Ellington Residential Mortgage REIT(EARN) - 2021 Q1 - Quarterly Report

PART I. Financial Information This section covers the unaudited consolidated financial statements, management's discussion and analysis, market risk, and internal controls for the first quarter of 2021 Consolidated Financial Statements (unaudited) This section provides the unaudited consolidated financial statements, including balance sheet, operations, equity, and cash flows, along with detailed accounting notes for Q1 2021 Consolidated Balance Sheet This section summarizes the company's financial position, including assets, liabilities, and equity, as of March 31, 2021 and December 31, 2020 Consolidated Balance Sheet Summary (in thousands) | Balance Sheet Items | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $1,432,087 | $1,194,811 | | Mortgage-backed securities, at fair value | $1,204,629 | $1,081,380 | | Cash and cash equivalents | $52,500 | $58,166 | | Total Liabilities | $1,268,948 | $1,028,409 | | Repurchase agreements | $1,106,724 | $1,015,245 | | Total Shareholders' Equity | $163,139 | $166,402 | Consolidated Statement of Operations This section details the company's financial performance, including net interest income, expenses, and net income, for the three-month periods ended March 31, 2021 and 2020 Consolidated Statement of Operations Summary (in thousands, except per share amounts) | Line Item | Three-Month Period Ended March 31, 2021 | Three-Month Period Ended March 31, 2020 | | :--- | :--- | :--- | | Total net interest income | $5,754 | $3,781 | | Total expenses | $1,465 | $1,288 | | Total other income (loss) | $(4,162) | $(19,238) | | Net Income (Loss) | $127 | $(16,745) | | Basic and Diluted EPS | $0.01 | $(1.35) | Consolidated Statement of Shareholders' Equity This section outlines changes in shareholders' equity, including net income and dividends, for the period ended March 31, 2021 - Total Shareholders' Equity decreased from $166.4 million at the beginning of the period to $163.1 million as of March 31, 2021. The decrease was primarily driven by the declaration of $3.5 million in dividends, partially offset by net income of $0.1 million[14] Consolidated Statement of Cash Flows This section presents the cash inflows and outflows from operating, investing, and financing activities for the first quarter of 2021 Cash Flow Summary for Q1 2021 (in thousands) | Cash Flow Activity | Amount | | :--- | :--- | | Net cash provided by operating activities | $6,670 | | Net cash used in investing activities | $(86,162) | | Net cash provided by financing activities | $73,826 | | Net decrease in cash and cash equivalents | $(5,666) | Notes to Consolidated Financial Statements These notes provide detailed explanations of the company's accounting policies, financial instrument composition, valuation methods, borrowing arrangements, and capital structure Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operational results, and market outlook for Q1 2021, including portfolio changes, leverage, and liquidity Executive Summary & Market Developments EARN is a REIT specializing in Agency and non-Agency RMBS. The first quarter of 2021 was characterized by rising long-term interest rates, a steepening yield curve, and continued accommodative monetary policy from the Federal Reserve. These market conditions contributed to a decrease in book value per share to $13.22 from $13.48 at year-end 2020 - The company's primary objective is to generate attractive current yields and risk-adjusted total returns by investing primarily in Agency RMBS and, to a lesser extent, non-Agency RMBS[146] - Key market trends in Q1 2021 included a significant rise in long-term interest rates (10-year Treasury yield up 83 bps to 1.74%), a steepening yield curve, and continued Federal Reserve asset purchases of $80 billion in Treasuries and $40 billion in Agency RMBS per month[151] - Book value per share decreased from $13.48 as of December 31, 2020, to $13.22 as of March 31, 2021[150] Portfolio Overview and Outlook As of March 31, 2021, the RMBS portfolio grew to $1.19 billion, primarily in Agency specified pools. The debt-to-equity ratio (adjusted for unsettled trades) increased to 7.0:1 from 6.1:1. Rising interest rates led to losses on long TBA positions but were more than offset by gains on interest rate hedges and net carry from the portfolio. The net mortgage assets-to-equity ratio increased to 6.2:1 Portfolio Composition (in millions) | Asset Type | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Agency RMBS | $1,178 | $1,051 | | Non-Agency RMBS | $10.4 | $17.6 | - The debt-to-equity ratio, adjusted for unsettled purchases and sales, increased to 7.0:1 as of March 31, 2021, from 6.1:1 as of December 31, 2020[156] - The net mortgage assets-to-equity ratio increased to 6.2:1 as of March 31, 2021, up from 5.6:1 in the prior quarter[160][162] Financial Condition This section provides a detailed snapshot of the company's financial position as of March 31, 2021. The investment portfolio was valued at $1.20 billion, financed primarily by $1.11 billion in repurchase agreements. The total debt-to-equity ratio stood at 6.8:1. Shareholders' equity decreased slightly during the quarter to $163.1 million Investment Portfolio Summary (in thousands) | Security Type | Fair Value (Mar 31, 2021) | Fair Value (Dec 31, 2020) | | :--- | :--- | :--- | | Agency RMBS | $1,178,362 | $1,050,719 | | Non-Agency RMBS | $10,370 | $17,612 | | Agency IOs | $15,897 | $13,049 | | Total mortgage-backed securities | $1,204,629 | $1,081,380 | - As of March 31, 2021, the company had $1.11 billion in outstanding borrowings under repurchase agreements with a weighted average interest rate of 0.22% and an average remaining maturity of 126 days[201] - The total debt-to-equity ratio was 6.8:1 as of March 31, 2021, compared to 6.1:1 as of December 31, 2020. Adjusted for unsettled trades, the ratio was 7.0:1[201] Results of Operations For Q1 2021, the company reported net income of $0.1 million ($0.01/share), a substantial turnaround from a net loss of $16.7 million ($(1.35)/share) in Q1 2020. The improvement was primarily due to a smaller 'Other Loss' and increased net interest income. Core Earnings, a non-GAAP metric, were $3.8 million ($0.31/share), compared to $3.4 million ($0.27/share) in the prior-year quarter, reflecting improved net interest margin Core Earnings Reconciliation (Non-GAAP, in thousands) | Line Item | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Net Income (Loss) | $127 | $(16,745) | | Adjustments (Net unrealized/realized gains/losses, etc.) | $3,655 | $20,105 | | Core Earnings | $3,782 | $3,360 | | Core Earnings Per Share | $0.31 | $0.27 | - Net interest income increased to $5.8 million in Q1 2021 from $3.8 million in Q1 2020, driven by a significant decrease in interest expense from $6.1 million to $0.8 million[205] - The net interest margin for Q1 2021 was 1.96%, a significant improvement from 1.20% in Q1 2020, due to lower average cost of funds[216] Liquidity and Capital Resources The company's primary sources of liquidity are cash on hand, cash flow from investments, and repurchase agreement borrowings. As of March 31, 2021, the company held $52.5 million in cash and cash equivalents and had $1.1 billion in outstanding repurchase agreements with 16 counterparties. Management believes these resources are sufficient to meet both short-term and long-term liquidity needs - As of March 31, 2021, the company had $1.1 billion outstanding under repurchase agreements with 16 counterparties[225] - Cash and cash equivalents were $52.5 million as of March 31, 2021, a decrease from $58.2 million at year-end 2020[235] - The company has a share repurchase program with authorization to repurchase an additional 765,829 common shares as of May 7, 2021. No shares were repurchased in Q1 2021[238] Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's exposure to key market risks, including interest rate, prepayment, and credit risk. The company actively manages these risks through hedging strategies. A sensitivity analysis indicates that a hypothetical 100 basis point parallel increase in interest rates would decrease the portfolio's fair value by an estimated $10.9 million, or 6.65% of total equity Interest Rate Sensitivity Analysis (as of March 31, 2021, in thousands) | Interest Rate Shift | Estimated Change in Market Value | % of Total Equity | | :--- | :--- | :--- | | -100 basis points | $(4,946) | (3.03)% | | -50 basis points | $(519) | (0.32)% | | +50 basis points | $(3,076) | (1.89)% | | +100 basis points | $(10,852) | (6.65)% | - The primary components of market risk are identified as interest rate risk, prepayment risk, and credit risk (comprising default and severity risk)[247] - The company uses various instruments to hedge interest rate risk, including interest rate swaps, TBAs, U.S. Treasury securities, and futures, to mitigate the mismatch between the duration of its assets and liabilities[248] Controls and Procedures Management, including the CEO and CFO, conducted an evaluation of the company's disclosure controls and procedures. They concluded that these controls were effective as of March 31, 2021. Additionally, it was reported that no changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of March 31, 2021[258] - There were no changes in internal control over financial reporting during the quarter ended March 31, 2021, that have materially affected, or are reasonably likely to materially affect, internal controls[259] PART II. Other Information This section includes disclosures on legal proceedings, risk factors, and a list of exhibits filed with the quarterly report Legal Proceedings The company reports that neither it nor its Manager are currently subject to any material legal proceedings. However, it acknowledges operating in a highly regulated market and anticipates the possibility of future regulatory inquiries - Neither the company nor its affiliates are currently subject to any legal proceedings that are considered material[262] Risk Factors The company states that there have been no material changes from the risk factors previously disclosed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2020 - There have been no material changes from the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2020[264] Exhibits This section provides a list of the exhibits filed with the quarterly report. The exhibits include certifications from the CEO and CFO as required by the Sarbanes-Oxley Act, as well as Inline XBRL financial data files - The report includes CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act, along with Inline XBRL documents[265]