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 September 30, 2017
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE 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'sRegistrant’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 ý☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ý☒ No ☐
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 ☐ No ý
Number of shares outstanding at October 27, 2017: 46,108,208April 25, 2024: 52,973,989
TABLE OF CONTENTS
Condensed | |||||
Condensed | |||||
Notes to Condensed | |||||
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk | |||||
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds | |||||
ITEM1. CONDENSED FINANCIAL STATEMENTS
| ORCHID ISLAND CAPITAL, INC. | ||||||||
| CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||||
| ($ in thousands, except per share data) | ||||||||
| (Unaudited) | ||||||||
| September 30, 2017 | December 31, 2016 | |||||||
| ASSETS: | ||||||||
| Mortgage-backed securities, at fair value | ||||||||
| Pledged to counterparties | $ | 3,917,425 | $ | 2,972,290 | ||||
| Unpledged | 12,915 | 49,884 | ||||||
| Total mortgage-backed securities | 3,930,340 | 3,022,174 | ||||||
| Cash and cash equivalents | 161,659 | 73,475 | ||||||
| Restricted cash | 19,629 | 20,950 | ||||||
| Accrued interest receivable | 15,410 | 11,512 | ||||||
| Derivative assets, at fair value | 16,871 | 10,365 | ||||||
| Other assets | 475 | 218 | ||||||
| Total Assets | $ | 4,144,384 | $ | 3,138,694 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| LIABILITIES: | ||||||||
| Repurchase agreements | $ | 3,710,077 | $ | 2,793,705 | ||||
| Dividends payable | 6,343 | 4,616 | ||||||
| Derivative liabilities, at fair value | 2,591 | 1,982 | ||||||
| Accrued interest payable | 4,815 | 1,826 | ||||||
| Due to affiliates | 762 | 566 | ||||||
| Other liabilities | 5,395 | 3,220 | ||||||
| Total Liabilities | 3,729,983 | 2,805,915 | ||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS' EQUITY: | ||||||||
| Preferred stock, $0.01 par value; 100,000,000 shares authorized; no shares issued | ||||||||
| and outstanding as of September 30, 2017 and December 31, 2016 | - | - | ||||||
| Common Stock, $0.01 par value; 500,000,000 shares authorized, 45,308,169 | ||||||||
| shares issued and outstanding as of September 30, 2017 and 32,962,919 shares issued | ||||||||
| and outstanding as of December 31, 2016 | 453 | 330 | ||||||
| Additional paid-in capital | 413,948 | 332,449 | ||||||
| Retained earnings (accumulated deficit) | - | - | ||||||
| Total Stockholders' Equity | 414,401 | 332,779 | ||||||
| Total Liabilities and Stockholders' Equity | $ | 4,144,384 | $ | 3,138,694 | ||||
| See Notes to Consolidated Financial Statements | ||||||||
| ORCHID ISLAND CAPITAL, INC. | ||||||||||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||||||||||
| (Unaudited) | ||||||||||||||||
| For the Nine and Three Months Ended September 30, 2017 and 2016 | ||||||||||||||||
| ($ in thousands, except per share data) | ||||||||||||||||
| Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Interest income | $ | 105,864 | $ | 62,059 | $ | 38,974 | $ | 22,358 | ||||||||
| Interest expense | (28,116 | ) | (10,629 | ) | (12,638 | ) | (3,979 | ) | ||||||||
| Net interest income | 77,748 | 51,430 | 26,336 | 18,379 | ||||||||||||
| Realized gains on mortgage-backed securities | 3,354 | 4,482 | 769 | 229 | ||||||||||||
| Unrealized (losses) gains on mortgage-backed securities | (35,601 | ) | 5,652 | (3,553 | ) | (2,398 | ) | |||||||||
| (Losses) gains on derivative instruments | (29,331 | ) | (32,594 | ) | (5,470 | ) | 6,587 | |||||||||
| FHLB stock dividends | - | 14 | - | - | ||||||||||||
| Net portfolio income | 16,170 | 28,984 | 18,082 | 22,797 | ||||||||||||
| Expenses: | ||||||||||||||||
| Management fees | 4,230 | 2,968 | 1,528 | 1,052 | ||||||||||||
| Allocated overhead | 1,168 | 963 | 412 | 336 | ||||||||||||
| Accrued incentive compensation | 439 | 598 | 209 | 212 | ||||||||||||
| Directors' fees and liability insurance | 722 | 763 | 215 | 236 | ||||||||||||
| Audit, legal and other professional fees | 547 | 654 | 157 | 193 | ||||||||||||
| Direct REIT operating expenses | 816 | 426 | 320 | 187 | ||||||||||||
| Other administrative | 259 | 215 | 58 | 55 | ||||||||||||
| Total expenses | 8,181 | 6,587 | 2,899 | 2,271 | ||||||||||||
| Net income | $ | 7,989 | $ | 22,397 | $ | 15,183 | $ | 20,526 | ||||||||
| Basic and diluted net income per share | $ | 0.21 | $ | 0.99 | $ | 0.33 | $ | 0.85 | ||||||||
| Weighted Average Shares Outstanding | 38,608,053 | 22,619,293 | 45,355,124 | 24,133,343 | ||||||||||||
| Dividends declared per common share | $ | 1.26 | $ | 1.26 | $ | 0.42 | $ | 0.42 | ||||||||
| See Notes to Consolidated Financial Statements | ||||||||||||||||
| ORCHID ISLAND CAPITAL, INC. | ||||||||||||||||
| CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY | ||||||||||||||||
| (Unaudited) | ||||||||||||||||
| For the Nine Months Ended September 30, 2017 | ||||||||||||||||
| ($ in thousands, except per share data) | ||||||||||||||||
| Additional | Retained | |||||||||||||||
| Common | Paid-in | Earnings | ||||||||||||||
| Stock | Capital | (Deficit) | Total | |||||||||||||
| Balances, January 1, 2017 | $ | 330 | $ | 332,449 | $ | - | $ | 332,779 | ||||||||
| Net income | - | - | 7,989 | 7,989 | ||||||||||||
| Cash dividends declared, $1.26 per share | - | (41,688 | ) | (7,989 | ) | (49,677 | ) | |||||||||
| Issuance of common stock pursuant to public offerings, net | 123 | 122,734 | - | 122,857 | ||||||||||||
| Issuance of common stock pursuant to stock based | ||||||||||||||||
| compensation plan | - | 232 | - | 232 | ||||||||||||
| Amortization of stock based compensation | - | 221 | - | 221 | ||||||||||||
| Balances, September 30, 2017 | $ | 453 | $ | 413,948 | $ | - | $ | 414,401 | ||||||||
| See Notes to Consolidated Financial Statements | ||||||||||||||||
| ORCHID ISLAND CAPITAL, INC. | ||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
| (Unaudited) | ||||||||
| For the Nine Months Ended September 30, 2017 and 2016 | ||||||||
| ($ in thousands) | ||||||||
| 2017 | 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | $ | 7,989 | $ | 22,397 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Stock based compensation | 453 | 492 | ||||||
| Realized and unrealized losses (gains) on mortgage-backed securities | 32,247 | (10,134 | ) | |||||
| Realized and unrealized gains on interest rate swaptions | (827 | ) | (36 | ) | ||||
| Realized and unrealized losses (gains) on interest rate swaps | 1,398 | (792 | ) | |||||
| Realized losses on forward settling to-be-announced securities | 3,843 | 2,385 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accrued interest receivable | (3,898 | ) | (967 | ) | ||||
| Other assets | (170 | ) | (93 | ) | ||||
| Accrued interest payable | 2,989 | 1,010 | ||||||
| Other liabilities | (601 | ) | (204 | ) | ||||
| Due to affiliates | 196 | 15 | ||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 43,619 | 14,073 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| From mortgage-backed securities investments: | ||||||||
| Purchases | (5,079,945 | ) | (2,184,709 | ) | ||||
| Sales | 3,890,959 | 1,717,612 | ||||||
| Principal repayments | 248,483 | 178,460 | ||||||
| Redemption of FHLB stock | 3 | 3,750 | ||||||
| Payments on net settlement of to-be-announced securities | (7,945 | ) | (2,145 | ) | ||||
| Purchase of interest rate swaptions, net of margin cash received | 410 | 705 | ||||||
| NET CASH USED IN INVESTING ACTIVITIES | (948,035 | ) | (286,327 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from repurchase agreements | 39,895,749 | 22,443,458 | ||||||
| Principal payments on repurchase agreements | (38,979,377 | ) | (21,944,174 | ) | ||||
| Principal payments on FHLB advances | - | (187,500 | ) | |||||
| Cash dividends | (47,950 | ) | (28,864 | ) | ||||
| Proceeds from issuance of common stock, net of issuance costs | 122,857 | 47,116 | ||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 991,279 | 330,036 | ||||||
| NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | 86,863 | 57,782 | ||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the period | 94,425 | 69,959 | ||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the period | $ | 181,288 | $ | 127,741 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 25,127 | $ | 9,619 | ||||
| SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES: | ||||||||
| Securities acquired settled in later period | $ | - | $ | 72,343 | ||||
| Securities sold settled in later period | - | 27,509 | ||||||
| See Notes to Consolidated Financial Statements | ||||||||
ORCHID ISLAND CAPITAL, INC.
CONDENSED BALANCE SHEETS
($ in thousands, except per share data)
(Unaudited) | ||||||||
March 31, | December 31, | |||||||
2024 | 2023 | |||||||
ASSETS: | ||||||||
Mortgage-backed securities, at fair value (includes pledged assets of $3,875,705 and $3,885,554, respectively) | $ | 3,881,078 | $ | 3,894,012 | ||||
U.S. Treasury securities, available-for-sale (includes pledged assets of $79,590 and $79,680, respectively) | 99,496 | 148,820 | ||||||
Cash and cash equivalents | 190,373 | 171,893 | ||||||
Restricted cash | 13,247 | 28,396 | ||||||
Accrued interest receivable | 15,614 | 14,951 | ||||||
Derivative assets | 12,511 | 6,420 | ||||||
Other assets | 2,343 | 455 | ||||||
Total Assets | $ | 4,214,662 | $ | 4,264,947 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
LIABILITIES: | ||||||||
Repurchase agreements | $ | 3,711,498 | $ | 3,705,649 | ||||
Payable for investment securities and TBA transactions | 395 | 60,454 | ||||||
Dividends payable | 6,365 | 6,222 | ||||||
Derivative liabilities | 80 | 12,694 | ||||||
Accrued interest payable | 12,769 | 7,939 | ||||||
Due to affiliates | 1,007 | 1,013 | ||||||
Other liabilities | 917 | 1,031 | ||||||
Total Liabilities | 3,733,031 | 3,795,002 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS' EQUITY: | ||||||||
Preferred stock, $0.01 par value; 20,000,000 shares authorized; no shares issued and outstanding as of March 31, 2024 and December 31, 2023 | - | - | ||||||
Common Stock, $0.01 par value; 100,000,000 shares authorized, 52,826,169 shares issued and outstanding as of March 31, 2024 and 51,636,074 shares issued and outstanding as of December 31, 2023 | 528 | 516 | ||||||
Additional paid-in capital | 841,790 | 849,845 | ||||||
Accumulated deficit | (360,657 | ) | (380,433 | ) | ||||
Accumulated other comprehensive (loss) income | (30 | ) | 17 | |||||
Total Stockholders' Equity | 481,631 | 469,945 | ||||||
Total Liabilities and Stockholders' Equity | $ | 4,214,662 | $ | 4,264,947 | ||||
See Notes to Financial Statements
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
For the Three Months Ended March 31, 2024 and 2023
($ in thousands, except per share data)
Three Months Ended March 31, | ||||||||
2024 | 2023 | |||||||
Interest income | $ | 48,871 | $ | 38,012 | ||||
Interest expense | (51,361 | ) | (42,217 | ) | ||||
Net interest expense | (2,490 | ) | (4,205 | ) | ||||
Unrealized (losses) gains on mortgage-backed securities and U.S. Treasury securities | (61,895 | ) | 53,895 | |||||
Gains (losses) on derivative and other hedging instruments | 87,899 | (41,156 | ) | |||||
Net portfolio income | 23,514 | 8,534 | ||||||
Expenses: | ||||||||
Management fees | 2,161 | 2,642 | ||||||
Allocated overhead | 598 | 576 | ||||||
Incentive compensation | (89 | ) | 470 | |||||
Directors' fees and liability insurance | 329 | 323 | ||||||
Audit, legal and other professional fees | 476 | 451 | ||||||
Direct REIT operating expenses | 170 | 165 | ||||||
Other administrative | 93 | 377 | ||||||
Total expenses | 3,738 | 5,004 | ||||||
Net income | $ | 19,776 | $ | 3,530 | ||||
Unrealized losses on U.S. Treasury securities measured at fair value through other comprehensive net income | (47 | ) | - | |||||
Comprehensive net income | $ | 19,729 | $ | 3,530 | ||||
Basic and diluted net income per share | $ | 0.38 | $ | 0.09 | ||||
Weighted Average Shares Outstanding | 51,604,135 | 38,491,767 | ||||||
See Notes to Financial Statements
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Three Months Ended March 31, 2024 and 2023
(in thousands)
Accumulated | ||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||
Additional | Retained | Comprehensive | ||||||||||||||||||||||
Common Stock | Paid-in | Earnings | Income | |||||||||||||||||||||
Shares | Par Value | Capital | (Deficit) | (Loss) | Total | |||||||||||||||||||
Balances, January 1, 2024 | 51,636 | $ | 516 | $ | 849,845 | $ | (380,433 | ) | $ | 17 | $ | 469,945 | ||||||||||||
Net income | - | - | - | 19,776 | - | 19,776 | ||||||||||||||||||
Unrealized loss on available-for-sale securities | - | - | - | - | (47 | ) | (47 | ) | ||||||||||||||||
Cash dividends declared ($0.36 per share) | - | - | (18,724 | ) | - | - | (18,724 | ) | ||||||||||||||||
Stock based awards and amortization | 33 | - | 350 | - | - | 350 | ||||||||||||||||||
Issuance of common stock pursuant to public offerings, net | 1,490 | 15 | 13,094 | - | - | 13,109 | ||||||||||||||||||
Shares repurchased and retired | (333 | ) | (3 | ) | (2,775 | ) | - | - | (2,778 | ) | ||||||||||||||
Balances, March 31, 2024 | 52,826 | $ | 528 | $ | 841,790 | $ | (360,657 | ) | $ | (30 | ) | $ | 481,631 | |||||||||||
Balances, January 1, 2023 | 36,765 | $ | 368 | $ | 779,602 | $ | (341,207 | ) | $ | - | $ | 438,763 | ||||||||||||
Net income | - | - | - | 3,530 | - | 3,530 | ||||||||||||||||||
Cash dividends declared ($0.48 per share) | - | - | (18,807 | ) | - | - | (18,807 | ) | ||||||||||||||||
Stock based awards and amortization | 4 | - | 181 | - | - | 181 | ||||||||||||||||||
Issuance of common stock pursuant to public offerings, net | 2,690 | 26 | 31,631 | - | - | 31,657 | ||||||||||||||||||
Shares repurchased and retired | (373 | ) | (3 | ) | (3,960 | ) | - | - | (3,963 | ) | ||||||||||||||
Balances, March 31, 2023 | 39,086 | $ | 391 | $ | 788,647 | $ | (337,677 | ) | $ | - | $ | 451,361 | ||||||||||||
See Notes to Financial Statements
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended March 31, 2024 and 2023
($ in thousands)
2024 | 2023 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 19,776 | $ | 3,530 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Stock based compensation | (140 | ) | 409 | |||||
Discount accretion on U.S. Treasury Bills | (1,221 | ) | - | |||||
Unrealized losses (gains) on mortgage-backed securities and U.S. Treasury securities | 61,895 | (53,895 | ) | |||||
Realized and unrealized (gains) losses on derivative instruments | (39,176 | ) | 43,563 | |||||
Changes in operating assets and liabilities: | ||||||||
Accrued interest receivable | (663 | ) | (1,601 | ) | ||||
Other assets | (530 | ) | (459 | ) | ||||
Accrued interest payable | 4,830 | 5,544 | ||||||
Other liabilities | 244 | 182 | ||||||
Due to affiliates | (6 | ) | 98 | |||||
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | 45,009 | (2,629 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
From mortgage-backed securities investments: | ||||||||
Purchases | (345,032 | ) | (467,460 | ) | ||||
Sales and maturities | 221,733 | - | ||||||
Principal repayments | 74,338 | 61,021 | ||||||
Purchases of U.S. Treasury securities, available-for-sale | (98,643 | ) | - | |||||
Proceeds from maturity of U.S. Treasury securities, available-for-sale | 100,000 | - | ||||||
Net proceeds from (payments on) derivative instruments | 8,435 | (42,450 | ) | |||||
NET CASH USED IN INVESTING ACTIVITIES | (39,169 | ) | (448,889 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from repurchase agreements | 8,529,398 | 7,849,145 | ||||||
Principal payments on repurchase agreements | (8,523,549 | ) | (7,458,153 | ) | ||||
Cash dividends | (18,564 | ) | (18,422 | ) | ||||
Proceeds from issuance of common stock, net of issuance costs | 13,109 | 31,657 | ||||||
Common stock repurchases, including shares withheld from employee stock awards for payment of taxes | (2,903 | ) | (3,970 | ) | ||||
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | (2,509 | ) | 400,257 | |||||
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | 3,331 | (51,261 | ) | |||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the period | 200,289 | 237,219 | ||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the period | $ | 203,620 | $ | 185,958 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 46,531 | $ | 36,673 | ||||
See Notes to Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2024
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Description
Orchid Island Capital, Inc. ("Orchid"(“Orchid” or the "Company"“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"(“RMBS”). From incorporation to the completion of Orchid’s initial public offering of its common stock on February 20, 2013, Orchid was a wholly owned subsidiary of Bimini Capital Management, Inc. ("Bimini"(“Bimini”). Orchid began operations on November 24, 2010 (the(the date of commencement of operations). From incorporation through November 24, 2010, Orchid'sOrchid’s only activity was the issuance of common stock to Bimini.
On February 20, 2013, Orchid completed the initial public offering ("IPO") of its common stock in which it sold approximately 2.4 million shares of its common stock and raised gross proceeds of $35.4 million, which were invested in RMBS that were issued and the principal and interest of which were guaranteed by a federally chartered corporation or agency ("Agency RMBS") on a leveraged basis. Orchid is an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act").
On February 23, 2017, March 7, 2023, Orchid entered into anotheran equity distribution agreement as amended and restated on May 10, 2017, (the "May 2017 “March 2023 Equity Distribution Agreement"Agreement”) with twothree sales agents pursuant to which the Company may offer and sell, from time to time, up to an aggregate amount of $125,000,000$250,000,000 of shares of the Company'sCompany’s common stock in transactions that are deemed to be "at“at the market"market” offerings and privately negotiated transactions. The May 2017 Equity Distribution Agreement replacedThrough March 31, 2024, the July 2016 Equity Distribution Agreement. The Company issued a total of 12,299,03214,680,114 shares under the May 2017 March 2023 Equity Distribution Agreement for aggregate gross proceeds of $125.0approximately $143.2 million, and net proceeds of approximately $122.9$140.9 million, net ofafter commissions and fees, prior to its termination in August 2017.
Basis of Presentation and Use of Estimates
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"(“GAAP”) for interim financial information and with the instructions to Form 10-Q10-Q and Article 8 of Regulation S-X.S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The consolidated financial statements include the accounts of our wholly-owned subsidiary, Orchid Island Casualty, LLC. Significant intercompany accounts and transactions have been eliminated. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentationstatement of results for the interim period have been included. Operating results for the nine and three month periodsperiod ended September 30, 2017March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
The balance sheet at December 31, 20162023 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'sCompany’s Annual Report on Form 10-K10-K for the year ended December 31, 2016.
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 significantly 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, 2024.
Variable Interest Entities (“VIEs”) Accounting Standards Codification ("ASC") Topic 220, Comprehensive Income, a statement of comprehensive income (loss) has
The Company obtains interests in VIEs through its investments in mortgage-backed securities. The Company’s interests in these VIEs are passive in nature and are not been included as expected to result in the Company has no items of other comprehensive income (loss). Comprehensive income (loss)obtaining a controlling financial interest in these VIEs in the future. As a result, the Company does not consolidate these VIEs and accounts for these interests in these VIEs as mortgage-backed securities. See Note 2 for additional information regarding the Company’s investments in mortgage-backed securities. The maximum exposure to loss for these VIEs is the same as net income (loss) forcarrying value of the periods presented.
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) | ||||||||
| September 30, 2017 | December 31, 2016 | |||||||
| Cash and cash equivalents | $ | 161,659 | $ | 73,475 | ||||
| Restricted cash | 19,629 | 20,950 | ||||||
| Total cash, cash equivalents and restricted cash | $ | 181,288 | $ | 94,425 | ||||
(in thousands) | ||||||||
March 31, 2024 | December 31, 2023 | |||||||
Cash and cash equivalents | $ | 190,373 | $ | 171,893 | ||||
Restricted cash | 13,247 | 28,396 | ||||||
Total cash, cash equivalents and restricted cash | $ | 203,620 | $ | 200,289 | ||||
The Company maintains cash balances at fourthree banks, a government securities backed overnight sweep fund, and atexcess margin on account with three 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$250,000 per depositor at each financial institution. At September 30, 2017, the Company's cash deposits exceeded federally insured limits by approximately $158.1 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 bankbanks and derivative counterpartiesexchange 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"(“PT”) certificates,residential mortgage backed securities (“RMBS”) and collateralized mortgage obligations and(“CMOs”) issued by Freddie Mac, Fannie Mae or Ginnie Mae, interest-only ("IO"(“IO”) securities and inverse interest-only ("IIO"(“IIO”) securities representing interest in or obligations backed by pools of RMBS. The Company refers to RMBS and CMOs as PT RMBS. The Company refers to IO and IIO securities as structured RMBS. The Company also invests in U.S. Treasury Notes and U.S. Treasury Bills (collectively, "U.S. Treasury securities"), primarily to satisfy collateral requirements of derivative counterparties. The Company has elected to account for its investment in RMBS and U.S. Treasury securities under the fair value option. Electing the fair value option requires the Company to record changes in fair value in the consolidated statement of operations,net income, which, in management'smanagement’s view, more appropriately reflects the results of ourthe Company’s operations for a particular reporting period and is consistent with the underlying economics and how the portfolio is managed.
The Company records RMBSsecurities transactions on the trade date. Security purchases that have not settled as of the balance sheet date are included in the RMBSportfolio balance with an offsetting liability recorded, whereas securities sold that have not settled as of the balance sheet date are removed from the RMBSportfolio balance with an offsetting receivable recorded.
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 ondefined 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. Estimated fair values for U.S. Treasury securities are based on quoted prices for identical assets in active markets.
Income on PT RMBS securitiesand U.S. Treasury Notes 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 consolidated statements of operations.comprehensive income. 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'sasset’s carrying value. At each reporting date, the effective yield is adjusted prospectively from thefor future reporting periodperiods 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 periodinvestments for which the fair value option is elected are recorded in earnings and reported as unrealized gains or losses on mortgage-backed securities and U.S. Treasury securities in the accompanying consolidated statements of operations.
U.S. Treasury Bills are zero-coupon bonds that are purchased at a discount to the par amount. This discount is accreted into income over the life of the investment and reported in the statements of comprehensive income as interest income. Changes in fair value of U.S. Treasury securities that are classified as available-for-sale are reported in accumulated other comprehensive income ("OCI"). Upon the sale of a security designated as available-for-sale, we determine the cost of the security and the amount of unrealized gain or loss to reclassify out of accumulated OCI into earnings based on the specific identification method. The Company evaluated securities for allowance for credit losses and since all of the Company's available-for-sale securities designated investments consist of U.S. Treasury securities, which are backed by the full faith and credit of the U.S. government, the Company does not record an allowance for credit losses.
Derivative Financialand 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”), Secured Overnight Financing Rate ("T-Note"SOFR"), federal funds (“Fed Funds”) and Eurodollar futures contracts, short positions in U.S. Treasury securities, interest rate swaps, and options to enter in interest rate swaps ("(“interest rate swaptions"swaptions”), dual digital options, interest rate caps and floors, and “to-be-announced” (“TBA”) securities transactions, but the Company may enter into other derivativesderivative and other hedging instruments 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. The Company accounts for TBA dollar roll transactions as a series of derivative transactions.instruments. Gains losses and dollar roll incomelosses associated with TBA securities transactions and dollar roll transactions are reported in gain (loss) on derivative instruments in the accompanying consolidated statements of operations. The fair value of TBA securities is estimated based on similar methods used to value RMBS securities.
Derivative and other hedging 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 beare carried at fair value. Changesvalue, and changes in fair value are recorded in earningsincome as gains or losses on derivative and other hedging instruments 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. ToThe Company’s derivative agreements require it to post or receive collateral to mitigate this risk,such risk. In addition, the Company uses only registered central clearing exchanges and well-established commercial banks as counterparties.
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, EurodollarFed Funds, SOFR and T-Note futures contracts, interest rate swaps, interest rate swaptions, dual digital options, interest rate floors and caps, and TBA securities are accounted for at fair value in the consolidated balance sheets. The methods and assumptions used to estimate fair value for these instruments are presented in Note 1213 of the consolidated financial statements.
Repurchase Agreements
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 accountsRepurchase agreements are accounted for repurchase transactions as collateralized financing transactions, which are carried at their contractual amounts, including accrued interest, as specified in the respective agreements.
Manager Compensation
The Company is externally managed by Bimini Advisors, LLC (the "Manager"“Manager” or "Bimini Advisors"“Bimini Advisors”), a Maryland limited liability company and wholly-owned subsidiary of Bimini. The Company'sCompany’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 1314 for the terms of the management agreement.
Earnings Per Share
Basic earnings per share ("EPS"(“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-classtwo-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.
Stock-Based Compensation
The Company may grant equity-based compensation to non-employee members of its Board of Directors and to the executive officers and employees of the Manager. Stock-based awards issued include performance units ("PUs"), deferred stock units ("DSUs") and immediately vested common stock awards. Compensation expense is measured and recognized for all stock-based payment awards made to employees and non-employee directors based on the fair value of the Company’s common stock on the date of grant. Compensation expense is recognized over each award’s respective service period using the graded vesting attribution method. The Company does not estimate forfeiture rates; but rather, adjusts for forfeitures in the periods in which they occur.
Income Taxes
Orchid has qualifiedelected and electedis organized and operated so as to qualify to be taxed as a real estate investment trust ("REIT"(“REIT”) under the Internal Revenue Code of 1986, as amended (the "Code"“Code”). REITs are generally not subject to U.S. federal income tax on their REIT taxable income provided that they distribute to their stockholders at least 90%all of their REIT taxable income on an annual basis. In addition, aA REIT must distribute at least 90% of its REIT taxable income, determined without regard to the deductions for dividends paid and excluding net capital gain, and meet other provisionsrequirements 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'sOrchid’s tax positions are categorized as highly certain. There is no accrual for any tax, interest or penalties related to Orchid'sOrchid’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, 2023, the FASB issued Accounting Standards Update ("ASU"ASU:) 2016-18, Statement of Cash Flows –2023-07"Segment Reporting (Topic 230)820): Restricted Cash. Improvements to Reportable Segment Disclosures. ASU 2016-182023-07 requires that restricted cashadditional disclosures about reportable segments’ significant expenses on an interim and restricted cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows.annual basis. The guidance in ASU 2016-182023-07 is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2017. Early application is permitted. The Company adopted the ASU beginning with the first quarter of 2017. The prior period consolidated statement of cash flows has been retrospectively adjusted to conform to this presentation.
NOTE 2. MORTGAGE-BACKED SECURITIES,
The following table presents the Company'sCompany’s RMBS portfolio that are remeasured at fair value through earnings as of September 30, 2017March 31, 2024 and December 31, 2016:
| (in thousands) | ||||||||
| September 30, 2017 | December 31, 2016 | |||||||
| Pass-Through RMBS Certificates: | ||||||||
| Hybrid Adjustable-rate Mortgages | $ | 42,201 | $ | 45,459 | ||||
| Adjustable-rate Mortgages | 1,783 | 2,062 | ||||||
| Fixed-rate Mortgages | 3,740,658 | 2,826,694 | ||||||
| Total Pass-Through Certificates | 3,784,642 | 2,874,215 | ||||||
| Structured RMBS Certificates: | ||||||||
| Interest-Only Securities | 90,551 | 69,726 | ||||||
| Inverse Interest-Only Securities | 55,147 | 78,233 | ||||||
| Total Structured RMBS Certificates | 145,698 | 147,959 | ||||||
| Total | $ | 3,930,340 | $ | 3,022,174 | ||||
(in thousands) | ||||||||||||||||||||||||
March 31, 2024 | December 31, 2023 | |||||||||||||||||||||||
Par Value | Cost(1) | Fair Value | Par Value | Cost(1) | Fair Value | |||||||||||||||||||
Pass-Through RMBS Certificates: | ||||||||||||||||||||||||
Fixed-rate Mortgages | $ | 4,351,259 | $ | 4,466,595 | $ | 3,864,505 | $ | 4,051,145 | $ | 4,198,424 | $ | 3,877,082 | ||||||||||||
Total Pass-Through Certificates | 4,351,259 | 4,466,595 | 3,864,505 | 4,051,145 | 4,198,424 | 3,877,082 | ||||||||||||||||||
Structured RMBS Certificates: | ||||||||||||||||||||||||
Interest-Only Securities(2) | n/a | 19,142 | 16,326 | n/a | 19,839 | 16,572 | ||||||||||||||||||
Inverse Interest-Only Securities(3) | n/a | 1,756 | 247 | n/a | 1,825 | 358 | ||||||||||||||||||
Total Structured RMBS Certificates | 20,898 | 16,573 | 21,664 | 16,930 | ||||||||||||||||||||
Total | $ | 4,351,259 | $ | 4,487,493 | $ | 3,881,078 | $ | 4,051,145 | $ | 4,220,088 | $ | 3,894,012 | ||||||||||||
(1) | The cost information in the table above represents the aggregate current par value, multiplied by the purchase price of each security in the portfolio. |
(2) | The notional balance for the interest-only securities portfolio was $94.9 million and $98.6 million as of March 31, 2024 and December 31, 2023, respectively. |
(3) | The notional balance for the inverse interest-only securities portfolio was $25.8 million and $26.8 million as of March 31, 2024 and December 31, 2023, respectively. |
During the three months ended March 31, 2024, the Company resecuritized RMBS with a fair value of $221.7 million, by transferring the RMBS into a larger RMBS that is backed by the transferred RMBS. The following table summarizesCompany retained the entire larger RMBS. No gain or loss was recorded on this resecuritization. There were no sales of RMBS during the three months ended March 31, 2023.
NOTE 3. U.S. TREASURY SECURITIES, AVAILABLE-FOR-SALE
As of March 31, 2024 and December 31, 2023, the Company held U.S. Treasury securities with a fair value of approximately $99.5 million and $148.8 million, respectively, that were classified as available-for-sale. U.S. Treasury securities are held primarily to satisfy collateral requirements of the Company's RMBS portfoliorepurchase and derivative counterparties.
The amortized cost, gross unrealized holding gains and losses, and fair value of available-for-sale investments as of September 30, 2017March 31, 2024 and December 31, 2016, according to the contractual maturities2023 are as follows:
(in thousands) | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
March 31, 2024 | ||||||||||||||||
U.S. Treasury Bill maturing 4/30/2024 | $ | 49,791 | $ | - | $ | (24 | ) | $ | 49,767 | |||||||
U.S. Treasury Note maturing 5/31/2024 | 49,735 | - | (6 | ) | 49,729 | |||||||||||
| $ | 99,526 | $ | - | $ | (30 | ) | $ | 99,496 | ||||||||
December 31, 2023 | ||||||||||||||||
U.S. Treasury Bill maturing 1/2/2024 | $ | 49,671 | $ | 9 | $ | - | $ | 49,680 | ||||||||
U.S. Treasury Bill maturing 2/15/2024 | 49,992 | 8 | - | 50,000 | ||||||||||||
U.S. Treasury Bill maturing 4/30/2024 | 49,140 | - | - | 49,140 | ||||||||||||
| $ | 148,803 | $ | 17 | $ | - | $ | 148,820 | |||||||||
Since all of the Company's available-for-sale securities in the portfolio. Actual maturities of RMBS investments are generally shorter than stated contractual maturities and are affectedbacked by the contractual livesfull faith and credit of the underlying mortgages, periodic paymentsU.S. government, the Company has not recorded an allowance for credit losses.
| (in thousands) | ||||||||
| September 30, 2017 | December 31, 2016 | |||||||
| Greater than one year and less than five years | $ | 52 | $ | 157 | ||||
| Greater than five years and less than ten years | 2,771 | 277 | ||||||
| Greater than or equal to ten years | 3,927,517 | 3,021,740 | ||||||
| Total | $ | 3,930,340 | $ | 3,022,174 | ||||
NOTE 3.4. 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 September 30, 2017,March 31, 2024, the Company had met all margin call requirements.
As of September 30, 2017, the Company had outstanding repurchase obligations of approximately $3,710.1 million with a net weighted average borrowing rate of 1.37%. These agreements were collateralized by RMBS with a fair value, including accrued interestMarch 31, 2024 and securities pledged related to securities sold but not yet settled, of approximately $3,932.6 million, and cash pledged to the counterparties of approximately $12.0 million. As of December 31, 2016,2023, the Company had outstanding repurchase obligations of approximately $2,793.7 million with a net weighted average borrowing rate of 1.00%. These agreements were collateralized by RMBS with a fair value, including accrued interest, of approximately $2,970.9 million, and cash pledged to the counterparties of approximately $10.8 million.
| ($ in thousands) | ||||||||||||||||||||
| OVERNIGHT | BETWEEN 2 | BETWEEN 31 | GREATER | |||||||||||||||||
| (1 DAY OR | AND | AND | THAN | |||||||||||||||||
| LESS) | 30 DAYS | 90 DAYS | 90 DAYS | TOTAL | ||||||||||||||||
| September 30, 2017 | ||||||||||||||||||||
| Fair market value of securities pledged, including | ||||||||||||||||||||
| accrued interest receivable | $ | - | $ | 2,506,628 | $ | 941,339 | $ | 484,607 | $ | 3,932,574 | ||||||||||
| Repurchase agreement liabilities associated with | ||||||||||||||||||||
| these securities | $ | - | $ | 2,358,459 | $ | 897,376 | $ | 454,242 | $ | 3,710,077 | ||||||||||
| Net weighted average borrowing rate | - | 1.34 | % | 1.34 | % | 1.57 | % | 1.37 | % | |||||||||||
| December 31, 2016 | ||||||||||||||||||||
| Fair market value of securities pledged, including | ||||||||||||||||||||
| accrued interest receivable | $ | - | $ | 2,284,815 | $ | 686,065 | $ | - | $ | 2,970,880 | ||||||||||
| Repurchase agreement liabilities associated with | ||||||||||||||||||||
| these securities | $ | - | $ | 2,154,766 | $ | 638,939 | $ | - | $ | 2,793,705 | ||||||||||
| Net weighted average borrowing rate | - | 1.01 | % | 0.96 | % | - | 1.00 | % | ||||||||||||
($ in thousands) | ||||||||||||||||||||
OVERNIGHT | BETWEEN 2 | BETWEEN 31 | GREATER | |||||||||||||||||
(1 DAY OR | AND | AND | THAN | |||||||||||||||||
LESS) | 30 DAYS | 90 DAYS | 90 DAYS | TOTAL | ||||||||||||||||
March 31, 2024 | ||||||||||||||||||||
Fair market value of securities pledged, including accrued interest receivable | $ | 94,362 | $ | 3,406,836 | $ | 361,390 | $ | 28,379 | $ | 3,890,967 | ||||||||||
Repurchase agreement liabilities associated with these securities | $ | 88,946 | $ | 3,251,797 | $ | 343,299 | $ | 27,456 | $ | 3,711,498 | ||||||||||
Net weighted average borrowing rate | 5.47 | % | 5.46 | % | 5.45 | % | 5.37 | % | 5.46 | % | ||||||||||
December 31, 2023 | ||||||||||||||||||||
Fair market value of securities pledged, including accrued interest receivable | $ | - | $ | 3,125,315 | $ | 710,055 | $ | 65,106 | $ | 3,900,476 | ||||||||||
Repurchase agreement liabilities associated with these securities | $ | - | $ | 2,966,650 | $ | 674,696 | $ | 64,303 | $ | 3,705,649 | ||||||||||
Net weighted average borrowing rate | - | 5.55 | % | 5.54 | % | 5.46 | % | 5.55 | % | |||||||||||
In addition, cash pledged to counterparties for repurchase agreements was approximately $7.4 million as of March 31, 2024.
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 September 30, 2017,March 31, 2024, 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 $227.9$174.1 million. The Company did not have an amount at risk with any individual counterparty that was greater than 10% of the Company'sCompany’s equity at September 30, 2017 and March 31, 2024 or December 31, 2016.
NOTE 4.5. DERIVATIVE FINANCIALAND OTHER HEDGING INSTRUMENTS
The table below summarizes fair value information about ourthe Company’s derivative and other hedging instruments assets and liabilities as of September 30, 2017March 31, 2024 and December 31, 2016.
| (in thousands) | |||||||||
| Derivative Instruments and Related Accounts | Balance Sheet Location | September 30, 2017 | December 31, 2016 | ||||||
| Assets | |||||||||
| Interest rate swaps | Derivative assets, at fair value | $ | 10,693 | $ | 10,302 | ||||
| Payer swaptions | Derivative assets, at fair value | 3,194 | - | ||||||
| TBA securities | Derivative assets, at fair value | 2,984 | 63 | ||||||
| Total derivative assets, at fair value | $ | 16,871 | $ | 10,365 | |||||
| Liabilities | |||||||||
| Interest rate swaps | Derivative liabilities, at fair value | $ | 2,591 | $ | 802 | ||||
| TBA securities | Derivative liabilities, at fair value | - | 1,180 | ||||||
| Total derivative liabilities, at fair value | $ | 2,591 | $ | 1,982 | |||||
| Margin Balances Posted to (from) Counterparties | |||||||||
| Futures contracts | Restricted cash | $ | 6,193 | $ | 9,419 | ||||
| TBA securities | Restricted cash | - | 446 | ||||||
| TBA securities | Other liabilities | (1,867 | ) | - | |||||
| Interest rate swaption contracts | Other liabilities | (2,776 | ) | - | |||||
| Interest rate swap contracts | Restricted cash | 1,437 | - | ||||||
| Total margin balances on derivative contracts | $ | 2,987 | $ | 9,865 | |||||
(in thousands) | |||||||||
Derivative and Other Hedging Instruments | Balance Sheet Location | March 31, 2024 | December 31, 2023 | ||||||
Assets | |||||||||
Interest rate swaps | Derivative assets, at fair value | $ | 11,252 | $ | 6,348 | ||||
Payer swaption (long position) | Derivative assets, at fair value | 14 | 72 | ||||||
Dual digital option | Derivative assets, at fair value | 261 | - | ||||||
TBA securities | Derivative assets, at fair value | 984 | - | ||||||
Total derivative assets, at fair value | $ | 12,511 | $ | 6,420 | |||||
Liabilities | |||||||||
TBA securities | Derivative liabilities, at fair value | $ | 80 | $ | 12,694 | ||||
Total derivative liabilities, at fair value | $ | 80 | $ | 12,694 | |||||
Margin Balances Posted to (from) Counterparties | |||||||||
Futures contracts | Restricted cash | $ | 5,009 | $ | 4,096 | ||||
TBA securities | Restricted cash | 65 | 23,720 | ||||||
TBA securities | Other liabilities | (240 | ) | - | |||||
Interest rate swaption contracts | Restricted cash | 755 | 580 | ||||||
Total margin balances on derivative contracts | $ | 5,589 | $ | 28,396 | |||||
Fed Funds, T-Note and T-NoteSOFR futures are cash settled futures contracts on an interest rate, with gains and losses credited or charged to the Company'sCompany’s cash accounts on a daily basis. A minimum balance, or "margin"“margin”, is required to be maintained in the account on a daily basis. The tables below present information related to the Company's EurodollarCompany’s T-Note and T-NoteSOFR futures positions at September 30, 2017March 31, 2024 and December 31, 2016.
| ($ in thousands) | ||||||||||||||||
| September 30, 2017 | ||||||||||||||||
| Average | Weighted | Weighted | ||||||||||||||
| Contract | Average | Average | ||||||||||||||
| Notional | Entry | Effective | Open | |||||||||||||
| Expiration Year | Amount | Rate | Rate | Equity(1) | ||||||||||||
| Eurodollar Futures Contracts (Short Positions) | ||||||||||||||||
| 2017 | $ | 1,000,000 | 1.62 | % | 1.48 | % | $ | (340 | ) | |||||||
| 2018 | 1,000,000 | 1.84 | % | 1.73 | % | (1,091 | ) | |||||||||
| 2019 | 1,000,000 | 2.09 | % | 1.98 | % | (1,138 | ) | |||||||||
| 2020 | 925,000 | 2.62 | % | 2.13 | % | (4,505 | ) | |||||||||
| Total / Weighted Average | $ | 976,923 | 2.13 | % | 1.91 | % | $ | (7,074 | ) | |||||||
Treasury Note Futures Contracts (Short Position)(2) | ||||||||||||||||
| September 2017 10-year T-Note futures | ||||||||||||||||
| (Sep 2017 - Sep 2027 Hedge Period) | $ | 115,000 | 1.98 | % | 2.16 | % | $ | (81 | ) | |||||||
($ in thousands) | ||||||||||||||||
March 31, 2024 | ||||||||||||||||
Average | Weighted | Weighted | ||||||||||||||
Contract | Average | Average | ||||||||||||||
Notional | Entry | Effective | Open | |||||||||||||
Expiration Year | Amount | Rate | Rate | Equity(1) | ||||||||||||
Treasury Note Futures Contracts (Short Positions)(2) | ||||||||||||||||
June 2024 5-year T-Note futures (Jun 2024 - Jun 2029 Hedge Period) | $ | 421,500 | 4.26 | % | 4.42 | % | $ | (1,099 | ) | |||||||
March 2024 10-year T-Note futures (Mar 2024 - Mar 2034 Hedge Period) | 320,000 | 4.29 | % | 4.64 | % | (2,475 | ) | |||||||||
SOFR Futures Contracts (Short Positions) | ||||||||||||||||
December 2024 3-Month SOFR futures (Sep 2024 - Dec 2024 Hedge Period) | $ | 25,000 | 4.27 | % | 4.87 | % | $ | 149 | ||||||||
March 2025 3-Month SOFR futures (Dec 2024 - Mar 2025 Hedge Period) | 25,000 | 3.90 | % | 4.57 | % | 168 | ||||||||||
June 2025 3-Month SOFR futures (Mar 2025 - Jun 2025 Hedge Period) | 25,000 | 3.58 | % | 4.30 | % | 179 | ||||||||||
September 2025 3-Month SOFR futures (Jun 2025 - Sep 2025 Hedge Period) | 25,000 | 3.37 | % | 4.07 | % | 175 | ||||||||||
December 2025 3-Month SOFR futures (Sep 2025 - Dec 2025 Hedge Period) | 25,000 | 3.25 | % | 3.88 | % | 158 | ||||||||||
March 2026 3-Month SOFR futures (Dec 2025 - Mar 2026 Hedge Period) | 25,000 | 3.21 | % | 3.76 | % | 138 | ||||||||||
| ($ in thousands) | ||||||||||||||||
| December 31, 2016 | ||||||||||||||||
| Average | Weighted | Weighted | ||||||||||||||
| Contract | Average | Average | ||||||||||||||
| Notional | Entry | Effective | Open | |||||||||||||
| Expiration Year | Amount | Rate | Rate | Equity(1) | ||||||||||||
| Eurodollar Futures Contracts (Short Positions) | ||||||||||||||||
| 2017 | $ | 600,000 | 1.48 | % | 1.28 | % | $ | (1,206 | ) | |||||||
| 2018 | 600,000 | 1.81 | % | 1.82 | % | 76 | ||||||||||
| 2019 | 675,000 | 2.00 | % | 2.21 | % | 1,429 | ||||||||||
| 2020 | 700,000 | 2.65 | % | 2.45 | % | (1,394 | ) | |||||||||
| Total / Weighted Average | $ | 643,750 | 2.01 | % | 1.97 | % | $ | (1,095 | ) | |||||||
Treasury Note Futures Contracts (Short Position)(2) | ||||||||||||||||
| March 2017 10 year T-Note futures | ||||||||||||||||
| (Mar 2017 - Mar 2027 Hedge Period) | $ | 465,000 | 2.27 | % | 2.24 | % | $ | (3,134 | ) | |||||||
($ in thousands) | ||||||||||||||||
December 31, 2023 | ||||||||||||||||
Average | Weighted | Weighted | ||||||||||||||
Contract | Average | Average | ||||||||||||||
Notional | Entry | Effective | Open | |||||||||||||
Expiration Year | Amount | Rate | Rate | Equity(1) | ||||||||||||
Treasury Note Futures Contracts (Short Positions)(2) | ||||||||||||||||
March 2024 5-year T-Note futures (Mar 2024 - Mar 2029 Hedge Period) | $ | 421,500 | 4.36 | % | 4.04 | % | $ | (9,936 | ) | |||||||
March 2024 10-year T-Note futures (Mar 2024 - Mar 2034 Hedge Period) | 320,000 | 4.38 | % | 4.39 | % | (11,393 | ) | |||||||||
SOFR Futures Contracts (Short Positions) | ||||||||||||||||
June 2024 3-Month SOFR futures (Mar 2024 - Jun 2024 Hedge Period) | $ | 25,000 | 5.08 | % | 4.99 | % | $ | (24 | ) | |||||||
September 2024 3-Month SOFR futures (Jun 2024 - Sep 2024 Hedge Period) | 25,000 | 4.67 | % | 4.52 | % | (39 | ) | |||||||||
December 2024 3-Month SOFR futures (Sep 2024 - Dec 2024 Hedge Period) | 25,000 | 4.27 | % | 4.10 | % | (44 | ) | |||||||||
March 2025 3-Month SOFR futures (Dec 2024 - Mar 2025 Hedge Period) | 25,000 | 3.90 | % | 3.73 | % | (43 | ) | |||||||||
June 2025 3-Month SOFR futures (Mar 2025 - Jun 2025 Hedge Period) | 25,000 | 3.58 | % | 3.42 | % | (41 | ) | |||||||||
September 2025 3-Month SOFR futures (Jun 2025 - Sep 2025 Hedge Period) | 25,000 | 3.37 | % | 3.21 | % | (39 | ) | |||||||||
December 2025 3-Month SOFR futures (Sep 2025 - Dec 2025 Hedge Period) | 25,000 | 3.25 | % | 3.10 | % | (37 | ) | |||||||||
March 2026 3-Month SOFR futures (Dec 2025 - Mar 2026 Hedge Period) | 25,000 | 3.21 | % | 3.07 | % | (35 | ) | |||||||||
(1) | Open equity represents the cumulative gains (losses) recorded on open futures positions from inception. |
(2) | 5-Year T-Note futures contracts were valued at a price of |
Under ourits interest rate swap agreements, wethe Company typically paypays a fixed rate and receivereceives a floating rate based on the London Interbank Offered Rate ("LIBOR") ("payer swaps"). based on an index, such as SOFR. The floating rate we receivethe Company receives under ourits swap agreements has the effect of offsetting the repricing characteristics of ourits repurchase agreements and cash flows on such liabilities. We areThe Company is typically required to post collateralmargin on ourits interest rate swap agreements. The table below presents information related to the Company'sCompany’s interest rate swap positions at September 30, 2017March 31, 2024 and December 31, 2016.2023.
($ in thousands) | ||||||||||||||||
Average | ||||||||||||||||
Fixed | Average | Average | ||||||||||||||
Notional | Pay | Receive | Maturity | |||||||||||||
Amount | Rate | Rate | (Years) | |||||||||||||
March 31, 2024 | ||||||||||||||||
Expiration > 1 to ≤ 5 years | $ | 1,200,000 | 1.34 | % | 5.45 | % | 3.9 | |||||||||
Expiration > 5 years | 1,331,800 | 3.28 | % | 5.38 | % | 7.4 | ||||||||||
| $ | 2,531,800 | 2.36 | % | 5.41 | % | 5.7 | ||||||||||
December 31, 2023 | ||||||||||||||||
Expiration > 1 to ≤ 5 years | $ | 500,000 | 0.84 | % | 5.64 | % | 2.7 | |||||||||
Expiration > 5 years | 1,826,500 | 2.62 | % | 5.40 | % | 6.8 | ||||||||||
| $ | 2,326,500 | 2.24 | % | 5.45 | % | 5.9 | ||||||||||
Our interest rate swaps are centrally cleared through two registered commodities exchanges, the Chicago Mercantile Exchange ("CME") and the London Clearing House (“LCH”). The clearing exchanges require that we post an "initial margin" amount determined by the exchanges. The initial margin amount is intended to be set at a level sufficient to protect the exchange from the interest rate swap's maximum estimated single-day price movement and is subject to adjustment based on changes in market volatility and other factors. We also exchange daily settlements of "variation margin" based upon changes in fair value, as measured by the exchanges.
| ($ in thousands) | ||||||||||||||||||||
| Average | Net | |||||||||||||||||||
| Fixed | Average | Estimated | Average | |||||||||||||||||
| Notional | Pay | Receive | Fair | Maturity | ||||||||||||||||
| Amount | Rate | Rate | Value | (Years) | ||||||||||||||||
| September 30, 2017 | ||||||||||||||||||||
| Expiration > 1 to ≤ 3 years | $ | 650,000 | 1.09 | % | 1.31 | % | $ | 10,318 | 2.3 | |||||||||||
| Expiration > 3 to ≤ 5 years | 360,000 | 2.05 | % | 1.32 | % | (2,216 | ) | 4.5 | ||||||||||||
| $ | 1,010,000 | 1.43 | % | 1.31 | % | $ | 8,102 | 3.1 | ||||||||||||
| December 31, 2016 | ||||||||||||||||||||
| Expiration > 3 to ≤ 5 years | $ | 700,000 | 1.20 | % | 0.91 | % | $ | 9,500 | 3.4 | |||||||||||
The table below presents information related to the Company'sCompany’s option positions at March 31, 2024 and December 31, 2023.
($ in thousands) | |||||||||||||||||||||||||
Option | Underlying Swap | ||||||||||||||||||||||||
Weighted | Weighted | ||||||||||||||||||||||||
Average | Average | Adjustable | Average | ||||||||||||||||||||||
Fair | Months to | Notional | Fixed | Rate | Term | ||||||||||||||||||||
Cost | Value | Expiration | Amount | Rate | Index | (Years) | |||||||||||||||||||
March 31, 2024 | |||||||||||||||||||||||||
Payer Swaption (long position) | $ | 1,619 | $ | 14 | 2.0 | $ | 800,000 | 5.40 | % | SOFR | 1.0 | ||||||||||||||
Dual Digital Option (1) | $ | 500 | $ | 261 | 5.7 | $ | 9,412 | n/a | n/a | n/a | |||||||||||||||
December 31, 2023 | |||||||||||||||||||||||||
Payer Swaption (long position) | $ | 1,619 | $ | 72 | 5.0 | $ | 800,000 | 5.40 | % | SOFR | 1.0 | ||||||||||||||
(1) | If, on September, 20, 2024, the S&P 500 Index (SPX) is lower than 4,725.166, and the SOFR 10 Year Swap Rate is above 3.883%, the Company will receive the notional amount. If either condition is not met, the Company will receive $0. |
We purchase interest rate swaptions to help mitigate the potential impact of larger, more rapid changes in interest rates on the performance of our investment portfolio. Interest rate swaptions provide us the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future. Our interest rate swaption positionsagreements are not subject to central clearing. The difference between the premium paid and the fair value of the swaption is reported in gain (loss) on derivative and other hedging instruments in our statements of comprehensive income. If a swaption expires unexercised, the realized loss on the swaption would be equal to the premium paid. If we sell or exercise a swaption, the realized gain or loss on the swaption would be equal to the difference between the cash or the fair value of the underlying interest rate swap and the premium paid.
A dual digital option is a type of binary, or digital option, that involves both upper and lower conditions. A dual digital option will only activate if both conditions are met at September 30, 2017.
| ($ in thousands) | |||||||
| Option | Underlying Swap | ||||||
| Weighted | Weighted | ||||||
| Average | Fixed | Receive | Average | ||||
| Fair | Months to | Notional | Pay | Rate | Term | ||
| Expiration | Cost | Value | Expiration | Amount | Rate | (LIBOR) | (Years) |
| Payer Swaptions | |||||||
| ≤ 1 year | $2,367 | $3,194 | 11.0 | $200,000 | 2.16% | 3 Month | 6.0 |
The following table summarizes ourthe Company’s contracts to purchase and sell TBA securities as of September 30, 2017March 31, 2024 and December 31, 2016.
| ($ in thousands) | |||||||||
| Notional | Net | ||||||||
| Amount | Cost | Market | Carrying | ||||||
Long (Short)(1) | Basis(2) | Value(3) | Value(4) | ||||||
| September 30, 2017 | |||||||||
| 30-Year TBA securities: | |||||||||
| 3.0% | $ | (300,000) | $ | (303,773) | $ | (300,789) | $ | 2,984 | |
| December 31, 2016 | |||||||||
| 30-Year TBA securities: | |||||||||
| 3.0% | $ | (100,000) | $ | (99,406) | $ | (99,344) | $ | 62 | |
| 4.0% | (100,000) | (103,898) | (105,078) | (1,180) | |||||
| Total | $ | (200,000) | $ | (203,304) | $ | (204,422) | $ | (1,118) | |
($ in thousands) | |||||||||||||||||
Notional | |||||||||||||||||
Amount |
| Net | |||||||||||||||
Long | Cost | Market | Carrying | ||||||||||||||
(Short)(1) | Basis(2) | Value(3) | Value(4) | ||||||||||||||
March 31, 2024 | |||||||||||||||||
30-Year TBA securities: | |||||||||||||||||
| 3.0% | $ | (170,700 | ) | $ | (147,202 | ) | $ | (147,282 | ) | $ | (80 | ) | |||||
| 3.5% | (200,000 | ) | (180,219 | ) | (179,235 | ) | 984 | ||||||||||
Total | $ | (370,700 | ) | $ | (327,421 | ) | $ | (326,517 | ) | $ | 904 | ||||||
December 31, 2023 | |||||||||||||||||
30-Year TBA securities: | |||||||||||||||||
| 3.0% | $ | (70,700 | ) | $ | (59,278 | ) | $ | (62,647 | ) | $ | (3,369 | ) | |||||
| 5.0% | (250,000 | ) | (242,725 | ) | (247,657 | ) | (4,932 | ) | |||||||||
| 5.5% | (325,000 | ) | (322,410 | ) | (326,803 | ) | (4,393 | ) | |||||||||
Total | $ | (645,700 | ) | $ | (624,413 | ) | $ | (637,107 | ) | $ | (12,694 | ) | |||||
(1) | Notional amount represents the par value (or principal balance) of the underlying Agency |
(2) | Cost basis represents the forward price to be paid (received) for the underlying Agency |
(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) |
Gain (Loss) From Derivative and Other Hedging Instruments, Net
The table below presents the effect of the Company'sCompany’s derivative financialand other hedging instruments on the consolidated statements of operationscomprehensive income for the nine and three months ended September 30, 2017 March 31, 2024 and 2016.
| (in thousands) | ||||||||||||||||
| Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Eurodollar futures contracts (short positions) | $ | (6,955 | ) | $ | (17,507 | ) | $ | 607 | $ | 1,194 | ||||||
| T-Note futures contracts (short position) | (16,190 | ) | (12,288 | ) | (6,450 | ) | 1,688 | |||||||||
| Interest rate swaps | (3,170 | ) | (450 | ) | 1,005 | 4,179 | ||||||||||
| Receiver swaptions | - | 36 | - | - | ||||||||||||
| Payer swaptions | 827 | - | 827 | - | ||||||||||||
| Net TBA securities | (3,843 | ) | (2,385 | ) | (1,459 | ) | (474 | ) | ||||||||
| Total | $ | (29,331 | ) | $ | (32,594 | ) | $ | (5,470 | ) | $ | 6,587 | |||||
(in thousands) | ||||||||
Three Months Ended March 31, | ||||||||
2024 | 2023 | |||||||
Interest rate futures contracts (short position) | $ | 19,090 | $ | (4,038 | ) | |||
Interest rate swaps | 59,098 | (26,144 | ) | |||||
Payer swaptions (short positions) | - | 6,585 | ||||||
Payer swaptions (long positions) | (58 | ) | (12,109 | ) | ||||
Interest rate caps | - | (645 | ) | |||||
Dual digital option | (239 | ) | - | |||||
Interest rate floors (long positions) | - | 1,185 | ||||||
TBA securities (short positions) | 9,903 | (5,990 | ) | |||||
TBA securities (long positions) | 105 | - | ||||||
Total | $ | 87,899 | $ | (41,156 | ) | |||
Credit Risk-Related Contingent Features
The use of derivatives and other hedging instruments creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. WeThe Company attempts to minimize this risk by limiting ourits 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 the Company may be required to pledge assets as collateral for ourits 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 the Company may not receive payments provided for under the terms of ourits derivative agreements, and may have difficulty obtaining ourits assets pledged as collateral for ourits derivatives. The cash and cash equivalents pledged as collateral for ourthe Company derivative instruments are included in restricted cash on our consolidatedits balance sheets.
It is the Company's policy not to offset assets and liabilities associated with open derivative contracts. However, CME and LCH 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 or LCH serves as the central clearing party are presented as if these derivatives had been settled as of the reporting date.
NOTE 5.6. PLEDGED ASSETS
Assets Pledged to Counterparties
The table below summarizes ourthe Company’s assets pledged as collateral under our repurchase agreements prime brokerage clearing accounts,and derivative agreements and insurance capital by type, including securities pledged related to securities sold but not yet settled, as of September 30, 2017March 31, 2024 and December 31, 2016.2023.
(in thousands) | ||||||||||||||||||||||||
March 31, 2024 | December 31, 2023 | |||||||||||||||||||||||
Repurchase | Derivative | Repurchase | Derivative | |||||||||||||||||||||
Assets Pledged to Counterparties | Agreements | Agreements | Total | Agreements | Agreements | Total | ||||||||||||||||||
PT RMBS - fair value | $ | 3,859,132 | $ | - | $ | 3,859,132 | $ | 3,868,624 | $ | - | $ | 3,868,624 | ||||||||||||
Structured RMBS - fair value | 16,573 | - | 16,573 | 16,930 | - | 16,930 | ||||||||||||||||||
U.S. Treasury securities | - | 79,590 | 79,590 | - | 79,680 | 79,680 | ||||||||||||||||||
Accrued interest on pledged securities | 15,262 | 336 | 15,598 | 14,922 | - | 14,922 | ||||||||||||||||||
Restricted cash | 7,418 | 5,829 | 13,247 | - | 28,396 | 28,396 | ||||||||||||||||||
Total | $ | 3,898,385 | $ | 85,755 | $ | 3,984,140 | $ | 3,900,476 | $ | 108,076 | $ | 4,008,552 | ||||||||||||
| (in thousands) | ||||||||||||
| September 30, 2017 | ||||||||||||
| Repurchase | Derivative | |||||||||||
| Assets Pledged to Counterparties | Agreements | Agreements | Total | |||||||||
| PT RMBS - fair value | $ | 3,779,375 | $ | - | $ | 3,779,375 | ||||||
| Structured RMBS - fair value | 138,050 | - | 138,050 | |||||||||
| Accrued interest on pledged securities | 15,150 | - | 15,150 | |||||||||
| Restricted cash | 11,999 | 7,630 | 19,629 | |||||||||
| Total | $ | 3,944,574 | $ | 7,630 | $ | 3,952,204 | ||||||
| (in thousands) | ||||||||||||||||||||
| December 31, 2016 | ||||||||||||||||||||
| Repurchase | Clearing | Derivative | Insurance | |||||||||||||||||
| Assets Pledged to Counterparties | Agreements | Margin | Agreements | Capital(1) | Total | |||||||||||||||
| PT RMBS - fair value | $ | 2,854,062 | $ | - | $ | - | $ | 1,065 | $ | 2,855,127 | ||||||||||
| Structured RMBS - fair value | 106,195 | 10,968 | - | - | 117,163 | |||||||||||||||
| Accrued interest on pledged securities | 10,623 | 266 | - | 4 | 10,893 | |||||||||||||||
| Restricted cash | 10,835 | - | 9,865 | 250 | 20,950 | |||||||||||||||
| Total | $ | 2,981,715 | $ | 11,234 | $ | 9,865 | $ | 1,319 | $ | 3,004,133 | ||||||||||
Assets Pledged from Counterparties
The table below summarizes our assets pledged to usthe Company from counterparties under our repurchase agreements and derivative agreements as of September 30, 2017March 31, 2024 and December 31, 2016.
| (in thousands) | ||||||||||||||||||||||||
| September 30, 2017 | December 31, 2016 | |||||||||||||||||||||||
| Repurchase | Derivative | Repurchase | Derivative | |||||||||||||||||||||
| Assets Pledged to Orchid | Agreements | Agreements | Total | Agreements | Agreements | Total | ||||||||||||||||||
| Cash | $ | 253 | $ | 4,643 | $ | 4,896 | $ | 1,029 | $ | - | $ | 1,029 | ||||||||||||
| PT RMBS - fair value | 1,768 | - | 1,768 | - | - | - | ||||||||||||||||||
| U.S. Treasury securities - fair value | - | - | - | 3,438 | - | 3,438 | ||||||||||||||||||
| Total | $ | 2,021 | $ | 4,643 | $ | 6,664 | $ | 4,467 | $ | - | $ | 4,467 | ||||||||||||
(in thousands) | ||||||||||||||||||||||||
March 31, 2024 | December 31, 2023 | |||||||||||||||||||||||
Repurchase | Derivative | Repurchase | Derivative | |||||||||||||||||||||
Assets Pledged to Orchid | Agreements | Agreements | Total | Agreements | Agreements | Total | ||||||||||||||||||
Cash | $ | 6,475 | $ | 240 | $ | 6,715 | $ | 42,179 | $ | - | $ | 42,179 | ||||||||||||
U.S. Treasury securities - fair value | 1,418 | - | 1,418 | 10,429 | - | 10,429 | ||||||||||||||||||
Total | $ | 7,893 | $ | 240 | $ | 8,133 | $ | 52,608 | $ | - | $ | 52,608 | ||||||||||||
Cash received as margin is recognized inas cash and cash equivalents with a corresponding amount recognized as an increase in repurchase agreements or other liabilities in the consolidated balance sheets.
NOTE 6.7. OFFSETTING ASSETS AND LIABILITIES
The Company's derivativesCompany’s derivative agreements 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 September 30, 2017March 31, 2024 and December 31, 2016.2023.
(in thousands) | ||||||||||||||||||||||||
Offsetting of Assets | ||||||||||||||||||||||||
Net Amount | Gross Amount Not | |||||||||||||||||||||||
| Gross | Gross | of Assets | Offset in the Balance Sheet | |||||||||||||||||||||
| Amount | Amount | Presented | Financial | |||||||||||||||||||||
of | Offset in the | in the | Instruments | Cash | ||||||||||||||||||||
Recognized | Balance | Balance | Received as | Received as | Net | |||||||||||||||||||
Assets | Sheet | Sheet | Collateral | Collateral | Amount | |||||||||||||||||||
March 31, 2024 | ||||||||||||||||||||||||
Interest rate swaps | $ | 11,252 | $ | - | $ | 11,252 | $ | - | $ | - | $ | 11,252 | ||||||||||||
Interest rate swaptions | 14 | - | 14 | - | - | 14 | ||||||||||||||||||
Dual digital option | 261 | - | 261 | - | - | 261 | ||||||||||||||||||
TBA securities | 984 | - | 984 | - | (240 | ) | 744 | |||||||||||||||||
| $ | 12,511 | $ | - | $ | 12,511 | $ | - | $ | (240 | ) | $ | 12,271 | ||||||||||||
December 31, 2023 | ||||||||||||||||||||||||
Interest rate swaps | $ | 6,348 | $ | - | $ | 6,348 | $ | - | $ | - | $ | 6,348 | ||||||||||||
Interest rate swaptions | 72 | - | 72 | - | - | 72 | ||||||||||||||||||
| $ | 6,420 | $ | - | $ | 6,420 | $ | - | $ | - | $ | 6,420 | |||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Offsetting of Assets | ||||||||||||||||||||||||
| Net Amount | Gross Amount Not Offset in the | |||||||||||||||||||||||
| of Assets | Consolidated Balance Sheet | |||||||||||||||||||||||
| Gross Amount | Presented | Financial | ||||||||||||||||||||||
| Gross Amount | Offset in the | in the | Instruments | Cash | ||||||||||||||||||||
| of Recognized | Consolidated | Consolidated | Received as | Received as | Net | |||||||||||||||||||
| Assets | Balance Sheet | Balance Sheet | Collateral | Collateral | Amount | |||||||||||||||||||
| September 30, 2017 | ||||||||||||||||||||||||
| Interest rate swaps | $ | 10,693 | $ | - | $ | 10,693 | $ | - | $ | - | $ | 10,693 | ||||||||||||
| Interest rate swaptions | 3,194 | - | 3,194 | - | (2,776 | ) | 418 | |||||||||||||||||
| TBA securities | 2,984 | - | 2,984 | - | (1,867 | ) | 1,117 | |||||||||||||||||
| $ | 16,871 | $ | - | $ | 16,871 | $ | - | $ | (4,643 | ) | $ | 12,228 | ||||||||||||
| December 31, 2016 | ||||||||||||||||||||||||
| Interest rate swaps | $ | 10,302 | $ | - | $ | 10,302 | $ | - | $ | - | $ | 10,302 | ||||||||||||
| TBA securities | 63 | - | 63 | - | (63 | ) | - | |||||||||||||||||
| $ | 10,365 | $ | - | $ | 10,365 | $ | - | $ | (63 | ) | $ | 10,302 | ||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Offsetting of Liabilities | ||||||||||||||||||||||||
| Net Amount | Gross Amount Not Offset in the | |||||||||||||||||||||||
| of Assets | Consolidated Balance Sheet | |||||||||||||||||||||||
| Gross Amount | Presented | Financial | ||||||||||||||||||||||
| Gross Amount | Offset in the | in the | Instruments | |||||||||||||||||||||
| of Recognized | Consolidated | Consolidated | Posted as | Cash Posted | Net | |||||||||||||||||||
| Liabilities | Balance Sheet | Balance Sheet | Collateral | Collateral | Amount | |||||||||||||||||||
| September 30, 2017 | ||||||||||||||||||||||||
| Repurchase Agreements | $ | 3,710,077 | $ | - | $ | 3,710,077 | $ | (3,698,078 | ) | $ | (11,999 | ) | $ | - | ||||||||||
| Interest rate swaps | 2,591 | - | 2,591 | - | (1,437 | ) | 1,154 | |||||||||||||||||
| $ | 3,712,668 | $ | - | $ | 3,712,668 | $ | (3,698,078 | ) | $ | (13,436 | ) | $ | 1,154 | |||||||||||
| December 31, 2016 | ||||||||||||||||||||||||
| Repurchase Agreements | $ | 2,793,705 | $ | - | $ | 2,793,705 | $ | (2,782,870 | ) | $ | (10,835 | ) | $ | - | ||||||||||
| Interest rate swaps | 802 | - | 802 | - | (802 | ) | - | |||||||||||||||||
| TBA securities | 1,180 | - | 1,180 | - | (848 | ) | 332 | |||||||||||||||||
| $ | 2,795,687 | $ | - | $ | 2,795,687 | $ | (2,782,870 | ) | $ | (12,485 | ) | $ | 332 | |||||||||||
(in thousands) | ||||||||||||||||||||||||
Offsetting of Liabilities | ||||||||||||||||||||||||
Net Amount | Gross Amount Not | |||||||||||||||||||||||
| Gross | Gross | of Liabilities | Offset in the Balance Sheet | |||||||||||||||||||||
Amount | Amount | Presented | Financial | |||||||||||||||||||||
| of | Offset in the | in the | Instruments | |||||||||||||||||||||
Recognized | Balance | Balance | Posted as | Cash Posted | Net | |||||||||||||||||||
Liabilities | Sheet | Sheet | Collateral | as Collateral | Amount | |||||||||||||||||||
March 31, 2024 | ||||||||||||||||||||||||
Repurchase Agreements | $ | 3,711,498 | $ | - | $ | 3,711,498 | $ | (3,704,080 | ) | $ | (7,418 | ) | $ | - | ||||||||||
TBA securities | 80 | - | 80 | - | (65 | ) | 15 | |||||||||||||||||
| $ | 3,711,578 | $ | - | $ | 3,711,578 | $ | (3,704,080 | ) | $ | (7,483 | ) | $ | 15 | |||||||||||
December 31, 2023 | ||||||||||||||||||||||||
Repurchase Agreements | $ | 3,705,649 | $ | - | $ | 3,705,649 | $ | (3,705,649 | ) | $ | - | $ | - | |||||||||||
TBA securities | 12,694 | - | 12,694 | - | (12,694 | ) | - | |||||||||||||||||
| $ | 3,718,343 | $ | - | $ | 3,718,343 | $ | (3,705,649 | ) | $ | (12,694 | ) | $ | - | |||||||||||
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 consolidated balance sheets. The fair value of the actual collateral received by or posted to the same counterparty typically exceeds the amounts presented. See Note 56 for a discussion of collateral posted or received against or for repurchase obligations and derivative and other hedging instruments.
NOTE 7.8. CAPITAL STOCK
Common Stock Issuances
During 2017the three months ended March 31, 2024 and 2016,the year ended December 31, 2023, the Company completed the following public offerings of shares of its common stock. There were no common stock issuances through public offerings during the three months ended March 31, 2016 and September 30, 2017.
| ($ in thousands, except per share amounts) | |||||||||||||
| Weighted | |||||||||||||
| Average | |||||||||||||
| Price | |||||||||||||
| Received | Net | ||||||||||||
| Type of Offering | Period | Per Share(1) | Shares | Proceeds(2) | |||||||||
| 2017 | |||||||||||||
At the Market Offering Program(3) | First Quarter | $ | 10.13 | 1,286,196 | $ | 12,792 | |||||||
At the Market Offering Program(3) | Second Quarter | 10.17 | 11,012,836 | 110,065 | |||||||||
| 12,299,032 | $ | 122,857 | |||||||||||
| 2016 | |||||||||||||
At the Market Offering Program(3) | Second Quarter | $ | 10.48 | 646,753 | $ | 6,591 | |||||||
At the Market Offering Program(3) | Third Quarter | 10.80 | 3,818,802 | 40,525 | |||||||||
At the Market Offering Program(3) | Fourth Quarter | 10.79 | 6,707,101 | 71,212 | |||||||||
| 11,172,656 | $ | 118,328 | |||||||||||
($ in thousands, except per share amounts) | |||||||||||||
Weighted | |||||||||||||
Average | |||||||||||||
Price | |||||||||||||
Received | Net | ||||||||||||
Type of Offering | Period | Per Share(1) | Shares | Proceeds(2) | |||||||||
2024 | |||||||||||||
At the Market Offering Program(3) | First Quarter | $ | 8.80 | 1,490,075 | $ | 13,109 | |||||||
| 1,490,075 | $ | 13,109 | |||||||||||
2023 | |||||||||||||
At the Market Offering Program(3) | First Quarter | $ | 11.77 | 2,690,000 | $ | 31,657 | |||||||
At the Market Offering Program(3) | Second Quarter | 9.95 | 4,757,953 | 47,355 | |||||||||
At the Market Offering Program(3) | Third Quarter | 9.54 | 8,432,086 | 80,426 | |||||||||
At the Market Offering Program(3) | Fourth Quarter | - | - | - | |||||||||
| 15,880,039 | $ | 159,438 | |||||||||||
(1) | Weighted average price received per share is |
(2) | Net proceeds are net of the |
(3) | The Company has entered into |
Stock Repurchase Program
On July 29, 2015, the Company'sCompany’s Board of Directors authorized the repurchase of up to 2,000,000400,000 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 904,564 shares of the Company's common stock. Coupled with the 156,751 shares remaining from the original 400,000 share authorization, the increased authorization brought the total authorization to 1,061,315 shares, representing 10% of the Company’s then outstanding share count.
On December 9, 2021, the Board of Directors approved an increase in the number of shares of the Company’s common stock available in the stock repurchase program for up to an additional 3,372,399 shares, bringing the remaining authorization under the stock repurchase program to 3,539,861 shares, representing approximately 10% of the Company’s then outstanding shares of common stock.
On October 12, 2022, the Board of Directors approved an increase in the number of shares of the Company’s common stock available in the stock repurchase program for up to an additional 4,300,000 shares, bringing the remaining authorization under the stock repurchase program to 6,183,601 shares, representing approximately 18% of the Company’s then outstanding shares of common stock.
As part of the sharestock repurchase program, shares may be purchased in open market transactions, including through block purchases, through privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-110b5-1 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”). Open market repurchases will be made in accordance with Exchange Act Rule 10b-18,10b-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'sCompany’s discretion without prior notice.
From the inception of the sharestock repurchase program through September 30, 2017,March 31, 2024, the Company repurchased a total of 1,216,2435,081,134 shares at an aggregate cost of approximately $10.8$77.0 million, including commissions and fees, for a weighted average price of $15.16 per share. During the three months ended March 31, 2024, the Company repurchased a total of 332,773 shares at an aggregate cost of approximately $2.8 million, including commissions and fees, for a weighted average price of $8.35 per share. During the year ended December 31, 2023, the Company repurchased a total of 1,072,789 shares at an aggregate cost of approximately $9.4 million, including commissions and fees, for a weighted average price of $8.92$8.79 per share. No shares were repurchased duringThe remaining authorization under the year ended December 31, 2016 or the nine months ended September 30, 2017.
Cash Dividends
The table below presents the cash dividends declared on the Company'sCompany’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 - YTD(1) | 1.400 | 56,027 | ||||||
| Totals | $ | 8.555 | $ | 163,468 | ||||
(in thousands, except per share amounts) | ||||||||
Year | Per Share Amount | Total | ||||||
2013 | $ | 6.975 | $ | 4,662 | ||||
2014 | 10.800 | 22,643 | ||||||
2015 | 9.600 | 38,748 | ||||||
2016 | 8.400 | 41,388 | ||||||
2017 | 8.400 | 70,717 | ||||||
2018 | 5.350 | 55,814 | ||||||
2019 | 4.800 | 54,421 | ||||||
2020 | 3.950 | 53,570 | ||||||
2021 | 3.900 | 97,601 | ||||||
2022 | 2.475 | 87,906 | ||||||
2023 | 1.800 | 81,127 | ||||||
2024 - YTD(1) | 0.480 | 25,089 | ||||||
Totals | $ | 66.930 | $ | 633,686 | ||||
(1) | On |
NOTE 8.9. STOCK INCENTIVE PLAN
In October 2012,2021, the Company'sCompany’s Board of Directors adopted, and Bimini, then the Company's sole stockholder,stockholders approved, the Orchid Island Capital, Inc. 20122021 Equity Incentive Plan (the "Incentive Plan"“2021 Incentive Plan”) to recruitreplace the Orchid Island Capital, Inc. 2012 Equity Incentive Plan (the “2012 Incentive Plan” and retain employees, directors and other service providers, including employees oftogether with the Manager and other affiliates.2021 Incentive Plan, the “Incentive Plans”). The2021 Incentive Plan provides for the award of stock options, stock appreciation rights, stock award, performance units,awards, PUs, other equity-based awards (and dividend equivalents with respect to awards of performance unitsPUs and other equity-based awards) and incentive awards. The2021 Incentive Plan is administered by the Compensation Committee of the Company'sCompany’s Board of Directors except that the Company'sCompany’s full Board of Directors will administer awards made to directors who are not employees of the Company or its affiliates. The2021 Incentive Plan provides for awards of up to an aggregate of 10% of the issued and outstanding shares of ourthe Company’s common stock (on a fully diluted basis) at the time of the awards, subject to a maximum aggregate 4,000,0001,473,324 shares of the Company'sCompany’s common stock that may be issued under the 2021Incentive Plan.
| ($ in thousands, except per share data) | ||||||||||||||||
| Nine Months Ended September 30, | ||||||||||||||||
| 2017 | 2016 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Grant Date | Grant Date | |||||||||||||||
| Shares | Fair Value | Shares | Fair Value | |||||||||||||
| Unvested, beginning of period | 8,000 | $ | 12.23 | 16,000 | $ | 12.23 | ||||||||||
| Granted | - | - | - | - | ||||||||||||
| Vested and issued | (8,000 | ) | 12.23 | (8,000 | ) | 12.23 | ||||||||||
| Unvested, end of period | - | $ | - | 8,000 | $ | 12.23 | ||||||||||
| Compensation expense during period | $ | 33 | $ | 73 | ||||||||||||
| Unrecognized compensation expense, end of period | $ | - | $ | 57 | ||||||||||||
| Intrinsic value, end of period | $ | - | $ | 83 | ||||||||||||
| Weighted-average remaining vesting term (in years) | - | 0.6 | ||||||||||||||
Performance Units
The Company issues immediately vested common stockhas issued, and may in the future issue additional, PUs under the Incentive Plan to certain executive officers, employees and directors. The following table presents information related to fully vested common stock issued during the nine months ended September 30, 2017 and 2016.
| ($ in thousands, except per share data) | ||||||||
| Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
Fully vested shares granted(1) | 25,848 | 37,695 | ||||||
| Weighted average grant date price per share | $ | 9.76 | $ | 10.05 | ||||
Compensation expense related to fully vested common share awards(2) | $ | 252 | $ | 379 | ||||
The following table presents information related to Performance UnitsPUs outstanding during the ninethree months ended September 30, 2017.
| ($ in thousands, except per share data) | ||||||||||||||||
| Nine Months Ended September, 30, | ||||||||||||||||
| 2017 | 2016 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Grant Date | Grant Date | |||||||||||||||
| Shares | Fair Value | Shares | Fair Value | |||||||||||||
| Unvested, beginning of period | 45,305 | $ | 10.33 | 7,508 | $ | 13.32 | ||||||||||
| Granted | 15,707 | 9.55 | 41,500 | 10.00 | ||||||||||||
| Forfeited | - | - | (100 | ) | 10.00 | |||||||||||
| Vested and issued | (14,490 | ) | 10.52 | (2,252 | ) | 13.32 | ||||||||||
| Unvested, end of period | 46,522 | $ | 10.01 | 46,656 | $ | 10.37 | ||||||||||
| Compensation expense during period | $ | 188 | $ | 148 | ||||||||||||
| Unrecognized compensation expense, end of period | $ | 217 | $ | 320 | ||||||||||||
| Intrinsic value, end of period | $ | 474 | $ | 486 | ||||||||||||
| Weighted-average remaining vesting term (in years) | 1.2 | 1.6 | ||||||||||||||
($ in thousands, except per share data) | ||||||||||||||||
Three Months Ended March 31, | ||||||||||||||||
2024 | 2023 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Grant Date | Grant Date | |||||||||||||||
Shares | Fair Value | Shares | Fair Value | |||||||||||||
Unvested, beginning of period (1) | 81,403 | $ | 12.48 | 36,921 | $ | 20.57 | ||||||||||
Granted | 36,773 | 8.62 | - | - | ||||||||||||
Vested and issued | (10,312 | ) | 14.97 | (4,462 | ) | 22.09 | ||||||||||
Unvested, end of period | 107,864 | $ | 10.92 | 32,459 | $ | 20.36 | ||||||||||
Compensation expense during period | $ | 44 | $ | 90 | ||||||||||||
Unrecognized compensation expense, end of period | $ | 692 | $ | 267 | ||||||||||||
Intrinsic value, end of period | $ | 963 | $ | 348 | ||||||||||||
Weighted-average remaining vesting term (in years) | 1.5 | 1.1 | ||||||||||||||
(1) | The number of shares of common stock issuable upon the vesting of the remaining outstanding PUs as of December 31, 2023 was reduced by 14,365 shares as a result of a book value impairment event that occurred pursuant to the terms of the long term equity incentive compensation plans (the “Plans”) established under the Company’s Incentive Plans. The book value impairment event occurred when the Company's book value per share declined by more than 15% during the quarter ended September 30, 2023 and the Company’s book value per share decline from July 1, 2023 to December 31, 2023 was more than 10%. The Plans provide that if such a book value impairment event occurs, then the number of outstanding PUs that are outstanding as of the last day of such two quarter period shall be reduced by 15%. |
Stock Awards
The Company has issued, and may in the future issue additional, immediately vested common stock under the Incentive Plans to certain executive officers and employees of its Manager. The following table presents information related to fully vested common stock issued during the three months ended March 31, 2024 and 2023. All of the fully vested shares of common stock issued during the three months ended March 31, 2024, and the related compensation expense, were granted with respect to service performed during the fiscal year ended December 31, 2023.
($ in thousands, except per share data) | ||||||||
Three Months Ended March 31, | ||||||||
2024 | 2023 | |||||||
Fully vested shares granted | 36,773 | - | ||||||
Weighted average grant date price per share | $ | 8.62 | $ | - | ||||
Compensation expense related to fully vested shares of common stock awards | $ | 317 | $ | - | ||||
Deferred Stock Units
Non-employee directors receive a portion of their compensation in the form of DSU awards pursuant to the Incentive Plans. Each DSU represents a right to receive one share of the Company’s common stock. Beginning in 2022, each non-employee director could elect to receive all of his or her compensation in the form of DSUs. The DSUs are immediately vested and are settled at a future date based on the election of the individual participant. Compensation expense for the DSUs is included in directors’ fees and liability insurance in the statements of comprehensive income. 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, 2024 and 2023.
($ in thousands, except per share data) | ||||||||||||||||
Three Months Ended March 31, | ||||||||||||||||
2024 | 2023 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Grant Date | Grant Date | |||||||||||||||
Shares | Fair Value | Shares | Fair Value | |||||||||||||
Outstanding, beginning of period | 96,704 | $ | 15.69 | 54,197 | $ | 20.29 | ||||||||||
Granted and vested | 13,484 | 8.46 | 9,302 | 10.59 | ||||||||||||
Outstanding, end of period | 110,188 | $ | 14.80 | 63,499 | $ | 18.87 | ||||||||||
Compensation expense during period | $ | 99 | $ | 89 | ||||||||||||
Intrinsic value, end of period | $ | 984 | $ | 681 | ||||||||||||
NOTE 9.10. 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 September 30, 2017.March 31, 2024.
NOTE 10.11. INCOME TAXES
The Company will generally not be subject to U.S. 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, determined without regard to the deductions for dividends paid and excluding net capital gain, to its stockholders, annually to maintain REIT status. An amount equal to the sum of which 85% generally of its REIT ordinary income and 95% of its REIT capital gain net income, plus certain undistributed income from prior taxable years, 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 11.12. EARNINGS PER SHARE (EPS)
The Company had dividend eligible shares of restricted common stockPUs and Performance UnitsDSUs that were outstanding during the nine and three months ended September 30, 2017.March 31, 2024 and 2023. The basic and diluted per share computations include these unvested shares of restricted common stockPUs and performance unitsDSUs if there is income available to common stock, as they have dividend participation rights. The shares of restricted common stockunvested PUs and Performance UnitsDSUs have no contractual obligation to share in losses. Because there is no such obligation, the shares of restricted common stockunvested PUs and Performance UnitsDSUs 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 nine and three months ended September 30, 2017 March 31, 2024 and 2016.2023.
(in thousands, except per share information) | ||||||||
Three Months Ended March 31, | ||||||||
2024 | 2023 | |||||||
Basic and diluted EPS per common share: | ||||||||
Numerator for basic and diluted EPS per share of common stock: | ||||||||
Net income - Basic and diluted | $ | 19,776 | $ | 3,530 | ||||
Weighted average shares of common stock: | ||||||||
Shares of common stock outstanding at the balance sheet date | 52,826 | 39,086 | ||||||
Unvested dividend eligible share based compensation outstanding at the balance sheet date | 218 | 96 | ||||||
Effect of weighting | (1,440 | ) | (690 | ) | ||||
Weighted average shares-basic and diluted | 51,604 | 38,492 | ||||||
Net income per common share: | ||||||||
Basic and diluted | $ | 0.38 | $ | 0.09 | ||||
| (in thousands, except per-share information) | ||||||||||||||||
| Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Basic and diluted EPS per common share: | ||||||||||||||||
| Numerator for basic and diluted EPS per common share: | ||||||||||||||||
| Net income - Basic and diluted | $ | 7,989 | $ | 22,397 | $ | 15,183 | $ | 20,526 | ||||||||
| Weighted average common shares: | ||||||||||||||||
| Common shares outstanding at the balance sheet date | 45,308 | 26,252 | 45,308 | 26,252 | ||||||||||||
| Unvested dividend eligible share based compensation | ||||||||||||||||
| outstanding at the balance sheet date | 47 | 55 | 47 | 55 | ||||||||||||
| Effect of weighting | (6,747 | ) | (3,688 | ) | - | (2,174 | ) | |||||||||
| Weighted average shares-basic and diluted | 38,608 | 22,619 | 45,355 | 24,133 | ||||||||||||
| Net Income per common share: | ||||||||||||||||
| Basic and diluted | $ | 0.21 | $ | 0.99 | $ | 0.33 | $ | 0.85 | ||||||||
NOTE 12.13. FAIR VALUE
The 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 stratificationpresentation of balance sheet amounts measured at fair value based on inputs the Company uses to derive fair value measurements. These stratificationsinputs 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 |
The Company's RMBS 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.quotes. 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. Alternatively,The Company and the Company could optindependent pricing sources use various valuation techniques to havedetermine 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 allthe security is determined by using the adjusted spread.
The Company’s U.S. Treasury securities are based on quoted prices for identical instruments in RMBS,active markets and are classified as Level 1 assets.
The Company’s futures contracts are Level 1 valuations, as they are exchange-traded instruments and quoted market prices are readily available. Futures contracts are settled daily. The Company’s interest rate swaps, interest rate swaptions and TBA securitiesdual digital options are Level 2 valuations. The fair value of interest rate swaps is determined by eitherusing a discounted cash flow approach using forward market interest rates and discount rates, which are observable inputs. The fair value of interest rate swaptions and dual digital options are determined using an independent third-party or could do so internally.
RMBS (based on the fair value option), interest rate swaps, interest rate swaptions,U.S. Treasury securities, derivatives and TBA securities and futures contracts were recorded at fair value on a recurring basis during the nine and three months ended September 30, 2017 March 31, 2024 and 2016.2023. 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 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 due to the short-term nature of these financial instruments as of March 31, 2024 and December 31, 2023. The Company estimates the fair value of the cash and cash equivalents using Level 1 inputs, and the 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 using Level 2 inputs.
The following table presents financial assets (liabilities) measured at fair value on a recurring basis as of September 30, 2017March 31, 2024 and December 31, 2016:
| (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) | |||||||||||||
| September 30, 2017 | ||||||||||||||||
| Mortgage-backed securities | $ | 3,930,340 | $ | - | $ | 3,930,340 | $ | - | ||||||||
| Interest rate swaps | 8,102 | - | 8,102 | - | ||||||||||||
| Interest rate swaptions | 3,194 | - | 3,194 | - | ||||||||||||
| TBA securities | 2,984 | - | 2,984 | - | ||||||||||||
| December 31, 2016 | ||||||||||||||||
| Mortgage-backed securities | $ | 3,022,174 | $ | - | $ | 3,022,174 | $ | - | ||||||||
| Interest rate swaps | 9,500 | - | 9,500 | - | ||||||||||||
| TBA securities | (1,117 | ) | - | (1,117 | ) | - | ||||||||||
(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, 2024 | ||||||||||||
Mortgage-backed securities | $ | - | $ | 3,881,078 | $ | - | ||||||
U.S. Treasury securities | 99,496 | - | - | |||||||||
Interest rate swaps | - | 11,252 | - | |||||||||
Interest rate swaptions | - | 14 | - | |||||||||
Dual digital option | - | 261 | - | |||||||||
TBA securities | - | 904 | - | |||||||||
December 31, 2023 | ||||||||||||
Mortgage-backed securities | $ | - | $ | 3,894,012 | $ | - | ||||||
U.S. Treasury securities | 148,820 | - | - | |||||||||
Interest rate swaps | - | 6,348 | - | |||||||||
Interest rate swaptions | - | 72 | - | |||||||||
TBA securities | - | (12,694 | ) | - | ||||||||
During the nine and three months ended September 30, 2017 March 31, 2024 and 2016,2023, there were no transfers of financial assets or liabilities between levels 1,2 or 3.
NOTE 13.14. RELATED PARTY TRANSACTIONS
Management Agreement
The Company is externally managed and advised by Bimini Advisors, LLC (the "Manager"“Manager”) pursuant to the terms of a management agreement. The management agreement has been renewed through February 20, 2018 2025 and provides for automatic one-yearone-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 |
● | One-twelfth of 1.25% of the |
● | One-twelfth of 1.00% of the |
On April 1, 2022, pursuant to the third amendment to the management agreement entered into on November 16, 2021, the Manager began providing certain repurchase agreement trading, clearing and administrative services to the Company that had been previously provided by AVM, L.P. under an agreement terminated on March 31, 2022. In consideration for such services, the Company pays the following fees to the Manager:
● | A daily fee equal to the outstanding principal balance of repurchase agreement funding in place as of the end of such day multiplied by 1.5 basis points for the amount of aggregate outstanding principal balance less than or equal to $5 billion, and multiplied by 1.0 basis point for any amount of aggregate outstanding principal balance in excess of $5 billion, and |
● | A fee for the clearing and operational services provided by personnel of the Manager equal to $10,000 per month. |
The Company is obligated to reimburse the Manager for any direct expenses incurred on its behalf and to pay the Manager the Company'sCompany’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 to 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, allocated overhead and costs incurredrepurchase agreement trading, clearing and administrative services were approximately $5.4 $2.9 million and $1.9$3.4 million for the nine and three months ended September 30, 2017, respectively, March 31, 2024 and approximately $3.9 million2023, respectively. At March 31, 2024 and $1.4 million for the nine and three months ended September 30, 2016, respectively. At September 30, 2017 and December 31, 2016,2023, the net amount due to affiliates was approximately $0.8 $1.0 million and $0.6 $1.0 million, respectively.
Other Relationships with Bimini
Robert Cauley, ourthe Company’s Chief Executive Officer and Chairman of ourthe 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. HunterGeorge H. Haas, ourIV, the Company’s Chief Financial Officer, Chief Investment Officer, Secretary and a member of ourthe 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 September 30, 2017,March 31, 2024, Bimini owned 1,520,036569,071 shares, or 3.4%1.1%, of the Company'sCompany’s common stock.
ITEM 2. MANAGEMENT'SMANAGEMENT’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 consolidated 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"“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"(“RMBS”) which are issued and guaranteed by a federally chartered corporation or agency ("(“Agency RMBS"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 the Federal National Mortgage Association ("Fannie Mae"), the Federal Home Loan Mortgage Corporation ("Freddie Mac" and together with Fannie Mae, the "Enterprises") or the Government National Mortgage Association ("Ginnie Mae" and, together with the Enterprises the “GSEs”) and collateralized mortgage obligations (“CMOs”) issued by the GSEs (“PT RMBS"RMBS”) and (ii) structured Agency RMBS, such as collateralized mortgage obligations ("CMOs"), interest-only securities ("IOs"(“IOs”), inverse interest-only securities ("IIOs"(“IIOs”) and principal only securities ("POs"(“POs”), among other types of structured Agency RMBS. We were formed by Bimini Capital Management, Inc. ("Bimini") in August 2010, commenced operations on November 24, 2010 and completed our initial public offering ("IPO"(“IPO”) on February 20, 2013. We are externally managed by Bimini Advisors, a registeredLLC ("Bimini Advisors," or our "Manager"), an investment adviser registered with the Securities and Exchange Commission (the "SEC"“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'sCompany’s common stock trades on the New York Stock Exchange ("NYSE") under the symbol "ORC"“ORC”.
Capital Raising Activities
On JulyOctober 29, 2016,2021, we entered into an equity distribution agreement (the "July 2016“October 2021 Equity Distribution Agreement"Agreement”) with twofour sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $125,000,000$250,000,000 of shares of our common stock in transactions that were deemed to be "at“at the market"market” offerings and privately negotiated transactions. We issued a total of 10,174,9929,742,188 shares under the July 2016October 2021 Equity Distribution Agreement for aggregate gross proceeds of $110.0approximately $151.8 million, and net proceeds of approximately $108.2$149.3 million, net ofafter commissions and fees, prior to its termination.
Stock Repurchase Agreement
On August 2, 2017, we entered into another equity distribution agreement (the "August 2017 Equity Distribution Agreement") with two sales agents pursuant to which we may offer and sell, from time to time,July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to an aggregate amount of $125,000,000 of400,000 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 transactions that are deemedthe stock repurchase program for up to be "atan additional 904,564 shares of the market" offerings and privately negotiated transactions. The August 2017 Equity Distribution Agreement replacedCompany’s common stock. Coupled with the May 2017 Equity Distribution Agreement. Through September 30, 2017, we have not issued any156,751 shares remaining from the original 400,000 share authorization, the increased authorization brought the total authorization to 1,061,315 shares, representing 10% of the Company’s then outstanding share count.
On December 9, 2021, the Board of Directors approved an increase in the number of shares of the Company’s common stock available in the stock repurchase program for up to an additional 3,372,399 shares, bringing the remaining authorization under the August 2017 Equity Distribution Agreement.
On October 12, 2022, the Board of Directors approved an increase in the number of shares of the Company’s common stock available in the stock repurchase program for up to an additional 4,300,000 shares, bringing the remaining authorization under the stock repurchase program to 6,183,601 shares, representing approximately 18% of the Company’s then outstanding shares of common stock. This stock repurchase program has no termination date.
From the inception of the stock repurchase program through March 31, 2024, the Company repurchased a total of 5,081,134 shares at an aggregate cost of approximately $77.0 million, including commissions and fees, for a weighted average price of $15.16 per share. During the three months ended March 31, 2024, the Company repurchased a total of 332,773 shares of its common stock at an aggregate cost of approximately $2.8 million, including commissions and fees, for a weighted average price of $8.35 per share.
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; |
| ● | changes in our cost of funds, including increases in the Fed Funds rate that are controlled by the Federal Reserve (the "Fed") that occurred in 2023, or potential decreases in the Fed Funds rate; |
● | 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 |
● | prepayment rates on mortgages underlying our Agency RMBS and credit trends insofar as they affect prepayment rates; and |
● | other market |
In addition, a variety of factors relating to our business may also impact our results of operations and financial condition. These factors include:
● | our degree of leverage; |
● | our access to funding and borrowing capacity; |
● | our borrowing costs; |
● | our hedging activities; |
● | the market value of our investments; and |
● | the requirements to |
Described below are the Company'sCompany’s results of operations for the nine and three months ended September 30, 2017,March 31, 2024, as compared to the Company'sCompany’s results of operations for the nine and three months ended September 30, 2016.
Net Income Summary
Net income for the ninethree months ended September 30, 2017March 31, 2024 was $8.0$19.8 million or $0.21$0.38 per share. Net income for the nine months ended September 30, 2016 was $22.4 million, or $0.99 per share. Net income for the three months ended September 30, 2017March 31, 2023 was $15.2$3.5 million, or $0.33 per share. Net income for the three months ended September 30, 2016 was $20.5 million, or $0.85$0.09 per share. The components of net income for the nine and three months ended September 30, 2017March 31, 2024 and 2016,2023, along with the changes in those components are presented in the table below:
| (in thousands) | ||||||||||||||||||||||||
| Nine Months Ended September 30, | Three Months Ended, September 30, | |||||||||||||||||||||||
| 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||
| Interest income | $ | 105,864 | $ | 62,059 | $ | 43,805 | $ | 38,974 | $ | 22,358 | $ | 16,616 | ||||||||||||
| Interest expense | (28,116 | ) | (10,629 | ) | (17,487 | ) | (12,638 | ) | (3,979 | ) | (8,659 | ) | ||||||||||||
| Net interest income | 77,748 | 51,430 | 26,318 | 26,336 | 18,379 | 7,957 | ||||||||||||||||||
| (Losses) gains on RMBS and derivative contracts | (61,578 | ) | (22,446 | ) | (39,132 | ) | (8,254 | ) | 4,418 | (12,672 | ) | |||||||||||||
| Net portfolio income | 16,170 | 28,984 | (12,814 | ) | 18,082 | 22,797 | (4,715 | ) | ||||||||||||||||
| Expenses | (8,181 | ) | (6,587 | ) | (1,594 | ) | (2,899 | ) | (2,271 | ) | (628 | ) | ||||||||||||
| Net income | $ | 7,989 | $ | 22,397 | $ | (14,408 | ) | $ | 15,183 | $ | 20,526 | $ | (5,343 | ) | ||||||||||
(in thousands) | ||||||||||||
Three Months Ended March 31, | ||||||||||||
2024 | 2023 | Change | ||||||||||
Interest income | $ | 48,871 | $ | 38,012 | $ | 10,859 | ||||||
Interest expense | (51,361 | ) | (42,217 | ) | (9,144 | ) | ||||||
Net interest expense | (2,490 | ) | (4,205 | ) | 1,715 | |||||||
Gains on RMBS and derivative contracts | 26,004 | 12,739 | 13,265 | |||||||||
Net portfolio income | 23,514 | 8,534 | 14,980 | |||||||||
Expenses | (3,738 | ) | (5,004 | ) | 1,266 | |||||||
Net income | $ | 19,776 | $ | 3,530 | $ | 16,246 | ||||||
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“Net Earnings Excluding Realized and Unrealized Gains and Losses"Losses”, "Economic“Economic Interest Expense" and "EconomicExpense,” “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 consolidated statements of operations.
In addition, we have not elected to designatedesignated our derivative holdingsfinancial instruments used for hedgehedging purposes as hedges for accounting treatment under the Financial Accounting Standards Board (the "FASB") Accounting Standards Codification ("ASC") Topic 815, Derivatives and Hedging.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 consolidatedCompany’s statements of operationscomprehensive income 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 mark-to-marketfair value adjustments and (ii) assess the effectiveness of our funding and hedging strategies on our capital allocation decisions and our asset allocation performance. Our funding and hedging strategies, capital allocation and asset selection are integral to our risk management strategy, and therefore critical to the management of our portfolio. We believe that the presentation of our net earnings excluding realized and unrealized gains is useful to investors because it provides a means of comparing our results of operations to those of our peers who have not elected the same accounting treatment. Our presentation of net earnings excluding realized and unrealized gains and losses may not be comparable to similarly-titled measures of other companies, who may use different calculations. As a result, net earnings excluding realized and unrealized gains and losses should not be considered as a substitute for our GAAP net income (loss) as a measure of our financial performance or any measure of our liquidity under GAAP. The table below presents a reconciliation of our net income (loss) determined in accordance with GAAP and net earnings excluding realized and unrealized gains.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 | ||||||||||||||||||||||||
| September 30, 2017 | $ | 15,183 | $ | (8,254 | ) | $ | 23,437 | $ | 0.33 | $ | (0.18 | ) | $ | 0.52 | ||||||||||
| June 30, 2017 | (9,643 | ) | (32,597 | ) | 22,954 | (0.26 | ) | (0.88 | ) | 0.62 | ||||||||||||||
| March 31, 2017 | 2,449 | (20,727 | ) | 23,176 | 0.07 | (0.63 | ) | 0.70 | ||||||||||||||||
| December 31, 2016 | (20,419 | ) | (38,003 | ) | 17,584 | (0.72 | ) | (1.33 | ) | 0.62 | ||||||||||||||
| September 30, 2016 | 20,526 | 4,418 | 16,108 | 0.85 | 0.18 | 0.67 | ||||||||||||||||||
| June 30, 2016 | 6,463 | (7,319 | ) | 13,782 | 0.29 | (0.33 | ) | 0.63 | ||||||||||||||||
| March 31, 2016 | (4,591 | ) | (19,561 | ) | 14,970 | (0.21 | ) | (0.90 | ) | 0.69 | ||||||||||||||
| Nine Months Ended | ||||||||||||||||||||||||
| September 30, 2017 | $ | 7,989 | $ | (61,578 | ) | $ | 69,567 | $ | 0.21 | $ | (1.59 | ) | $ | 1.80 | ||||||||||
| September 30, 2016 | 22,397 | �� | (22,460 | ) | 44,857 | 0.99 | (0.99 | ) | 1.98 | |||||||||||||||
Described below are the Company’s results of operations for the three months ended March 31, 2024 and for each quarter in 2023.
Net Earnings Excluding Realized and Unrealized Gains and Losses | ||||||||||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||||||
| Net | Per Share | |||||||||||||||||||||||
Loss | Net Loss | |||||||||||||||||||||||
Excluding | Excluding | |||||||||||||||||||||||
Net | Realized and | Realized and | Net | Realized and | Realized and | |||||||||||||||||||
Income | Unrealized | Unrealized | Income | Unrealized | Unrealized | |||||||||||||||||||
| (Loss) | Gains and | Gains and | (Loss) | Gains and | Gains and | |||||||||||||||||||
(GAAP) | Losses(1) | Losses | (GAAP) | Losses | Losses | |||||||||||||||||||
Three Months Ended | ||||||||||||||||||||||||
March 31, 2024 | $ | 19,776 | $ | 26,004 | $ | (6,228 | ) | $ | 0.38 | $ | 0.50 | $ | (0.12 | ) | ||||||||||
December 31, 2023 | 27,127 | 33,977 | (6,850 | ) | 0.52 | 0.65 | (0.13 | ) | ||||||||||||||||
September 30, 2023 | (80,132 | ) | (66,890 | ) | (13,242 | ) | (1.68 | ) | (1.40 | ) | (0.28 | ) | ||||||||||||
June 30, 2023 | 10,249 | 23,828 | (13,579 | ) | 0.25 | 0.59 | (0.34 | ) | ||||||||||||||||
March 31, 2023 | 3,530 | 12,739 | (9,209 | ) | 0.09 | 0.33 | (0.24 | ) | ||||||||||||||||
(1) | Includes realized and unrealized gains (losses) on RMBS and derivative financial |
Economic Interest Expense and Economic Net Interest Income
We use derivative and other hedging instruments, specifically EurodollarFed Funds, SOFR and Treasury Note ("T-Note")T-Note futures contracts, short positions in U.S. Treasury securities, dual digital options, interest rate floors and caps, and 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 under the Financial Accounting Standards Board, (the "FASB"), Accounting Standards Codification, ("ASC"), Topic 815, Derivatives and Hedging.treatment. Changes in fair value of these instruments are presented in a separate line item in our consolidated statements of operationscomprehensive income 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 specificcertain derivative instruments the Company uses, specifically Eurodollar, Fed Funds, SOFR and U.S. Treasury futures, dual digital options, interest rate floors and caps, 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 allthese 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.
From time to time, we 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 consolidated statements of operationscomprehensive income 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 the three months ended March 31, 2024, and for each quarter during 2017 and 2016.
| Gains (Losses) on Derivative Instruments | ||||||||||||||||
| (in thousands) | ||||||||||||||||
| Funding Hedges | ||||||||||||||||
| Recognized in | Attributed to | Attributed to | ||||||||||||||
| Income | TBA | Current | Future | |||||||||||||
| Statement | Securities | Period | Periods | |||||||||||||
| (GAAP) | Income | (Non-GAAP) | (Non-GAAP) | |||||||||||||
| Three Months Ended | ||||||||||||||||
| September 30, 2017 | $ | (5,470 | ) | $ | (1,459 | ) | $ | (3,754 | ) | $ | (257 | ) | ||||
| June 30, 2017 | (19,442 | ) | (2,384 | ) | (3,654 | ) | (13,404 | ) | ||||||||
| March 31, 2017 | (4,419 | ) | - | (3,193 | ) | (1,226 | ) | |||||||||
| December 31, 2016 | 23,207 | (133 | ) | (2,967 | ) | 26,307 | ||||||||||
| September 30, 2016 | 6,587 | (474 | ) | (2,660 | ) | 9,721 | ||||||||||
| June 30, 2016 | (11,591 | ) | (786 | ) | (2,210 | ) | (8,595 | ) | ||||||||
| March 31, 2016 | (27,590 | ) | (1,125 | ) | (1,933 | ) | (24,532 | ) | ||||||||
| Nine Months Ended | ||||||||||||||||
| September 30, 2017 | $ | (29,331 | ) | $ | (3,843 | ) | $ | (10,601 | ) | $ | (14,887 | ) | ||||
| September 30, 2016 | (32,594 | ) | (2,385 | ) | (6,803 | ) | (23,406 | ) | ||||||||
| Economic Interest Expense and Economic Net Interest Income | ||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Interest Expense on Borrowings | ||||||||||||||||||||||||
| Gains | ||||||||||||||||||||||||
| (Losses) on | ||||||||||||||||||||||||
| Derivative | ||||||||||||||||||||||||
| Instruments | Net Interest Income | |||||||||||||||||||||||
| GAAP | Attributed | Economic | GAAP | Economic | ||||||||||||||||||||
| Interest | Interest | to Current | Interest | Net Interest | Net Interest | |||||||||||||||||||
| Income | Expense | Period(1) | Expense(2) | Income | Income(3) | |||||||||||||||||||
| Three Months Ended | ||||||||||||||||||||||||
| September 30, 2017 | $ | 38,974 | $ | 12,638 | $ | (3,754 | ) | $ | 16,392 | $ | 26,336 | $ | 22,582 | |||||||||||
| June 30, 2017 | 34,579 | 8,763 | (3,654 | ) | 12,417 | 25,816 | 22,162 | |||||||||||||||||
| March 31, 2017 | 32,311 | 6,715 | (3,193 | ) | 9,908 | 25,596 | 22,403 | |||||||||||||||||
| December 31, 2016 | 25,068 | 4,976 | (2,967 | ) | 7,943 | 20,092 | 17,125 | |||||||||||||||||
| September 30, 2016 | 22,358 | 3,979 | (2,660 | ) | 6,639 | 18,379 | 15,719 | |||||||||||||||||
| June 30, 2016 | 19,235 | 3,330 | (2,210 | ) | 5,540 | 15,905 | 13,695 | |||||||||||||||||
| March 31, 2016 | 20,466 | 3,319 | (1,933 | ) | 5,252 | 17,147 | 15,214 | |||||||||||||||||
| Nine Months Ended | ||||||||||||||||||||||||
| September 30, 2017 | $ | 105,864 | $ | 28,116 | $ | (10,601 | ) | $ | 38,717 | $ | 77,748 | $ | 67,147 | |||||||||||
| September 30, 2016 | 62,059 | 10,629 | (6,803 | ) | 17,431 | 51,430 | 44,628 | |||||||||||||||||
Gains (Losses) on Derivative Instruments | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Funding Hedges | ||||||||||||||||||||
Recognized | TBA Securities | Attributed to | Attributed to | |||||||||||||||||
in Income | Gain (Loss) | Current | Future | |||||||||||||||||
| Statement | (Short | (Long | Period | Periods | ||||||||||||||||
(GAAP) | Positions) | Positions) | (Non-GAAP) | (Non-GAAP) | ||||||||||||||||
Three Months Ended | ||||||||||||||||||||
March 31, 2024 | $ | 87,899 | $ | 9,903 | $ | 105 | 27,587 | 50,304 | ||||||||||||
December 31, 2023 | (149,016 | ) | (29,750 | ) | (2,262 | ) | 25,161 | (142,165 | ) | |||||||||||
September 30, 2023 | 142,042 | 21,511 | (2,024 | ) | 24,440 | 98,115 | ||||||||||||||
June 30, 2023 | 93,367 | 15,599 | (574 | ) | 23,482 | 54,860 | ||||||||||||||
March 31, 2023 | (41,156 | ) | (5,990 | ) | - | 19,211 | (54,377 | ) | ||||||||||||
Economic Interest Expense and Economic Net Interest Income | ||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Interest Expense on Borrowings | ||||||||||||||||||||||||
Gains | ||||||||||||||||||||||||
(Losses) on | ||||||||||||||||||||||||
Derivative | ||||||||||||||||||||||||
Instruments | Net Interest Income | |||||||||||||||||||||||
| GAAP | 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, 2024 | $ | 48,871 | $ | 51,361 | $ | 27,587 | $ | 23,774 | $ | (2,490 | ) | $ | 25,097 | |||||||||||
December 31, 2023 | 49,539 | 52,325 | 25,161 | 27,164 | (2,786 | ) | 22,375 | |||||||||||||||||
September 30, 2023 | 50,107 | 58,705 | 24,440 | 34,265 | (8,598 | ) | 15,842 | |||||||||||||||||
June 30, 2023 | 39,911 | 48,671 | 23,482 | 25,189 | (8,760 | ) | 14,722 | |||||||||||||||||
March 31, 2023 | 38,012 | 42,217 | 19,211 | 23,006 | (4,205 | ) | 15,006 | |||||||||||||||||
(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. |
During the ninethree months ended September 30, 2017,March 31, 2024, we generated $77.7 million ofincurred net interest income,expense of $2.5 million consisting of $105.9$48.9 million of interest income from RMBS assets offset by $28.1$51.4 million of interest expense on borrowings. For the comparable period ended September 30, 2016,March 31, 2023, we generated $51.4$4.2 million of net interest income,expense, consisting of $62.1$38.0 million of interest income from RMBS assets offset by $10.6$42.2 million of interest expense on borrowings. The $43.8$10.9 millionincrease in interest income and $17.5was due to a 100 basis point ("bps") increase in the yield on average RMBS, combined with a $117.6 million increase in average RMBS. The $9.2 millionincrease in interest expense forwas due to a 82 bps increase in the nine months ended September 30, 2017 primarily reflects the growthaverage cost of our portfolio fueled by our net capital raising activities,funds, combined with increased yields earned on our portfolio and increased costs and amounts of oura $134.6 million increase in average outstanding borrowings.
On an economic basis, our interest expense on borrowings for the ninethree months ended September 30, 2017March 31, 2024 and 20162023 was $38.7$23.8 million and $17.4$23.0 million, respectively, resulting in $67.1$25.1 million and $44.6$15.0 million of economic net interest income, respectively.
The tables below provide information on our portfolio average balances, interest income, yield on assets, average borrowings, interest expense, cost of funds, net interest income and net interest spread for the ninethree months ended September 30, 2017 and 2016March 31, 2024, and each quarter during 2017 and 2016of 2023 on both a GAAP and economic basis.
| ($ in thousands) | ||||||||||||||||||||||||||||||||
| Average | Yield on | Interest Expense | Average Cost of Funds | |||||||||||||||||||||||||||||
| RMBS | Interest | Average | Average | GAAP | Economic | GAAP | Economic | |||||||||||||||||||||||||
Held(1) | Income | RMBS | Borrowings(1) | Basis | Basis(2) | Basis | Basis(3) | |||||||||||||||||||||||||
| Three Months Ended | ||||||||||||||||||||||||||||||||
| September 30, 2017 | $ | 3,834,083 | $ | 38,974 | 4.07 | % | $ | 3,494,266 | $ | 12,638 | $ | 16,392 | 1.45 | % | 1.88 | % | ||||||||||||||||
| June 30, 2017 | 3,499,922 | 34,579 | 3.95 | % | 3,164,532 | 8,763 | 12,417 | 1.11 | % | 1.57 | % | |||||||||||||||||||||
| March 31, 2017 | 3,142,095 | 32,311 | 4.11 | % | 2,922,157 | 6,715 | 9,908 | 0.92 | % | 1.36 | % | |||||||||||||||||||||
| December 31, 2016 | 2,761,836 | 25,068 | 3.63 | % | 2,545,901 | 4,974 | 7,943 | 0.78 | % | 1.25 | % | |||||||||||||||||||||
| September 30, 2016 | 2,362,377 | 22,358 | 3.79 | % | 2,179,462 | 3,979 | 6,639 | 0.73 | % | 1.22 | % | |||||||||||||||||||||
| June 30, 2016 | 2,100,151 | 19,235 | 3.66 | % | 2,000,158 | 3,330 | 5,540 | 0.67 | % | 1.11 | % | |||||||||||||||||||||
| March 31, 2016 | 2,067,527 | 20,466 | 3.96 | % | 1,962,901 | 3,319 | 5,252 | 0.68 | % | 1.07 | % | |||||||||||||||||||||
| Nine Months Ended | ||||||||||||||||||||||||||||||||
| September 30, 2017 | $ | 3,492,033 | $ | 105,864 | 4.04 | % | $ | 3,193,652 | $ | 28,116 | $ | 38,717 | 1.17 | % | 1.62 | % | ||||||||||||||||
| September 30, 2016 | 2,176,685 | 62,059 | 3.80 | % | 2,047,507 | 10,629 | 17,431 | 0.69 | % | 1.14 | % | |||||||||||||||||||||
| ($ in thousands) | ||||||||||||||||
| Net Interest Income | Net Interest Spread | |||||||||||||||
| GAAP | Economic | GAAP | Economic | |||||||||||||
| Basis | Basis(2) | Basis | Basis(4) | |||||||||||||
| Three Months Ended | ||||||||||||||||
| September 30, 2017 | $ | 26,336 | $ | 22,582 | 2.62 | % | 2.19 | % | ||||||||
| June 30, 2017 | 25,816 | 22,162 | 2.84 | % | 2.38 | % | ||||||||||
| March 31, 2017 | 25,596 | 22,403 | 3.19 | % | 2.75 | % | ||||||||||
| December 31, 2016 | 20,092 | 17,125 | 2.85 | % | 2.38 | % | ||||||||||
| September 30, 2016 | 18,379 | 15,719 | 3.06 | % | 2.57 | % | ||||||||||
| June 30, 2016 | 15,905 | 13,695 | 2.99 | % | 2.55 | % | ||||||||||
| March 31, 2016 | 17,147 | 15,214 | 3.28 | % | 2.89 | % | ||||||||||
| Nine Months Ended | ||||||||||||||||
| September 30, 2017 | $ | 77,748 | $ | 67,147 | 2.87 | % | 2.42 | % | ||||||||
| September 30, 2016 | 51,430 | 44,628 | 3.11 | % | 2.66 | % | ||||||||||
($ 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, 2024 | $ | 3,887,545 | $ | 48,871 | 5.03 | % | $ | 3,708,573 | $ | 51,361 | $ | 23,774 | 5.54 | % | 2.56 | % | ||||||||||||||||
December 31, 2023 | 4,207,118 | 49,539 | 4.71 | % | 4,066,298 | 52,325 | 27,164 | 5.15 | % | 2.67 | % | |||||||||||||||||||||
September 30, 2023 | 4,447,098 | 50,107 | 4.51 | % | 4,314,332 | 58,705 | 34,265 | 5.44 | % | 3.18 | % | |||||||||||||||||||||
June 30, 2023 | 4,186,939 | 39,911 | 3.81 | % | 3,985,577 | 48,671 | 25,189 | 4.88 | % | 2.53 | % | |||||||||||||||||||||
March 31, 2023 | 3,769,954 | 38,012 | 4.03 | % | 3,573,941 | 42,217 | 23,006 | 4.72 | % | 2.57 | % | |||||||||||||||||||||
($ in thousands) | ||||||||||||||||
Net Interest Expense | Net Interest Spread | |||||||||||||||
GAAP | Economic | GAAP | Economic | |||||||||||||
Basis | Basis(2) | Basis | Basis(4) | |||||||||||||
Three Months Ended | ||||||||||||||||
March 31, 2024 | $ | (2,490 | ) | $ | 25,097 | (0.51 | )% | 2.47 | % | |||||||
December 31, 2023 | (2,786 | ) | 22,375 | (0.44 | )% | 2.04 | % | |||||||||
September 30, 2023 | (8,598 | ) | 15,842 | (0.93 | )% | 1.33 | % | |||||||||
June 30, 2023 | (8,760 | ) | 14,722 | (1.07 | )% | 1.28 | % | |||||||||
March 31, 2023 | (4,205 | ) | 15,006 | (0.69 | )% | 1.46 | % | |||||||||
(1) | Portfolio yields and costs of borrowings presented in the tables above and the tables on |
(2) | Economic interest expense and economic net interest |
(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. |
The table below presents the average portfolio size, income and yields of our respective sub-portfolios, consisting of structured RMBS and PT RMBS, for the ninethree months ended September 30, 2017 and 2016,March 31, 2024, and for each quarter during 2017 and 2016.
| ($ in thousands) | ||||||||||||||||||||||||||||||||||||
| Average RMBS Held | Interest Income | Realized Yield on Average RMBS | ||||||||||||||||||||||||||||||||||
| PT | Structured | PT | Structured | PT | Structured | |||||||||||||||||||||||||||||||
| RMBS | RMBS | Total | RMBS | RMBS | Total | RMBS | RMBS | Total | ||||||||||||||||||||||||||||
| Three Months Ended | ||||||||||||||||||||||||||||||||||||
| September 30, 2017 | $ | 3,687,533 | $ | 146,550 | $ | 3,834,083 | $ | 38,476 | $ | 498 | $ | 38,974 | 4.17 | % | 1.36 | % | 4.07 | % | ||||||||||||||||||
| June 30, 2017 | 3,349,042 | 150,880 | 3,499,922 | 32,479 | 2,100 | 34,579 | 3.88 | % | 5.57 | % | 3.95 | % | ||||||||||||||||||||||||
| March 31, 2017 | 2,990,937 | 151,158 | 3,142,095 | 29,772 | 2,539 | 32,311 | 3.98 | % | 6.72 | % | 4.11 | % | ||||||||||||||||||||||||
| December 31, 2016 | 2,628,967 | 132,869 | 2,761,836 | 23,647 | 1,421 | 25,068 | 3.60 | % | 4.28 | % | 3.63 | % | ||||||||||||||||||||||||
| September 30, 2016 | 2,257,480 | 104,897 | 2,362,377 | 21,898 | 460 | 22,358 | 3.88 | % | 1.75 | % | 3.79 | % | ||||||||||||||||||||||||
| June 30, 2016 | 2,006,392 | 93,759 | 2,100,151 | 19,072 | 163 | 19,235 | 3.80 | % | 0.70 | % | 3.66 | % | ||||||||||||||||||||||||
| March 31, 2016 | 1,968,690 | 98,837 | 2,067,527 | 19,682 | 784 | 20,466 | 4.00 | % | 3.17 | % | 3.96 | % | ||||||||||||||||||||||||
| Nine Months Ended | ||||||||||||||||||||||||||||||||||||
| September 30, 2017 | $ | 3,342,504 | $ | 149,529 | $ | 3,492,033 | $ | 100,727 | $ | 5,137 | $ | 105,864 | 4.02 | % | 4.58 | % | 4.04 | % | ||||||||||||||||||
| September 30, 2016 | 2,077,521 | 99,164 | 2,176,685 | 60,652 | 1,407 | 62,059 | 3.89 | % | 1.89 | % | 3.80 | % | ||||||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||||||||||||||
Average RMBS Held | Interest Income | Realized Yield on Average RMBS | ||||||||||||||||||||||||||||||||||
PT | Structured | PT | Structured | PT | Structured | |||||||||||||||||||||||||||||||
RMBS | RMBS | Total | RMBS | RMBS | Total | RMBS | RMBS | Total | ||||||||||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||||||||||||||||||
March 31, 2024 | $ | 3,870,794 | $ | 16,751 | $ | 3,887,545 | $ | 48,483 | $ | 388 | $ | 48,871 | 5.01 | % | 9.27 | % | 5.03 | % | ||||||||||||||||||
December 31, 2023 | 4,189,599 | 17,519 | 4,207,118 | 49,135 | 404 | 49,539 | 4.69 | % | 9.21 | % | 4.71 | % | ||||||||||||||||||||||||
September 30, 2023 | 4,429,159 | 17,939 | 4,447,098 | 49,661 | 446 | 50,107 | 4.48 | % | 9.96 | % | 4.51 | % | ||||||||||||||||||||||||
June 30, 2023 | 4,168,333 | 18,606 | 4,186,939 | 39,495 | 416 | 39,911 | 3.79 | % | 8.95 | % | 3.81 | % | ||||||||||||||||||||||||
March 31, 2023 | 3,750,184 | 19,770 | 3,769,954 | 37,594 | 418 | 38,012 | 4.01 | % | 8.44 | % | 4.03 | % | ||||||||||||||||||||||||
Interest Expense and the Cost of Funds
We had average outstanding borrowings of $3,193.7 million$3.7 billion and $2,047.5 million$3.6 billion and total interest expense of $28.1$51.4 million and $10.6$42.2 million for the ninethree months ended September 30, 2017March 31, 2024 and 2016,2023, respectively. Our average cost of funds was 1.17%5.54% for the ninethree months ended September 30, 2017,March 31, 2024, compared to 0.69%4.72% for the comparable period in 2016. There was a $1,146.12023. The $9.2 million increase in average outstanding borrowings during the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016. The higher cost of funds for the nine months ended September 30, 2017, compared to the same period in 2016, reflects the higher short-term rates as presented in the table below. The increase in average outstanding borrowings reflects the investment, on a leveraged basis, of the proceeds of our net capital raising activities.
Our economic interest expense was $16.4$23.8 million and $6.6$23.0 million for the three months ended September 30, 2017March 31, 2024 and 2016,2023, respectively. There was a 661 bps increasedecrease in the average economic cost of funds to 1.88%2.56% for the three months ended September 30, 2017March 31, 2024, from 1.22%2.57% for the three months ended September 30, 2016. The increase in economic interest expense during the three months ended September 30, 2017 was due to a combination of the increase in average outstanding borrowings, higher average interest rates charged for those borrowings, and the negative performance of our derivative agreements attributed to the current period.
Since all of our repurchase agreements are short-term, changes in market rates directly affect our interest expense. Our average cost of funds calculated on a GAAP basis was 2522 bps above the one-month average one-month LIBORSOFR and 015 bps belowabove the six-month average six-month LIBORSOFR for the quarter ended September 30, 2017.March 31, 2024. Our average economic cost of funds was 68276 bps abovebelow the average one-month LIBORSOFR and 43283 bps abovebelow the average six-month LIBORSOFR for the quarter ended September 30, 2017.March 31, 2024. The average term to maturity of the outstanding repurchase agreements increased to 59was 21 days at September 30, 2017 from 15March 31, 2024 and 26 days at December 31, 2016.
The tables below present the average balance of repurchase agreementsborrowings outstanding, interest expense and average cost of funds, and average one-month and six-month LIBORSOFR rates for the ninethree months ended September 30, 2017 and 2016,March 31, 2024, and for each quarter in 2017 and 20162023, on both a GAAP and economic basis.
($ in thousands) | ||||||||||||||||||||
Average | Interest Expense | Average Cost of Funds | ||||||||||||||||||
Balance of | GAAP | Economic | GAAP | Economic | ||||||||||||||||
Borrowings | Basis | Basis | Basis | Basis | ||||||||||||||||
Three Months Ended | ||||||||||||||||||||
March 31, 2024 | $ | 3,708,573 | $ | 51,361 | $ | 23,774 | 5.54 | % | 2.56 | % | ||||||||||
December 31, 2023 | 4,066,298 | 52,325 | 27,164 | 5.15 | % | 2.67 | % | |||||||||||||
September 30, 2023 | 4,314,332 | 58,705 | 34,265 | 5.44 | % | 3.18 | % | |||||||||||||
June 30, 2023 | 3,985,577 | 48,671 | 25,189 | 4.88 | % | 2.53 | % | |||||||||||||
March 31, 2023 | 3,573,941 | 42,217 | 23,006 | 4.72 | % | 2.57 | % | |||||||||||||
Average GAAP Cost of Funds | Average Economic Cost of Funds | |||||||||||||||||||||||
Relative to Average | Relative to Average | |||||||||||||||||||||||
Average SOFR | One-Month | Six-Month | One-Month | Six-Month | ||||||||||||||||||||
One-Month | Six-Month | SOFR | SOFR | SOFR | SOFR | |||||||||||||||||||
Three Months Ended | ||||||||||||||||||||||||
March 31, 2024 | 5.32 | % | 5.39 | % | 0.22 | % | 0.15 | % | (2.76 | )% | (2.83 | )% | ||||||||||||
December 31, 2023 | 5.34 | % | 5.35 | % | (0.19 | )% | (0.20 | )% | (2.67 | )% | (2.68 | )% | ||||||||||||
September 30, 2023 | 5.32 | % | 5.17 | % | 0.12 | % | 0.27 | % | (2.14 | )% | (1.99 | )% | ||||||||||||
June 30, 2023 | 5.07 | % | 4.78 | % | (0.19 | )% | 0.10 | % | (2.54 | )% | (2.25 | )% | ||||||||||||
March 31, 2023 | 4.63 | % | 4.09 | % | 0.09 | % | 0.63 | % | (2.06 | )% | (1.52 | )% | ||||||||||||
| ($ in thousands) | ||||||||||||||||||||
| Average | Interest Expense | Average Cost of Funds | ||||||||||||||||||
| Balance of | GAAP | Economic | GAAP | Economic | ||||||||||||||||
| Borrowings | Basis | Basis | Basis | Basis | ||||||||||||||||
| Three Months Ended | ||||||||||||||||||||
| September 30, 2017 | $ | 3,494,266 | $ | 12,638 | $ | 16,392 | 1.45 | % | 1.88 | % | ||||||||||
| June 30, 2017 | 3,164,532 | 8,763 | 12,417 | 1.11 | % | 1.57 | % | |||||||||||||
| March 31, 2017 | 2,922,157 | 6,715 | 9,908 | 0.92 | % | 1.36 | % | |||||||||||||
| December 31, 2016 | 2,545,901 | 4,974 | 7,943 | 0.78 | % | 1.25 | % | |||||||||||||
| September 30, 2016 | 2,179,462 | 3,979 | 6,639 | 0.73 | % | 1.22 | % | |||||||||||||
| June 30, 2016 | 2,000,158 | 3,330 | 5,540 | 0.67 | % | 1.11 | % | |||||||||||||
| March 31, 2016 | 1,962,901 | 3,319 | 5,252 | 0.68 | % | 1.07 | % | |||||||||||||
| Nine Months Ended | ||||||||||||||||||||
| September 30, 2017 | $ | 3,193,652 | $ | 28,116 | $ | 38,717 | 1.17 | % | 1.62 | % | ||||||||||
| September 30, 2016 | 2,047,507 | 10,628 | 17,431 | 0.69 | % | 1.14 | % | |||||||||||||
| Average GAAP Cost of Funds | Average Economic Cost of Funds | |||||||||||||||||||||||
| Relative to Average | Relative to Average | |||||||||||||||||||||||
| Average LIBOR | One-Month | Six-Month | One-Month | Six-Month | ||||||||||||||||||||
| One-Month | Six-Month | LIBOR | LIBOR | LIBOR | LIBOR | |||||||||||||||||||
| Three Months Ended | ||||||||||||||||||||||||
| September 30, 2017 | 1.20 | % | 1.45 | % | 0.25 | % | (0.00 | )% | 0.68 | % | 0.43 | % | ||||||||||||
| June 30, 2017 | 1.05 | % | 1.43 | % | 0.06 | % | (0.32 | )% | 0.52 | % | 0.14 | % | ||||||||||||
| March 31, 2017 | 0.82 | % | 1.37 | % | 0.10 | % | (0.45 | )% | 0.54 | % | (0.01 | )% | ||||||||||||
| December 31, 2016 | 0.62 | % | 1.28 | % | 0.16 | % | (0.50 | )% | 0.63 | % | (0.03 | )% | ||||||||||||
| September 30, 2016 | 0.49 | % | 1.09 | % | 0.24 | % | (0.36 | )% | 0.73 | % | 0.13 | % | ||||||||||||
| June 30, 2016 | 0.44 | % | 0.92 | % | 0.23 | % | (0.25 | )% | 0.67 | % | 0.19 | % | ||||||||||||
| March 31, 2016 | 0.40 | % | 0.84 | % | 0.28 | % | (0.16 | )% | 0.67 | % | 0.23 | % | ||||||||||||
| Nine Months Ended | ||||||||||||||||||||||||
| September 30, 2017 | 1.03 | % | 1.42 | % | 0.14 | % | (0.25 | )% | 0.59 | % | 0.20 | % | ||||||||||||
| September 30, 2016 | 0.44 | % | 0.95 | % | 0.25 | % | (0.26 | )% | 0.70 | % | 0.19 | % | ||||||||||||
Gains or Losses
The table below presents our gains or losses for the nine and three months ended September 30, 2017March 31, 2024 and 2016.
| (in thousands) | ||||||||||||||||||||||||
| Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||||||
| 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||
| Realized gains on sales of RMBS | $ | 3,354 | $ | 4,482 | $ | (1,128 | ) | $ | 769 | $ | 229 | $ | 540 | |||||||||||
| Unrealized (losses) gains on RMBS | (35,601 | ) | 5,652 | (41,253 | ) | (3,553 | ) | (2,398 | ) | (1,155 | ) | |||||||||||||
| Total (losses) gains on RMBS | (32,247 | ) | 10,134 | (42,381 | ) | (2,784 | ) | (2,169 | ) | (615 | ) | |||||||||||||
| Losses on interest rate futures | (23,145 | ) | (29,795 | ) | 6,650 | (5,843 | ) | 2,882 | (8,725 | ) | ||||||||||||||
| Losses on interest rate swaps | (3,170 | ) | (450 | ) | (2,720 | ) | 1,005 | 4,179 | (3,174 | ) | ||||||||||||||
| Gains on receiver swaptions | 827 | 36 | 791 | 827 | - | 827 | ||||||||||||||||||
| Losses on TBA securities | (3,843 | ) | (2,385 | ) | (1,458 | ) | (1,459 | ) | (474 | ) | (985 | ) | ||||||||||||
(in thousands) | ||||||||||||
Three Months Ended March 31, | ||||||||||||
2024 | 2023 | Change | ||||||||||
Realized losses on sales of RMBS | $ | - | $ | - | $ | - | ||||||
Unrealized (losses) gains on RMBS and U.S. Treasury securities | (61,895 | ) | 53,895 | (115,790 | ) | |||||||
Total (losses) gains on RMBS and U.S. Treasury securities | (61,895 | ) | 53,895 | (115,790 | ) | |||||||
Gains (losses) on T-Note futures | 19,090 | (4,038 | ) | 23,128 | ||||||||
Gains (losses) on interest rate swaps | 59,098 | (26,144 | ) | 85,242 | ||||||||
Gains on payer swaptions (short positions) | - | 6,585 | (6,585 | ) | ||||||||
Losses on payer swaptions (long positions) | (58 | ) | (12,109 | ) | 12,051 | |||||||
Losses on interest rate caps | - | (645 | ) | 645 | ||||||||
Losses on dual digital option | (239 | ) | - | (239 | ) | |||||||
Gains on interest rate floors (long positions) | - | 1,185 | (1,185 | ) | ||||||||
Gains (losses) on TBA securities (short positions) | 9,903 | (5,990 | ) | 15,893 | ||||||||
Gains on TBA securities (long positions) | 105 | - | 105 | |||||||||
Total gains (losses) from derivative instruments | $ | 87,899 | $ | (41,156 | ) | $ | 129,055 | |||||
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 purposesthe 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 ninethree months ended September 30, 2017 and 2016,March 31, 2024, we received proceeds of $3,891.0$221.7 million and $1,717.6 million, respectively, from the sales of RMBS. DuringThese sales consisted entirely of pools that were consolidated into a larger pool and simultaneously acquired by us. No gain or loss was recorded on these sales. We did not sell any RMBS during the three months ended September 30, 2017 and 2016, we received proceeds of $826.0 million and $418.2 million, respectively, from the sales of RMBS, including sales settling in subsequent periods.
Realized and unrealized gains and losses on RMBS are driven in part by changes in yields and interest rates, the spreads that Agency RMBS trade relative to comparable duration U.S. Treasuries or swaps, as well as varying levels of demand for RMBS, which affect the pricing of the securities in our portfolio. The unrealized gains and losses on RMBS may also include the premium lost as a result of prepayments on the underlying mortgages, decreasing unrealized gains or increasing unrealized losses as prepayment speeds or premiums increase. To the extent RMBS are carried at a discount to par, unrealized gains or losses on RMBS would also include discount accreted as a result of prepayments on the underlying mortgages, increasing unrealized gains or decreasing unrealized losses as speeds on discounts increase. Gains and losses on interest rate futures contracts are affected by changes in implied forward rates during the reporting period. The table below presents historical interest rate data for each quarter end during 20172024 to date and 2016.
| 15 Year | 30 Year | Three | ||||||||||||||||||
| 5 Year | 10 Year | Fixed-Rate | Fixed-Rate | Month | ||||||||||||||||
Treasury Rate(1) | Treasury Rate(1) | Mortgage Rate(2) | Mortgage Rate(2) | LIBOR(3) | ||||||||||||||||
| September 30, 2017 | 1.93 | % | 2.33 | % | 3.11 | % | 3.81 | % | 1.32 | % | ||||||||||
| June 30, 2017 | 1.88 | % | 2.30 | % | 3.17 | % | 3.90 | % | 1.26 | % | ||||||||||
| March 31, 2017 | 1.93 | % | 2.40 | % | 3.41 | % | 4.20 | % | 1.13 | % | ||||||||||
| December 31, 2016 | 1.93 | % | 2.45 | % | 3.43 | % | 4.20 | % | 0.98 | % | ||||||||||
| September 30, 2016 | 1.16 | % | 1.61 | % | 2.76 | % | 3.46 | % | 0.85 | % | ||||||||||
| June 30, 2016 | 1.01 | % | 1.49 | % | 2.84 | % | 3.57 | % | 0.65 | % | ||||||||||
| March 31, 2016 | 1.22 | % | 1.79 | % | 2.97 | % | 3.69 | % | 0.63 | % | ||||||||||
5 Year | 10 Year | 15 Year | 30 Year | |||||||||||||||||
| U.S. | U.S. | Fixed-Rate | Fixed-Rate | 90 Day | ||||||||||||||||
Treasury | Treasury | Mortgage | Mortgage | Average | ||||||||||||||||
Rate(1) | Rate(1) | Rate(2) | Rate(2) | SOFR(3) | ||||||||||||||||
March 31, 2024 | 4.22 | % | 4.21 | % | 6.11 | % | 6.79 | % | 5.35 | % | ||||||||||
December 31, 2023 | 3.84 | % | 3.87 | % | 5.93 | % | 6.61 | % | 5.36 | % | ||||||||||
September 30, 2023 | 4.61 | % | 4.57 | % | 6.72 | % | 7.31 | % | 5.27 | % | ||||||||||
June 30, 2023 | 4.13 | % | 3.82 | % | 6.06 | % | 6.71 | % | 5.00 | % | ||||||||||
March 31, 2023 | 3.61 | % | 3.49 | % | 5.56 | % | 6.32 | % | 4.51 | % | ||||||||||
(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 |
(3) | Historical |
Unrealized Gains and Losses on PT RMBS
For the ninepurpose of recording income on the Company’s investments in PT RMBS, interest income is based on the stated interest rate of the security. Using the fair value accounting method, premiums or discounts to the face value of the PT RMBS 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 comprehensive income (loss). The following table adjusts the Company’s interest income as reported on the Company’s statements of comprehensive income (loss) for the periods indicated to show interest income adjusted for premium amortization and discount accretion on its mortgage-backed security investments. The purpose of presenting this non-GAAP measure of interest income is to provide management and investors with an alternative way of evaluating yield on RMBS that may be more comparable to some of its peers who amortize premiums and discounts on their PT RMBS investments.
($ in thousands | ||||||||||||||||||||||||||||||||
Unrealized Gains (Losses) on PT RMBS | Inclusive of | |||||||||||||||||||||||||||||||
Price | Premium Amortization/ | |||||||||||||||||||||||||||||||
Premium | Only | Discount Accretion | ||||||||||||||||||||||||||||||
Average | Yield on | Amortization/ | Unrealized | Yield on | ||||||||||||||||||||||||||||
RMBS | Interest | Average | As | Discount | Gains | Interest | Average | |||||||||||||||||||||||||
Held | Income | RMBS | Reported(1) | Accretion(2) | (Losses) | Income(3) | RMBS(3) | |||||||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||||||||||||||
March 31, 2024 | $ | 3,887,545 | $ | 48,871 | 5.03 | % | $ | (62,111 | ) | $ | 3,037 | $ | (65,148 | ) | $ | 51,908 | 5.34 | % | ||||||||||||||
December 31, 2023 | 4,207,118 | 49,539 | 4.71 | % | 206,222 | 8,067 | 214,289 | 57,606 | 5.48 | % | ||||||||||||||||||||||
September 30, 2023 | 4,447,098 | 50,107 | 4.51 | % | (210,159 | ) | 7,252 | (202,907 | ) | 57,359 | 5.16 | % | ||||||||||||||||||||
June 30, 2023 | 4,186,939 | 39,911 | 3.81 | % | (68,898 | ) | 4,886 | (64,012 | ) | 44,797 | 4.28 | % | ||||||||||||||||||||
March 31, 2023 | 3,769,954 | 38,012 | 4.03 | % | 53,444 | 4,774 | 58,218 | 42,786 | 4.54 | % | ||||||||||||||||||||||
(1) | As reported in the Company’s statements of comprehensive income (loss) using the fair value accounting method. |
(2) | Premium amortization/discount accretion for each period is calculated using the beginning of period market value of all securities. Amounts presented are intended to approximate amortization/accretion using the yield method over the life of the security based on premium/discount present at purchase date. |
(3) | Interest Income – Inclusive of Premium Amortization/Discount Accretion and Yield on Average RMBS – Inclusive of Premium Amortization/Discount Accretion are non-GAAP measures. See “—GAAP and Non-GAAP Reconciliations,” for a description of our non-GAAP measures. |
Expenses
For the three months ended September 30, 2017,March 31, 2024, the Company'sCompany’s total operating expenses were approximately $8.2$3.7 million, and $2.9 million, respectively, compared to approximately $6.6$5.0 million and $2.3 million, respectively, for the nine and three months ended September 30, 2016.March 31, 2023. The table below presents a breakdown of operating expenses for the nine and three months ended September 30, 2017March 31, 2024 and 2016.2023.
(in thousands) | ||||||||||||
Three Months Ended March 31, | ||||||||||||
2024 | 2023 | Change | ||||||||||
Management fees | $ | 2,161 | $ | 2,642 | $ | (481 | ) | |||||
Overhead allocation | 598 | 576 | 22 | |||||||||
Accrued incentive compensation | (89 | ) | 470 | (559 | ) | |||||||
Directors fees and liability insurance | 329 | 323 | 6 | |||||||||
Audit, legal and other professional fees | 476 | 451 | 25 | |||||||||
Direct REIT operating expenses | 170 | 165 | 5 | |||||||||
Other administrative | 93 | 377 | (284 | ) | ||||||||
Total expenses | $ | 3,738 | $ | 5,004 | $ | (1,266 | ) | |||||
As of December 31, 2023, the Company had accrued a liability of $0.6 million for bonuses to be paid to the Manager's employees. During the first three months of 2024, the Company awarded shares of Company common stock with a fair value of $0.3 million. Accrued incentive compensation for the three months ended March 31, 2024 includes a reversal of the over accrual of this liability.
| (in thousands) | ||||||||||||||||||||||||
| Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||||||
| 2017 | 2016 | Change | 2017 | 2016 | Change | |||||||||||||||||||
| Management fees | $ | 4,230 | $ | 2,968 | $ | 1,262 | $ | 1,528 | $ | 1,052 | $ | 476 | ||||||||||||
| Overhead allocation | 1,168 | 963 | 205 | 412 | 336 | 76 | ||||||||||||||||||
| Accrued incentive compensation | 439 | 598 | (159 | ) | 209 | 212 | (3 | ) | ||||||||||||||||
| Directors fees and liability insurance | 722 | 763 | (41 | ) | 215 | 236 | (21 | ) | ||||||||||||||||
| Audit, legal and other professional fees | 547 | 654 | (107 | ) | 157 | 193 | (36 | ) | ||||||||||||||||
| Direct REIT operating expenses | 816 | 426 | 390 | 320 | 187 | 133 | ||||||||||||||||||
| Other administrative | 259 | 215 | 44 | 58 | 55 | 3 | ||||||||||||||||||
| Total expenses | $ | 8,181 | $ | 6,587 | $ | 1,594 | $ | 2,899 | $ | 2,271 | $ | 628 | ||||||||||||
We are externally managed and advised by Bimini Advisors, LLC (the "Manager"“Manager”) pursuant to the terms of a management agreement. The management agreement has been renewed through February 20, 20182025 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 |
● | One-twelfth of 1.25% of the |
● | One-twelfth of 1.00% of the |
The Company is obligated to reimburse Bimini Advisorsthe Manager for any direct expenses incurred on its behalf. In addition, beginning July 1, 2014, Bimini Advisors began allocatingbehalf and to us itspay the Manager the Company’s pro rata portion of certain overhead costs set forth in accordance with the management agreement.
On April 1, 2022, pursuant to the third amendment to the management agreement entered into on November 16, 2021, the Manager began providing certain repurchase agreement trading, clearing and administrative services to the Company that had been previously provided by AVM, L.P. under an agreement terminated on March 31, 2022. In consideration for such services, the Company pays the following fees to the Manager:
● | A daily fee equal to the outstanding principal balance of repurchase agreement funding in place as of the end of such day multiplied by 1.5 basis points for the amount of aggregate outstanding principal balance less than or equal to $5 billion, and multiplied by 1.0 basis point for any amount of aggregate outstanding principal balance in excess of $5 billion, and |
● | A fee for the clearing and operational services provided by personnel of the Manager equal to $10,000 per month. |
Should wethe Company terminate the management agreement without cause, weit will pay to the Manager a termination fee equal to three times the average annual management fee, as defined in the management agreement, before or on the last day of the term of the agreement.
The following table summarizes the management fee and overhead allocation expenses for the three months ended March 31, 2024 and for each quarter in 2023.
($ in thousands) | ||||||||||||||||||||
Average | Average | Advisory Services | ||||||||||||||||||
Orchid | Orchid | Management | Overhead | |||||||||||||||||
Three Months Ended | MBS | Equity | Fee | Allocation | Total | |||||||||||||||
March 31, 2024 | $ | 3,887,545 | $ | 672,057 | $ | 2,161 | $ | 598 | $ | 2,759 | ||||||||||
December 31, 2023 | 4,207,118 | 851,532 | 2,275 | 617 | 2,892 | |||||||||||||||
September 30, 2023 | 4,447,098 | 964,230 | 2,870 | 557 | 3,427 | |||||||||||||||
June 30, 2023 | 4,186,939 | 899,109 | 2,704 | 639 | 3,343 | |||||||||||||||
March 31, 2023 | 3,769,954 | 865,722 | 2,642 | 576 | 3,218 | |||||||||||||||
Financial Condition:
Mortgage-Backed Securities
As of September 30, 2017,March 31, 2024, our RMBS portfolio consisted of $3,930.3$3,881.1 million of Agency RMBS at fair value and had a weighted average coupon on assets of 4.34%. During the ninethree months ended September 30, 2017,March 31, 2024, we received principal repayments of $248.5$74.3 million, compared to $178.5$61.0 million for the ninethree months ended September 30, 2016.March 31, 2023. The average three month prepayment speeds for the quarters ended September 30, 2017March 31, 2024 and 20162023 were 10.3%6.0% and 11.7%4.0%, respectively.
The following table presents the 3-month constant prepayment rate ("CPR"(“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 (%) | |||||||||
| September 30, 2017 | 8.3 | 14.9 | 10.3 | |||||||||
| June 30, 2017 | 7.0 | 12.7 | 9.5 | |||||||||
| March 31, 2017 | 7.5 | 14.3 | 9.9 | |||||||||
| December 31, 2016 | 9.7 | 18.4 | 12.2 | |||||||||
| September 30, 2016 | 8.9 | 17.9 | 11.7 | |||||||||
| June 30, 2016 | 8.4 | 15.9 | 11.0 | |||||||||
| March 31, 2016 | 5.5 | 12.4 | 8.2 | |||||||||
Structured | ||||||||||||
PT RMBS | RMBS | Total | ||||||||||
Three Months Ended | Portfolio (%) | Portfolio (%) | Portfolio (%) | |||||||||
March 31, 2024 | 6.0 | 5.9 | 6.0 | |||||||||
December 31, 2023 | 5.4 | 7.9 | 5.5 | |||||||||
September 30, 2023 | 6.1 | 5.7 | 6.0 | |||||||||
June 30, 2023 | 5.6 | 7.0 | 5.6 | |||||||||
March 31, 2023 | 3.9 | 5.7 | 4.0 | |||||||||
The following tables summarize certain characteristics of the Company'sCompany’s PT RMBS and structured RMBS as of September 30, 2017March 31, 2024 and December 31, 2016:
| ($ in thousands) | |||||||||
| Weighted | Weighted | ||||||||
| Percentage | Average | Average | Weighted | Weighted | |||||
| of | Weighted | Maturity | Coupon | Average | Average | ||||
| Fair | Entire | Average | in | Longest | Reset in | Lifetime | Periodic | ||
| Asset Category | Value | Portfolio | Coupon | Months | Maturity | Months | Cap | Cap | |
| September 30, 2017 | |||||||||
| Adjustable Rate RMBS | $ | 1,783 | 0.0% | 3.90% | 209 | 1-Sep-35 | 7.85 | 10.05% | 2.00% |
| Fixed Rate RMBS | 3,740,658 | 95.2% | 4.37% | 341 | 1-Sep-47 | NA | NA | NA | |
| Hybrid Adjustable Rate RMBS | 42,201 | 1.1% | 2.55% | 304 | 1-Aug-43 | 64.07 | 7.55% | 2.00% | |
| Total Mortgage-backed Pass-through | 3,784,642 | 96.3% | 4.35% | 341 | 1-Sep-47 | NA | NA | NA | |
| Interest-Only Securities | 90,551 | 2.3% | 3.75% | 263 | 15-Apr-47 | NA | NA | NA | |
| Inverse Interest-Only Securities | 55,147 | 1.4% | 4.43% | 330 | 15-Jul-47 | NA | 5.37% | NA | |
| Total Structured RMBS | 145,698 | 3.7% | 4.00% | 288 | 15-Jul-47 | NA | NA | NA | |
| Total Mortgage Assets | $ | 3,930,340 | 100.0% | 4.34% | 339 | 1-Sep-47 | NA | NA | NA |
| December 31, 2016 | |||||||||
| Adjustable Rate RMBS | $ | 2,062 | 0.1% | 3.50% | 219 | 1-Sep-35 | 5.67 | 10.05% | 2.00% |
| Fixed Rate RMBS | 2,826,694 | 93.5% | 4.21% | 325 | 1-Dec-46 | NA | NA | NA | |
| Hybrid Adjustable Rate RMBS | 45,459 | 1.5% | 2.55% | 313 | 1-Aug-43 | 73.08 | 7.55% | 2.00% | |
| Total Mortgage-backed Pass-through | 2,874,215 | 95.1% | 4.19% | 324 | 1-Dec-46 | NA | NA | NA | |
| Interest-Only Securities | 69,726 | 2.3% | 3.59% | 235 | 25-Apr-45 | NA | NA | NA | |
| Inverse Interest-Only Securities | 78,233 | 2.6% | 5.40% | 338 | 25-Dec-46 | NA | 6.14% | NA | |
| Total Structured RMBS | 147,959 | 4.9% | 4.55% | 290 | 25-Dec-46 | NA | NA | NA | |
| Total Mortgage Assets | $ | 3,022,174 | 100.0% | 4.20% | 323 | 25-Dec-46 | NA | NA | NA |
| ($ in thousands) | ||||||||||||||||
| September 30, 2017 | December 31, 2016 | |||||||||||||||
| Percentage of | Percentage of | |||||||||||||||
| Agency | Fair Value | Entire Portfolio | Fair Value | Entire Portfolio | ||||||||||||
| Fannie Mae | $ | 2,580,973 | 65.7 | % | $ | 2,226,893 | 73.7 | % | ||||||||
| Freddie Mac | 1,342,803 | 34.2 | % | 785,496 | 26.0 | % | ||||||||||
| Ginnie Mae | 6,564 | 0.1 | % | 9,785 | 0.3 | % | ||||||||||
| Total Portfolio | $ | 3,930,340 | 100.0 | % | $ | 3,022,174 | 100.0 | % | ||||||||
| September 30, 2017 | December 31, 2016 | |||||||
| Weighted Average Pass-through Purchase Price | $ | 108.23 | $ | 108.64 | ||||
| Weighted Average Structured Purchase Price | $ | 14.19 | $ | 15.39 | ||||
| Weighted Average Pass-through Current Price | $ | 108.03 | $ | 107.14 | ||||
| Weighted Average Structured Current Price | $ | 13.18 | $ | 15.49 | ||||
Effective Duration (1) | 2.603 | 4.579 | ||||||
($ in thousands) | |||||||||||||||||
Weighted | |||||||||||||||||
Percentage | Average | ||||||||||||||||
of | Weighted | Maturity | |||||||||||||||
Fair | Entire | Average | in | Longest | |||||||||||||
Asset Category | Value | Portfolio | Coupon | Months | Maturity | ||||||||||||
March 31, 2024 | |||||||||||||||||
Fixed Rate RMBS | $ | 3,864,505 | 99.6 | % | 4.38 | % | 331 | 1-Feb-54 | |||||||||
Interest-Only Securities | 16,326 | 0.4 | % | 4.01 | % | 220 | 25-Jul-48 | ||||||||||
Inverse Interest-Only Securities | 247 | 0.0 | % | 0.00 | % | 270 | 15-Jun-42 | ||||||||||
Total Mortgage Assets | $ | 3,881,078 | 100.0 | % | 4.34 | % | 328 | 1-Feb-54 | |||||||||
December 31, 2023 | |||||||||||||||||
Fixed Rate RMBS | $ | 3,877,082 | 99.4 | % | 4.33 | % | 334 | 1-Nov-53 | |||||||||
Interest-Only Securities | 16,572 | 0.6 | % | 4.01 | % | 223 | 25-Jul-48 | ||||||||||
Inverse Interest-Only Securities | 358 | 0.0 | % | 0.00 | % | 274 | 15-Jun-42 | ||||||||||
Total Mortgage Assets | $ | 3,894,012 | 100.0 | % | 4.30 | % | 331 | 1-Nov-53 | |||||||||
($ in thousands) | ||||||||||||||||
March 31, 2024 | December 31, 2023 | |||||||||||||||
Percentage of | Percentage of | |||||||||||||||
Agency | Fair Value | Entire Portfolio | Fair Value | Entire Portfolio | ||||||||||||
Fannie Mae | $ | 2,719,139 | 70.1 | % | $ | 2,714,192 | 65.6 | % | ||||||||
Freddie Mac | 1,161,939 | 29.9 | % | 1,179,820 | 34.4 | % | ||||||||||
Total Portfolio | $ | 3,881,078 | 100.0 | % | $ | 3,894,012 | 100.0 | % | ||||||||
March 31, 2024 | December 31, 2023 | |||||||
Weighted Average Pass-through Purchase Price | $ | 102.83 | $ | 104.10 | ||||
Weighted Average Structured Purchase Price | $ | 18.74 | $ | 18.74 | ||||
Weighted Average Pass-through Current Price | $ | 94.28 | $ | 95.70 | ||||
Weighted Average Structured Current Price | $ | 13.73 | $ | 13.51 | ||||
Effective Duration (1) | 4.550 | 4.400 | ||||||
(1) | Effective duration is the approximate percentage change in price for a 100 bps change in rates. An effective duration of |
The following table presents a summary of portfolio assets acquired during the ninethree months ended September 30, 2017March 31, 2024 and 2016.
| ($ in thousands) | ||||||||||||||||||||||||
| 2017 | 2016 | |||||||||||||||||||||||
| Total Cost | Average Price | Weighted Average Yield | Total Cost | Average Price | Weighted Average Yield | |||||||||||||||||||
| Pass-through RMBS | $ | 5,007,614 | $ | 108.16 | 2.75 | % | $ | 2,204,085 | $ | 109.70 | 2.24 | % | ||||||||||||
| Structured RMBS | 72,331 | 14.46 | 6.21 | % | 52,897 | 18.03 | 5.46 | % | ||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||
2024 | 2023 | |||||||||||||||||||||||
Total Cost | Average Price | Weighted Average Yield | Total Cost | Average Price | Weighted Average Yield | |||||||||||||||||||
Pass-through RMBS | $ | 345,032 | $ | 101.28 | 5.79 | % | $ | 467,460 | $ | 97.97 | 4.59 | % | ||||||||||||
Structured RMBS | - | - | - | - | - | - | ||||||||||||||||||
Borrowings
As of September 30, 2017,March 31, 2024, 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 2021 of these counterparties. None of these lenders are affiliated with the Company. These borrowings are secured by the Company'sCompany’s RMBS and cash, and bear interest at the prevailing market rates. We believe our established repurchase agreement borrowing facilities provide borrowing capacity in excess of our needs.
As of September 30, 2017,March 31, 2024, we had obligations outstanding under the repurchase agreements of approximately $3,710.1$3,711.5 million with a net weighted average borrowing cost of 1.37%5.46%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 21 to 318106 days, with a weighted average remaining maturity of 5921 days. Securing the repurchase agreement obligations as of September 30, 2017March 31, 2024 are RMBS with an estimated fair value, including accrued interest, of approximately $3,932.6$3,891.0 million, and a weighted average maturity of 340 months, and cash pledged to counterparties of approximately $12.0$7.4 million. Through October 27, 2017,April 26, 2024, we have been able to maintain our repurchase facilities with comparable terms to those that existed at September 30, 2017March 31, 2024, with maturities through August 14, 2018.
The table below presents information about our period end, maximum and average repurchase agreement obligationsbalances of borrowings for each quarter in 20172024 to date and 2016.2023.
($ 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, 2024 | $ | 3,711,498 | $ | 3,774,739 | $ | 3,708,573 | $ | 2,925 | 0.08 | % | ||||||||||
December 31, 2023 | 3,705,649 | 4,426,947 | 4,066,298 | (360,649 | ) | (8.87 | )% | |||||||||||||
September 30, 2023 | 4,426,947 | 4,494,858 | 4,314,332 | 112,615 | 2.61 | % | ||||||||||||||
June 30, 2023 | 4,201,717 | 4,201,717 | 3,985,577 | 216,140 | 5.42 | % | ||||||||||||||
March 31, 2023 | 3,769,437 | 3,849,137 | 3,573,941 | 195,496 | 5.47 | % | ||||||||||||||
Leverage
We use two primary measures of leverage. Economic leverage is calculated by dividing the sum of total liabilities and our net notional TBA position, by stockholders' equity. Adjusted leverage is calculated by dividing our repurchase agreements by stockholders' equity. Our economic leverage at March 31, 2024 was 7.0 to 1, compared to 6.7 to 1 as of December 31, 2023. Our adjusted leverage at March 31, 2024 was 7.7 to 1, compared to 7.9 to 1 as of December 31, 2023. The following table presents information related to our historical leverage.
($ in thousands) | |||||||||||||||||||||
Ending | Ending | Ending | Ending | ||||||||||||||||||
Repurchase | Total | Net TBA | Stockholders' | Adjusted | Economic | ||||||||||||||||
Agreements | Liabilities | Positions | Equity | Leverage | Leverage | ||||||||||||||||
March 31, 2024 | $ | 3,711,498 | $ | 3,733,031 | $ | (370,700 | ) | $ | 481,632 | 7.7:1 | 7.0:1 | ||||||||||
December 31, 2023 | 3,705,649 | 3,795,002 | (645,700 | ) | 469,944 | 7.9:1 | 6.7:1 | ||||||||||||||
September 30, 2023 | 4,426,947 | 4,470,052 | (502,500 | ) | 466,841 | 9.5:1 | 8.5:1 | ||||||||||||||
June 30, 2023 | 4,201,717 | 4,240,845 | (250,000 | ) | 490,086 | 8.6:1 | 8.1:1 | ||||||||||||||
March 31, 2023 | 3,769,437 | 3,814,651 | (875,000 | ) | 451,361 | 8.4:1 | 6.5:1 | ||||||||||||||
| ($ in thousands) | ||||||||||||||||
| Difference Between Ending | ||||||||||||||||
| Ending | Average | Borrowings and | ||||||||||||||
| Balance of | Balance of | Average Borrowings | ||||||||||||||
| Three Months Ended | Borrowings | Borrowings | Amount | Percent | ||||||||||||
| September 30, 2017 | $ | 3,710,077 | $ | 3,494,266 | $ | 215,811 | 6.18 | % | ||||||||
| June 30, 2017 | 3,278,456 | 3,164,532 | 113,924 | 3.60 | % | |||||||||||
| March 31, 2017 | 3,050,608 | 2,922,157 | 128,451 | 4.40 | % | |||||||||||
| December 31, 2016 | 2,793,705 | �� | 2,545,901 | 247,804 | 9.73 | % | ||||||||||
| September 30, 2016 | 2,298,097 | 2,179,462 | 118,635 | 5.44 | % | |||||||||||
| June 30, 2016 | 2,060,827 | 2,000,158 | 60,669 | 3.03 | % | |||||||||||
| March 31, 2016 | 1,939,489 | 1,962,901 | (23,412 | ) | (1.19 | )% | ||||||||||
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 immediateWe have both internal and external sources of liquidity. However, our material unused 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 earningability to sell encumbered assets varies.to raise cash. 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 short-term and long-term 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.
Internal Sources of Liquidity
Our internal sources of liquidity include our cash balances, unencumbered assets and our ability to liquidate our encumbered security holdings. Our balance sheet also generates liquidity on an on-going basis through payments of principal and interest we receive on our RMBS portfolio. 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. Since inception we have primarily used short positions in Eurodollar futures. 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 funds or risk operating the portfolio with less liquidity.
External Sources of Liquidity
Our primary external sources of liquidity are our ability to (i) borrow under master repurchase agreements, (ii) use the TBA security market and (iii) sell our equity or debt securities in public offerings or private placements. Our borrowing capacity will vary over time as the market value of our interest earning assets varies. 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.
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 repurchaserepo transaction basis. Throughout the ninethree months ended September 30, 2017,March 31, 2024, haircuts on our pledged collateral remained stable and as of September 30, 2017,March 31, 2024, our weighted average haircut was approximately 5.5%4.5% of the value of our collateral.
TBAs represent a form of off-balance sheet financing and are accounted for as derivative instruments. (See Note 5 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 (“MSFTAs”), which may establish margin levels in excess of the MBSD. Such provisions require that we establish an initial margin based on the notional value of the TBA, which is subject to increase if the estimated fair value of our TBAs or the estimated fair value of our pledged collateral declines. The MBSD has the sole discretion to determine the value of our TBAs and of the pledged collateral securing such contracts. In the event of a margin call, we must generally provide additional collateral on the same business day.
Settlement of our TBA obligations by taking delivery of the underlying securities as well as satisfying margin requirements could negatively impact our liquidity position. However, since we do not use TBA dollar roll transactions as our primary source of financing, we believe that we will have adequate sources of liquidity to meet such obligations.
We invest a portion of our capital in structured Agency RMBS. We generally do not apply leverage to this portion of our portfolio. The leverage inherent in structured securities replaces the leverage obtained by acquiring PT securities and funding them in the repurchase market. This structured RMBS strategy has been a core element of the Company'sCompany’s overall investment strategy since inception. However, we have and may continue to pledge a portion of our structured RMBS in order to raise our cash levels, but generally will not pledge these securities in order to acquire additional assets.
| (in thousands) | ||||||||||||||||||||
| Obligations Maturing | ||||||||||||||||||||
| Within One Year | One to Three Years | Three to Five Years | More than Five Years | Total | ||||||||||||||||
| Repurchase agreements | $ | 3,710,077 | $ | - | $ | - | $ | - | $ | 3,710,077 | ||||||||||
Interest expense on repurchase agreements(1) | 13,672 | - | - | - | 13,672 | |||||||||||||||
| Totals | $ | 3,723,749 | $ | - | $ | - | $ | - | $ | 3,723,749 | ||||||||||
In future periods, we expect to continue to finance our activities in a manner that is consistent with our current operations through repurchase agreements. As of September 30, 2017,March 31, 2024, we had cash and cash equivalents of $161.7$190.4 million. We generated cash flows of $350.4$118.4 million from principal and interest payments on our RMBS and had average repurchase agreements outstanding of $3,193.7$3,708.6 million during the ninethree months ended September 30, 2017.
As described more fully below, we may also access liquidity by selling our equity or debt securities in public offerings or private placements.
Stockholders’ Equity
On JulyOctober 29, 2016,2021, we entered into an equity distribution agreement (the "July 2016“October 2021 Equity Distribution Agreement"Agreement”) with twofour sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $125,000,000$250,000,000 of shares of our common stock in transactions that were deemed to be "at“at the market"market” offerings and privately negotiated transactions. We issued a total of 10,174,9929,742,188 shares under the July 2016October 2021 Equity Distribution Agreement for aggregate gross proceeds of $110.0approximately $151.8 million, and net proceeds of approximately $108.2$149.3 million, net ofafter commissions and fees, prior to its termination.termination in March 2023.
Outlook
Economic Summary
Towards the end of 2023 it appeared the interest rate cycle was about to its termination.
While most measures of inflation were clearly declining over the second half of 2023 there was also clear evidence that the economy was not slowing much at all. Most market participants had anticipated the significant tightening of monetary policy would slow the economy, if not cause a recession, and thus bring inflation down to the Fed’s policy target of 2.0%. However, economic growth, as measured by gross domestic product (“GDP”), was above trend during the second half of 2023. The labor market, as measured by the monthly non-farm payroll reports, averaged 213,000 new jobs over the course of the last six months of 2023, a level considered above the rate necessary to absorb new entrants into the labor market and thus keep the unemployment rate from increasing. For the first three months of 2024 the monthly average has increased to 280,000. More significantly, monthly inflation readings are above levels observed in late 2023 and it appears inflation may actually be re-accelerating. Public comments by various Fed officials have generally pushed back against market pricing which implied the market still expected the Fed to pivot soon and start to relax monetary policy. However, as we enter the second quarter, market pricing of future levels of the Fed’s policy rate are shifting upwards and a pivot in monetary policy does not appear to be imminent.
Interest Rates
As the market sensed the Fed was about to pivot and reverse the stance of monetary policy from additional firming to easing, interest rates decreased over the course of the last two months of 2023.
Rates had peaked in October, reaching cycle highs at most points along the maturity curve. U.S. Treasury yields declined so much in November and December such that all U.S. Treasuries with a maturity longer than the 1-year bill declined by at least 70 basis points during the fourth quarter, in spite of the significant increases that occurred in October. As we entered into another equity distribution agreement (the "August 2017 Equity Distribution Agreement") with two sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate amount of $125,000,000 of shares of our common stock in transactions that are deemed to be "at the market" offerings and privately negotiated transactions. The August 2017 Equity Distribution Agreement replaced the May 2017 Equity Distribution Agreement. Through September 30, 2017, we have not issued any shares under the August 2017 Equity Distribution Agreement.
As mentioned above, market reversed course into the end of the third quarter and early fourth quarter. Geo-political events calmed down, removing the flight-to-quality induced demand for safe-haven assets, and economic news strengthened. Events in Washington turned mildly positive as the Trump Administration pivoted away from health care reform to tax reform, with what the market perceived to be slightly better prospects for success. Inflation data finally met expectations and showed signs of reversing its decline when the August data was released on September 14th. Finally, on September 20th, Fed Chairwomen Yellen sounded quite hawkish and reiterated her belief that recent inflation data represented temporary or transitory effects and would reverse soon enough back towards their 2% target. It was quite clearpricing implied the Fed intended to raise the Federal Fundswould reduce their policy rate again in December. The market responded as Fed Funds futures pricing implied a 70-80% probability of aby six 25 basis point increasecuts in 2024 as 2023 came to a close. When the Federal Funds rate in December. The September economic data released in early October has also been very strong,first quarter of 2024 ended, market pricing was for only three 25 basis point cuts and the anticipated short-term effects of the hurricanes appears to have been less than feared. Further, the repair work associated with the hurricanes should put even more upward pressure on economic activity.
In spite of the next Fed chair, with manyreversal in the rates market during the first quarter of 2024 as described above, interest rate volatility declined over the course of the leading candidates perceivedquarter. A widely followed measure of interest rate volatility is the ICE Bank of America MOVE index. The index declined from a reading of approximately 127 on January 2, 2024, to be more hawkish bya reading of approximately 86.4 on March 28, 2024. This was a significant development as implied volatility is a significant determinant of Agency MBS performance as it affects the markets than the current chairwoman, even though she remains a candidate herself. Regardlesspricing of the uncertainty in the bond market, the equity markets, and risk markets generally, continue to hit all-time high closes almost daily, and the combination of robust economic data, low inflation and the prospects for tax reform make for an ideal environment for risk assets.
The mortgage market closed the quarter with the current coupon, 30-year fixed rate Agency RMBS trading at the tightest spreadMarket
As with interest rates described above by late October of 2023 Agency RMBS spreads to comparable duration U.S. Treasuries since early 2014.or swaps reached their cycle wide for the cycle. As has been the case formarket reversed and risk appetite rapidly recovered the spread contracted quickly – declining by over 50 basis points by year-end. However, unlike interest rates which reversed much of the year, lower coupondecline seen during November and December, over the course of the first quarter of 2024 Agency RMBS outperformed high couponspreads, while somewhat volatile, ended the quarter very close to where they were at the beginning of the quarter. As mentioned above, declining interest rate volatility supported Agency RMBS performance. However, the sector also benefitted from increased demand from banks and money managers deploying funds from growing flows into fixed income funds.
Based on ICE Bank of America data for the fixed income indices, for the first quarter of 2024 Agency RMBS generated a return of -1.1% and -0.1% versus their comparable duration U.S. Treasury benchmarks. As we approachswaps, respectively. The 30-year fixed rate sector generated returns of -1.3% and -0.2% versus comparable duration swaps, respectively. With respect to individual sectors of the winter monthsAgency RMBS index, shorter duration sectors and the seasonal slowdown in prepayment activity, coupled withcoupons outperformed owing to the increase in interest rates. Across the 30-year fixed rate coupon stack returns varied from -2.1% for 2.0% coupons to 1.4% for 7.0% coupons. Excess returns for the same coupons were -0.6% and 0.8%, respectively, and the distribution of returns followed the durations of the various coupons in a consistent fashion.
The Agency RMBS sector underperformed investment grade and sub-investment grade corporates on an absolute basis. Relative to comparable duration swaps for the first quarter, Agency RMBS trailed investment grade corporates by 140 bps and sub-investment grade corporates by 190 bps. The performance of Agency RMBS versus these two sectors of the fixed income markets is important as multi-sector asset managers who allocate funds across the fixed income markets view these three significant sectors on a relative value basis when making allocation decisions.
Recent Legislative and Regulatory Developments
In response to the deterioration in the markets for U.S. Treasuries, Agency RMBS and other mortgage and fixed income markets resulting from the impacts of the COVID-19 pandemic, the Fed implemented a program of quantitative easing. Through November of 2021, the Fed was committed to purchasing $80 billion of U.S. Treasuries and $40 billion of Agency RMBS each month. In November of 2021, it began tapering its net asset purchases each month, ended net asset purchases by early March of 2022, and ended asset purchases entirely in September of 2022. On May 4, 2022, the FOMC announced a plan for reducing the Fed’s balance sheet. In June of 2022, in accordance with this plan, the Fed began reducing its balance sheet by a maximum of $30 billion of U.S. Treasuries and $17.5 billion of Agency RMBS each month. On September 21, 2022, the FOMC announced the Fed’s decision to continue reducing the balance sheet by a maximum of $60 billion of U.S. Treasuries and $35 billion of Agency RMBS per month. As interest rates have increased and prepayment speeds have slowed, the actual balance sheet reduction of Agency RMBS has trended well below the cap during 2023. Recently the Fed has indicated they may taper their quantitative tightening by slowing the rate of run-off of their portfolio, although it is likely they will allow their holdings of Agency RMBS to continue at the current pace and slow the run-off of U.S. Treasuries in a way that began in earlyachieves their desired rate of portfolio run-off.
On September speeds should30, 2019, the FHFA announced that Fannie Mae and Feddie Macwere allowed to increase their capital buffers to $25 billion and $20 billion, respectively, from the prior limit of $3 billion each. This step could ultimately lead to the Enterprisesbeing privatized and represents the first concrete step on the road to Enterprise reform. In December 2020, the FHFA released a final rule on a new regulatory framework for the Enterpriseswhich seeks to implement both a risk-based capital framework and minimum leverage capital requirements. On January 14, 2021, the U.S. Treasury and the FHFA executed letter agreements allowing the Enterprisesto continue to moderate.
On July 27, 2023, the federal banking regulators, including Orchid Island Casualty ("Post-NPR Captives"the Office of the Comptroller of the Currency, the FDIC and the Fed, jointly issued a proposed rule that would revise large bank capital requirements (the "Basel III Endgame"). The Final Rule also precludesBasel III Endgame, if implemented as proposed, would significantly increase the FHLBscredit weight risk for balance-sheet mortgages and for Agency RMBS sold to the GSEs, which could disincentivize banks from making any new advances or extending existing advancesoriginating mortgages for sale to Post-NPR Captives. In addition, upon the termination of membership,GSEs and impact pricing in the FHLBs were required to liquidate all outstanding advances to Post-NPR Captives, settle all other business transactions, and repurchase or redeem all FHLB stock held by the terminated Post-NPR Captive in accordance with the Final Rule. Therefore, Orchid Island Casualty, along with all other Post-NPR Captives, was required to completely wind down all business relationships with the FHLBC, including the repayment of all outstanding advances, prior to or simultaneously with the termination of Orchid Island Casualty's membership with the FHLBC.
The scope and nature of the actions the U.S. government or the Fed will ultimately undertake are unknown and will continue to evolve. Although the Trump administration has made statements of its intentions to reform housing finance and tax policy, many of these potential policy changes will require congressional action. In addition, the Fed has made statements regarding additional increases to the Federal Funds Rate over the balance of 2017 and beyond. The Fed also announced that it will begin to reduce its holdings of Agency MBS and U.S. treasuries.
Effect on Us
Regulatory developments, movements in interest rates and prepayment rates affect us in many ways, including the following:
Effects on our Assets
A change in or elimination of the guarantee structure of Agency RMBS may increase our costs (if, for example, guarantee fees increase) or require us to change our investment strategy altogether. For example, the elimination of the guarantee structure of Agency RMBS may cause us to change our investment strategy to focus on non-Agency RMBS, which in turn would require us to significantly increase our monitoring of the credit risks of our investments in addition to interest rate and prepayment risks.
If prepayment rates are relatively low (due, in part, to the refinancing problems described above), lower long-term interest rates can increase the value of higher-couponour Agency RMBS. This is because investors typically place a premium on assets with coupon/yields that are higher than coupon/yields available in the market. To the extent such securities pre-pay slower than would otherwise be the case, we benefit from an above market yields.coupon/yield for longer, enhancing the return from the security. Although lower long-term interest rates may increase asset values in our portfolio, we may not be able to invest new funds in similarly-yieldingsimilarly yielding assets.
If prepayment levels increase, the value of any of our Agency RMBS that are carried at a premium to par that are affected by such prepayments may decline. This is because a principal prepayment accelerates the effective term of an Agency RMBS, which would shorten the period during which an investor would receive above-market returns (assuming the yield on the prepaid asset is higher than market yields). Also, prepayment proceeds may not be able to be reinvested in similar-yielding assets. Agency RMBS backed by mortgages with high interest rates are more susceptible to prepayment risk because holders of those mortgages are most likely to refinance to a lower rate. If prepayment levels decrease, the value of any of our Agency RMBS that are carried at a discount to par that are affected by such prepayments may increase. This is because a principal prepayment accelerates the effective term of an Agency RMBS, which would shorten the timeframe over which an investor would receive the principal of the underlying loans. Agency RMBS backed by mortgages with low interest rates are less susceptible to prepayment risk because holders of those mortgages are less likely to refinance to a higher rate. IOs and IIOs, however, may be the types of Agency RMBS most sensitive to increased prepayment rates. Because the holder of an IO or IIO receives no principal payments, the values of IOs and IIOs are entirely dependent on the existence of a principal balance on the underlying mortgages. If the principal balance is eliminated due to prepayment, IOs and IIOs essentially become worthless. Although increased prepayment rates can negatively affect the value of our IOs and IIOs, they have the opposite effect on POs. Because POs act like zero-coupon bonds, meaning they are purchased at a discount to their par value and have an effective interest rate based on the discount and the term of the underlying loan, an increase in prepayment rates would reduce the effective term of our POs and accelerate the yields earned on those assets, which would increase our net income.
Higher long-term rates can also affect the value of our Agency RMBS. As long-term rates rise, rates available to borrowers also rise. This tends to cause prepayment activity to slow and extend the expected average life of mortgage cash flows. As the expected average life of the mortgage cash flows increases, coupled with higher discount rates, the value of Agency RMBS declines. Some of the instruments we use to hedge our Agency RMBS assets, such as interest rate futures, swaps and swaptions, are stable average life instruments. This means that to the extent we use such instruments to hedge our Agency RMBS assets, our hedges may not adequately protect us from price declines, and therefore may negatively impact our book value. It is for this reason we use interest only securities in our portfolio. As interest rates rise, the expected average life of these securities increases, causing generally positive price movements as the number and size of the cash flows increase the longer the underlying mortgages remain outstanding. This makes interest only securities desirable hedge instruments for pass-through Agency RMBS.
Because we base our investment decisions on risk management principles rather than anticipated movements in interest rates, in a volatile interest rate environment we may allocate more capital to structured Agency RMBS with shorter durations, such as short-term fixed and floating rate CMOs.durations. We believe these securities have a lower sensitivity to changes in long-term interest rates than other asset classes. We may attempt to mitigate our exposure to changes in long-term interest rates by investing in IOs and IIOs, which typically have different sensitivities to changes in long-term interest rates than PT RMBS, particularly PT RMBS backed by fixed-rate mortgages.
Effects on our borrowing costs
We leverage our PT RMBS portfolio and a portion of our structured Agency RMBS with principal balances through the use of short-term repurchase agreement transactions. The interest rates on our debt are determined by market levels of both the Fed Funds Rate and LIBOR. An increaseshort term interest rate markets. Increases in the Fed Funds Raterate or LIBOR wouldSOFR typically increase our borrowing costs, which could affect our interest rate spread if there is no corresponding increase in the interest we earn on our assets. ThisThe impact of these increases would be most prevalent with respect to our Agency RMBS backed by fixed rate mortgage loans because the interest rate on a fixed-rate mortgage loan does not change even though market rates may change.
In order to protect our net interest margin against increases in short-term interest rates, we may enter into interest rate swaps, which effectivelyeconomically convert our floating-rate repurchase agreement debt to fixed-rate debt or utilize other hedging instruments such as EurodollarFed Funds, SOFR and T-Note futures contracts, dual digital options or interest rate swaptions.
Summary
The current economic and interest rate cycle that began with the onset of the COVID-19 pandemic in 2020 followed by the Fed raising their policy rate by 525 basis points in a little over a year in 2022 and 2023 was expected to end in early 2024 as the Fed pivoted and started to remove their tight monetary policy. The economy and inflation are simply too strong for this to occur, at least not yet. While market participants still expect some easing of monetary policy over the course of 2024, as reflected in the pricing of forward overnight rates, the starting point continues to get pushed out further and further into the future, and the magnitude of eases in 2024 continues to decrease. Incoming economic data so far in 2024 is consistent with firming inflation and a solid economy, and the labor market shows no signs of weakness. Stimulative fiscal policy out of Washington is working against restrictive monetary policy from the Fed. While inflation has decreased significantly from the peak seen in 2023 it still remains far above the Fed’s target level of 2.0%.
In spite of the ongoing strength of the economy and interest rates retracing much of the declines seen over the last two months of 2023, Agency MBS securities performed fairly well during the first quarter of 2017, risk assets2024. While absolute returns and duration adjusted excess returns versus comparable duration U.S. Treasuries were performing very well asboth negative for the Trump administration took officequarter, they were only slightly negative, including the excess return of just -0.1%. At this juncture it is unclear how much longer the economy and appearedinflation will remain too strong for the Fed and whether or not interest rates will continue to be very pro-business. The markets looked forwardrise, and if so to a roll backwhat extent. When the first quarter of recently expanding regulations across many industries, a new and hopefully improved health care act, tax reform and possibly much needed infrastructure spending to refurbish2024 ended, the nation's aging roads, highways, bridges and airports. While the Administration made bold promises, there has been very little delivered. Market optimism was quickly replaced with pessimism. Political infighting among the Administration and congressional republicans has generally been the cause, as has turmoil within the White House itself. Geopolitical events surfaced in early April, specifically the Korean peninsula. These events kept the market on edge and induced sporadic flight to quality rallies as headlines hit the market from time to time. Incoming inflation data since March was below expectations. In the casespread of the core Consumer Price Index, ("CPI") measure, the year over year figure moved from 2.3% in January 2017 to 1.7% by May and has stayed there through September. Despite these readings, the Federal Reserve remains convinced these readings are being driven by temporary or transitory phenomenon and that inflation will reverse and head back towards their two percent target over the medium term. To wit, the Fed appears as if they will hike their target rate again at the December meeting baring surprise outcomes to the downside. The market accepts this outcome as highly likely – as reflected in Fed Funds futures pricing. However, using the same measure, the market does not expect the Fed to raise rates in 2018 and beyond to the extent the Fed expects to. As a result, the combination of benign inflation readings currently coupled with hawkish Fed expectation has caused the yield curve to flatten significantly – to multi-year lows. A second order effect of these developments has occurred in the equity and risk markets as they continue to perform exceedingly well. The major equity indices in the US make record new highs almost daily.
Critical Accounting Policies
Our condensed consolidated financial statements are prepared in accordance with GAAP. GAAP requires our management to make some complex and subjective decisions and assessments. Our most critical accounting policiesestimates involve decisions and assessments which could significantly affect reported assets, liabilities, revenues and expenses. There have been no changes to our critical accounting policiesestimates as discussed in our annual report on Form 10-K for the year ended December 31, 2016.
Capital Expenditures
At September 30, 2017,March 31, 2024, we had no material commitments for capital expenditures.
Dividends
In addition to other requirements that must be satisfied to continue to qualify as a REIT, we must pay annual dividends to our stockholders of at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains. REIT taxable income (loss) is computed in accordance with the Code, and can be greater than or less than our financial statement net income (loss) computed in accordance with GAAP. These book to tax differences primarily relate to the recognition of interest income on RMBS, unrealized gains and losses on RMBS, and the amortization of losses on derivative instruments that are treated as funding hedges for tax purposes.
We intend to pay regular monthly dividends to our stockholders and have declared the following dividends since the completion of our IPO.
| (in thousands, except per share amounts) | ||||||||
| Year | Per Share Amount | Total | ||||||
| 2013 | $ | 1.395 | $ | 4,662 | ||||
| 2014 | 2.160 | 22,643 | ||||||
| 2015 | 1.920 | 38,748 | ||||||
| 2016 | 1.680 | 41,388 | ||||||
2017 - YTD(1) | 1.400 | 56,027 | ||||||
| Totals | $ | 8.555 | $ | 163,468 | ||||
(in thousands, except per share amounts) | ||||||||
Year | Per Share Amount | Total | ||||||
2013 | $ | 6.975 | $ | 4,662 | ||||
2014 | 10.800 | 22,643 | ||||||
2015 | 9.600 | 38,748 | ||||||
2016 | 8.400 | 41,388 | ||||||
2017 | 8.400 | 70,717 | ||||||
2018 | 5.350 | 55,814 | ||||||
2019 | 4.800 | 54,421 | ||||||
2020 | 3.950 | 53,570 | ||||||
2021 | 3.900 | 97,601 | ||||||
2022 | 2.475 | 87,906 | ||||||
2023 | 1.800 | 81,127 | ||||||
2024 - YTD(1) | 0.480 | 25,089 | ||||||
Totals | $ | 66.930 | $ | 633,686 | ||||
(1) | On |
Market risk is the exposure to loss resulting from changes in market factors such as interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risks that we are exposed to are interest rate risk, prepayment risk, spread risk, liquidity risk, extension risk and counterparty credit risk.
Interest Rate Risk
Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.
Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income earned on interest-earning assets and the interest expense incurred in connection with our interest-bearing liabilities, by affecting the spread between our interest-earning assets and interest-bearing liabilities. Changes in the level of interest rates can also affect the rate of prepayments of our securities and the value of the RMBS that constitute our investment portfolio, which affects our net income, and ability to realize gains from the sale of these assets and impacts our ability to borrow, and the amount that we can borrow against these securities.
We may utilize a variety of financial instruments in order to limit the effects of changes in interest rates on our operations. The principal instruments that we use are futures contracts, anddual digital options, to enter into interest rate swaps.swaps and swaptions, and interest rate floors and caps. These instruments are intended to serve as aan economic hedge against future interest rate increases on our repurchase agreement borrowings. Hedging techniques are partly based on assumed levels of prepayments of our Agency RMBS. If prepayments are slower or faster than assumed, the life of the Agency RMBS will be longer or shorter, which would reduce the effectiveness of any hedging strategies we may use and may cause losses on such transactions. Hedging strategies involving the use of derivative securities are highly complex and may produce volatile returns. Hedging techniques are also limited by the rules relating to REIT qualification. In order to preserve our REIT status, we may be forced to terminate a hedging transaction at a time when the transaction is most needed.
Our profitability and the value of our investment portfolio (including derivatives used for hedging purposes) may be adversely affected during any period as a result of changing interest rates, including changes in the forward yield curve.
Our portfolio of PT RMBS is typically comprised of adjustable-rate RMBS ("ARMs"(“ARMs”), fixed-rate RMBS and hybrid adjustable-rate RMBS. We generally seek to acquire low duration assets that offer high levels of protection from mortgage prepayments provided that they are reasonably priced by the market. Although the duration of an individual asset can change as a result of changes in interest rates, we strive to maintain a hedged PT RMBS portfolio with an effective duration of less than 2.0. The stated contractual final maturity of the mortgage loans underlying our portfolio of PT RMBS generally ranges up to 30 years. However, the effect of prepayments of the underlying mortgage loans tends to shorten the resulting cash flows from our investments substantially. Prepayments occur for various reasons, including refinancing of underlying mortgages and loan payoffs in connection with home sales.
The duration of our IO and IIO portfolios will vary greatly depending on the structural features of the securities. While prepayment activity will always affect the cash flows associated with the securities, the interest only nature of IOs may cause their durations to become extremely negative when prepayments are high, and less negative when prepayments are low. Prepayments affect the durations of IIOs similarly, but the floating rate nature of the coupon of IIOs (which is inversely related to the level of one month LIBOR) causeSOFR) causes their price movements, and model duration, to be affected by changes in both prepayments and one month LIBOR,SOFR, both current and anticipated levels. As a result, the duration of IIO securities will also vary greatly.
Prepayments on the loans underlying our RMBS can alter the timing of the cash flows from the underlying loans to us. As a result, we gauge the interest rate sensitivity of our assets by measuring their effective duration. While modified duration measures the price sensitivity of a bond to movements in interest rates, effective duration captures both the movement in interest rates and the fact that cash flows to a mortgage related security are altered when interest rates move. Accordingly, when the contract interest rate on a mortgage loan is substantially above prevailing interest rates in the market, the effective duration of securities collateralized by such loans can be quite low because of expected prepayments.
We face the risk that the market value of our PT RMBS assets will increase or decrease at different rates than that of our structured RMBS or liabilities, including our hedging instruments. Accordingly, we assess our interest rate risk by estimating the duration of our assets and the duration of our liabilities. We generally calculate duration using various third party models. However, empirical results and various third party models may produce different duration numbers for the same securities.
The following sensitivity analysis shows the estimated impact on the fair value of our interest rate-sensitive investments and hedge positions as of September 30, 2017March 31, 2024 and December 31, 2016,2023, assuming rates instantaneously fall 200 bps, fall 100 bps, fall 50 bps, rise 50 bps, rise 100 bps and rise 100200 bps, adjusted to reflect the impact of convexity, which is the measure of the sensitivity of our hedge positions and Agency RMBS'RMBS’ effective duration to movements in interest rates.
All changes in value in the table below are measured as percentage changes from the investment portfolio value and net asset value at the base interest rate scenario. The base interest rate scenario assumes interest rates and prepayment projections as of September 30, 2017March 31, 2024 and December 31, 2016. We apply a floor of 0% for the down rate scenarios on our interest bearing liabilities and hedge positions, such that any hypothetical interest rate decrease would have a limited positive impact on our funding costs beyond a certain level.
Actual results could differ materially from estimates, especially in the current market environment. To the extent that these estimates or other assumptions do not hold true, which is likely in a period of high price volatility, actual results will likely differ materially from projections and could be larger or smaller than the estimates in the table below. Moreover, if different models were employed in the analysis, materially different projections could result. Lastly, while the table below reflects the estimated impact of interest rate increases and decreases on a static portfolio, we may from time to time sell any of our agency securities as a part of ourthe overall management of our investment portfolio.
Interest Rate Sensitivity(1) | ||||||||
| Portfolio | ||||||||
| Market | Book | |||||||
| Change in Interest Rate | Value(2)(3) | Value(2)(4) | ||||||
| As of September 30, 2017 | ||||||||
| -100 Basis Points | (0.32 | )% | (3.06 | )% | ||||
| -50 Basis Points | (0.11 | )% | (1.05 | )% | ||||
| +50 Basis Points | (0.44 | )% | (4.20 | )% | ||||
| +100 Basis Points | (1.53 | )% | (14.47 | )% | ||||
| As of December 31, 2016 | ||||||||
| -100 Basis Points | 0.55 | % | 4.96 | % | ||||
| -50 Basis Points | 0.55 | % | 4.97 | % | ||||
| +50 Basis Points | (0.95 | )% | (8.61 | )% | ||||
| +100 Basis Points | (2.20 | )% | (19.98 | )% | ||||
Interest Rate Sensitivity(1) | ||||||||
Portfolio | ||||||||
Market | Book | |||||||
Change in Interest Rate | Value(2)(3) | Value(2)(4) | ||||||
As of March 31, 2024 | ||||||||
-200 Basis Points | (2.19 | )% | (17.67 | )% | ||||
-100 Basis Points | (0.58 | )% | (4.66 | )% | ||||
-50 Basis Points | (0.17 | )% | (1.41 | )% | ||||
+50 Basis Points | (0.04 | )% | (0.33 | )% | ||||
+100 Basis Points | (0.28 | )% | (2.27 | )% | ||||
+200 Basis Points | (1.27 | )% | (10.25 | )% | ||||
As of December 31, 2023 | ||||||||
-200 Basis Points | (2.03 | )% | (16.78 | )% | ||||
-100 Basis Points | (0.54 | )% | (4.48 | )% | ||||
-50 Basis Points | (0.17 | )% | (1.40 | )% | ||||
+50 Basis Points | 0.00 | % | 0.02 | % | ||||
+100 Basis Points | (0.15 | )% | (1.23 | )% | ||||
+200 Basis Points | (0.81 | )% | (6.70 | )% | ||||
(1) | Interest rate sensitivity is derived from models that are dependent on inputs and assumptions provided by third parties as well as by our Manager, and assumes there are no changes in mortgage spreads and assumes a static portfolio. Actual results could differ materially from these estimates. |
(2) | Includes the effect of derivatives and other securities used for hedging purposes. |
(3) | Estimated dollar change in investment portfolio value expressed as a percent of the total fair value of our investment portfolio as of such date. |
(4) | Estimated dollar change in portfolio value expressed as a percent of stockholders' equity as of such date. |
In addition to changes in interest rates, other factors impact the fair value of our interest rate-sensitive investments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, in the event of changes in actual interest rates, the change in the fair value of our assets would likely differ from that shown above and such difference might be material and adverse to our stockholders.
Prepayment Risk
Because residential borrowers have the option to prepay their mortgage loans at par at any time, we face the risk that we will experience a return of principal on our investments faster than anticipated. Various factors affect the rate at which mortgage prepayments occur, including changes in the level of and directional trends in housing prices, interest rates, general economic conditions, loan age and size, loan-to-value ratio, the location of the property and social and demographic conditions. Additionally, changes to GSEgovernment sponsored entity underwriting practices or other governmental programs could also significantly impact prepayment rates or expectations. Generally, prepayments on Agency RMBS increase during periods of falling mortgage interest rates and decrease during periods of rising mortgage interest rates. However, this may not always be the case. We may reinvest principal repayments at a yield that is lower or higher than the yield on the repaid investment, thus affecting our net interest income by altering the average yield on our assets.
Spread Risk
When the market spread widens between the yield on our Agency RMBS and benchmark interest rates, our net book value could decline if the value of our Agency RMBS fallfalls by more than the offsetting fair value increases on our hedging instruments tied to the underlying benchmark interest rates. We refer to this as "spread risk" or "basis risk." The spread risk associated with our mortgage assets and the resulting fluctuations in fair value of these securities can occur independent of changes in benchmark interest rates and may relate to other factors impacting the mortgage and fixed income markets, such as actual or anticipated monetary policy actions by the Fed, market liquidity, or changes in required rates of return on different assets. Consequently, while we use futures contracts, anddual digital options, interest rate swaps and swaptions, and interest rate caps and floors to attempt to protect against moves in interest rates, such instruments typically will not protect our net book value against spread risk.
The primary liquidity risk for us arises from financing long-term assets with shorter-term borrowings through repurchase agreements. Our assets that are pledged to secure repurchase agreements are Agency RMBS and cash. As of September 30, 2017,March 31, 2024, we had unrestricted cash and cash equivalents of $161.7$190.4 million and unpledged securities of approximately $12.9$25.3 million (not including unsettled securities purchases or securities pledged to us) available to meet margin calls on our repurchase agreements and derivative contracts, and for other corporate purposes. However, should the value of our Agency RMBS pledged as collateral or the value of our derivative instruments suddenly decrease, margin calls relating to our repurchase and derivative agreements could increase, causing an adverse change in our liquidity position. Further, there is no assurance that we will always be able to renew (or roll) our repurchase agreements. In addition, our counterparties have the option to increase our haircuts (margin requirements) on the assets we pledge against repurchase agreements, thereby reducing the amount that can be borrowed against an asset even if they agree to renew or roll the repurchase agreement. Significantly higher haircuts can reduce our ability to leverage our portfolio or even force us to sell assets, especially if correlated with asset price declines or faster prepayment rates on our assets.
Extension Risk
The projected weighted average life and the duration (or interest rate sensitivity) of our investments is based on our Manager's assumptions regarding the rate at which the borrowers will prepay the underlying mortgage loans. In general, we use futures contracts, dual digital options and interest rate swaps and swaptions to help manage our funding cost on our investments in the event that interest rates rise. These hedging instruments allow us to reduce our funding exposure on the notional amount of the instrument for a specified period of time.
However, if prepayment rates decrease in a rising interest rate environment, the average life or duration of our fixed-rate assets or the fixed-rate portion of the ARMs or other assets generally extends. This could have a negative impact on our results from operations, as our hedging instrument expirations are fixed and will, therefore, cover a smaller percentage of our funding exposure on our mortgage assets to the extent that their average lives increase due to slower prepayments. This situation may also cause the market value of our agency securitiesAgency RMBS and CMOs collateralized by fixed rate mortgages or hybrid ARMs to decline by more than otherwise would be the case while most of our hedging instruments would not receive any incremental offsetting gains. In extreme situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur realized losses.
Counterparty Credit Risk
We are exposed to counterparty credit risk relating to potential losses that could be recognized in the event that the counterparties to our repurchase agreements and derivative contracts fail to perform their obligations under such agreements. The amount of assets we pledge as collateral in accordance with our agreements varies over time based on the market value and notional amount of such assets as well as the value of our derivative contracts. In the event of a default by a counterparty, we may not receive payments provided for under the terms of our agreements and may have difficulty obtaining our assets pledged as collateral under such agreements. Our credit risk related to certain derivative transactions is largely mitigated through daily adjustments to collateral pledged based on changes in market value and we limit our counterparties to registered central clearing exchanges and major financial institutions with acceptable credit ratings.ratings, monitoring positions with individual counterparties and adjusting collateral posted as required. However, there is no guarantee our efforts to manage counterparty credit risk will be successful and we could suffer significant losses if unsuccessful.
As of the end of the period covered by this report (the "evaluation date"“evaluation date”), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (the "CEO"“CEO”) and Chief Financial Officer (the "CFO"“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act").Act. Based on this evaluation, the CEO and CFO concluded our disclosure controls and procedures, as designed and implemented, were effective as of the evaluation date (1) in ensuring that information regarding the Company and its subsidiary is accumulated and communicated to our management, including our CEO and CFO, by our Manager's employees, as appropriate to allow timely decisions regarding required disclosure and (2) in providing reasonable assurance that information we must disclose in itsour periodic reports under the Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by the SEC'sSEC’s rules and forms.
Changes in Internal ControlsControl over Financial Reporting
There were no significant changes in the Company'sCompany’s internal control over financial reporting that occurred during the Company'sCompany’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company'sCompany’s internal control over financial reporting.
We are not party to any material pending legal proceedings as described in Item 103 of Regulation S-K.
A description of certain factors that may affect our future results and risk factors disclosedis set forth in the "Risk Factors" section of our Annual Report on Form 10-K filed withfor the SECyear ended December 31, 2023. As of March 31, 2024, there have been no material changes in our risk factors from those set forth in our Annual Report on February 17, 2017.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
| Shares Purchased | Maximum Number | |||||||||||||||
| Total Number | Weighted-Average | as Part of Publicly | of Shares That May Yet | |||||||||||||
| of Shares | Price Paid | Announced | Be Repurchased Under | |||||||||||||
Repurchased(1) | Per Share | Programs(2) | the Authorization(2) | |||||||||||||
| July | - | $ | - | - | 783,757 | |||||||||||
| August | - | - | - | 783,757 | ||||||||||||
| September | 482 | 10.19 | - | 783,757 | ||||||||||||
| Totals / Weighted Average | 482 | $ | 10.19 | - | 783,757 | |||||||||||
The Company did not have any unregistered sales of its equity securities during the three months ended September 30, 2017.
The table below presents the Company’s share repurchase activity for the three months ended March 31, 2024.
| Total Number | Shares Purchased | Maximum Number | ||||||||||||||
of Shares of | Weighted-Average | as Part of Publicly | of Shares That May Yet | |||||||||||||
Common Stock | Price Paid | Announced | Be Repurchased Under | |||||||||||||
Repurchased(1) | Per Share | Programs | the Authorization | |||||||||||||
January 1, 2024 - January 31, 2024 | 332,773 | $ | 8.35 | 332,773 | 3,895,829 | |||||||||||
February 1, 2024 - February 29, 2024 | - | - | - | 3,895,829 | ||||||||||||
March 1, 2024 - March 31, 2024 | 14,288 | $ | 8.71 | - | 3,895,829 | |||||||||||
Totals / Weighted Average | 347,061 | $ | 8.36 | 332,773 | 3,895,829 | |||||||||||
(1) | Includes 14,288 shares of the Company’s common stock acquired by the Company in connection with the satisfaction of tax withholding obligations on vested employment related awards under equity incentive plans. These repurchases do not reduce the number of shares available under the stock repurchase program authorization. |
Not Applicable.
Exhibit No.
Exhibit 101.INS | Inline XBRL | Instance Document | ** |
Exhibit 101.SCH | Inline XBRL | Taxonomy Extension Schema Document *** | |
Exhibit 101.CAL | Inline XBRL | Taxonomy Extension Calculation Linkbase Document*** | |
Exhibit 101.DEF | Inline XBRL | Additional Taxonomy Extension Definition Linkbase Document Created*** | |
Exhibit 101.LAB | Inline XBRL | Taxonomy Extension Label Linkbase Document *** | |
Exhibit 101.PRE | Inline XBRL | Taxonomy Extension Presentation Linkbase Document *** | |
Exhibit 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* | Filed herewith. |
** | Furnished herewith. |
*** | Submitted electronically herewith. |
† | Management contract or compensatory plan. |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Orchid Island Capital, Inc . | ||||
Registrant | ||||
Date: | By: | /s/ Robert E. Cauley | ||
Robert E. Cauley Chief Executive Officer, President and Chairman of the Board (Principal Executive Officer) | ||||
Date: | By: | /s/ | ||
George H. Haas, IV Secretary, Chief Financial Officer, Chief Investment Officer and Director (Principal Financial and Accounting Officer) | ||||