the Company’s securities. These techniques
include observing the most recent market for like or identical assets (including security coupon, maturity, yield, and prepayment speeds),
spread pricing techniques to determine market credit spreads (option adjusted spread, zero volatility spread, spread to the U.S. Treasury
curve or spread to a benchmark such as a TBA), and model driven approaches (the discounted cash flow method, Black Scholes and
SABR models which rely upon observable market rates such as the term structure of interest rates and volatility). The appropriate spread
pricing method used is based on market convention. The pricing source determines the spread of recently observed trade activity or
observable markets for assets similar to those being priced. The spread is then adjusted based on variances in certain characteristics
between the market observation and the asset being priced. Those characteristics include: type of asset, the expected life of the asset, the
stability and predictability of the expected future cash flows of the asset, whether the coupon of the asset is fixed or adjustable, the
guarantor of the security if applicable, the coupon, the maturity, the issuer, size of the underlying loans, year in which the underlying loans
were originated, loan to value ratio, state in which the underlying loans reside, credit score of the underlying borrowers and other variables
if appropriate. The fair value of the security is determined by using the adjusted spread.
The Company’s futures contracts are Level 1 valuations, as they are exchange-traded instruments and quoted market prices are
readily available. Futures contracts are settled daily. The Company’s interest rate swaps and interest rate swaptions are Level 2
valuations. The fair value of interest rate swaps is determined using a discounted cash flow approach using forward market interest rates
and discount rates, which are observable inputs. The fair value of interest rate swaptions is determined using an option pricing model.
RMBS (based on the fair value option), derivatives and TBA securities were recorded at fair value on a recurring basis during the
three months ended March 31, 2021 and 2020. When determining fair value measurements, the Company considers the principal or most
advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset.
When possible, the Company looks to active and observable markets to price identical assets. When identical assets are not traded in
active markets, the Company looks to market observable data for similar assets.
21
The following table presents financial assets (liabilities) measured at fair value on a recurring basis as of March 31, 2021 and
December 31, 2020.
(in thousands)
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
Assets
Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
March 31, 2021
Mortgage-backed securities
$
0
$
4,338,536
$
0
Interest rate swaps
-
25,254
0
Interest rate swaptions
0
23,586
0
Interest rate floors
0
2,399
0
TBA securities
0
9,456
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 three months ended March 31, 2021 and 2020, there were no transfers of financial assets or liabilities between levels 1,
2 or 3.
NOTE 13. RELATED PARTY TRANSACTIONS
Management Agreement
The Company is externally managed and advised by Bimini Advisors, LLC (the “Manager”) pursuant to the terms of a
management agreement. The management agreement has been renewed through February 20, 2022 and provides for
automatic one-year extension options thereafter and is subject to certain termination rights. Under the terms of the
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.
22
Total expenses recorded for the management fee and costs incurred were approximately $
2.0
1.7
for the three months ended March 31, 2021 and 2020, respectively. At March 31, 2021 and December 31, 2020, the net
amount due to affiliates was approximately $
0.7
0.6
Other Relationships with Bimini
Robert Cauley, our Chief Executive Officer and Chairman of our Board of Directors, also serves as Chief Executive Officer and
Chairman of the Board of Directors of Bimini and owns shares of common stock of Bimini. George H. Haas, IV, our Chief Financial
Officer, Chief Investment Officer, Secretary and a member of our Board of Directors, also serves as the Chief Financial Officer, Chief
Investment Officer and Treasurer of Bimini and owns shares of common stock of Bimini. In addition, as of March 31, 2021, Bimini
owned
2,595,357
23
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with the financial
statements and notes to those statements included in Item 1 of this Form 10-Q. The discussion may contain certain forward-looking
statements that involve risks and uncertainties. Forward-looking statements are those that are not historical in nature. As a result of
many factors, such as those set forth under “Risk Factors” in our most recent Annual Report on Form 10-K, our actual results may
differ materially from those anticipated in such forward-looking statements.
Overview
We are a specialty finance company that invests in residential mortgage-backed securities (“RMBS”) which are issued and
guaranteed by a federally chartered corporation or agency (“Agency RMBS”). Our investment strategy focuses on, and our portfolio
consists of, two categories of Agency RMBS: (i) traditional pass-through Agency RMBS, such as mortgage pass-through certificates
issued by Fannie Mae, Freddie Mac or Ginnie Mae (the “GSEs”) and collateralized mortgage obligations (“CMOs”) issued by the GSEs
(“PT RMBS”) and (ii) structured Agency RMBS, such as interest-only securities (“IOs”), inverse interest-only securities (“IIOs”) and
principal only securities (“POs”), among other types of structured Agency RMBS. We were formed by Bimini in August 2010,
commenced operations on November 24, 2010 and completed our initial public offering (“IPO”) on February 20, 2013. We are
externally managed by Bimini Advisors, an investment adviser registered with the Securities and Exchange Commission (the “SEC”).
Our business objective is to provide attractive risk-adjusted total returns over the long term through a combination of capital
appreciation and the payment of regular monthly distributions. We intend to achieve this objective by investing in and strategically
allocating capital between the two categories of Agency RMBS described above. We seek to generate income from (i) the net interest
margin on our leveraged PT RMBS portfolio and the leveraged portion of our structured Agency RMBS portfolio, and (ii) the interest
income we generate from the unleveraged portion of our structured Agency RMBS portfolio. We intend to fund our PT RMBS and
certain of our structured Agency RMBS through short-term borrowings structured as repurchase agreements. PT RMBS and structured
Agency RMBS typically exhibit materially different sensitivities to movements in interest rates. Declines in the value of one portfolio
may be offset by appreciation in the other. The percentage of capital that we allocate to our two Agency RMBS asset categories will
vary and will be actively managed in an effort to maintain the level of income generated by the combined portfolios, the stability of that
income stream and the stability of the value of the combined portfolios. We believe that this strategy will enhance our liquidity,
earnings, book value stability and asset selection opportunities in various interest rate environments.
We operate so as to qualify to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as
amended (the “Code”). We generally will not be subject to U.S. federal income tax to the extent that we currently distribute all of our
REIT taxable income (as defined in the Code) to our stockholders and maintain our REIT qualification.
The Company’s common stock trades on the New York Stock Exchange under the symbol “ORC”.
Capital Raising Activities
On January 23, 2020, we entered into an equity distribution agreement (the “January 2020 Equity Distribution Agreement”) with
three sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $200,000,000 of shares
of our common stock in transactions that were deemed to be “at the market” offerings and privately negotiated transactions. We issued
a total of 3,170,727 shares under the January 2020 Equity Distribution Agreement for aggregate gross proceeds of $19.8 million, and
net proceeds of approximately $19.4 million, net of commissions and fees, prior to its termination in August 2020.
On August 4, 2020, we entered into an equity distribution agreement (the “August 2020 Equity Distribution Agreement”) with four
sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate amount of $150,000,000 of shares of our
common stock in transactions that are deemed to be “at the market” offerings and privately negotiated transactions. Through March 31,
24
2021, we issued a total of 10,156,561 shares under the August 2020 Equity Distribution Agreement for aggregate gross proceeds of
approximately $54.1 million, and net proceeds of approximately $53.2 million, net of commissions and fees.
On January 20, 2021, we entered into an underwriting agreement (the “January 2021 Underwriting Agreement”) with J.P. Morgan
Securities LLC (“J.P. Morgan”), relating to the offer and sale of 7,600,000 shares of our common stock. J.P. Morgan purchased the
shares of our common stock from the Company pursuant to the January 2021 Underwriting Agreement at $5.20 per share. In addition,
we granted J.P. Morgan a 30-day option to purchase up to an additional 1,140,000 shares of our common stock on the same terms and
conditions, which J.P. Morgan exercised in full on January 21, 2021. The closing of the offering of 8,740,000 shares of our common
stock occurred on January 25, 2021, with net proceeds to us of approximately $45.2 million, net of offering expenses.
On March 2, 2021 we entered into an underwriting agreement (the “March 2021 Underwriting Agreement”) with J.P. Morgan,
relating to the offer and sale of 8,000,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from
the Company pursuant to the March 2021 Underwriting Agreement at $5.45 per share. In addition, we granted J.P. Morgan a 30-day
option to purchase up to an additional 1,200,000 shares of our common stock on the same terms and conditions, which J.P. Morgan
exercised in full on March 3, 2021. The closing of the offering of 9,200,000 shares of our common stock occurred on March 5, 2021,
with net proceeds to us of approximately $50.1 million, net of offering expenses.
Stock Repurchase Agreement
On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to 2,000,000 shares of our common stock.
The timing, manner, price and amount of any repurchases is determined by the Company in its discretion and is subject to economic
and market conditions, stock price, applicable legal requirements and other factors. The authorization does not obligate the Company
to acquire any particular amount of common stock and the program may be suspended or discontinued at the Company’s discretion
without prior notice. On February 8, 2018, the Board of Directors approved an increase in the stock repurchase program for up to an
additional 4,522,822 shares of the Company’s common stock. Coupled with the 783,757 shares remaining from the original 2,000,000
share authorization, the increased authorization brought the total authorization to 5,306,579 shares, representing 10% of the
Company’s then outstanding share count. This stock repurchase program has no termination date.
From the inception of the stock repurchase program through March 31, 2021, the Company repurchased a total of 5,685,511
shares at an aggregate cost of approximately $40.4 million, including commissions and fees, for a weighted average price of $7.10 per
share. The Company did not repurchase any shares of its common stock during the three months ended March 31, 2021. The
remaining authorization under the repurchase program as of March 31, 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;
●
competition for, and supply of, investments in Agency RMBS;
●
actions taken by the U.S. government, including the presidential administration, the Fed, the Federal Housing Financing
Agency (the “FHFA”), the Federal Open Market Committee (the “FOMC”) and the U.S. Treasury;
●
prepayment rates on mortgages underlying our Agency RMBS and credit trends insofar as they affect prepayment rates; and
●
other market developments.
In addition, a variety of factors relating to our business may also impact our results of operations and financial condition. These
factors include:
25
●
our degree of leverage;
●
our access to funding and borrowing capacity;
●
our borrowing costs;
●
our hedging activities;
●
the market value of our investments; and
●
the requirements to qualify as a REIT and the requirements to qualify for a registration exemption under the Investment
Company Act.
Results of Operations
Described below are the Company’s results of operations for the three months ended March 31, 2021, as compared to the
Company’s results of operations for the three months ended March 31, 2020.
Net (Loss) Income Summary
Net loss for the three months ended March 31, 2021 was $29.4 million, or $0.34 per share. Net loss for the three months ended
March 31, 2020 was $91.2 million, or $1.41 per share. The components of net loss for the three months ended March 31, 2021 and 2020,
along with the changes in those components are presented in the table below:
(in thousands)
2021
2020
Change
Interest income
$
26,856
$
35,671
$
(8,815)
Interest expense
(1,941)
(16,523)
14,582
Net interest income
24,915
19,148
5,767
Losses on RMBS and derivative contracts
(50,791)
(108,206)
57,415
Net portfolio deficiency
(25,876)
(89,058)
63,182
Expenses
(3,493)
(2,141)
(1,352)
Net loss
$
(29,369)
$
(91,199)
$
61,830
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
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.
26
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
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
(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.
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
27
net interest income. This presentation includes gains or losses on all contracts in effect during the reporting period, covering
the current period as well as periods in the future.
The Company may invest in TBAs, which are forward contracts for the purchase or sale of Agency RMBS at a
predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific Agency
RMBS to be delivered into the contract are not known until shortly before the settlement date. We may choose, prior to
settlement, to move the settlement of these securities out to a later date by entering into a dollar roll transaction. The
Agency RMBS purchased or sold for a forward settlement date are typically priced at a discount to equivalent securities
settling in the current month. Consequently, forward purchases of Agency RMBS and dollar roll transactions represent a
form of off-balance sheet financing. These TBAs are accounted for as derivatives and marked to market through the income
statement. Gains or losses on TBAs are included with gains or losses on other derivative contracts and are not included in
interest income for purposes of the discussions below.
We believe that economic interest expense and economic net interest income provide meaningful information to
consider, in addition to the respective amounts prepared in accordance with GAAP. The non-GAAP measures help
management to evaluate its financial position and performance without the effects of certain transactions and GAAP
adjustments that are not necessarily indicative of our current investment portfolio or operations. The unrealized gains or
losses on derivative instruments presented in our statements of operations are not necessarily representative of the total
interest rate expense that we will ultimately realize. This is because as interest rates move up or down in the future, the
gains or losses we ultimately realize, and which will affect our total interest rate expense in future periods, may differ from
the unrealized gains or losses recognized as of the reporting date.
Our presentation of the economic value of our hedging strategy has important limitations. First, other market
participants may calculate economic interest expense and economic net interest income differently than the way we
calculate them. Second, while we believe that the calculation of the economic value of our hedging strategy described
above helps to present our financial position and performance, it may be of limited usefulness as an analytical tool.
Therefore, the economic value of our investment strategy should not be viewed in isolation and is not a substitute for
interest expense and net interest income computed in accordance with GAAP.
The tables below present a reconciliation of the adjustments to interest expense shown for each period relative to our
derivative instruments, and the income statement line item, gains (losses) on derivative instruments, calculated in
accordance with GAAP for each quarter of 2021 to date and 2020.
Gains (Losses) on Derivative Instruments
(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
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)
Economic Interest Expense and Economic Net Interest Income
(in thousands)
Interest Expense on Borrowings
Gains
(Losses) on
28
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
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
(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 three months ended March 31, 2021, we generated $24.9 million of net interest income, consisting of $26.9 million of
interest income from RMBS assets offset by $1.9 million of interest expense on borrowings. For the comparable period ended March 31,
2020, we generated $19.1 million of net interest income, consisting of $35.7 million of interest income from RMBS assets offset by $16.5
million of interest expense on borrowings. The $8.8 million decrease in interest income was due to a 170 basis point ("bps") decrease in
the yield on average RMBS, partially offset by the $762.9 million increase in average RMBS. The $14.6 million decrease in interest
expense was due to a 191 bps decrease in the average cost of funds, partially offset by a $759.5 million increase in average outstanding
borrowings. We had more average assets and borrowings during the first quarter of 2021 compared to the first quarter of 2020 as we
deployed the proceeds of our capital raising activity during the second half of 2020 and the first quarter of 2021.
On an economic basis, our interest expense on borrowings for the three months ended March 31, 2021 and 2020 was $6.0 million
and $21.4 million, respectively, resulting in $20.9 million and $14.2 million of economic net interest income, respectively. The lower
economic interest expense during the three months ended March 31, 2021 was due to the 191 bps decrease in the average cost of funds
noted above, partially offset by the $759.5 million increase in average outstanding borrowings and the negative performance of our
hedging activities during the period.
The tables below provide information on our portfolio average balances, interest income, yield on assets, average borrowings, interest
expense, cost of funds, net interest income and net interest spread for each quarter in 2021 to date and 2020 on both a GAAP and
economic basis.
($ 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
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%
($ in thousands)
Net Interest Income
Net Interest Spread
GAAP
Economic
GAAP
Economic
Basis
Basis
(2)
Basis
Basis
(4)
Three Months Ended
29
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%
(1)
Portfolio yields and costs of borrowings presented in the tables above and the tables on pages 29 and 30 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 30 include 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 three months ended March 31, 2021 and 2020 was $26.9 million and $35.7 million, respectively. We had
average RMBS holdings of $4,032.7 million and $3,269.9 million for the three months ended March 31, 2021 and 2020, respectively. The
yield on our portfolio was 2.66% and 4.36% for the three months ended March 31, 2021 and 2020, respectively. For the three months
ended March 31, 2021 as compared to the three months ended March 31, 2020, there was a $8.8 million decrease in interest income due
to a 170 bps decrease in the yield on average RMBS, partially offset by a $762.9 million increase in average RMBS.
The table below presents the average portfolio size, income and yields of our respective sub-portfolios, consisting of structured RMBS
and PT RMBS for each quarter in 2021 to date and 2020.
($ in thousands)
Average RMBS Held
Interest Income
Realized Yield on Average RMBS
PT
Structured
PT
Structured
PT
Structured
Three Months Ended
RMBS
RMBS
Total
RMBS
RMBS
Total
RMBS
RMBS
Total
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%
Interest Expense and the Cost of Funds
We had average outstanding borrowings of $3,888.6 million and $3,129.2 million and total interest expense of $1.9 million and $16.5
million for the three months ended March 31, 2021 and 2020, respectively. Our average cost of funds was 0.20% and 2.11% for the three
months ended March 31, 2021 and 2020, respectively. Contributing to the decrease in interest expense was a 191 bps decrease in the
average cost of funds, partially offset by a $759.5 million increase in average outstanding borrowings during the three months ended
March 31, 2021 as compared to the three months ended March 31, 2020.
Our economic interest expense was $6.0 million and $21.4 million for the three months ended March 31, 2021 and 2020, respectively.
There was a 212 bps decrease in the average economic cost of funds to 0.62% for the three months ended March 31, 2021 from 2.74%
for the three months ended March 31, 2020.
Since all of our repurchase agreements are short-term, changes in market rates directly affect our interest expense. Our average cost
of funds calculated on a GAAP basis was 7 bps above the average one-month LIBOR and 3 bps below the average six-month LIBOR for
the quarter ended March 31, 2021. Our average economic cost of funds was 49 bps above the average one-month LIBOR and 39 bps
above the average six-month LIBOR for the quarter ended March 31, 2021. The average term to maturity of the outstanding repurchase
30
agreements was 43 days at March 31, 2021 and 31 days at December 31, 2020.
The tables below present the average balance of borrowings outstanding, interest expense and average cost of funds, and average
one-month and six-month LIBOR rates for each quarter in 2021 to date and 2020 on both a GAAP and economic basis.
($ in thousands)
Average
Interest Expense
Average Cost of Funds
Balance of
GAAP
Economic
GAAP
Economic
Three Months Ended
Borrowings
Basis
Basis
Basis
Basis
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%
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
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%
Gains or Losses
The table below presents our gains or losses for the three months ended March 31, 2021 and 2020.
(in thousands)
2021
2020
Change
Realized losses on sales of RMBS
$
(7,397)
$
(28,380)
$
20,983
Unrealized (losses) gains on RMBS
(88,866)
3,032
(91,898)
Total losses on RMBS
(96,263)
(25,348)
(70,915)
Gains (losses) on interest rate futures
2,488
(12,556)
15,044
Gains (losses) on interest rate swaps
27,123
(60,623)
87,746
Losses on payer swaptions (short positions)
(26,167)
-
(26,167)
Gains (losses) on payer swaptions (long positions)
40,070
(2,589)
42,659
Gains on interest rate floors
1,384
-
1,384
Losses on TBA securities (long positions)
(8,559)
-
(8,559)
Gains (losses) on TBA securities (short positions)
9,133
(7,090)
16,223
Total
$
(50,791)
$
(108,206)
$
57,415
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 three months ended March 31, 2021 and 2020, we received proceeds of $988.5 million and $1,808.9 million,
respectively, from the sales of RMBS. Most of these sales in the first quarter of 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.
31
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. As rates increased during the three months ended March 31, 2021, it had a negative impact on our RMBS
portfolio. 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)
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
Total operating expenses were approximately $3.5 million and $2.1 million for the three months ended March 31, 2021
and 2020, respectively. The table below presents a breakdown of operating expenses for the three months ended March
31, 2021 and 2020.
(in thousands)
2021
2020
Change
Management fees
$
1,621
$
1,377
$
244
Overhead allocation
404
347
57
Accrued incentive compensation
364
(436)
800
Directors fees and liability insurance
272
260
12
Audit, legal and other professional fees
318
255
63
Other direct REIT operating expenses
421
206
215
Other expenses
93
132
(39)
Total expenses
$
3,493
$
2,141
$
1,352
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 $500 million.
The Company is obligated to reimburse the Manager for any direct expenses incurred on its behalf and to pay the Manager the
Company’s pro rata portion of certain overhead costs set forth in the management agreement. Should the Company terminate the
management agreement without cause, it will pay the Manager a termination fee equal to three times the average annual management
fee, as defined in the management agreement, before or on the last day of the term of the agreement.
32
The following table summarizes the management fee and overhead allocation expenses for each quarter in 2021 to date and
2020.
($ in thousands)
Average
Average
Advisory Services
Orchid
Orchid
Management
Overhead
Three Months Ended
MBS
Equity
Fee
Allocation
Total
March 31, 2021
$
4,032,716
$
453,353
$
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
Financial Condition:
Mortgage-Backed Securities
As of March 31, 2021, our RMBS portfolio consisted of $4,338.5 million of Agency RMBS at fair value and had a weighted average
coupon on assets of 3.02%. During the three months ended March 31, 2021, we received principal repayments of $123.9 million
compared to $142.3 million for the three months ended March 31, 2020. The average three month prepayment speeds for the quarters
ended March 31, 2021 and 2020 were 12.0% and 11.9%, respectively.
The following table presents the 3-month constant prepayment rate (“CPR”) experienced on our structured and PT RMBS
sub-portfolios, on an annualized basis, for the quarterly periods presented. CPR is a method of expressing the prepayment
rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year.
Specifically, the CPR in the chart below represents the three month prepayment rate of the securities in the respective asset
category. Assets that were not owned for the entire quarter have been excluded from the calculation. The exclusion of certain
assets during periods of high trading activity can create a very high, and often volatile, reliance on a small sample of underlying
loans.
Structured
PT RMBS
RMBS
Total
Three Months Ended
Portfolio (%)
Portfolio (%)
Portfolio (%)
March 31, 2021
9.9
40.3
12.0
December 31, 2020
16.7
44.3
20.1
September 30, 2020
14.3
40.4
17.0
June 30, 2020
13.9
35.3
16.3
March 31, 2020
9.8
22.9
11.9
The following tables summarize certain characteristics of the Company’s PT RMBS and structured RMBS as of March 31, 2021 and
December 31, 2020:
($ in thousands)
Weighted
Percentage
Average
of
Weighted
Maturity
Fair
Entire
Average
in
Longest
Asset Category
Value
Portfolio
Coupon
Months
Maturity
March 31, 2021
Fixed Rate RMBS
$
4,297,731
99.1%
2.95%
335
1-Mar-51
Total Mortgage-backed Pass-through
4,297,731
99.1%
2.95%
335
1-Mar-51
33
Interest-Only Securities
35,521
0.8%
3.98%
264
25-May-50
Inverse Interest-Only Securities
5,284
0.1%
3.77%
311
15-Jun-42
Total Structured RMBS
40,805
0.9%
3.93%
275
25-May-50
Total Mortgage Assets
$
4,338,536
100.0%
3.02%
331
1-Mar-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)
March 31, 2021
December 31, 2020
Percentage of
Percentage of
Agency
Fair Value
Entire Portfolio
Fair Value
Entire Portfolio
Fannie Mae
$
3,439,588
79.3%
$
2,733,960
73.4%
Freddie Mac
898,948
20.7%
992,935
26.6%
Total Portfolio
$
4,338,536
100.0%
$
3,726,895
100.0%
March 31, 2021
December 31, 2020
Weighted Average Pass-through Purchase Price
$
107.56
$
107.43
Weighted Average Structured Purchase Price
$
18.69
$
20.06
Weighted Average Pass-through Current Price
$
106.14
$
108.94
Weighted Average Structured Current Price
$
13.83
$
10.87
Effective Duration
(1)
4.090
2.360
(1)
Effective duration is the approximate percentage change in price for a 100 bps change in rates. An effective duration of 4.090 indicates that an
interest rate increase of 1.0% would be expected to cause a 4.090% decrease in the value of the RMBS in the Company’s investment portfolio
at March 31, 2021. An effective duration of 2.360 indicates that an interest rate increase of 1.0% would be expected to cause a 2.360%
decrease in the value of the RMBS in the Company’s investment portfolio at December 31, 2020. These figures include the structured securities
in the portfolio, but do not include the effect of the Company’s funding cost hedges. Effective duration quotes for individual investments are
obtained from The Yield Book, Inc.
The following table presents a summary of portfolio assets acquired during the three months ended March 31, 2021 and
2020, including securities purchased during the period that settled after the end of the period, if any.
($ in thousands)
2021
2020
Total Cost
Average
Price
Weighted
Average
Yield
Total Cost
Average
Price
Weighted
Average
Yield
Pass-through RMBS
$
1,971,296
$
107.09
1.38%
$
1,334,350
$
107.18
2.28%
Structured RMBS
4,807
6.93
0.14
-
-
0.00%
Borrowings
As of March 31, 2021, we had established borrowing facilities in the repurchase agreement market with a number of commercial
banks and other financial institutions and had borrowings in place with 21 of these counterparties. None of these lenders are affiliated with
the Company. These borrowings are secured by the Company’s RMBS and cash, and bear interest at prevailing market rates. We believe
our established repurchase agreement borrowing facilities provide borrowing capacity in excess of our needs.
34
As of March 31, 2021, we had obligations outstanding under the repurchase agreements of approximately $4,181.7 million with a net
weighted average borrowing cost of 0.18%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 1 to
166 days, with a weighted average remaining maturity of 43 days. Securing the repurchase agreement obligations as of March 31, 2021
are RMBS with an estimated fair value, including accrued interest, of approximately $4,285.9 million and a weighted average maturity of
339 months, and cash pledged to counterparties of approximately $102.6 million. Through April 30, 2021, we have been able to maintain
our repurchase facilities with comparable terms to those that existed at March 31, 2021 with maturities through October 8, 2021.
The table below presents information about our period end, maximum and average balances of borrowings for each quarter in
2021 to date and 2020.
($ in thousands)
Difference Between Ending
Ending
Maximum
Average
Borrowings and
Balance of
Balance of
Balance of
Average Borrowings
Three Months Ended
Borrowings
Borrowings
Borrowings
Amount
Percent
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)
(1)
The lower ending balance relative to the average balance during the quarter ended March 31, 2020 reflects the disposal of RMBS pledged as
collateral in order to maintain cash and liquidity in response to the dislocations in the financial and mortgage markets resulting from the
economic impacts of COVID-19. During the quarter ended March 31, 2020, the Company’s investment in RMBS decreased $642.1 million.
Liquidity and Capital Resources
Liquidity is our ability to turn non-cash assets into cash, purchase additional investments, repay principal and interest on borrowings,
fund overhead, fulfill margin calls and pay dividends. Our principal immediate sources of liquidity include cash balances, unencumbered
assets and borrowings under repurchase agreements. Our borrowing capacity will vary over time as the market value of our interest
earning assets varies. Our balance sheet also generates liquidity on an on-going basis through payments of principal and interest we
receive on our RMBS portfolio. Management believes that we currently have sufficient liquidity and capital resources available for (a) the
acquisition of additional investments consistent with the size and nature of our existing RMBS portfolio, (b) the repayments on borrowings
and (c) the payment of dividends to the extent required for our continued qualification as a REIT. We may also generate liquidity from time
to time by selling our equity or debt securities in public offerings or private placements.
Because our PT RMBS portfolio consists entirely of government and agency securities, we do not anticipate having difficulty
converting our assets to cash should our liquidity needs ever exceed our immediately available sources of cash. Our structured RMBS
portfolio also consists entirely of governmental agency securities, although they typically do not trade with comparable bid / ask spreads as
PT RMBS. However, we anticipate that we would be able to liquidate such securities readily, even in distressed markets, although we
would likely do so at prices below where such securities could be sold in a more stable market. To enhance our liquidity even further, we
may pledge a portion of our structured RMBS as part of a repurchase agreement funding, but retain the cash in lieu of acquiring additional
assets. In this way we can, at a modest cost, retain higher levels of cash on hand and decrease the likelihood we will have to sell assets in
a distressed market in order to raise cash.
Our strategy for hedging our funding costs typically involves taking short positions in interest rate futures, treasury futures, interest rate
swaps, interest rate swaptions or other instruments. When the market causes these short positions to decline in value we are required to
meet margin calls with cash. This can reduce our liquidity position to the extent other securities in our portfolio move in price in such a way
that we do not receive enough cash via margin calls to offset the derivative related margin calls. If this were to occur in sufficient
magnitude, the loss of liquidity might force us to reduce the size of the levered portfolio, pledge additional structured securities to raise
35
funds or risk operating the portfolio with less liquidity.
Our master repurchase agreements have no stated expiration, but can be terminated at any time at our option or at the option of the
counterparty. However, once a definitive repurchase agreement under a master repurchase agreement has been entered into, it generally
may not be terminated by either party. A negotiated termination can occur, but may involve a fee to be paid by the party seeking to
terminate the repurchase agreement transaction, as it did during the three months ended March 31, 2020.
Under our repurchase agreement funding arrangements, we are required to post margin at the initiation of the borrowing. The margin
posted represents the haircut, which is a percentage of the market value of the collateral pledged. To the extent the market value of the
asset collateralizing the financing transaction declines, the market value of our posted margin will be insufficient and we will be required to
post additional collateral. Conversely, if the market value of the asset pledged increases in value, we would be over collateralized and we
would be entitled to have excess margin returned to us by the counterparty. Our lenders typically value our pledged securities daily to
ensure the adequacy of our margin and make margin calls as needed, as do we. Typically, but not always, the parties agree to a minimum
threshold amount for margin calls so as to avoid the need for nuisance margin calls on a daily basis.
Our master repurchase agreements
do not specify the haircut; rather haircuts are determined on an individual repurchase transaction basis. Throughout the three months
ended March 31, 2021, haircuts on our pledged collateral remained stable and as of March 31, 2021, our weighted average haircut was
approximately 5.0% of the value of our collateral.
TBAs represent a form of off-balance sheet financing and are accounted for as derivative instruments. (See Note 4 to our Financial
Statements in this Form 10-Q for additional details on our TBAs). Under certain market conditions, it may be uneconomical for us to roll our
TBAs into future months and we may need to take or make physical delivery of the underlying securities. If we were required to take
physical delivery to settle a long TBA, we would have to fund our total purchase commitment with cash or other financing sources and our
liquidity position could be negatively impacted.
Our TBAs are also subject to margin requirements governed by the Mortgage-Backed Securities Division ("MBSD") of the FICC and
by our master securities forward transaction agreements, which may establish margin