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Common Stock,
for the three
months ended
March 31,
2020. The
components
of net income
(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)
Three Months Ended March 31,
2021
2020
Change
Advisory services revenues
$
2,025
$
1,725
$
300
Interest and dividend income
1,117
2,405
(1,288)
Interest expense
(289)
(1,277)
988
Net revenues
2,853
2,853
-
Other income (expense)
658
(16,077)
16,735
Expenses
(1,757)
(1,706)
(51)
Net income (loss) before income tax provision
1,754
(14,930)
16,684
Income tax provision
(464)
(7,403)
6,939
Net income (loss)
$
1,290
$
(22,333)
$
23,623
GAAP and Non-GAAP Reconciliation
Economic Interest Expense and Economic Net Interest Income
We use derivative instruments, specifically Eurodollar and Treasury Note (“T-Note”) futures contracts and TBA short positions to
hedge a portion of the interest rate risk on repurchase agreements in a rising rate environment.
We have not designated our derivative financial instruments as hedge accounting relationships,
but rather hold them for economic
hedging purposes. Changes
in fair value of these instruments are presented in a separate line item in our consolidated
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 that
pertain to each period presented. We believe that adjusting our interest expense for the periods
presented by the gains or losses on
these derivative instruments would not accurately reflect our economic interest
expense for these periods. The reason is that these
derivative instruments may cover periods that extend into the future, not just the current
period.
Any realized or unrealized gains or
losses on the instruments reflect the change in market value of the instrument caused
by changes in underlying interest rates
applicable to the term covered by the instrument, not just the current period.
For each period presented, we have combined the effects of the derivative financial instruments
in place for the respective period
with the actual interest expense incurred on borrowings to reflect total economic interest
expense for the applicable period. Interest
expense, including the effect of derivative instruments for the period, is referred to as economic interest
expense. Net interest income,
when calculated to include the effect of derivative instruments for the period, is referred to
as economic net interest income. This
presentation includes gains or losses on all contracts in effect during the reporting period, covering
the current period as well as
periods in the future.
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
consolidated 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.