NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 August 2, 2017, Orchid
entered into an equity distribution agreement (the “August 2017 Equity Distribution Agreement”) with two sales agents pursuant to which the Company may offer and sell, from time to time, up to an aggregate amount of $125,000,000 of 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, 2019, the Company issued a total of 9,013,946 shares under the August 2017 Equity Distribution
Agreement for aggregate gross proceeds of approximately $84.6 million, and net proceeds of approximately $83.3 million, net of commissions and fees.
Subsequent to
March 31, 2019, the Company issued an additional 1,432,466 shares under the August 2017 Equity Distribution Agreement for aggregate gross proceeds of approximately $9.6 million, and net proceeds of
approximately $9.5 million, net of commissions and fees.
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, 2019 are
not necessarily indicative of the results that may be expected for the year ending December 31, 2019.
The balance sheet at December 31, 2018 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, 2018.
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.
Statement of Comprehensive Income (Loss)
In accordance with the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) Topic
220,
Comprehensive Income
, a statement of comprehensive income (loss) has not been included as the Company has no items of other
comprehensive income (loss). Comprehensive income (loss) is the same as net income (loss) for the periods presented.
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.
(in thousands)
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Cash and cash equivalents
|
|
$
|
125,933
|
|
|
$
|
108,282
|
|
Restricted cash
|
|
|
16,998
|
|
|
|
17,981
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
142,931
|
|
|
$
|
126,263
|
|
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. At March 31, 2019, the Company’s cash deposits exceeded federally insured limits by approximately $123.5 million. 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 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.
The fair value of the Company’s investments in RMBS is governed by FASB ASC 820,
Fair Value Measurement
. The definition of fair value in FASB ASC 820 focuses on 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 Financial Instruments
The Company uses derivative 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”) and Eurodollar futures contracts, interest rate swaps, options to enter in interest rate swaps
(“interest rate swaptions”) and “to-be-announced” (“TBA”) securities transactions, but the Company may enter into other derivatives in the future.
The Company accounts for TBA securities as derivative instruments if either the TBA securities do not settle in the
shortest period of time possible or if the Company cannot assert that it is probable at inception of the TBA transaction, or throughout its term, that it will take physical delivery
of the Agency RMBS for a long position, or make delivery of the Agency RMBS for a short position, upon settlement of the trade. Gains and losses associated with TBA securities transactions are reported in gain (loss) on
derivative instruments in the accompanying statements of operations.
The Company has elected not to treat any of its derivative financial instruments as hedges in order to align the accounting
treatment of its derivative instruments with the treatment of its portfolio assets under the fair value option election. FASB ASC Topic 815,
Derivatives
and Hedging
, requires that all derivative instruments be carried at fair value. Changes in fair value are recorded in earnings for each period.
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 addition, the Company may be required to post collateral based on any declines in the market value of the derivatives. 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. To mitigate this risk, the Company uses only well-established commercial banks and exchanges as counterparties.
FASB ASC 825,
Financial
Instruments
, requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value, either in the body of the financial statements or in the accompanying notes. RMBS, Eurodollar 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, 2019 and December 31,
2018 due to the short-term nature of these financial instruments.
The Company finances the acquisition of the majority of its RMBS through the use of repurchase agreements under master
repurchase agreements. Pursuant to ASC Topic 860,
Transfers and Servicing
, the Company accounts for repurchase transactions as collateralized
financing transactions, which are carried at their contractual amounts, including accrued interest, as specified in the respective agreements.
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.
The Company follows the provisions of FASB ASC 260,
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.
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 measures, recognizes and presents its uncertain tax positions in accordance with FASB ASC 740,
Income Taxes
. Under that guidance, Orchid assesses the likelihood, based on their technical merit, that tax positions will be sustained upon
examination based on the facts, circumstances and information available at the end of each period. All of Orchid’s tax positions are categorized as highly certain. There is no accrual for any tax, interest or penalties related to Orchid’s tax
position assessment. The measurement of uncertain tax positions is adjusted when new information is available, or when an event occurs that requires a change.
Recent Accounting Pronouncements
In November 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-18,
Statement of Cash Flows – (Topic 230): Restricted Cash.
ASU 2016-18 requires that restricted cash and restricted cash equivalents be included as components of total cash and cash
equivalents as presented on the statement of cash flows. ASU 2016-18 is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2017. Early application is permitted. The Company early adopted the ASU
beginning with the first quarter of 2017.
In June 2016, the FASB issued 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). ASU 2016-13 is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2019.
Early application is permitted for fiscal periods beginning after December 15, 2018. The Company does not expect that the adoption of this ASU will have a significant effect on its financial statements.
NOTE 2. MORTGAGE-BACKED SECURITIES
The following table presents the Company’s RMBS portfolio as of March 31, 2019 and December 31, 2018:
(in thousands)
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Pass-Through RMBS Certificates:
|
|
|
|
|
|
|
Adjustable-rate Mortgages
|
|
$
|
1,217
|
|
|
$
|
1,437
|
|
Fixed-rate Mortgages
|
|
|
2,245,280
|
|
|
|
2,130,974
|
|
Fixed-rate CMOs
|
|
|
717,995
|
|
|
|
741,926
|
|
Total Pass-Through Certificates
|
|
|
2,964,492
|
|
|
|
2,874,337
|
|
Structured RMBS Certificates:
|
|
|
|
|
|
|
|
|
Interest-Only Securities
|
|
|
99,804
|
|
|
|
116,415
|
|
Inverse Interest-Only Securities
|
|
|
24,218
|
|
|
|
23,751
|
|
Total Structured RMBS Certificates
|
|
|
124,022
|
|
|
|
140,166
|
|
Total
|
|
$
|
3,088,514
|
|
|
$
|
3,014,503
|
|
The following table summarizes the Company’s RMBS portfolio as of March 31, 2019 and December 31, 2018, according to the
contractual maturities of the securities in the portfolio. Actual maturities of RMBS investments are generally shorter than stated contractual maturities and are affected by the contractual lives of the underlying mortgages, periodic payments of
principal, and prepayments of principal.
(in thousands)
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Greater than five years and less than ten years
|
|
$
|
2,681
|
|
|
$
|
5,696
|
|
Greater than or equal to ten years
|
|
|
3,085,833
|
|
|
|
3,008,807
|
|
Total
|
|
$
|
3,088,514
|
|
|
$
|
3,014,503
|
|
NOTE 3. REPURCHASE AGREEMENTS AND OTHER BORROWINGS
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, 2019, the Company had met all margin call requirements.
As of March 31, 2019, the Company had outstanding repurchase obligations of approximately $2,866.7 million with a net
weighted average borrowing rate of 2.70%. These agreements were collateralized by RMBS with a fair value, including accrued interest and securities pledged related to securities sold but not yet settled, of approximately $3,041.4 million, and
cash pledged to the counterparties of approximately $6.8 million. As of December 31, 2018, the Company had outstanding repurchase obligations of approximately $3,025.1 million with a net weighted average borrowing rate of 2.65%. These
agreements were collateralized by RMBS with a fair value, including accrued interest, of approximately $3,214.4 million, and cash pledged to the counterparties of approximately $7.0 million.
As of March 31, 2019 and 2018, the Company’s repurchase agreements had remaining maturities as summarized below:
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OVERNIGHT
|
|
|
BETWEEN 2
|
|
|
BETWEEN 31
|
|
|
GREATER
|
|
|
|
|
|
|
(1 DAY OR
|
|
|
AND
|
|
|
AND
|
|
|
THAN
|
|
|
|
|
|
|
LESS)
|
|
|
30 DAYS
|
|
|
90 DAYS
|
|
|
90 DAYS
|
|
|
TOTAL
|
|
March 31, 2019
|
|
Fair market value of securities pledged, including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accrued interest receivable
|
|
$
|
85,828
|
|
|
$
|
1,109,913
|
|
|
$
|
1,845,628
|
|
|
$
|
-
|
|
|
$
|
3,041,369
|
|
Repurchase agreement liabilities associated with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
these securities
|
|
$
|
82,642
|
|
|
$
|
1,038,199
|
|
|
$
|
1,745,897
|
|
|
$
|
-
|
|
|
$
|
2,866,738
|
|
Net weighted average borrowing rate
|
|
|
2.85
|
%
|
|
|
2.73
|
%
|
|
|
2.67
|
%
|
|
|
-
|
|
|
|
2.70
|
%
|
December 31, 2018
|
|
Fair market value of securities pledged, including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accrued interest receivable
|
|
$
|
-
|
|
|
$
|
1,720,804
|
|
|
$
|
1,493,565
|
|
|
$
|
-
|
|
|
$
|
3,214,369
|
|
Repurchase agreement liabilities associated with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
these securities
|
|
$
|
-
|
|
|
$
|
1,611,185
|
|
|
$
|
1,413,867
|
|
|
$
|
-
|
|
|
$
|
3,025,052
|
|
Net weighted average borrowing rate
|
|
|
-
|
|
|
|
2.72
|
%
|
|
|
2.57
|
%
|
|
|
-
|
|
|
|
2.65
|
%
|
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, 2019, 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 $176.3 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, 2019 and December 31, 2018.
NOTE 4. DERIVATIVE FINANCIAL INSTRUMENTS
In connection with its interest rate risk management strategy, the Company economically hedges a portion of the cost of its
repurchase agreement funding by entering into derivatives and other hedging contracts. To date, the Company has entered into Eurodollar and T-Note futures contracts, interest rate swaps, and interest rate swaptions, but may enter into other
contracts in the future. The Company has not elected hedging treatment under GAAP, and as such all gains or losses (realized and unrealized) on these instruments are reflected in earnings for all periods presented.
In addition, the Company utilizes TBA securities as a means of investing in and financing PT RMBS or as a means of reducing
its exposure to PT RMBS.
The Company accounts for TBA securities as derivative instruments if either the TBA securities do not settle in the shortest period of
time possible or if the Company cannot assert that it is probable at inception and throughout the term of the TBA securities that it will take physical delivery
of
the Agency RMBS for a long position, or make delivery of the Agency RMBS for a short position, upon settlement of the trade.
Derivative Assets (Liabilities), at Fair Value
The table below summarizes fair value information about our derivative assets and liabilities as of March 31, 2019 and
December 31, 2018.
(in thousands)
|
|
|
|
|
|
|
|
Derivative Instruments and Related Accounts
|
Balance Sheet Location
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Assets
|
|
|
|
|
|
|
|
Interest rate swaps
|
Derivative assets, at fair value
|
|
$
|
13,146
|
|
|
$
|
16,762
|
|
Payer swaptions
|
Derivative assets, at fair value
|
|
|
53
|
|
|
|
123
|
|
Total derivative assets, at fair value
|
|
|
$
|
13,199
|
|
|
$
|
16,885
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
Derivative liabilities, at fair value
|
|
$
|
1,111
|
|
|
$
|
2,205
|
|
TBA securities
|
Derivative liabilities, at fair value
|
|
|
4,235
|
|
|
|
3,742
|
|
Total derivative liabilities, at fair value
|
|
|
$
|
5,346
|
|
|
$
|
5,947
|
|
|
|
|
|
|
|
|
|
|
|
Margin Balances Posted to (from) Counterparties
|
|
|
|
|
|
|
|
|
|
Futures contracts
|
Restricted cash
|
|
$
|
2,347
|
|
|
$
|
4,711
|
|
TBA securities
|
Restricted cash
|
|
|
3,064
|
|
|
|
6,236
|
|
Interest rate swaption contracts
|
Other liabilities
|
|
|
-
|
|
|
|
(268
|
)
|
Interest rate swap contracts
|
Restricted cash
|
|
|
4,812
|
|
|
|
-
|
|
Interest rate swap contracts
|
Other liabilities
|
|
|
-
|
|
|
|
(14,308
|
)
|
Total margin balances on derivative contracts
|
|
|
$
|
10,223
|
|
|
$
|
(3,629
|
)
|
Eurodollar 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, 2019 and December 31, 2018.
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
|
Average
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Contract
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Notional
|
|
|
Entry
|
|
|
Effective
|
|
|
Open
|
|
Expiration Year
|
|
Amount
|
|
|
Rate
|
|
|
Rate
|
|
|
Equity
(1)
|
|
Eurodollar Futures Contracts (Short Positions)
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
$
|
400,000
|
|
|
|
2.76
|
%
|
|
|
2.46
|
%
|
|
$
|
(909
|
)
|
2020
|
|
|
500,000
|
|
|
|
2.97
|
%
|
|
|
2.21
|
%
|
|
|
(3,799
|
)
|
Total / Weighted Average
|
|
$
|
457,143
|
|
|
|
2.89
|
%
|
|
|
2.31
|
%
|
|
$
|
(4,708
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Note Futures Contracts (Short Position)
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 2019 5-year T-Note futures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Jun 2019 - Dec 2024 Hedge Period)
|
|
$
|
165,000
|
|
|
|
2.86
|
%
|
|
|
2.62
|
%
|
|
$
|
(1,789
|
)
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
Average
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Contract
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Notional
|
|
|
Entry
|
|
|
Effective
|
|
|
Open
|
|
Expiration Year
|
|
Amount
|
|
|
Rate
|
|
|
Rate
|
|
|
Equity
(1)
|
|
Eurodollar Futures Contracts (Short Positions)
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
$
|
1,650,000
|
|
|
|
2.25
|
%
|
|
|
2.64
|
%
|
|
$
|
7,036
|
|
2020
|
|
|
1,800,000
|
|
|
|
2.74
|
%
|
|
|
2.45
|
%
|
|
|
(4,503
|
)
|
Total / Weighted Average
|
|
$
|
1,725,000
|
|
|
|
2.51
|
%
|
|
|
2.54
|
%
|
|
$
|
2,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Note Futures Contracts (Short Position)
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 2019 5 year T-Note futures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Mar 2019 - Mar 2024 Hedge Period)
|
|
$
|
165,000
|
|
|
|
3.22
|
%
|
|
|
2.83
|
%
|
|
$
|
(3,185
|
)
|
(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 $115.83 at March 31, 2019 and $114.69 at December 31, 2018. The notional
contract values of the short positions were $191.1 million and $185.6 million at March 31, 2019 and December 31, 2018, respectively.
|
Under our interest rate swap agreements, we typically pay a fixed rate and receive a floating rate based on the London
Interbank Offered Rate (“LIBOR”) ("payer swaps"). The floating rate we receive under our swap agreements has the effect of offsetting the repricing characteristics of our repurchase agreements and cash flows on such liabilities. We are typically
required to post collateral on our interest rate swap agreements. The table below presents information related to the Company’s interest rate swap positions at March 31, 2019 and December 31, 2018.
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
Average
|
|
|
Estimated
|
|
|
Average
|
|
|
|
Notional
|
|
|
Pay
|
|
|
Receive
|
|
|
Fair
|
|
|
Maturity
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Rate
|
|
|
Value
|
|
|
(Years)
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration > 1 to ≤ 3 years
|
|
$
|
1,100,000
|
|
|
|
1.67
|
%
|
|
|
2.69
|
%
|
|
$
|
8,757
|
|
|
|
1.3
|
|
Expiration > 3 to ≤ 5 years
|
|
|
660,000
|
|
|
|
2.15
|
%
|
|
|
2.63
|
%
|
|
|
3,278
|
|
|
|
4.6
|
|
|
|
$
|
1,760,000
|
|
|
|
1.85
|
%
|
|
|
2.66
|
%
|
|
$
|
12,035
|
|
|
|
2.5
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration > 1 to ≤ 3 years
|
|
$
|
1,000,000
|
|
|
|
1.62
|
%
|
|
|
2.63
|
%
|
|
$
|
10,365
|
|
|
|
1.4
|
|
Expiration > 3 to ≤ 5 years
|
|
|
260,000
|
|
|
|
2.01
|
%
|
|
|
2.68
|
%
|
|
|
4,192
|
|
|
|
3.4
|
|
|
|
$
|
1,260,000
|
|
|
|
1.70
|
%
|
|
|
2.64
|
%
|
|
$
|
14,557
|
|
|
|
1.8
|
|
The table below presents information related to the Company’s interest rate swaption positions at March 31, 2019 and
December 31, 2018.
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
Underlying Swap
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Average
|
|
Adjustable
|
|
Average
|
|
|
|
|
|
Fair
|
|
Months to
|
|
|
Notional
|
|
Fixed
|
|
Rate
|
|
Term
|
Expiration
|
|
Cost
|
|
Value
|
|
Expiration
|
|
|
Amount
|
|
Rate
|
|
(LIBOR)
|
|
(Years)
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
≤ 1 year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payer Swaptions
|
$
|
308
|
$
|
53
|
|
2.3
|
|
$
|
100,000
|
|
2.71%
|
|
3 Month
|
|
7.0
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
≤ 1 year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payer Swaptions
|
$
|
7,805
|
$
|
123
|
|
1.4
|
|
$
|
700,000
|
|
3.20%
|
|
3 Month
|
|
9.0
|
The following table summarizes our contracts to purchase and sell TBA securities as of March 31, 2019 and December 31,
2018.
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
Amount
|
|
|
Cost
|
|
|
Market
|
|
|
Carrying
|
|
|
|
|
Long (Short)
(1)
|
|
|
Basis
(2)
|
|
|
Value
(3)
|
|
|
Value
(4)
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-Year TBA securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.0
|
%
|
|
$
|
(200,000
|
)
|
|
$
|
(194,896
|
)
|
|
$
|
(199,131
|
)
|
|
$
|
(4,235
|
)
|
Total
|
|
|
$
|
(200,000
|
)
|
|
$
|
(194,896
|
)
|
|
$
|
(199,131
|
)
|
|
$
|
(4,235
|
)
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-Year TBA securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.0
|
%
|
|
$
|
(250,000
|
)
|
|
$
|
(240,164
|
)
|
|
$
|
(243,906
|
)
|
|
$
|
(3,742
|
)
|
Total
|
|
|
$
|
(250,000
|
)
|
|
$
|
(240,164
|
)
|
|
$
|
(243,906
|
)
|
|
$
|
(3,742
|
)
|
(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 Instruments, Net
The table below presents the effect of the Company’s derivative financial instruments on the statements of operations for
the three months ended March 31, 2019 and 2018.
(in thousands)
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
Eurodollar futures contracts (short positions)
|
|
$
|
(10,041
|
)
|
|
$
|
14,541
|
|
T-Note futures contracts (short position)
|
|
|
(1,677
|
)
|
|
|
6,821
|
|
Interest rate swaps
|
|
|
(2,295
|
)
|
|
|
10,508
|
|
Receiver swaptions
|
|
|
-
|
|
|
|
(349
|
)
|
Payer swaptions
|
|
|
(378
|
)
|
|
|
2,066
|
|
Net TBA securities
|
|
|
(4,641
|
)
|
|
|
8,407
|
|
Total
|
|
$
|
(19,032
|
)
|
|
$
|
41,994
|
|
Credit Risk-Related Contingent Features
The use of derivatives 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.
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, 2019 and December 31, 2018.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
|
Repurchase
|
|
Derivative
|
|
|
|
Repurchase
|
|
Derivative
|
|
|
|
Assets Pledged to Counterparties
|
Agreements
|
|
Agreements
|
|
Total
|
|
Agreements
|
|
Agreements
|
|
Total
|
|
PT RMBS - fair value
|
|
$
|
2,918,623
|
|
|
$
|
-
|
|
|
$
|
2,918,623
|
|
|
$
|
2,854,540
|
|
|
$
|
10,776
|
|
|
$
|
2,865,316
|
|
Structured RMBS - fair value
|
|
|
110,494
|
|
|
|
-
|
|
|
|
110,494
|
|
|
|
126,270
|
|
|
|
-
|
|
|
|
126,270
|
|
Accrued interest on pledged securities
|
|
|
12,253
|
|
|
|
-
|
|
|
|
12,253
|
|
|
|
12,904
|
|
|
|
35
|
|
|
|
12,939
|
|
Receivable for securities sold
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
220,654
|
|
|
|
-
|
|
|
|
220,654
|
|
Restricted cash
|
|
|
6,775
|
|
|
|
10,223
|
|
|
|
16,998
|
|
|
|
7,034
|
|
|
|
10,947
|
|
|
|
17,981
|
|
Total
|
|
$
|
3,048,145
|
|
|
$
|
10,223
|
|
|
$
|
3,058,368
|
|
|
$
|
3,221,402
|
|
|
$
|
21,758
|
|
|
$
|
3,243,160
|
|
Assets Pledged from Counterparties
The table below summarizes our assets pledged to us from counterparties under our repurchase agreements and derivative
agreements as of March 31, 2019 and December 31, 2018.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
Repurchase
|
|
Derivative
|
|
|
|
Repurchase
|
|
Derivative
|
|
|
|
Assets Pledged to Orchid
|
Agreements
|
|
Agreements
|
|
Total
|
|
Agreements
|
|
Agreements
|
|
Total
|
|
Cash
|
|
$
|
4,201
|
|
|
$
|
-
|
|
|
$
|
4,201
|
|
|
$
|
3,852
|
|
|
$
|
14,576
|
|
|
$
|
18,428
|
|
PT RMBS - fair value
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,557
|
|
|
|
-
|
|
|
|
1,557
|
|
U.S. Treasury securities - fair value
|
|
|
954
|
|
|
|
-
|
|
|
|
954
|
|
|
|
180
|
|
|
|
-
|
|
|
|
180
|
|
Total
|
|
$
|
5,155
|
|
|
$
|
-
|
|
|
$
|
5,155
|
|
|
$
|
5,589
|
|
|
$
|
14,576
|
|
|
$
|
20,165
|
|
PT 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. Cash received as margin is recognized in cash and cash equivalents with a corresponding amount recognized as an increase in repurchase agreements or other liabilities in the
balance sheets.
NOTE 6. OFFSETTING ASSETS AND LIABILITIES
The Company’s derivatives and 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, 2019 and December 31, 2018.
(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, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
13,146
|
|
|
$
|
-
|
|
|
$
|
13,146
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,146
|
|
Interest rate swaptions
|
|
|
53
|
|
|
|
-
|
|
|
|
53
|
|
|
|
-
|
|
|
|
-
|
|
|
|
53
|
|
|
|
$
|
13,199
|
|
|
$
|
-
|
|
|
$
|
13,199
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
13,199
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
16,762
|
|
|
$
|
-
|
|
|
$
|
16,762
|
|
|
$
|
-
|
|
|
$
|
(14,308
|
)
|
|
$
|
2,454
|
|
Interest rate swaptions
|
|
|
123
|
|
|
|
-
|
|
|
|
123
|
|
|
|
-
|
|
|
|
(123
|
)
|
|
|
-
|
|
|
|
$
|
16,885
|
|
|
$
|
-
|
|
|
$
|
16,885
|
|
|
$
|
-
|
|
|
$
|
(14,431
|
)
|
|
$
|
2,454
|
|
(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
|
|
Collateral
|
|
Amount
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase Agreements
|
|
$
|
2,866,738
|
|
|
$
|
-
|
|
|
$
|
2,866,738
|
|
|
$
|
(2,859,963
|
)
|
|
$
|
(6,775
|
)
|
|
$
|
-
|
|
Interest rate swaps
|
|
|
1,111
|
|
|
|
-
|
|
|
|
1,111
|
|
|
|
-
|
|
|
|
(1,111
|
)
|
|
|
-
|
|
TBA securities
|
|
|
4,235
|
|
|
|
-
|
|
|
|
4,235
|
|
|
|
-
|
|
|
|
(3,064
|
)
|
|
|
1,171
|
|
|
|
$
|
2,872,084
|
|
|
$
|
-
|
|
|
$
|
2,872,084
|
|
|
$
|
(2,859,963
|
)
|
|
$
|
(10,950
|
)
|
|
$
|
1,171
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase Agreements
|
|
$
|
3,025,052
|
|
|
$
|
-
|
|
|
$
|
3,025,052
|
|
|
$
|
(3,018,018
|
)
|
|
$
|
(7,034
|
)
|
|
$
|
-
|
|
Interest rate swaps
|
|
|
2,205
|
|
|
|
-
|
|
|
|
2,205
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,205
|
|
TBA securities
|
|
|
3,742
|
|
|
|
-
|
|
|
|
3,742
|
|
|
|
-
|
|
|
|
(3,742
|
)
|
|
|
-
|
|
|
|
$
|
3,030,999
|
|
|
$
|
-
|
|
|
$
|
3,030,999
|
|
|
$
|
(3,018,018
|
)
|
|
$
|
(10,776
|
)
|
|
$
|
2,205
|
|
The amounts disclosed for collateral received by or posted to the same counterparty up to and not exceeding the net amount
of the asset or liability presented in the balance sheets. The fair value of the actual collateral received by or posted to the same counterparty typically exceeds the amounts presented. See Note 5 for a discussion of collateral posted or
received against or for repurchase obligations and derivative instruments.
Common Stock Issuances
During the three months ended March 31, 2019, the Company completed the following public offerings of shares of its common
stock. There were no common stock issuances through public offerings during 2018.
($ in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
Received
|
|
|
|
|
|
Net
|
|
Type of Offering
|
Period
|
|
Per Share
(1)
|
|
|
Shares
|
|
|
Proceeds
(2)
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
At the Market Offering Program
(3)
|
First Quarter
|
|
$
|
6.84
|
|
|
|
1,267,894
|
|
|
$
|
8,503
|
|
At the Market Offering Program
(3)(4)
|
Second Quarter
|
|
|
6.74
|
|
|
|
1,432,466
|
|
|
|
9,504
|
|
Total
|
|
|
|
|
|
|
|
2,700,360
|
|
|
$
|
18,007
|
|
(1)
|
Weighted average price received per share is before 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 six equity distribution agreements, five of which have either been terminated because all shares were
sold or were replaced with a subsequent agreement.
|
(4)
|
Shares issued in the second quarter of 2019 are not reflected in the Company's financial statements as of March 31, 2019.
|
Stock Repurchase Program
On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to 2,000,000 shares of the Company’s
common stock. On February 8, 2018, the Board of Directors approved an increase in the stock repurchase program for up to an additional 4,522,822 shares of the Company's common stock. 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, 2019, the Company repurchased a total of 5,665,620
shares at an aggregate cost of approximately $40.3 million, including commissions and fees, for a weighted average price of $7.11 per share. During the three months ended March 31, 2019, the Company repurchased a total of 469,975 shares at an
aggregate cost of approximately $3.0 million, including commissions and fees, for a weighted average price of $6.43 per share. The remaining authorization under the repurchase program as of March 31, 2019 was 857,202 shares.
Cash Dividends
The table below presents the cash dividends declared on the Company’s common stock.
(in thousands, except per share amounts)
|
|
Year
|
|
Per Share Amount
|
|
|
Total
|
|
2013
|
|
$
|
1.395
|
|
|
$
|
4,662
|
|
2014
|
|
|
2.160
|
|
|
|
22,643
|
|
2015
|
|
|
1.920
|
|
|
|
38,748
|
|
2016
|
|
|
1.680
|
|
|
|
41,388
|
|
2017
|
|
|
1.680
|
|
|
|
70,717
|
|
2018
|
|
|
1.070
|
|
|
|
55,814
|
|
2019 - YTD
(1)
|
|
|
0.320
|
|
|
|
15,824
|
|
Totals
|
|
$
|
10.225
|
|
|
$
|
249,796
|
|
(1)
|
On April 17, 2019, the Company declared a dividend of $0.08 per share to be paid on May 31, 2019. The effect of this dividend is
included in the table above, but is not reflected in the Company’s financial statements as of March 31, 2019.
|
NOTE 8. STOCK INCENTIVE PLAN
In October 2012, the Company’s Board of Directors adopted and Bimini, then the Company’s sole stockholder, approved, the
Orchid Island Capital, Inc. 2012 Equity Incentive Plan (the “Incentive Plan”) to recruit and retain employees, directors and other service providers, including employees of the Manager and other affiliates. The Incentive Plan provides for the
award of stock options, stock appreciation rights, stock award, performance units, other equity-based awards (and dividend equivalents with respect to awards of performance units and other equity-based awards) and incentive awards. The Incentive
Plan is administered by the Compensation Committee of the Company’s Board of Directors except that the Company’s full Board of Directors will administer awards made to directors who are not employees of the Company or its affiliates. The
Incentive Plan provides for awards of up to an aggregate of 10% of the issued and outstanding shares of our common stock (on a fully diluted basis) at the time of the awards, subject to a maximum aggregate 4,000,000 shares of the Company’s common
stock that may be issued under the Incentive Plan.
The Company has issued, and may in the future issue additional, immediately vested common stock under the Incentive Plan to
certain executive officers and employees of its Manager. The Company’s non-employee directors received grants of immediately vested common stock for their service to the Company during the first quarter of 2018. The following table presents
information related to fully vested common stock issued during the three months ended March 31, 2019 and 2018.
($ in thousands, except per share data)
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Fully vested shares granted
|
|
|
-
|
|
|
|
3,886
|
|
Weighted average grant date price per share
|
|
$
|
-
|
|
|
$
|
9.28
|
|
Compensation expense related to fully vested shares of common stock awards
|
|
$
|
-
|
|
|
$
|
36
|
|
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 shares. Performance Units are subject to forfeiture should the
participant no longer serve as an executive officer or employee of the Company. 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,
2019 and 2018.
($ in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
Unvested, beginning of period
|
|
|
43,672
|
|
|
$
|
8.34
|
|
|
|
41,693
|
|
|
$
|
9.95
|
|
Vested and issued
|
|
|
(8,173
|
)
|
|
|
9.08
|
|
|
|
(6,406
|
)
|
|
|
10.28
|
|
Unvested, end of period
|
|
|
35,499
|
|
|
$
|
8.17
|
|
|
|
35,287
|
|
|
$
|
9.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense during period
|
|
|
|
|
|
$
|
42
|
|
|
|
|
|
|
$
|
45
|
|
Unrecognized compensation expense, end of period
|
|
|
|
|
|
$
|
115
|
|
|
|
|
|
|
$
|
121
|
|
Intrinsic value, end of period
|
|
|
|
|
|
$
|
234
|
|
|
|
|
|
|
$
|
260
|
|
Weighted-average remaining vesting term (in years)
|
|
|
|
|
|
|
1.0
|
|
|
|
|
|
|
|
0.9
|
|
Beginning with the second quarter of 2018, non-employee directors received a portion of their compensation in the form of
deferred stock unit awards (“DSUs”) pursuant to the Incentive Plan. 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, 2019.
($ in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
Outstanding, beginning of period
|
|
|
12,434
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Granted and vested
|
|
|
7,350
|
|
|
|
6.41
|
|
|
|
-
|
|
|
|
-
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, end of period
|
|
|
19,784
|
|
|
$
|
7.01
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense during period
|
|
|
|
|
|
$
|
45
|
|
|
|
|
|
|
$
|
-
|
|
Intrinsic value, end of period
|
|
|
|
|
|
$
|
130
|
|
|
|
|
|
|
$
|
-
|
|
There were no DSUs issued during the three months ended March 31, 2018.
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, 2019.
The Company will generally not be subject to federal income tax on its REIT taxable income to the extent that 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 that were outstanding during the three months ended March 31, 2019 and
2018. The basic and diluted per share computations include these unvested Performance Units if there is income available to common stock, as they have dividend participation rights. The Performance Units have no contractual obligation to share in
losses. Because there is no such obligation, the Performance 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, 2019 and 2018.
(in thousands, except per-share information)
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Basic and diluted EPS per common share:
|
|
|
|
|
|
|
Numerator for basic and diluted EPS per share of common stock:
|
|
|
|
|
|
|
Net income (loss) - Basic and diluted
|
|
$
|
10,597
|
|
|
$
|
(16,377
|
)
|
Weighted average shares of common stock:
|
|
|
|
|
|
|
|
|
Shares of common stock outstanding at the balance sheet date
|
|
|
49,938
|
|
|
|
53,072
|
|
Unvested dividend eligible share based compensation
|
|
|
|
|
|
|
|
|
outstanding at the balance sheet date
|
|
|
55
|
|
|
|
-
|
|
Effect of weighting
|
|
|
(1,088
|
)
|
|
|
(6
|
)
|
Weighted average shares-basic and diluted
|
|
|
48,905
|
|
|
|
53,066
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.22
|
|
|
$
|
(0.31
|
)
|
Anti-dilutive incentive shares not included in calculation.
|
|
|
-
|
|
|
|
42
|
|
Authoritative accounting literature establishes a framework for using fair value to measure assets and liabilities and
defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) as opposed to the price that would be paid to acquire the asset or received to assume the liability (an entry 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, interest rate swaps, interest rate swaptions and TBA securities are valued using 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, spread pricing techniques (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.
RMBS (based on the fair value option), interest rate swaps, interest rate swaptions, TBA securities and futures contracts
were recorded at fair value on a recurring basis during the three months ended March 31, 2019 and 2018. When determining fair value measurements, the Company considers the principal or most advantageous market in which it would transact and
considers assumptions that market participants would use when pricing the asset. When possible, the Company looks to active and observable markets to price identical assets. When identical assets are not traded in active markets, the Company
looks to market observable data for similar assets.
The following table presents financial assets (liabilities) measured at fair value on a recurring basis as of March 31,
2019 and December 31, 2018. Derivative contracts are reported as a net position by contract type, and not based on master netting arrangements.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Fair Value
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Measurements
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
3,088,514
|
|
|
$
|
-
|
|
|
$
|
3,088,514
|
|
|
$
|
-
|
|
Interest rate swaps
|
|
|
12,036
|
|
|
|
-
|
|
|
|
12,036
|
|
|
|
-
|
|
Interest rate swaptions
|
|
|
53
|
|
|
|
-
|
|
|
|
53
|
|
|
|
-
|
|
TBA securities
|
|
|
(4,235
|
)
|
|
|
-
|
|
|
|
(4,235
|
)
|
|
|
-
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
3,014,503
|
|
|
$
|
-
|
|
|
$
|
3,014,503
|
|
|
$
|
-
|
|
Interest rate swaps
|
|
|
14,557
|
|
|
|
-
|
|
|
|
14,557
|
|
|
|
-
|
|
Interest rate swaptions
|
|
|
123
|
|
|
|
-
|
|
|
|
123
|
|
|
|
-
|
|
TBA securities
|
|
|
(3,742
|
)
|
|
|
-
|
|
|
|
(3,742
|
)
|
|
|
-
|
|
During the three months ended March 31, 2019 and 2018, 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, 2020 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.
Total expenses recorded for the management fee and costs incurred were approximately $1.6 million and $2.1 million for the
three months ended March 31, 2019 and 2018, respectively. At March 31, 2019 and December 31, 2018, the net amount due to affiliates was approximately $0.5 million and $0.7 million, respectively.
Other Relationships with Bimini
Robert Cauley, our Chief Executive Officer and Chairman of our Board of Directors, also serves as Chief Executive Officer
and Chairman of the Board of Directors of Bimini and owns shares of common stock of Bimini. George H. Haas, 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, 2019, Bimini owned 1,520,036 shares, or 3.0%, of the Company’s common stock.