orc10q20220930p1i0
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, 20212022
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number
:
 
001-35236
Orchid Island Capital, Inc.
(Exact name of registrant as specified in its charter)
Maryland
27-3269228
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
3305 Flamingo Drive
,
Vero Beach
,
Florida
32963
(Address of principal executive offices) (Zip Code)
 
(
772
)
231-1400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol:
Name of Each Exchange on Which
Registered
Common Stock, $0.01 par value
ORC
New York Stock Exchange
Indicate by
 
check mark
 
whether the
 
registrant (1) has
 
filed all
 
reports required
 
to be
 
filed by
 
Section 13 or
 
15(d) of
 
the Securities
 
Exchange Act
 
of
1934 during the preceding 12 months (or for such shorter
 
period that the registrant was required to file such
 
reports), and (2) has been subject to such
filing requirements for the past 90 days.
 
Yes
☒
 
No
☐
Indicate by check
 
mark whether the registrant
 
has submitted electronically every
 
Interactive Data File required
 
to be submitted pursuant
 
to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12
 
months (or for such shorter period that the registrant was
 
required to submit such
files).
 
Yes
☒
 
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
☒
Number of shares outstanding at October 28, 2021:27, 2022:
161,157,34933,422,207
ORCHID ISLAND
 
CAPITAL, INC.
TABLE OF CONTENTS
PART I. FINANCIAL
 
INFORMATION
ITEM 1. Financial
 
Statements
1
Condensed
 
Balance Sheets
 
(unaudited)
1
Condensed
 
Statements
 
of Operations
 
(unaudited)
2
Condensed
 
Statements
 
of Stockholders’
 
Equity (unaudited)
3
Condensed
 
Statements
 
of Cash Flows
 
(unaudited)
4
Notes to
 
Condensed
 
Financial
 
Statements
 
(unaudited)
5
ITEM 2. Management’s
 
Discussion
 
and Analysis
 
of Financial
 
Condition
 
and Results
 
of Operations
2326
ITEM 3. Quantitative
 
and Qualitative
 
Disclosures
 
about Market
 
Risk
4550
ITEM 4. Controls
 
and Procedures
4954
PART II. OTHER INFORMATION
ITEM 1. Legal
 
Proceedings
5055
ITEM 1A.
 
Risk Factors
5055
ITEM 2. Unregistered
 
Sales of Equity
 
Securities
 
and Use of
 
Proceeds
5055
ITEM 3. Defaults
 
upon Senior
 
Securities
5055
ITEM 4. Mine
 
Safety Disclosures
5055
ITEM 5. Other
 
Information
5055
ITEM 6. Exhibits
5156
SIGNATURES
5257
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
PART I. FINANCIAL
 
INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORCHID ISLAND CAPITAL, INC.
CONDENSED BALANCE SHEETS
($ in thousands, except per share data)
(Unaudited)
September 30,
December 31,
20212022
20202021
ASSETS:
Mortgage-backed securities, at fair value (includes pledged assets
 
of $
5,415,1983,195,846
and $
3,719,9066,506,372
, respectively)
$
5,601,4233,201,214
$
3,726,8956,511,095
U.S. Treasury Notes, at fair value (includes pledged assets of $
29,92736,118
 
and $0,$
29,740
, respectively)
37,40936,118
037,175
Cash and cash equivalents
424,133214,183
220,143385,143
Restricted cash
51,11166,769
79,36365,299
Accrued interest receivable
15,24110,527
9,72118,859
Derivative assets
47,383262,318
20,99950,786
Receivable for securities sold, pledged to counterparties
013,684
414-
Other assets
4421,027
516320
Total Assets
$
6,177,1423,805,840
$
4,058,0517,068,677
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements
$
5,213,8693,133,861
$
3,595,586
Payable for unsettled securities purchased
180,619
06,244,106
Dividends payable
9,9915,636
4,97011,530
Derivative liabilities
10,28853,013
33,2277,589
Accrued interest payable
7534,424
1,157788
Due to affiliates
9351,075
6321,062
Other liabilities
30,058207,454
7,18835,505
Total Liabilities
5,446,5133,405,463
3,642,7606,300,580
 
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $
0.01
 
par value;
100,000,00020,000,000
 
shares authorized; no shares issued
and outstanding as of September 30, 20212022 and December 31, 20202021
0-
0-
Common Stock, $
0.01
 
par value;
500,000,000100,000,000
 
shares authorized,
153,318,35135,066,251
shares issued and outstanding as of September 30, 20212022 and
76,073,31735,398,610
 
shares issued
and outstanding as of December 31, 20202021
1,533351
761354
Additional paid-in capital
767,286776,159
432,524850,497
Accumulated deficit
(38,190)(376,133)
(17,994)(82,754)
Total Stockholders' Equity
730,629400,377
415,291768,097
Total Liabilities
 
and Stockholders' Equity
$
6,177,1423,805,840
$
4,058,0517,068,677
See Notes to Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS
 
OF OPERATIONS
(Unaudited)
For the Three and Nine Months Ended September 30, 20212022 and 20202021
($ in thousands, except per share data)
Nine Months Ended September 30,
Three Months Ended September 30,
2021
20202022
2021
20202022
2021
Interest income
$
112,735
$
90,279
$
90,15235,610
$
34,169
$
27,223
Interest expense
(32,196)
(5,067)
(23,045)(21,361)
(1,570)
(2,043)
Net interest income
80,539
85,212
67,10714,249
32,599
25,180
Realized (losses) gains on mortgage-backed securities
(132,672)
(3,068)
(24,522)(66,143)
2,977
498
Unrealized (losses) gains on mortgage-backed securities and
U.S. Treasury Notes
(692,781)
(107,386)
38,440(212,221)
(11,239)
1,168
Gains (losses) on derivative and other hedging instruments
466,394
15,932
(87,630)184,820
5,375
4,079
Net portfolio (loss) income
(278,520)
(9,310)
(6,605)(79,295)
29,712
30,925
Expenses:
Management fees
7,881
5,569
3,8972,616
2,156
1,252
Allocated overhead
1,482
1,189
1,072522
390
377Incentive compensation
Accrued incentive compensation763
884
(117)212
259
158
Directors' fees and liability insurance
929
874
750308
279
242
Audit, legal and other professional fees
899
832
841293
212
240
Direct REIT operating expenses
2,281
1,024
8521,064
309
406
Other administrative
624
514
451203
69
174
Total expenses
14,859
10,886
7,7465,218
3,674
2,849
Net (loss) income
$
(293,379)
$
(20,196)
$
(14,351)(84,513)
$
26,038
$
28,076
Basic and diluted net (loss) income per share
$
(0.19)(8.31)
$
(0.22)(0.95)
$
0.20(2.40)
$
0.42
Diluted net (loss) income per share
$
(0.19)
$
(0.22)
$
0.20
$
0.421.00
Weighted Average Shares Outstanding
105,305,77235,336,702
66,014,37921,061,154
128,587,34735,205,888
67,301,90125,717,469
Dividends declared per common share
$
0.5851.995
$
0.5952.925
$
0.1950.545
$
0.1900.975
See Notes to Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS
 
OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Three and Nine Months Ended September 30, 20212022 and 20202021
(in thousands)
Additional
Retained
Common Stock
Paid-in
Earnings
Shares
Par Value
Capital
(Deficit)
Total
Balances, January 1, 20202021
63,06215,215
$
631152
$
414,998
$
(20,122)
$
395,507
Net loss
-
0
0
(91,199)
(91,199)
Cash dividends declared
-
0
(15,670)
0
(15,670)
Issuance of common stock pursuant to public offerings, net
3,171
31
19,416
0
19,447
Stock based awards and amortization
4
0
59
0
59
Balances, March 31, 2020
66,237
$
662
$
418,803
$
(111,321)
$
308,144
Net income
-
0
0
48,772
48,772
Cash dividends declared
-
0
(10,935)
0
(10,935)
Stock based awards and amortization
4
0
55
0
55
Shares repurchased and retired
(20)
0
(68)
0
(68)
Balances, June 30, 2020
66,221
$
662
$
407,855
$
(62,549)
$
345,968
Net income
-
0
0
28,076
28,076
Cash dividends declared
-
0
(12,920)
0
(12,920)
Issuance of common stock pursuant to public offerings, net
3,073
31
15,535
0
15,566
Stock based awards and amortization
2
0
51
0
51
Balances, September 30, 2020
69,296
$
693
$
410,521
$
(34,473)
$
376,741
Balances, January 1, 2021
76,073
$
761
$
432,524433,133
$
(17,994)
$
415,291
Net loss
-
0-
0-
(29,369)
(29,369)
Cash dividends declared
-
0-
(17,226)
0-
(17,226)
Issuance of common stock pursuant to public offerings, net
18,2483,650
18237
96,72696,871
0-
96,908
Stock based awards and amortization
9018
1-
571572
0-
572
Balances, March 31, 2021
94,41118,883
$
944189
$
512,595513,350
$
(47,363)
$
466,176
Net lossincome
-
0-
0-
(16,865)
(16,865)
Cash dividends declared
-
0-
(20,416)
0-
(20,416)
Issuance of common stock pursuant to public offerings, net
23,0874,617
23146
124,515124,700
0-
124,746
Stock based awards and amortization
2-
0-
180
0-
180
Balances, June 30, 2021
117,50023,500
$
1,175235
$
616,874617,814
$
(64,228)
$
553,821
Net income
-
0-
0-
26,038
26,038
Cash dividends declared
-
0-
(26,420)
0-
(26,420)
Issuance of common stock pursuant to public offerings, net
35,8187,164
35871
176,649176,936
0-
177,007
Stock based awards and amortization
0-
0-
183
0-
183
Balances, September 30, 2021
153,31830,664
$
1,533306
$
767,286768,513
$
(38,190)
$
730,629
Balances, January 1, 2022
35,399
$
354
$
850,497
$
(82,754)
$
768,097
Net loss
-
-
-
(148,727)
(148,727)
Cash dividends declared
-
-
(27,492)
-
(27,492)
Stock based awards and amortization
25
-
540
-
540
Balances, March 31, 2022
35,424
$
354
$
823,545
$
(231,481)
$
592,418
Net loss
-
-
-
(60,139)
(60,139)
Cash dividends declared
-
-
(23,936)
-
(23,936)
Stock based awards and amortization
2
-
237
-
237
Shares repurchased and retired
(175)
(1)
(2,217)
-
(2,218)
Balances, June 30, 2022
35,251
$
353
$
797,629
$
(291,620)
$
506,362
Net income
-
-
-
(84,513)
(84,513)
Cash dividends declared
-
-
(19,231)
-
(19,231)
Stock based awards and amortization
1
-
143
-
143
Shares repurchased and retired
(186)
(2)
(2,382)
-
(2,384)
Balances, September 30, 2022
35,066
$
351
$
776,159
$
(376,133)
$
400,377
See Notes to Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS
 
OF CASH FLOWS
(Unaudited)
For the Nine Months Ended September 30, 20212022 and 20202021
($ in thousands)
20212022
20202021
CASH FLOWS FROM OPERATING
 
ACTIVITIES:
Net loss
$
(20,196)(293,379)
$
(14,351)(20,196)
Adjustments to reconcile net loss to net cash provided by operating activities:
Stock based compensation
552
612
167Realized losses on mortgage-backed securities
132,672
3,068
Unrealized losses on mortgage-backed securities and U.S. Treasury
Notes
692,781
107,386
Realized and unrealized losses (gains) on mortgage-backed securities
110,423
(13,918)
Unrealized losses on U.S. Treasury Notes
31
0
Realized and unrealized (gains) lossesgains on derivative instruments
(22,180)(261,364)
67,744(22,180)
Changes in operating assets and liabilities:
Accrued interest receivable
(5,449)8,332
2,137(5,449)
Other assets
74(353)
(533)74
Accrued interest payable
(404)3,636
(10,349)(404)
Other liabilities
(2,031)7,770
16(2,031)
Due to (from) affiliates
30313
(32)303
NET CASH PROVIDED BY OPERATING
 
ACTIVITIES
61,183290,660
30,88161,183
CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases
(4,816,301)(622,535)
(2,898,616)(4,816,301)
Sales
2,598,8932,731,497
2,692,2302,598,893
Principal repayments
413,005376,169
384,314413,005
Purchases of U.S. Treasury Notes
(37,440)-
0
Net payments on reverse repurchase agreements
0
30(37,440)
Net proceeds from (payments on) derivative instruments
(1,228)246,321
(68,223)(1,228)
NET CASH PROVIDED BY (USED IN) PROVIDED BY INVESTING ACTIVITIES
(1,843,071)2,731,452
109,735(1,843,071)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements
22,995,28032,427,448
27,995,55622,995,280
Principal payments on repurchase agreements
(21,376,997)(35,537,693)
(28,162,359)(21,376,997)
Cash dividends
(59,019)(76,527)
(40,065)(59,019)
Proceeds from issuance of common stock, net of issuance costs
-
398,661
35,013Shares repurchased and retired
(4,602)
-
Shares withheld from employee stock awards for payment of taxes
(299)(228)
(70)(299)
NET CASH (USED IN) PROVIDED BY (USED IN) FINANCING ACTIVITIES
1,957,626(3,191,602)
(171,925)1,957,626
NET (DECREASE) INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS
 
AND RESTRICTED CASH
175,738(169,490)
(31,309)175,738
CASH, CASH EQUIVALENTS
 
AND RESTRICTED CASH, beginning of the period
299,506450,442
278,655299,506
CASH, CASH EQUIVALENTS
 
AND RESTRICTED CASH, end of the period
$
475,244280,952
$
247,346475,244
SUPPLEMENTAL DISCLOSURE OF
 
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest
$
5,47128,560
$
33,3955,471
SUPPLEMENTAL DISCLOSURE OF
 
NONCASH INVESTING ACTIVITIES:
Securities acquired settled in later period
$
180,619-
$
113,653180,619
See Notes to Financial Statements
5
ORCHID ISLAND
 
CAPITAL, INC.
NOTES TO CONDENSED
 
FINANCIAL
 
STATEMENTS
(Unaudited)
SEPTEMBER
 
30, 20212022
NOTE 1.
 
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
 
and Business
 
Description
Orchid Island
 
Capital,
 
Inc. (“Orchid”
 
or the “Company”),
 
was incorporated
 
in Maryland
 
on August
 
17, 2010 for
 
for the purpose
 
of creating
and managing
 
a leveraged
 
investment
 
portfolio
 
consisting
 
of residential
 
mortgage-backed
 
securities
 
(“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”).
 
Orchid began
 
operations
 
on
November
 
24, 2010
 
(the date
 
of commencement
 
of operations).
 
From
incorporation
 
through November
 
24, 2010,
 
Orchid’s only
 
activity
was the issuance
 
of common
 
stock to
Bimini.
On January 23, 2020, Orchid entered into an equity distribution agreement (the
“January 2020 Equity Distribution Agreement”) with
three sales agents pursuant to which the Company could offer and sell, from time to time,
up to an aggregate amount of $
200,000,000
of shares of the Company’s common stock in transactions that were deemed to be “at the
market” offerings and privately negotiated
transactions.
The Company issued a total of
3,170,727
shares under the January 2020 Equity Distribution Agreement for
aggregate
gross proceeds of
approximately $
19.8
million, and net proceeds of approximately $
19.4
million, after commissions and fees, prior to
its termination in August 2020.
On August 4, 2020, Orchid entered into an equity distribution agreement (the “August
 
2020 Equity Distribution Agreement”) with
four sales agents pursuant to which the Company could offer and sell, from time to time,
 
up to an aggregate amount of $
150,000,000
 
of
shares of the Company’s common stock in transactions that were deemed to be “at the market”
offerings and privately
negotiated
transactions.
 
The Company issued a total of
27,493,6505,538,730
 
shares under the August 2020 Equity Distribution Agreement for aggregate
gross proceeds of
approximately $
150.0
 
million, and net proceeds of approximately $
147.4
 
million, after commissions and fees, prior to
its termination in June 2021.
On January 20, 2021, Orchid entered into an underwriting
agreement (the “January
2021 Underwriting Agreement”) with
J.P.
Morgan Securities LLC (“J.P. Morgan”), relating to the offer and sale of
7,600,0001,520,000
 
shares of the Company’s common stock. J.P.
Morgan purchased the shares of the Company’s common stock from the Company pursuant
 
to the January 2021 Underwriting
Agreement at $
5.2026.00
 
per share. In addition, the Company granted J.P. Morgan a 30-day option to purchase up to an additional
1,140,000228,000
 
shares of the Company’s common stock on the same terms and conditions, which
J.P.
Morgan exercised in full on January 21,
21, 2021. The closing of the offering of
8,740,0001,748,000
 
shares of the Company’s common stock occurred on January 25, 2021, with
proceeds to
the Company of approximately $
45.2
 
million, net of offering expenses.
On March 2, 2021, Orchid entered into an underwriting agreement (the “March 2021
 
Underwriting Agreement”) with J.P. Morgan,
relating to the offer and sale of
8,000,0001,600,000
 
shares of the Company’s common stock. J.P. Morgan purchased the shares of the
Company’s common stock from the Company pursuant to the March 2021 Underwriting
 
Agreement at $
5.4527.25
 
per share. In addition, the
the Company granted J.P. Morgan a 30-day option to purchase up to an additional
1,200,000240,000
 
shares of the Company’s common stock on
the same terms and conditions, which J.P. Morgan exercised in full on March 3, 2021. The closing of the offering of
9,200,0001,840,000
 
shares
of the Company’s common stock occurred on March 5, 2021, with proceeds to the Company
 
of approximately $
50.0
 
million, net of
offering expenses.
On June 22, 2021, Orchid entered into an equity distribution agreement
 
(the “June 2021 Equity Distribution Agreement”) with four
sales agents pursuant to which the Company maycould offer and sell, from time to time, up to
 
an aggregate amount of $
250,000,000
of
shares of the Company’s common stock in transactions that were deemed to be “at the market” offerings and privately negotiated
transactions. The Company issued a total of
9,881,467
shares under the June 2021 Equity Distribution Agreement for aggregate gross
proceeds of approximately $
250.0
million, and net proceeds of approximately $
246.0
million, after commissions and fees, prior to its
termination in October 2021.
6
On October 29, 2021, Orchid entered into an equity distribution agreement (the
“October 2021 Equity Distribution Agreement”) with
four sales agents pursuant to which the Company may offer and sell, from time to time,
up to an aggregate amount of $
250,000,000
 
of
shares of the Company’s common stock in transactions that are deemed to be “at the market”
 
offerings and privately negotiated
6
transactions.
 
Through September 30, 2021,2022, the Company issued a total of
41,568,3383,167,140
 
shares under the JuneOctober 2021 Equity Distribution
Distribution Agreement for aggregate gross proceeds of approximately $
211.078.3
 
million, and net proceeds of approximately $
207.577.0
 
million, after
commissions and fees. Subsequent to September 30, 2021 and through October
28, 2021, the Company issued a total of
7,838,998
shares under the June 2021 Equity Distribution Agreement for aggregate
gross proceeds of approximately $
39.0
million, and net
proceeds of approximately $
38.4
million, after commissions and fees.
COVID-19 Impact
Beginning
in mid-March
2020, No shares were issued under the
global pandemic
associated
with the
novel coronavirus
(“COVID-19”)
and related
economic
conditions
began to
impact our
financial
position and
results of
operations.
As a result
of the economic,
health and
market turmoil
brought
about by COVID-19,
the Agency
RMBS market
experienced
severe dislocations.
This resulted
in falling
prices of
our assets
and increased
margin calls
from our
repurchase
agreement
lenders,
resulting
in material
adverse effects
on our results
of operations
and to our
financial
condition.
The Agency
RMBS market
largely stabilized
after the
U.S. Federal
Reserve (the
“Fed”) announced
on March
23, 2020
that it would
purchase
Agency RMBS
and U.S.
Treasuries in
the amounts
needed to
support smooth
market functioning.
As of September
30, October 2021
 
weEquity Distribution Agreement during the nine months
have timely
satisfied
all margin
calls. The
RMBS market
continues
to react
to the pandemic
and the
various measures
put in place
to
stabilize
the market.
To the extent the
financial
or mortgage
markets do
not respond
favorably
to any of
these actions,
or such
actions do
not function
as intended,
our business,
results of
operations
and financial
condition
may continue
to be materially
adversely
affected.
Although
the Company
cannot estimate
the length
or gravity
of the impact
of the COVID-19
pandemic at
this time,
it may have
a material
adverse effect
on the Company’s
results of
future operations,
financial
position,
and liquidity.
ended September 30, 2022.
Basis of
 
Presentation
 
and Use of
 
Estimates
The accompanying
 
unaudited
 
financial
 
statements
 
have been
 
prepared
 
in accordance
 
with accounting
 
principles
 
generally
 
accepted
in the United
 
States (“GAAP”)
 
for interim
 
financial
 
information
 
and with
 
the instructions
 
to Form 10-Q
 
and Article
 
8 of Regulation
 
S-X.
 
Accordingly, they
 
do not include
 
all of the
 
information
 
and footnotes
 
required
 
by GAAP for
 
complete financial
 
statements.
 
In the opinion
 
of
management,
 
all adjustments
 
(consisting
 
of normal
 
recurring
 
accruals)
 
considered
 
necessary
 
for a fair
 
presentation
 
have been
 
included.
 
Operating
 
results for
 
the nine and
 
three month
 
period endedperiods
 
ended September
 
30, 20212022
 
are not necessarily
 
indicative
 
of the results
 
that may
 
be
expected for
 
the year
 
ending December
 
31, 2021.2022.
The balance
 
sheet at
December
 
31, 2020 has2021
 
has been derived
 
derived from the
 
the audited
financial
 
statements
 
at that date
 
but does
 
not include
 
all
of the information
 
and footnotes
 
required
 
by GAAP for
 
complete financial
 
statements.
 
For further
 
information,
 
refer to
 
the financial
statements
 
and footnotes
 
thereto included
 
in the Company’s
 
Annual Report
 
on Form 10-K
 
for the year
 
ended December
 
31, 2020.2021.
The preparation
 
of financial
 
statements
 
in conformity
 
with GAAP
 
requires
 
management
 
to make estimates
 
and assumptions
 
that affect
the reported
 
amounts of
 
assets and
 
liabilities
 
and disclosure
 
of contingent
 
assets and
 
liabilities
 
at the date
 
of the financial
 
statements
 
and
the reported
 
amounts of
 
revenues
 
and expenses
 
during the
 
reporting
 
period. Actual
 
results could
 
differ from
 
those estimates.
 
The
significant
 
estimates
 
affecting the
 
accompanying
 
financial
 
statements
 
are the fair
 
values of RMBS
 
RMBS and
derivatives.
 
Management
 
believes
the estimates
 
and assumptions
 
underlying
 
the financial
 
statements
 
are reasonable
 
based on
 
the information
 
available as
 
as of September
 
30,
2021.2022.
Common Stock
Reverse
Split
On August 30, 2022, the Company effected a 1-for-5 reverse stock split of its common
stock and proportionately decreased the
number of authorized shares of common stock.
All share, per share, deferred stock unit (“DSU”) and performance unit (“PU”)
information has been retroactively adjusted to reflect the reverse split.
The shares of common stock retain a par value of $0.01 per
share.
Variable Interest Entities (“VIEs”)
We obtainThe Company obtains interests in VIEs through ourits investments in mortgage-backed
securities.
 
OurThe Company’s interests in these
VIEs are passive in
nature and are not expected to result in usthe Company obtaining a
controlling financial interest
in these VIEs in the
future.
 
As a result, we dothe Company does not
consolidate these VIEs and we account accounts
for our interestthese interests in these VIEs as mortgage-backed
securities.
 
See Note 2 for additional
information regarding ourthe Company’s investments in
mortgage-backed securities.
 
OurThe maximum
exposure to loss for these VIEs is the carrying
value of the mortgage-backed securities.
 
 
 
 
 
 
 
 
 
 
 
 
7
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
 
such amounts shown
 
shown in
the statement
 
of cash flows.
(in thousands)
September 30, 20212022
December 31, 20202021
Cash and cash equivalents
$
424,133214,183
$
220,143385,143
Restricted cash
51,11166,769
79,36365,299
Total cash, cash equivalents
 
and restricted cash
$
475,244280,952
$
299,506450,442
The Company
 
maintains
 
cash balances
 
at three
 
banks and
 
excess margin
 
on account
 
with two
 
exchange clearing
 
members.
 
At times,
balances may
 
exceed federally
 
insured limits.
 
The Company
 
has not
 
experienced
 
any losses
 
related to
 
these balances.
 
The Federal
Deposit Insurance
 
Corporation
 
insures eligible
 
accounts
 
up to $250,000
 
per depositor
 
at each financial
 
institution.
 
Restricted
 
cash
balances are
 
uninsured,
 
but are held
 
in separate
 
customer accounts
 
that are
 
segregated
 
from the
 
general funds
 
of the counterparty.
 
The
Company limits
 
uninsured
 
balances
 
to only large,
 
well-known
 
banks and
 
exchange clearing
 
members and
 
believes that
 
it is not
 
exposed to
any significant
 
credit risk
 
on cash and
 
cash equivalents
 
or restricted
 
cash balances.
Mortgage-Backed
 
Securities
 
and U.S.
 
Treasury Notes
The Company
 
invests primarily
 
in mortgage
 
pass-through
 
(“PT”) residential
 
mortgage
 
backed securities
(“RMBS”)
 
and collateralized
mortgage
 
mortgage
obligations
 
(“CMOs”)
certificates
 
issued by
 
Freddie Mac,
 
Fannie Mae
 
or Ginnie
 
Mae,
 
interest-only
 
(“IO”) securities
 
and inverse
 
interest-interest-only
only (“IIO”)
securities
 
representing interest in or obligations backed by pools of RMBS. We refer The Company
refers
to RMBS and
CMOs as PT
RMBS. We
referThe Company refers to IO and IIO securities as structured RMBS. The Company
also invests
in U.S. Treasury Notes, primarily
to satisfy collateral
requirements of derivative counterparties. The Company has elected
to account
for its investment in RMBS and
U.S. Treasury Notes
under the fair value option. Electing the fair value option requires the Company
 
Company to record changes in fair value in
the statement of
operations, which, in management’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 securities
 
transactions
 
on the trade
 
date. Security
 
purchases
 
that have
 
not settled
 
as of the
 
balance sheet
 
date
are included
 
in the portfolio
 
balance with
 
an offsetting
 
liability
 
recorded,
 
whereas securities
 
sold that
 
have not
 
settled as
 
of the balance
sheet date
 
are removed
 
removed from
the portfolio
 
balance with
 
an offsetting
 
receivable
 
recorded.
Fair value
 
is defined
 
as the price
 
that would
 
be received
 
to sell the
 
asset or
 
paid to transfer
 
the liability
 
in an orderly
 
transaction
between market
 
participants
 
at the measurement
 
date.
 
The fair
 
value measurement
 
assumes
 
that the
 
transaction
 
to sell the
 
asset or
transfer
 
the liability
 
either occurs
 
in the principal
 
market for
 
the asset
 
or liability, or
 
in the absence
 
of a principal
 
market, occurs
 
in the most
advantageous
 
market for
 
the asset
 
or liability. Estimated
 
fair values
 
for RMBS
 
are based
 
on independent
 
pricing sources
 
and/or third
 
party
broker quotes,
 
when available.
 
Estimated
 
fair values
 
for U.S.
 
Treasury Notes
 
are based
 
on quoted
 
prices for
 
identical
 
assets in
 
active
markets.
8
Income on
 
PT RMBS
 
securitiesand U.S. Treasury
 
and U.S.Notes is based
 
Treasury Notes
is based on
the stated
 
interest
 
rate of the
 
security. Premiums
 
or discounts
present at
 
present
at
the date
 
of purchase
 
are not amortized.
 
Premium lost
 
and discount
 
accretion
 
resulting
 
from monthly
 
principal
 
repayments
 
are
reflected
 
in
unrealized
 
gains (losses)
 
on RMBS
 
in the statements
 
of operations.
 
For IO securities,
 
the income
 
is accrued
 
based on
 
the
carrying value
 
value
and the effective
 
yield. The
 
difference
 
between income
 
accrued and
 
and the interest
 
received on
 
the security
 
is characterized
 
as
8
a return
 
of
investment
 
and serves
 
to reduce
 
the asset’s
 
carrying value.
 
value. At each
 
each reporting
 
date, the
 
effective yield
 
is adjusted
 
prospectively
for future
reporting
 
periods
 
based on
 
the new estimate
 
of prepayments
 
and the contractual
 
terms of
 
the security. For
 
IIO securities,
effective yield
 
effective
yield
and income
 
recognition
 
calculations
 
also take
 
into account
 
the index
 
value applicable
 
to the security.
 
Changes in
 
fair value
of RMBS during
during each
reporting
 
period are
 
recorded
 
in earnings
 
and reported
 
as unrealized
 
gains or
 
losses on
 
mortgage-backed
 
securities
in the
accompanying
 
statements
 
of operations.
Derivative and Other Hedging Instruments
 
The Company
 
uses derivative
 
and other
 
hedging instruments
 
to manage
 
interest
 
rate risk,
 
facilitate
 
asset/liability
 
strategies
 
and
manage other
 
exposures,
 
and it may
 
continue to
 
do so in the
 
future. The
 
The principal
 
instruments
 
that the
 
Company has
 
used to date
 
are
Treasury Note
 
(“T-Note”),
 
federal funds
(“Fed FundsFunds”)
 
and Eurodollar
 
futures contracts,
 
short positions
 
in U.S.
 
Treasury securities,
 
interest
rate swaps,
 
rate swaps,
options to
 
enter in
 
interest
 
rate swaps
 
(“interest
 
rate swaptions”)
 
and “to-be-announced”
 
(“TBA”)
securities
 
transactions,
 
but the Company
Company may enter
 
enter into other
 
other derivative
 
and other
 
hedging instruments
 
in the future.
 
The Company
 
accounts for
 
TBA securities
 
as derivative
 
instruments.
 
Gains and
 
losses associated
 
with TBA
 
securities
 
transactions
are reported
 
in gain (loss)
 
on derivative
 
instruments
 
in the accompanying
 
statements
 
of operations.
Derivative
 
and other
 
hedging instruments
 
are carried
 
at fair value,
 
and changes
 
in fair value
 
are recorded
 
in earnings
 
for each
 
period.
The Company’s
 
derivative
 
financial
 
instruments
 
are not designated
 
as hedge
 
accounting
 
relationships,
 
but rather
 
are used
 
as economic
hedges of
 
its portfolio
 
assets and
 
liabilities.
Gains and
losses on
derivatives,
except those
that result
in cash receipts
or payments,
are
included in
operating
activities
on the statement
of cash flows.
Cash payments
and cash receipts
from settlements
of derivatives,
including
current period
net cash settlements
on interest
rates swaps,
are classified
as an investing
activity
on the statements
of cash flows.
Holding derivatives
 
creates exposure
 
to credit
 
risk related
 
to the potential
 
for failure
 
on the part
 
of counterparties
 
and exchanges
 
to
honor their
 
commitments.
 
In the event
 
of default
 
by a counterparty,
 
the Company
 
may have
 
difficulty recovering
 
its collateral
 
and may not
receive payments
 
payments provided
 
for under
 
the terms
 
of the agreement.
 
The Company’s
 
derivative
 
agreements
 
require it
 
to post or
 
receive
collateral
 
to mitigate
 
such risk.
 
In addition,
 
the Company
 
uses only
 
registered
 
central clearing
 
exchanges
 
and well-established
 
commercial
banks as counterparties,
 
monitors
 
positions
 
with individual
 
counterparties
 
and adjusts
 
posted collateral
 
as required.
Financial
 
Instruments
The fair
 
value of financial
 
instruments
 
for which
 
it is practicable
 
to estimate
 
that value
 
is disclosed
 
either in
 
the body
 
of the financial
statements
 
or in the
 
accompanying
 
notes. RMBS,
 
Eurodollar,
 
Fed Funds
 
and T-Note futures
 
contracts,
 
interest
 
rate swaps,
 
interest
 
rate
swaptions
 
and TBA
 
securities
 
are accounted
 
for at fair
 
value in the
 
balance sheets.
 
The methods
 
and assumptions
 
used to
 
estimate fair
value for
 
these instruments
 
are presented
 
in Note 12
 
of the financial
 
statements.
The estimated
 
fair value
 
of cash and
 
cash equivalents,
 
restricted
 
cash, accrued
 
interest
 
receivable,
 
receivable
 
for securities
 
sold,
other assets,
 
due to affiliates,
 
repurchase
 
agreements,
 
payable for
 
unsettled
 
securities
 
purchased,
 
accrued interest
 
payable and
 
other
liabilities
 
generally
 
approximates
 
their carrying
 
values as
 
of September
 
30, 20212022
 
and December
 
31, 20202021 due
 
due to the
short-term
 
nature of
these financial
 
instruments.
 
9
Repurchase
 
Agreements
The Company
 
finances the
 
acquisition
 
of the majority
 
of its RMBS
 
through the
 
use of repurchase
 
agreements
 
under master
repurchase
 
agreements.
 
Repurchase
 
agreements
 
are accounted
 
for as collateralized
 
financing
 
transactions,
 
which are
 
carried at
 
their
contractual
 
amounts,
 
including
 
accrued interest,
 
as specified
 
in the respective
 
agreements.
Reverse
Repurchase
Agreements
and Obligations
to Return
Securities
Borrowed
under Reverse
Repurchase
Agreements
9
The Company
borrows
securities
to cover
short sales
of U.S.
Treasury securities
through reverse
repurchase
transactions
under our
master repurchase
agreements.
We account
for these
as securities
borrowing
transactions
and recognize
an obligation
to return
the
borrowed
securities
at fair value
on the balance
sheet based
on the value
of the underlying
borrowed
securities
as of the
reporting
date.
The securities
received as
collateral
in connection
with our
reverse repurchase
agreements
mitigate
our credit
risk exposure
to
counterparties.
Our reverse
repurchase
agreements
typically
have maturities
of 30 days
or less.
Manager Compensation
The Company
 
is externally
 
managed
 
by Bimini
 
Advisors,
 
LLC (the
 
“Manager”
 
or “Bimini
 
Advisors”),
 
a Maryland
 
limited liability
company and
 
wholly-owned
 
subsidiary
 
of Bimini.
 
The Company’s
 
management
 
agreement
 
with the
 
Manager provides
 
for payment
 
to the
Manager of
 
a management
 
fee and reimbursement
 
of certain
 
operating
 
expenses,
 
which are
 
accrued and
 
expensed during
 
the period
 
for
which they
 
are earned
 
or incurred.
 
Refer to
 
Note 13 for
 
the terms
 
of the management
 
agreement.
Earnings
 
Per Share
Basic earnings
 
per share
 
(“EPS”)
 
is calculated
 
as net income
 
or loss attributable
 
to common
 
stockholders
 
divided by
 
the weighted
average number
 
of shares
 
of common
 
stock outstanding
 
or subscribed
during the
 
period. Diluted
 
EPS is calculated
 
using the
 
treasury
stock or two-class
 
two-class
method, as
 
applicable,
 
for common
 
stock equivalents,
 
if any. However, the
 
common stock
 
equivalents
 
are not included
 
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, deferred
stock units
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”) under the
the Internal Revenue Code of 1986,
as amended (the “Code”).
 
REITs are generally not subject to federal income tax on their REIT taxable
income provided that they
distribute to their stockholders at least 90%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
provisions requirements of the Code to retain its tax status.
Orchid assesses the likelihood, based on their technical merit, that uncertain tax positions
 
positions will be sustained upon examination
based on the facts, circumstances and information available at the end of each period.
 
All of Orchid’s tax positions are categorized as
highly certain.
 
There is no accrual for any tax, interest or penalties related to Orchid’s tax position
 
assessment.
 
The measurement of
uncertain tax positions is adjusted when new information is available,
 
or when an event occurs that requires a change.
10
Recent Accounting
 
Pronouncements
In March 2020, the FASB issued ASU 2020-04 “
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate
Reform on Financial Reporting.
”
 
ASU 2020-04 provides optional expedients and exceptions to GAAP requirements
 
for modifications
on debt instruments, leases,
derivatives, and other contracts, related to the expected
market transition from the
London Interbank
Offered Rate (“LIBOR”), and certain other floating rate benchmark indices, or collectively, IBORs, to alternative reference rates. ASU
2020-04 generally considers contract modifications related to reference rate reform to
 
be an event that does not require contract
remeasurement at the modification date nor a reassessment of a previous accounting
 
determination. The guidance in ASU 2020-04 is
optional and may be elected over time, through December 31, 2022, as reference
 
rate reform activities occur. The Company does not
believe the adoption of this ASU will have a material impact on its consolidated financial
statements.
In January 2021, the FASB issued ASU 2021-01 “Reference“
Reference Rate Reform (Topic 848)848
).” ASU 2021-01 expands the scope of ASC
848 to include all affected derivatives and give market participants the ability to apply certain
 
certain aspects of the contract modification and
hedge accounting expedients to derivative contracts affected by the discounting transition. In addition,
 
addition, ASU 2021-01 adds
implementation guidance to permit a company to apply certain optional expedients
 
to modifications of interest rate indexes used for
margining, discounting or contract price alignment of certain derivatives as a result
 
of reference rate reform initiatives and extends
optional expedients to account for a derivative contract modified as a continuation
of the existing contract and to continue hedge
accounting when certain critical terms of a hedging relationship change to
modifications made as part of the discounting transition. The
guidance in ASU 2021-01 is effective
immediately and available generally through December 31, 2022, as reference
rate reform
activities occur. The Company does not believe the adoption of this ASU will have a material impact on its financial statements.
NOTE 2.
MORTGAGE-BACKED SECURITIES AND U.S. TREASURY NOTES
The following
table presents
the Company’s
RMBS portfolio
as of September
30, 2022
and December
31, 2021:
(in thousands)
September 30, 2022
December 31, 2021
Pass-Through RMBS Certificates:
Fixed-rate Mortgages
$
3,150,403
$
6,298,189
Total Pass-Through
Certificates
3,150,403
6,298,189
Structured RMBS Certificates:
Interest-Only Securities
50,274
210,382
Inverse Interest-Only Securities
537
2,524
Total Structured
RMBS Certificates
50,811
212,906
Total
$
3,201,214
$
6,511,095
As of September
30, 2022
and December
31, 2021,
the Company
held U.S.
Treasury Notes
with a fair
value of approximately
$
36.1
million and
$
37.2
million,
respectively, primarily
to satisfy
collateral
requirements
of one of
its derivative
counterparties.
The following
table is a
summary of
the Company’s
net gain
(loss) from
the sale of
RMBS for
the nine
months ended
September
30,
2022 and
2021.
Nine Months Ended September 30,
2022
2021
Proceeds from sales of RMBS
$
2,731,497
$
2,598,893
Carrying value of RMBS sold
(2,864,169)
(2,601,961)
Net (loss) gain on sales of RMBS
$
(132,672)
$
(3,068)
Gross gain on sales of RMBS
$
2,705
$
7,866
Gross loss on sales of RMBS
(135,377)
(10,934)
Net (loss) gain on sales of RMBS
$
(132,672)
$
(3,068)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10
optional expedients to account for a derivative contract modified as a continuation
of the existing contract and to continue hedge
accounting when certain critical terms of a hedging relationship change to modifications
made as part of the discounting transition. The
guidance in ASU 2021-01 is effective immediately and available generally through December
31, 2022, as reference rate reform
activities occur. The Company does not believe the adoption of this ASU will have a material impact on its financial statements.
NOTE 2.
MORTGAGE-BACKED SECURITIES
The following
table presents
the Company’s
RMBS portfolio
as of September
30, 2021
and December
31, 2020:
(in thousands)
September 30, 2021
December 31, 2020
Pass-Through RMBS Certificates:
Fixed-rate Mortgages
$
5,458,562
$
3,560,746
Fixed-rate CMOs
0
137,453
Total Pass-Through
Certificates
5,458,562
3,698,199
Structured RMBS Certificates:
Interest-Only Securities
140,078
28,696
Inverse Interest-Only Securities
2,783
0
Total Structured
RMBS Certificates
142,861
28,696
Total
$
5,601,423
$
3,726,895
11
NOTE 3.
 
REPURCHASE AGREEMENTS
The Company
 
pledges certain
 
of its RMBS
 
as collateral
 
under repurchase
 
agreements
 
with financial
 
institutions.
 
Interest
 
rates are
generally
 
fixed based
 
on prevailing
 
rates corresponding
 
to the terms
 
of the borrowings,
 
and interest
 
is generally
 
paid at the
 
termination
 
of a
borrowing.
 
If the fair
 
value of the
 
pledged securities
 
declines,
 
lenders
 
will typically
 
require the
 
Company to
 
post additional
 
collateral
 
or pay
down borrowings
 
to re-establish
 
agreed upon
 
collateral
 
requirements,
 
referred
 
to as "margin
 
calls." Similarly,
 
if the fair
 
value of
 
the pledged
securities
 
increases,
 
lenders
 
may release
 
collateral
 
back to the
 
Company. As of
 
September
 
30, 2021,2022,
 
the Company
 
had met all
 
margin call
requirements.
As of September
 
30, 20212022
 
and December
 
31, 2020,2021,
 
the Company’s
 
repurchase
 
agreements
 
had remaining
 
maturities
 
as summarized
below:
($ in thousands)
OVERNIGHT
BETWEEN 2
BETWEEN 31
GREATER
 
(1 DAY OR
AND
AND
THAN
LESS)
30 DAYS
90 DAYS
90 DAYS
TOTAL
(1)
September 30, 2022
Fair market value of securities pledged, including
accrued interest receivable
$
-
$
1,731,976
$
1,413,061
$
61,316
$
3,206,353
Repurchase agreement liabilities associated with
these securities
$
-
$
1,707,215
$
1,372,870
$
53,776
$
3,133,861
Net weighted average borrowing rate
-
2.96%
3.07%
2.84%
3.00%
December 31, 2021
Fair market value of securities pledged, including
accrued interest receivable
$
3,501-
$
3,393,7624,624,396
$
1,979,0111,848,080
$
54,04552,699
$
5,430,3196,525,175
Repurchase agreement liabilities associated with
these securities
$
2,500-
$
3,250,1334,403,182
$
1,909,6391,789,327
$
51,597
$
5,213,8696,244,106
Net weighted average borrowing rate
0.63%
0.13%
0.12%-
0.15%
0.13%
December 31, 20200.15%
Fair market value of securities pledged, including
accrued interest receivable
$
0
$
2,112,969
$
1,560,798
$
55,776
$
3,729,543
Repurchase agreement liabilities associated with
these securities
$
0
$
2,047,897
$
1,494,500
$
53,189
$
3,595,586
Net weighted average borrowing rate
0
0.23%
0.22%
0.30%
0.23%0.15%
1)
Includes repurchase agreements with outstanding principal balances of approximately
$
103.7
million as of September 30, 2022, with interest
rates indexed to Secured Overnight Financing Rate (“SOFR”) that reprice daily.
In addition, cash pledged to counterparties for repurchase agreements was approximately
 
$
47.549.4
 
million and $
58.857.3
 
million as of
September 30, 20212022 and December 31, 2020,2021, respectively.
If, during
the term
of a repurchase
agreement,
a lender
files for
bankruptcy, the
Company might
experience
difficulty recovering
its
pledged assets,
which could
result in
an unsecured
claim against
the lender
for the difference
between the
amount loaned
to the Company
plus interest
due to the
counterparty
and the fair
value of the
collateral
pledged to
such lender,
including the accrued interest receivable
and cash posted by the Company as collateral. At September
30, 2022,
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
$
117.4
million.
The Company
did not
have an amount
at risk with
any individual
counterparty
that was
greater than
10% of the
Company’s equity
at September
30, 2022
and December
31, 2021.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
11
12
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, 2021,
the Company
had an aggregate
amount at
risk (the
difference
between the
amount loaned
to the Company,
including
interest
payable and
securities
posted by
the counterparty
(if any),
and the fair
value of securities
and cash
pledged
(if any),
including
accrued
interest
on such securities)
with all
counterparties
of approximately
$
263.2
million.
The Company
did not
have an amount
at risk with
any individual
counterparty
that was
greater than
10% of the
Company’s equity
at September
30, 2021
and December
31, 2020.
NOTE 4. DERIVATIVE AND 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, 20212022
 
and December
 
31, 2020.2021.
(in thousands)
Derivative and Other Hedging Instruments
Balance Sheet Location
September 30, 20212022
December 31, 20202021
Assets
Interest rate swaps
Derivative assets, at fair value
$
16,972169,630
$
729,293
Payer swaptions (long positions)
Derivative assets, at fair value
28,05191,195
17,43321,493
Interest rate floorscaps
Derivative assets, at fair value
2,3601,188
0-
TBA securities
Derivative assets, at fair value
0305
3,559-
Total derivative
 
assets, at fair value
$
47,383262,318
$
20,99950,786
Liabilities
Interest rate swaps
Derivative liabilities, at fair value
$
2,225-
$
24,7112,862
Payer swaptions (short positions)
Derivative liabilities, at fair value
8,06352,315
7,7304,423
TBA securities
Derivative liabilities, at fair value
0698
786304
Total derivative
 
liabilities, at fair value
$
10,28853,013
$
33,2277,589
Margin Balances Posted to (from) Counterparties
Futures contracts
Restricted cash
$
2,47516,056
$
4898,035
TBA securities
Restricted cash
01,336
284-
TBA securities
Other liabilities
0(11,422)
(2,520)
Interest rate swaption contracts
Restricted cash
1,099
0(856)
Interest rate swaption contracts
Other liabilities
(13,765)(27,149)
(3,563)
Interest rate swap contracts
Restricted cash
0
19,761
Interest rate swap contracts
U.S. Treasury Notes
29,927
0(6,350)
Total margin
 
balances on derivative contracts
$
19,736(21,179)
$
14,451829
Eurodollar, Fed
 
Funds and
 
T-Note futures
 
are cash
 
settled futures
 
contracts
 
on an interest
 
rate, with
 
gains and
 
losses credited
 
or
charged to
 
the Company’s
 
cash accounts
 
on a daily
 
basis. A
 
minimum balance,
 
or “margin”,
 
is required
 
to be maintained
 
in the account
 
on
a daily basis.
The tables
 
below present
 
information
 
related to
 
the Company’s
 
Eurodollar
and T-Note futures
 
positions
 
at September
 
30,
2021 and 2022
 
and
December
 
31, 2020.2021.
 
($ in thousands)
September 30, 20212022
Average
Weighted
Weighted
Contract
Average
Average
Notional
Entry
Effective
Open
Expiration Year
Amount
Rate
Rate
Equity
(1)
EurodollarTreasury Note Futures Contracts (Short
Positions)
(2)
December 2022 5-year T-Note futures
(Dec 2022 - Dec 2027 Hedge Period)
$
750,500
3.54%
4.32%
$
29,141
December 2022 10-year Ultra futures
(Dec 2022 - Dec 2032 Hedge Period)
$
174,500
3.03%
3.77%
$
13,141
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12
2021
$
50,000
1.01%
0.17%
$
(104)
Treasury Note Futures Contracts (Short
Positions)
(2)
December 2021 5-year T-Note futures
(Dec 2021 - Dec 2026 Hedge Period)
$
269,000
1.14%
1.29%
$
1,631
December 2021 10-year Ultra futures
(Dec 2021 - Dec 2031 Hedge Period)
$
23,500
0.97%
1.19%
$
518
13
($ in thousands)
December 31, 20202021
Average
Weighted
Weighted
Contract
Average
Average
Notional
Entry
Effective
Open
Expiration Year
Amount
Rate
Rate
Equity
(1)
Eurodollar Futures Contracts (Short Positions)
2021
$
50,000
1.03%
0.18%
$
(424)
Treasury Note Futures Contracts (Short
 
Position)
(2)
March 2021 5 year2022 5-year T-Note futures
(Mar 20212022 - Mar 20262027 Hedge Period)
$
69,000369,000
0.72%1.56%
0.67%1.62%
$
(186)1,013
March 2022 10-year Ultra futures
(Mar 2022 - Mar 2032 Hedge Period)
$
220,000
1.22%
1.09%
$
(3,861)
(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 $
122.74107.51
 
at September 30, 20212022 and $
126.16120.98
 
at December 31, 2020.2021.
 
The contract
values of the short positions were $
330.2806.8
 
million and $
87.1446.4
 
million at September 30, 20212022 and December 31, 2020,2021, respectively.
 
10-Year Ultra
futures contracts were valued at a price of $
145.25118.48
 
at September 30, 2022 and $
146.44
at December 31, 2021. The contract value of the short
position was $
34.1206.8
million and $
322.2
 
million at
September 30, 2021.2022 and December 31, 2021, respectively
Under ourits
 
interest
 
rate swap
 
agreements,
 
we the Company
typically
 
pay pays
a fixed rate
and receive
a floating
 
rate andbased
 
receive aon an index
("payer swaps").
 
floating rate
based on
LIBOR ("payer
swaps").
The floating
 
rate wethe
 
receive underCompany receives
 
our swapunder its
 
swap agreements
 
has the effect
 
of offsetting
 
the repricing
characteristics
 
of our repurchase
agreements
 
and cash flows
 
on such liabilities.
 
We areThe Company
is typically
 
required
 
to post collateral
 
on our its
interest rate
 
rate swap
agreements.
 
The table
below presents
 
information
 
related to
 
the Company’s
 
interest
 
rate swap
 
positions
 
at September
30, 2022
 
30, 2021 and
December
 
31, 2020.2021.
($ in thousands)
Average
Net
Fixed
Average
Estimated
Average
Notional
Pay
Receive
Fair
Maturity
Amount
Rate
Rate
Value
(Years)
September 30, 2022
Expiration > 3 to ≤ 5 years
$
500,000
0.84%
3.46%
$
60,776
4.0
Expiration > 5 years
900,000
1.70%
2.56%
108,854
6.8
$
1,400,000
1.39%
2.88%
$
169,630
5.8
December 31, 2021
Expiration > 3 to ≤ 5 years
$
955,000
0.64%
0.13%0.16%
$
11,56621,788
4.34.0
Expiration > 5 years
400,000
1.16%
0.12%0.21%
3,1814,643
7.57.3
$
1,355,000
0.79%
0.13%0.18%
$
14,74726,431
5.2
December 31, 2020
Expiration > 3 to ≤ 5 years
$
620,000
1.29%
0.22%
$
(23,760)
3.6
Expiration > 5 years
200,000
0.67%
0.23%
(944)
6.4
$
820,000
1.14%
0.23%
$
(24,704)
4.35.0
The table
 
below presents
 
information
 
related to
 
the Company’s
 
interest
 
rate floor
cap positions
 
at September
 
30, 2021.2022.
($ in thousands)
Net
Strike
Estimated
Notional
Swap
Curve
Fair
Expiration
Amount
Cost
Rate
Spread
Value
February 3, 20238, 2024
$
70,000200,000
$
5111,450
0.76%0.09%
30Y5Y2Y10Y
$
1,257
February 3, 2023
80,000
504
1.10%
10Y2Y
1,1031,188
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
13
$
150,000
$
1,015
0.94%
2,360
14
The table
 
below presents
 
information
 
related to
 
the Company’s
 
interest
 
rate swaption
 
positions
 
at September
 
30, 20212022
 
and
 
December
31, 2020.2021.
($ in thousands)
Option
Underlying Swap
Weighted
Average
Weighted
Average
Average
Adjustable
Average
Fair
Months to
Notional
Fixed
Rate
Term
Expiration
Cost
Value
Expiration
Amount
Rate
(LIBOR)
(Years)
September 30, 2022
Payer Swaptions - long
≤ 1 year
$
35,230
$
83,470
10.6
$
1,303,600
2.95%
3 Month
10.0
>10 years
7,267
7,725
238.9
80,000
2.07%
3 Month
10.0
$
42,497
$
91,195
23.8
$
1,383,600
2.90%
3 Month
10.0
Payer Swaptions - short
≤ 1 year
$
(17,500)
$
52,315
4.7
$
(958,300)
2.95%
3 Month
10.0
December 31, 2021
Payer Swaptions - long
≤ 1 year
$
4,000
$
1,4211,575
6.23.2
$
400,000
1.66%
3 Month
5.0
>1 year ≤ 2 years
25,39032,690
26,63019,918
16.118.4
1,027,2001,258,500
2.20%2.46%
3 Month
15.014.1
$
29,39036,690
$
28,05121,493
13.314.7
$
1,427,2001,658,500
2.05%2.27%
3 Month
12.211.9
Payer Swaptions - short
≤ 1 year
$
(13,400)(16,185)
$
(8,063)(4,423)
4.85.3
$
(1,182,850)(1,331,500)
2.10%2.29%
3 Month
11.6
December 31, 2020
Payer Swaptions - long
≤ 1 year
$
3,450
$
5
2.5
$
500,000
0.95%
3 Month
4.0
>1 year ≤ 2 years
13,410
17,428
17.4
675,000
1.49%
3 Month
12.8
$
16,860
$
17,433
11.0
$
1,175,000
1.26%
3 Month
9.0
Payer Swaptions - short
≤ 1 year
$
(4,660)
$
(7,730)
5.4
$
(507,700)
1.49%
3 Month
12.811.4
The
 
following
 
table
 
summarizes
 
ourthe
Company’s
 
contracts
 
to
 
purchase
 
and
 
sell
 
TBA
 
securities
 
as
 
of
 
DecemberSeptember
 
31,30,
 
2020
.2022
 
There
were
noand
outstanding TBA contracts as of September 30,December 31, 2021.
($ in thousands)
Notional
Net
Amount
Cost
Market
Carrying
Long (Short)
(1)
Basis
(2)
Value
(3)
Value
(4)
December 31, 2020September 30, 2022
30-Year TBA securities:
2.0%
$
465,000(175,000)
$
479,531(141,329)
$
483,090(141,723)
$
3,559(394)
3.0%
(328,000)(300,000)
(342,896)(261,047)
(343,682)(261,047)
(786)-
Total
$
137,000(475,000)
$
136,635(402,376)
$
139,408(402,770)
$
2,773(394)
December 31, 2021
30-Year TBA securities:
3.0%
$
(575,000)
$
(595,630)
$
(595,934)
$
(304)
Total
$
(575,000)
$
(595,630)
$
(595,934)
$
(304)
(1)
Notional amount represents the par value (or principal balance) of the underlying
 
Agency RMBS.
(2)
Cost basis represents the forward price to be paid (received) for the underlying
 
Agency RMBS.
(3)
Market value represents the current market value of the TBA securities
 
(or of the underlying Agency RMBS) as of period-end.
(4)
Net carrying value represents the difference between the market value
 
value and the cost basis of the TBA securities as of period-end and
is reported
in derivative assets (liabilities) at fair value in ourthe balance sheets.
15
Gain (Loss) From Derivative and Other Hedging Instruments, Net
The table below presents the effect of the Company’s derivative and other hedging instruments on the statements of
operations for
the nine and three months ended September 30, 20212022 and 2020.
2021.
(in thousands)
Nine Months Ended September 30,
Three Months Ended September 30,
2021
20202022
2021
20202022
2021
T-Note futures contracts (short position)
$
207,681
$
866
$
84,713
$
581
Eurodollar futures contracts (short positions)
$-
(14)
$-
(8,324)(7)
Interest rate swaps
172,069
12,446
65,966
3,000
Payer swaptions (short positions)
(80,183)
3,507
(35,239)
2,295
Payer swaptions (long positions)
150,445
5,477
59,131
1,767
Interest rate caps
988
-
(499)
-
Interest rate floors
-
1,345
-
45
TBA securities (short positions)
14,194
864
10,642
(2,306)
TBA securities (long positions)
1,200
(8,559)
106
-
Total
$
(7)466,394
$
(6)15,932
$
184,820
$
5,375
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. The
Company
attempts to minimize
this risk by
limiting its 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, the Company
may be
required to
pledge assets
as collateral
for its
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, the
Company may
not receive payments
provided
for
under
the
terms
of
its
derivative
agreements,
and
may
have
difficulty
obtaining
its
assets
pledged
as
collateral
for
its
derivatives. The cash and cash equivalents pledged as collateral for the Company derivative instruments
are included in restricted cash
on its balance sheets.
It is the Company's policy not
to offset assets and liabilities associated
with open derivative contracts. However, Chicago
Mercantile
Exchange
(“CME”)
and
Intercontinental
Exchange
(“ICE”)
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 ICE serves as the central clearing party are presented as if these derivatives
had been settled as of the reporting date.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
14
T-Note futures contracts (short position)
866
(4,837)
581
(113)
Interest rate swaps
12,446
(67,713)
3,000
489
Payer swaptions (short positions)
3,507
(1,561)
2,295
(672)
Payer swaptions (long positions)
5,477
(3,287)
1,767
914
Interest rate floors
1,345
0
45
0
TBA securities (short positions)
864
(6,282)
(2,306)
95
TBA securities (long positions)
(8,559)
4,469
0
3,336
U.S. Treasury securities (short positions)
0
(95)
0
36
Total
$
15,932
$
(87,630)
$
5,375
$
4,079
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. We minimize this risk by limiting our counterparties for instruments which are not centrally cleared on a registered
exchange to major financial institutions with acceptable credit ratings and monitoring positions with individual counterparties.
In addition, we may be required to pledge assets as collateral for our derivatives, whose amounts vary over time based on
the market value, notional amount and remaining term of the derivative contract. In the event of a default by a counterparty,
we may not receive payments provided for under the terms of our derivative agreements, and may have difficulty obtaining
our assets pledged as collateral for our derivatives. The cash and cash equivalents pledged as collateral for our derivative
instruments are included in restricted cash on our balance sheets.
It is the Company's policy not to offset assets and
liabilities associated with open derivative contracts. However, the Chicago Mercantile Exchange (“CME”) rules characterize
variation margin transfers as settlement payments, as opposed to adjustments to collateral. As a result, derivative assets
and liabilities associated with centrally cleared derivatives for which the CME serves as the central clearing party are
presented as if these derivatives had been settled as of the reporting date.
16
NOTE 5. PLEDGED ASSETS
Assets Pledged
 
to Counterparties
The table
 
below summarizes
 
our assetsthe Company’s
 
assets pledged as
 
as collateral
 
under our
repurchase
 
agreements
 
and derivative
 
agreements
by type,
including
 
securities
 
pledged related
 
related to
securities
 
sold but not
 
not yet settled,
 
as of September
 
30, 20212022
 
and December
 
31, 2020.2021.
(in thousands)
September 30, 20212022
December 31, 20202021
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Counterparties
Agreements
Agreements
Total
Agreements
Agreements
Total
PT RMBS - fair value
$
5,273,1993,145,035
$
0-
$
5,273,1993,145,035
$
3,692,8116,294,102
$
0-
$
3,692,8116,294,102
Structured RMBS - fair value
141,99950,811
0-
141,99950,811
27,095212,270
0-
27,095212,270
U.S. Treasury Notes
0-
29,92736,118
29,92736,118
0-
029,740
029,740
Accrued interest on pledged securities
15,12110,507
34
15,12410,511
9,63618,804
013
9,63618,817
Restricted cash
47,53749,377
3,57417,392
51,11166,769
58,82957,264
20,5348,035
79,36365,299
Total
$
5,477,8563,255,730
$
33,50453,514
$
5,511,3603,309,244
$
3,788,3716,582,440
$
20,53437,788
$
3,808,9056,620,228
Assets Pledged
 
from Counterparties
The table
 
below summarizes
 
assets pledged
 
to us fromthe Company
 
from counterparties
 
under our
repurchase
 
agreements
 
reverse repurchase
agreements
and derivative
agreements
 
as of September
 
30, 20212022
 
and December
 
31, 2020.2021.
(in thousands)
September 30, 20212022
December 31, 20202021
15
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Orchid
Agreements
Agreements
Total
Agreements
Agreements
Total
Cash
$
4,998-
$
13,76538,571
$
18,76338,571
$
1204,339
$
6,0837,206
$
6,203
U.S. Treasury securities - fair value
0
0
0
253
0
25311,545
Total
$
4,998-
$
13,76538,571
$
18,76338,571
$
$
3734,339
$
6,0837,206
$
6,45611,545
RMBS and
U.S. Treasury
securities
received as
margin under
our repurchase
agreements
are not recorded
in the balance
sheets
because the
counterparty
retains ownership
of the security.
U.S. Treasury
securities
received
from counterparties
as collateral
under our
reverse repurchase
agreements
are recognized
as obligations
to return
securities
borrowed
under reverse
repurchase
agreements
in the
balance sheet.
Cash received
 
as margin
 
is recognized
 
as cash and
 
and cash equivalents
 
with a corresponding
 
amount recognized
 
as an
increase in
 
in
repurchase
 
agreements
 
or other
 
liabilities
 
in the balance
 
sheets.
NOTE 6. OFFSETTING ASSETS AND LIABILITIES
The Company’s
 
derivative
 
agreements
 
and repurchase
 
agreements
 
and reverse
 
repurchase
 
agreements
 
are subject
 
to underlying
agreements
 
with master
 
netting or
 
similar arrangements,
 
which provide
 
for the right
 
of offset in
 
the event
 
of default
 
or in the
 
event of
bankruptcy
 
of either
 
party to
 
the transactions.
 
The Company
 
reports its
 
assets and
 
liabilities
 
subject to
 
these arrangements
 
on a gross
basis.
 
The following
table presents
information
regarding
those assets
and liabilities
subject to
such arrangements
as if the
Company had
presented
them on a
net basis
as of September
30, 2021
and December
31, 2020.
(in thousands)
Offsetting of Assets
Gross Amount Not
Net Amount
Offset in the Balance Sheet
of Assets
Financial
Gross Amount
Gross Amount
Presented
Instruments
Cash
of Recognized
Offset in the
in the
Received as
Received as
Net
Assets
Balance Sheet
Balance Sheet
Collateral
Collateral
Amount
September 30, 2021
Interest rate swaps
$
16,972
$
0
$
16,972
$
0
$
0
$
16,972
Interest rate swaptions
28,051
0
28,051
0
(13,765)
14,286
Interest rate floors
2,360
0
2,360
0
0
2,360
$
47,383
$
0
$
47,383
$
0
$
(13,765)
$
33,618
December 31, 2020
Interest rate swaps
$
7
$
0
$
7
$
0
$
0
$
7
Interest rate swaptions
17,433
0
17,433
0
(3,563)
13,870
TBA securities
3,559
0
3,559
0
(2,520)
1,039
$
20,999
$
0
$
20,999
$
0
$
(6,083)
$
14,916
(in thousands)
Offsetting of Liabilities
Gross Amount Not
Net Amount
Offset in the Balance Sheet
of Liabilities
Financial
Gross Amount
Gross Amount
Presented
Instruments
of Recognized
Offset in the
in the
Posted as
Cash Posted
Net
Liabilities
Balance Sheet
Balance Sheet
Collateral
as Collateral
Amount
September 30, 2021
Repurchase Agreements
$
5,213,869
$
0
$
5,213,869
$
(5,166,332)
$
(47,537)
$
0
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
16
17
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, 2022
and December
31, 2021.
(in thousands)
Offsetting of Assets
Gross Amount Not
Net Amount
Offset in the Balance Sheet
of Assets
Financial
Gross Amount
Gross Amount
Presented
Instruments
Cash
of Recognized
Offset in the
in the
Received as
Received as
Net
Assets
Balance Sheet
Balance Sheet
Collateral
Collateral
Amount
September 30, 2022
Interest rate swaps
2,225$
0169,630
2,225$
(2,225)-
0$
0169,630
$
-
$
-
$
169,630
Interest rate swaptions
8,06391,195
0-
8,06391,195
0-
(1,099)(27,149)
6,96464,046
Interest rate caps
1,188
-
1,188
-
-
1,188
TBA securities
305
-
305
-
(305)
-
$
5,224,157262,318
$
0-
$
5,224,157262,318
$
(5,168,557)-
$
(48,636)(27,454)
$
6,964234,864
December 31, 20202021
Interest rate swaps
$
29,293
$
-
$
29,293
$
-
$
-
$
29,293
Interest rate swaptions
21,493
-
21,493
-
(6,350)
15,143
$
50,786
$
-
$
50,786
$
-
$
(6,350)
$
44,436
(in thousands)
Offsetting of Liabilities
Gross Amount Not
Net Amount
Offset in the Balance Sheet
of Liabilities
Financial
Gross Amount
Gross Amount
Presented
Instruments
of Recognized
Offset in the
in the
Posted as
Cash Posted
Net
Liabilities
Balance Sheet
Balance Sheet
Collateral
as Collateral
Amount
September 30, 2022
Repurchase Agreements
$
3,595,5863,133,861
$
0-
$
3,595,5863,133,861
$
(3,536,757)(3,084,484)
$
(58,829)(49,377)
$
0-
Interest rate swaptions
52,315
-
52,315
-
-
52,315
TBA securities
698
-
698
-
(698)
-
$
3,186,874
$
-
$
3,186,874
$
(3,084,484)
$
(50,075)
$
52,315
December 31, 2021
Repurchase Agreements
$
6,244,106
$
-
$
6,244,106
$
(6,186,842)
$
(57,264)
$
-
Interest rate swaps
24,7112,862
0-
24,7112,862
0(2,862)
(19,761)-
4,950-
Interest rate swaptions
7,7304,423
0-
7,7304,423
0-
0-
7,7304,423
TBA securities
786304
0-
786304
0-
(284)-
502304
$
3,628,8136,251,695
$
0-
$
3,628,8136,251,695
$
(3,536,757)(6,189,704)
$
(78,874)(57,264)
$
13,1824,727
The amounts
 
disclosed
 
for collateral
 
received by
 
or posted
 
to the same
 
counterparty
 
up to and
 
not exceeding
 
the net amount
 
of the
asset or
 
liability
 
presented
 
in the balance
 
sheets.
 
The fair
 
value of
 
the actual
 
collateral
 
received
 
by or posted
 
to the same
 
counterparty
typically
 
exceeds the
 
amounts
 
presented.
 
See Note
 
5 for a discussion
 
of collateral
 
posted or
 
received
 
against or
 
for repurchase
 
obligations
and derivative
 
and other
 
hedging
 
instruments.
18
NOTE 7.
 
CAPITAL STOCK
Reverse
Stock Split
On August
30, 2022,
the Company
effected a
1-for-5 reverse
stock split
of its common
stock and
proportionately
decreased
the
number of
authorized
shares of
common stock.
All share,
per share,
deferred
stock unit
(“DSU”)
and performance
unit information
has
been retroactively
adjusted to
reflect
the reverse
split.
The shares
of common
stock retain
a par value
of $0.01
per share.
Common Stock
 
Issuances
During theThe Company
 
nine monthsdid not complete
 
any public
offerings of
its common
stock during
the nine
months ended
September
 
30, 20212022.
 
and During
the year
 
ended December
 
31, 2020,2021,
 
the Company
 
completed
 
the following
public offerings
 
of shares
 
of its common
 
stock.
($ in thousands, except per share amounts)
Weighted
Average
Price
Received
Net
Type of Offering
Period
Per Share
(1)
Shares
Proceeds
(2)
2021
At the Market Offering Program
(3)
First Quarter
$
5.1025.50
308,04861,610
$
1,572
Follow-on Offerings
First Quarter
5.3126.55
17,940,0003,588,000
95,336
At the Market Offering ProgramsProgram
(3)
Second Quarter
5.4027.00
23,087,0894,617,418
124,746
At the Market Offering Program
(3)
Third Quarter
4.9424.70
35,818,3387,163,668
177,007
Total
77,153,475
$
398,661
2020
At the Market Offering Program
(3)
First Quarter
$
6.13
3,170,727
$
19,447
At the Market Offering Program
(3)
Second Quarter
0
0
0
At the Market Offering Program
(3)
Third Quarter
5.06
3,073,326
15,566
At the Market Offering Program
(3)
Fourth Quarter
5.3224.35
6,775,1874,734,940
36,037115,398
13,019,24020,165,636
$
71,050514,059
(1)
Weighted average price received per share is after deducting the underwriters’
 
discount, if applicable, and other offering costs.
(2)
Net proceeds are net of the underwriters’ discount, if applicable, and other
 
offering costs.
(3)
The Company has entered into nineten equity distribution agreements,
eight nine of which have
either been terminated because all shares were sold or
were replaced with a subsequent agreement.
Stock Repurchase Program
On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to
2,000,000400,000
 
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
4,522,822904,564
 
shares of the Company's common stock. Coupled with the
783,757156,751
 
shares remaining from the original
2,000,000400,000
share authorization, the increased authorization brought the total authorization
 
to
5,306,5791,061,316
 
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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1719
Company’s then outstanding share count. As part of the stock repurchase program,
shares may be purchased in open market
transactions, block purchases, through
privately negotiated transactions, or pursuant
to any trading plan that may be adopted
in
accordance with Rule 10b5-1 of the Securities
Exchange Act of 1934, as amended
(the (the “Exchange Act”).
 
Open market repurchases
will be made in accordance with Exchange Act
Rule 10b-18, which sets certain restrictions
on the method, timing, price
and volume of
open market stock repurchases. The timing,
manner, price and amount of any repurchases will be determined
by the Company in its
discretion and will be subject
to economic and
market conditions, stock price, applicable
legal requirements and other factors.
 
The
authorization does not obligate the Company to
acquire any particular amount
of common stock and the program may
be suspended or
discontinued at the Company’s discretion
without prior notice. The stock repurchase program has no termination date.
From the inception of the stock repurchase program through September 30, 2021, the2022,
 
the Company repurchased a total of
5,685,5111,487,362
shares at an aggregate cost of approximately $
40.444.8
 
million, including commissions and fees, for a weighted average price
 
of $$30.12
7.10
per
share. No shares were repurchased during the nine months ended September
30, 2021. During the nine months ended September 30, 2022, the Company repurchased
a total of
2020,350,260
shares at an aggregate
cost of approximately $
4.4
million, including commissions and fees, for a weighted average
price of $
12.68
per share. No shares were
repurchased during the year ended December 31, 2021. Subsequent to September
30, 2022, and through October 27, 2022, the
Company repurchased a total of
19,8911,644,044
 
shares at an aggregate cost of approximately $
0.114.2
 
million, including commissions and
and fees, for a weighted average price of $
3.428.64
 
per share. The remaining authorization under the stock repurchase
program as of SeptemberOctober
30, 202127, 2022 was
837,3115,845,557
 
shares.
 
Cash Dividends
The table below presents the cash dividends declared on the Company’s common
 
stock.
(in thousands, except per share amounts)
Year
Per Share
Amount
Total
2013
$
1.3956.975
$
4,662
2014
2.16010.800
22,643
2015
1.9209.600
38,748
2016
1.6808.400
41,388
2017
1.6808.400
70,717
2018
1.0705.350
55,814
2019
0.9604.800
54,421
2020
0.7903.950
53,570
2021
3.900
97,601
2022 - YTD
(1)
0.6502.155
74,04576,024
Totals
$
12.30564.330
$
416,008515,588
(1)
On
October 12, 20212022
, the Company declared a dividend of $
0.0650.16
 
per share to be paid on
November 26, 202128, 2022
.
 
The effect of this dividend is
included in the table above but is not reflected in the Company’s financial
 
statements as of September 30, 2021.
NOTE 8.
STOCK INCENTIVE PLAN
In April 2021, the Company’s Board of Directors adopted, and the stockholders approved, the Orchid Island Capital, Inc.
2021 Equity Incentive Plan (the “2021 Incentive Plan”) to replace the Orchid Island Capital, Inc. 2012 Equity Incentive Plan
(the “2012 Incentive Plan” and together with the 2021 Incentive Plan, the “Incentive Plans”). The 2021 Incentive Plan
provides for the award of stock options, stock appreciation rights, stock award, performance units, other equity-based
awards (and dividend equivalents with respect to awards of performance units and other equity-based awards) and
incentive awards.
The 2021 Incentive Plan is administered by the Compensation Committee of the Company’s Board of
Directors except that the Company’s full Board of Directors will administer awards made to directors who are not employees
of the Company or its affiliates. The 2021 Incentive Plan provides for awards of up to an aggregate of 10% of the issued and
outstanding shares of our common stock (on a fully diluted basis) at the time of the awards, subject to a maximum
aggregate
7,366,623
shares of the Company’s common stock that may be issued under the 2021 Incentive Plan. The 2021
Incentive Plan replaces the 2012 Incentive Plan, and no further grants will be made under the 2012 Incentive Plan.
2022.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1820
However, any outstanding awards under NOTE 8.
STOCK INCENTIVE PLAN
In 2021,
the Company’s
Board of
Directors
adopted,
and the stockholders
approved,
the Orchid
Island Capital,
Inc. 2021
Equity
Incentive
Plan (the
“2021 Incentive
Plan”) to
replace the
Orchid Island
Capital,
Inc. 2012
Equity Incentive
Plan (the
“2012 Incentive Plan will continue in accordance
Plan”
and together
with the terms
2021 Incentive
Plan, the
“Incentive
Plans”).
The 2021
Incentive
Plan provides
for the award
of stock options,
stock
appreciation
rights, stock
award, performance
units, other
equity-based
awards (and
dividend equivalents
with respect
to awards
of
performance
units and
other equity-based
awards) and
incentive
awards.
The 2021
Incentive
Plan is administered
by the Compensation
Committee
of the 2012Company’s
Board of
Directors
except that
the Company’s
full Board
of Directors
will administer
awards made
to directors
who are
not employees
of the Company
or its affiliates.
The 2021
Incentive
Plan provides
for awards
of up to
an aggregate
of
10
% of the
issued and any award agreement executed in connection with such
outstanding awards.
shares of
the Company’s
common stock
(on a fully
diluted basis)
at the time
of the awards,
subject to
a maximum
aggregate
1,473,324
 
shares of
the Company’s
common stock
that may
be issued
under the
2021 Incentive
Plan. The
2021 Incentive
Plan
replaces the
2012 Incentive
Plan, and
no further
grants will
be made under
the 2012
Incentive
Plan.
However, any
outstanding
awards
under the
2012 Incentive
Plan will
continue in
accordance
with the
terms of
the 2012
Incentive
Plan and
any award
agreement
executed in
connection
with such
outstanding
awards.
Performance
Units
The Company
has issued,
and may
in the future
issue additional,
performance
units under
the Incentive
Plans to
certain executive
executive officers and
employees
of its Manager.
 
“Performance
Units” vest
after the
end of a
defined performance
period, based
based on satisfaction
of
the performance
conditions
set forth
in the performance
unit agreement.
When earned,
each Performance
Performance Unit will
be settled
by the
issuance of
one share
of the Company’s
common stock,
at which
time the
Performance
Performance
Unit will
be cancelled.
 
The Performance
Units
contain dividend
equivalent
rights, which
entitle the
Participants
to receive
distributions
declared
by the Company
on common
stock, but
do
not include
the right
to vote the
underlying
shares of
common stock.
 
Performance
Units are
subject to
forfeiture
should the
participant
no
longer serve
as an executive
officer or
employee of
the Company
or the Manager.
 
Compensation
expense for
the Performance
Units,
included in
incentive
compensation
on the statements
of operations,
is recognized
over the
remaining
the remaining
vesting period
once it becomes
probable
that the
performance
conditions
will be achieved.
The following
table presents
information
related to
Performance
Units outstanding
during the
nine months
ended September
30, 2022
September 30, 2021 and 2020.2021.
($ in thousands, except per share data)
Nine Months Ended September 30,
20212022
20202021
Weighted
Weighted
Average
Average
Grant Date
Grant Date
 
Shares
Fair Value
Shares
Fair Value
Unvested, beginning of period
4,55426,645
$
7.4529.40
19,021911
$
7.7837.25
Granted
137,89735,114
5.8816.55
027,579
029.40
Forfeited
0(8,464)
021.40
(1,607)-
7.45-
Vested and issued
(4,554)(7,594)
7.4529.40
(10,583)(911)
8.0337.25
Unvested, end of period
137,89745,701
$
5.8821.01
6,83127,579
$
7.4529.40
Compensation expense during period
$
222331
$
32222
Unrecognized compensation expense, end of period
$
592535
$
8592
Intrinsic value, end of period
$
674375
$
34674
Weighted-average remaining vesting term (in years)
1.4
1.6
0.5
21
The number
of shares
of common
stock issuable
upon the
vesting of
the remaining
outstanding
Performance
Units was
reduced as a
result of
the book
value impairment
event that
occurred
pursuant
to the terms
of the remaining outstanding Performance Units waslong
term equity
incentive
compensation
plans (the
reduced in“Plans”)
established
under the third quarter of 2020 as a result of the book value impairment event that occurred pursuant to the Company's
Company’s 2012
Long Term
Equity Incentive
Plan and
2021 Equity
 
Incentive Compensation Plans (the "Plans")
Plan. The
book value
impairment
event
occurred
when the
Company's
book value
per share
declined
by more than
15% during
the quarter
ended March
31, 2022
and the
Company’s book
value per
share decline
from January
1, 2022 to
June 30,
2022 was
more than
10%. The book value impairment event occurred when the Company's
Plans provide
that if such
a
book value per share declined by more than 15% during the quarter ended March 31, 2020 and the Company's book value
impairment
per share decline from January 1, 2020 to June 30, 2020 was more than 10%. The Plans provide that if such a book value
impairment event occurs,
then the
number of
outstanding
Performance
Units that
are outstanding
as of the
last day of
such two
two-quarterquarter 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
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 nine months
ended September
30, 2022
and 2021.
All of the
fully vested
shares of
common stock
issued during
the nine
months ended
September
30, 2022
and 2021,
and the related
compensation
expense, were
granted with
respect to
service performed
during the
fiscal years
ended December
31, 2021
and 2020,
respectively.
($ in thousands, except per share data)
Nine Months Ended September 30,
2022
2021
Fully vested shares granted
35,114
27,579
Weighted average grant date price per share
$
16.55
$
29.40
Compensation expense related to fully vested common stock issued during the nine months ended September 30, 2021 and 2020. All of the fully vested
shares of common stock issued awards
$
581
$
811
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
can 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 operations.
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
nine months
ended September
30, 2022
and
2021.
($ in thousands, except per share data)
Nine Months Ended September 30,
2022
2021
Weighted
Weighted
Average
Average
Grant Date
Grant Date
Shares
Fair Value
Shares
Fair Value
Outstanding, beginning of period
28,595
$
26.92
18,189
$
27.20
Granted and the related compensationvested
14,227
16.52
7,337
27.30
Outstanding, end of period
42,822
$
23.46
25,526
$
27.20
Compensation expense were granted with respect to service performed during the previous fiscal year.period
$
239
$
180
Intrinsic value, end of period
$
351
$
624
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
19
($ in thousands, except per share data)
Nine Months Ended September 30,
2021
2020
Fully vested shares granted
137,897
0
Weighted average grant date price per share
$
5.88
$
0
Compensation expense related to fully vested shares of common stock awards
(1)
$
811
$
0
(1)
The awards issued during the nine months ended September 30, 2021
were granted with respect to service performed in 2020. Approximately
$600,000 of compensation expense related to the 2021 awards was accrued
and recognized in 2020.
Deferred Stock Units
Non-employee directors receive a portion of their compensation in the form of deferred stock unit awards (“DSUs”)
pursuant to the Incentive Plans.
Each DSU represents a right to receive one share of the Company’s common stock. The
DSUs are immediately vested and are settled at a future date based on the election of the individual participant.
The DSUs
contain dividend equivalent rights, which entitle the participant to receive distributions declared by the Company on common
stock.
These dividend equivalent rights are settled in cash or additional DSUs at the participant’s election. The DSUs do not
include the right to vote the underlying shares of common stock.
The following table presents information related to the DSUs outstanding during the nine months ended September 30,
2021 and 2020.
($ in thousands, except per share data)
Nine Months Ended September 30,
2021
2020
Weighted
Weighted
Average
Average
Grant Date
Grant Date
Shares
Fair Value
Shares
Fair Value
Outstanding, beginning of period
90,946
$
5.44
43,570
$
6.56
Granted and vested
36,684
5.46
36,682
4.22
Issued
0
0
0
0
Outstanding, end of period
127,630
$
5.44
80,252
$
5.49
Compensation expense during period
$
180
$
135
Intrinsic value, end of period
$
624
$
402
22
NOTE 9.
 
COMMITMENTS AND CONTINGENCIES
From time to time, the Company may become involved in various claims and
 
legal actions arising in the ordinary course of
business. Management is not aware of any reported or unreported contingencies
 
at September 30, 2021.2022.
NOTE 10. 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
REIT taxable income to its stockholders and satisfies the ongoing REIT requirements,
 
including meeting certain asset, income and stock
stock ownership tests.
A REIT must generally distribute at least 90% of its REIT taxable income,
 
incomedetermined 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% generallyof 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.
 
EARNINGS PER SHARE (EPS)
20
The Company
 
had dividend
 
eligible
 
Performance
 
Units and
 
Deferred
 
Stock Units
 
that were
 
outstanding
 
during the
 
nine and
 
three
months ended
 
September
 
30, 20212022
 
and 2020.2021.
 
The basic
 
and diluted
 
per share
 
computations
 
include these
 
unvested Performance
 
Units
and Deferred
 
Stock Units
 
if there is
 
income available
 
to common
 
stock, as
 
they have
 
dividend
 
participation
 
rights. The
 
unvested
Performance
 
Units and
 
Deferred
 
Stock Units
 
have no contractual
 
obligation
 
to share
 
in losses.
 
Because there
 
is no such
 
obligation,
 
the
unvested Performance
 
Units and
 
Deferred
 
Stock Units
 
are not included
 
in the basic
 
and diluted
 
EPS computations
 
when no income
 
is
available
 
to common
 
stock even
 
though they
 
are considered
 
participating
 
securities.
The table
 
below reconciles
 
the numerator
 
and denominator
 
of EPS for
 
the nine
 
and three
 
months ended
 
September
 
30, 20212022
 
and
2020.2021.
(in thousands, except per share information)
Nine Months Ended September 30,
Three Months Ended September 30,
2022
2021
20202022
2021
2020
Basic and diluted EPS per common share:
Numerator for basic and diluted EPS per share of common stock:
Net (loss) income - Basic and diluted
$
(293,380)
$
(20,196)
$
(14,351)(84,514)
$
26,038
$
28,076
Weighted average shares of common stock:
Shares of common stock outstanding at the balance sheet date
153,31835,066
69,29630,664
153,31835,066
69,29630,664
Unvested dividend eligible share based compensation
outstanding at the balance sheet date
0-
0-
266-
8753
Effect of weighting
 
(48,012)271
(3,282)(9,603)
(24,997)140
(2,081)(5,000)
Weighted average shares-basic and diluted
105,30635,337
66,01421,061
128,58735,206
67,30225,717
Net (loss) income per common share:
Basic and diluted
$
(0.19)(8.31)
$
(0.22)(0.95)
$
0.20(2.40)
$
0.421.00
Anti-dilutive incentive shares not included in calculation.calculation
26689
8753
089
0-
23
NOTE 12.
 
FAIR VALUE
The framework
 
for using
 
fair value
 
to measure
 
assets and
 
liabilities
 
defines fair
 
value as the
 
price that
 
would be
 
received to
 
sell an
asset or
 
paid to transfer
 
a liability
 
(an exit
 
price). A
 
fair value
 
measure should
 
reflect the
 
assumptions
 
that market
 
participants
 
would use
 
in
pricing the
 
asset or
 
liability, including
 
the assumptions
 
about the
 
risk inherent
 
in a particular
 
valuation
 
technique,
 
the effect of
 
of a restriction
on the sale
 
or use of
 
an asset and
 
the risk of
 
non-performance.
 
Required
 
disclosures
 
include stratification
 
of balance
 
sheet amounts
measured at
 
at fair value
 
based on
 
inputs the
 
Company uses
 
to derive
 
fair value
 
measurements.
 
These stratifications
 
are:
 
●
Level 1 valuations,
 
where the
 
valuation
 
is based on
 
quoted market
 
prices for
 
identical
 
assets or
 
liabilities
 
traded in
 
active markets
(which include
 
exchanges
 
and over-the-counter
 
markets with
 
sufficient
 
volume),
 
●
Level 2 valuations,
 
where the
 
valuation
 
is based on
 
quoted market
 
prices for
 
similar instruments
 
traded in
 
active markets,
 
quoted
prices for
 
identical
 
or similar
 
instruments
 
in markets
 
that are not
 
not active and
 
and model-based
 
valuation
 
techniques
 
for which
 
all
significant
 
assumptions
 
are observable
 
in the market,
 
and
●
Level 3 valuations,
 
where the
 
valuation
 
is generated
 
from model-based
 
techniques
 
that use
 
significant
 
assumptions
 
not
observable
 
in the market,
 
but observable
 
based on
 
Company-specific
 
data. These
 
unobservable
 
assumptions
 
reflect the
Company’s own
 
estimates
 
for assumptions
 
that market
 
participants
 
would use
 
in pricing
 
the asset
 
or liability. Valuation
techniques
 
typically
 
include option
 
pricing models,
 
discounted
 
cash flow
 
models and
 
similar techniques,
 
but may also
 
include
the
use of market
 
prices of
 
assets or
 
liabilities
 
that are
 
not directly
 
comparable
 
to the subject
 
asset or
 
liability.
The Company's
 
RMBS and
 
TBA securities
 
are Level
 
2 valuations,
 
and such valuations
 
currently
 
are determined
 
by the Company
based on
 
independent
 
pricing sources
 
and/or third
 
party broker
 
quotes, whenquotes. Because
 
available.the price
 
Because the
price estimates
 
may vary, the
Company must
 
must make
certain
judgments
 
and assumptions
 
about the
 
appropriate
 
price to
 
use to calculate
 
the fair
 
values. The
 
Company and
the independent
pricing sources
 
use various
 
valuation
 
techniques
 
to determine
 
the price
 
of the Company’s
 
securities.
 
These techniques
 
21
include observing
the most
 
recent market
 
for like or
 
or identical
 
assets (including
 
security
 
coupon, maturity,
 
maturity, yield, and
 
and prepayment
 
speeds),
spread pricing
 
pricing
techniques
 
to determine
 
market credit
 
spreads (option
 
adjusted spread,
 
zero volatility
 
spread, spread
to the U.S.
Treasury
curve or
 
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
 
Black Scholes and
SABR models
 
which relyand SABR
 
models which
rely upon
observable
 
market rates
 
such as the
 
term structure
 
of interest
 
rates and
 
volatility).
 
The appropriate
 
spread
pricing method
 
method used
is based on
 
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
 
type of asset,
the expected
life of the
 
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
 
or adjustable,
 
the
guarantor
 
of the
security if
 
if applicable,
 
the coupon,
 
the maturity, the
 
the issuer, size of
 
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.
 
appropriate.
The fair
 
value of the
 
security is
 
determined
 
by using the
 
the adjusted
 
spread.
 
The Company’s
 
U.S. Treasury
 
Notes are
 
based on
 
quoted prices
 
for identical
 
instruments
 
in 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
 
and interest
 
rate swaptions
 
are Level
 
2
valuations.
 
The fair
 
value of interest
 
rate swaps
 
is determined
 
using a discounted
 
cash flow
 
approach
 
using forward
 
market interest
 
rates
and discount
 
rates, which
 
are observable
 
inputs. The
 
fair value
 
of interest
 
rate swaptions
 
is determined
 
using an option
 
pricing model.
 
RMBS (based
 
on the fair
 
value option),
 
derivatives
 
and TBA securities
 
were recorded
 
at fair value
 
on a recurring
 
basis during
 
the nine
and three
 
months ended
 
September
 
30, 20212022
 
and 2020.2021.
 
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.
24
The following
 
table presents
 
financial
 
assets (liabilities)
 
measured
 
at fair value
 
on a recurring
 
basis as of
 
September
 
30, 20212022 and
December
 
31, 2020.
2021.
 
Derivative
 
contracts
 
are reported
 
as a net
 
position by
 
contract
 
type, and
 
not based
 
on master
 
netting arrangements.
 
(in thousands)
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
 
Observable
Unobservable
Assets
Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
September 30, 2022
Mortgage-backed securities
$
-
$
3,201,214
$
-
U.S. Treasury Notes
36,118
-
-
Interest rate swaps
-
169,630
-
Interest rate swaptions
-
38,880
-
Interest rate caps
-
1,188
-
TBA securities
-
(394)
-
December 31, 2021
Mortgage-backed securities
$
0-
$
5,601,4236,511,095
$
0-
U.S. Treasury Notes
37,40937,175
0-
0-
Interest rate swaps
0-
14,74726,431
0-
Interest rate swaptions
0-
19,98817,070
0
Interest rate floors
0
2,360
0
December 31, 2020
Mortgage-backed securities
$
0
$
3,726,895
$
0
Interest rate swaps
0
(24,704)
0
Interest rate swaptions
0
9,703
0-
TBA securities
0-
2,773(304)
0-
During the nine and three months ended September 30, 20212022 and 2020,2021, there were
 
no transfers of financial assets or liabilities
between levels 1, 2 or 3.
22
NOTE 13. 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, 2022 2023
and provides for automatic one-
automatic one-yearyear extension options thereafter and is subject to certain termination rights.
 
Under the terms of the
management agreement, the
Manager is responsible for administering the business activities and day-to-day
operations of
the Company.
 
The Manager receives a
monthly management fee in the amount of:
●
One-twelfth of 1.5% of the first $250 million of the Company’s month-end equity, as defined in the management
agreement,
●
One-twelfth of 1.25% of the Company’s month-end equity that is greater than $250
million and less than or
equal to $500
million, and
●
One-twelfth of 1.00% of the Company’s month-end equity that is greater than $500
million.
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
will pay the following fees to the Manager:
25
●
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’s pro rata portion of certain overhead costs set forth in the management
agreement.
 
Should the
Company terminate the
management agreement without cause, it will pay the Manager a termination
fee equal to three
times the average annual management
fee, as defined in the management agreement, before or on the last day of the
term
of the agreement.
Total
 
expenses recorded for the management fee and costsallocated overhead incurred
were approximately $
9.4
million and $
3.1
million for the nine and three months ended September 30, 2022, respectively, and $
6.8
 
million and $
2.5
 
million
for the nine and three
months ended September 30, 2021, respectively,respectively. At September 30, 2022 and December 31, 2021, the net amount due to
affiliates was
approximately $
5.01.1
 
million and $
1.6
million for the nine and
three months ended September 30, 2020, respectively. At September 30, 2021 and December 31, 2020, the net amount
due to affiliates was approximately $
0.9
million and $
0.61.1
 
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
 
stock of Bimini. George H. Haas, IV, ourthe
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, 2021,2022, Bimini
owned
2,595,357519,871
 
shares, or
1.71.5
%, of the Company’s common stock.
2326
ITEM 2. MANAGEMENT’S
 
DISCUSSION
 
AND ANALYSIS OF FINANCIAL
 
CONDITION
 
AND RESULTS OF
 
OPERATIONS
The following discussion of our financial condition and results of operations should
 
be read in conjunction with the financial
statements and notes to those statements included in Item 1 of this Form 10-Q.
 
The discussion may contain certain forward-looking
statements that involve risks and uncertainties. Forward-looking statements
 
are those that are not historical in nature. As a result of
many factors, such as those set forth under “Risk Factors” in our most recent
 
Annual Report on Form 10-K, our actual results may
differ materially from those anticipated in such forward-looking statements.
Common Stock
Reverse
Split
On August 30, 2022, the Company effected a 1-for-5 reverse stock split of its common
stock and proportionately decreased the
number of authorized shares of common stock.
All share and per share information has been retroactively adjusted to reflect
the
reverse split.
Overview
We are a specialty finance company that invests in residential mortgage-backed securities
 
(“RMBS”) which are issued and
guaranteed by a federally chartered corporation or agency (“Agency RMBS”).
 
Our investment strategy focuses on, and our portfolio
consists of, two categories of Agency RMBS: (i) traditional pass-through Agency RMBS,
 
such as mortgage pass-through certificates
issued by Fannie Mae, Freddie Mac or Ginnie Mae (the “GSEs”) and collateralized
 
mortgage obligations (“CMOs”) issued by the GSEs
(“PT RMBS”) and (ii) structured Agency RMBS, such as interest-only securities (“IOs”),
 
inverse interest-only securities (“IIOs”) and
principal only securities (“POs”), among other types of structured Agency RMBS.
 
We were formed by Bimini in August 2010,
commenced operations on November 24, 2010 and completed our initial public
 
offering (“IPO”) on February 20, 2013.
 
We are
externally managed by Bimini Advisors, an investment adviser registered with
 
the Securities and Exchange Commission (the “SEC”).
Our business objective is to provide attractive risk-adjusted total returns over the
 
long term through a combination of capital
appreciation and the payment of regular monthly distributions. We intend to achieve this objective
 
objective by investing in and strategically
allocating capital between the two categories of Agency RMBS described above.
 
We seek to generate income from (i) the net interest
margin on our leveraged PT RMBS portfolio and the leveraged portion
 
of our structured Agency RMBS portfolio, and (ii) the interest
income we generate from the unleveraged portion of our structured Agency RMBS
 
portfolio. We intend to fund our PT RMBS and
certain of our structured Agency RMBS through short-term borrowings
 
structured as repurchase agreements. PT RMBS and structured
Agency RMBS typically exhibit materially different sensitivities to movements in interest
 
rates. Declines in the value of one portfolio
may be offset by appreciation in the other. The percentage of capital that we allocate to our two Agency RMBS asset categories will
vary and will be actively managed in an effort to maintain the level of income generated by
 
the combined portfolios, the stability of that
income stream and the stability of the value of the combined portfolios. We believe that this
 
strategy will enhance our liquidity,
earnings, book value stability and asset selection opportunities in various interest
 
rate environments.
 
We operate so as to qualify to be taxed as a real estate investment trust
(“REIT”) under the
Internal Revenue Code of 1986, as
amended (the “Code”).
 
We generally will not be subject to U.S. federal income tax to the extent that we
 
currently distribute all of our
REIT taxable income (as defined in the Code) to our stockholders and maintain
 
our REIT qualification.
The Company’s common stock trades on the New York Stock Exchange under the symbol “ORC”.
 
27
Capital Raising Activities
On January 23, 2020, we entered into an equity distribution agreement (the “January
2020 Equity Distribution Agreement”) with
three sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount
of $200,000,000 of shares
of our common stock in transactions that were deemed to be “at the market”
offerings and privately negotiated transactions.
We issued
a total of 3,170,727 shares under the January 2020 Equity Distribution Agreement for aggregate
gross proceeds of $19.8 million, and
net proceeds of approximately $19.4 million, after commissions and fees,
prior to its termination in August 2020.
On August 4, 2020, we entered into an equity distribution agreement (the “August
 
2020 Equity Distribution Agreement”) with four
sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate
 
amount of $150,000,000 of shares of our
common stock in transactions that were deemed to be “at the market” offerings and privately
 
negotiated transactions. We issued a total
24
of 27,493,6505,538,730 shares under the August 2020 Equity Distribution Agreement for aggregate
 
aggregate gross proceeds of approximately $150.0
million, and
net proceeds of approximately $147.4 million, after commissions and
 
and fees,
 
prior to its termination in June 2021.
On January 20, 2021, we entered into an underwriting agreement (the “January 2021
 
Underwriting Agreement”) with J.P. Morgan
Securities LLC (“J.P. Morgan”), relating to the offer and sale of 7,600,0001,520,000 shares of our common stock. J.P.
 
Morgan purchased the
shares of our common stock from the Company pursuant to the January 2021
 
Underwriting Agreement at $5.20$26.00 per share. In addition,
we granted J.P.
 
Morgan a 30-day option to purchase up to an additional 1,140,000228,000 shares
 
of our common stock on the same terms and
conditions, which J.P. Morgan exercised in full on January 21, 2021. The closing of the offering of 8,740,0001,748,000 shares of our common
stock occurred on January 25, 2021, with proceeds to us of approximately $45.2
 
million, net of offering expenses.
On March 2, 2021, we entered into an underwriting agreement (the “March 2021 Underwriting
 
Agreement”) with J.P. Morgan,
relating to the offer and sale of 8,000,0001,600,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from
the Company pursuant to the March 2021 Underwriting Agreement at $5.45$27.25 per share.
 
share. In addition, we granted J.P. Morgan a 30-day
option to purchase up to an additional 1,200,000240,000 shares of our common stock
on the same
terms and conditions, which J.P. Morgan
exercised in full on March 3, 2021. The closing of the offering of 9,200,0001,840,000 shares of our common
 
stock occurred on March 5, 2021,
with proceeds to us of approximately $50.0 million, net of offering expenses.
On June 22, 2021, we entered into an equity distribution agreement (the “June 2021
 
Equity Distribution Agreement”) with four
sales agents pursuant to which we maycould offer and sell, from time to time, up to an aggregate
 
amount of $250,000,000 of shares of our
common stock in transactions that arewere deemed to be “at the market” offerings and privately
 
negotiated transactions. Through
September 30, 2021, weWe issued a total
of 41,568,3389,881,467 shares under the June 2021 Equity Distribution Agreement for aggregate
 
gross proceeds of approximately $250.0 million,
and net proceeds of approximately $246.2 million, after commissions and fees, prior to
its termination in October 2021.
On October 29, 2021,
we entered into an equity distribution agreement (the “October 2021
Equity Distribution Agreement”) with
four sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate
amount of $250,000,000 of shares of
our common stock in transactions that are deemed to be “at the market” offerings and privately negotiated
transactions. Through
September 30, 2022, we issued a total of 3,167,140 shares under the October 2021
Equity Distribution Agreement for aggregate gross
proceeds of approximately $211.0$78.3 million, and net proceeds of approximately $207.5
$77.0 million, after commissions and fees.
 
Subsequent
to September 30, 2021 and through October 28, 2021, we issued a total of 7,838,998
shares under the June 2021 Equity Distribution
Agreement for aggregate gross proceeds of approximately $39.0 million, and net proceeds
of approximately $38.4 million, after
commissions and fees.
Stock Repurchase Agreement
On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to 2,000,000400,000
 
shares of our common stock. The
The timing, manner, price and amount of any repurchases is determined by the Company in its discretion and is subject
 
to economic and
and market conditions, stock price, applicable legal requirements and other factors.
 
The authorization does not obligate the Company to
to acquire any particular amount of common stock and the program may be
 
suspended or discontinued at the Company’s discretion
without prior notice. On February 8, 2018, the Board of Directors approved
 
an increase in the stock repurchase program for up to an
additional 4,522,822904,564 shares of the Company’s common stock. Coupled with the 783,757156,751
 
shares remaining from the original 2,000,000400,000
share authorization, the increased authorization brought the total authorization
 
to 5,306,5791,061,316 shares, representing 10% of the
Company’s then outstanding share count.
28
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. This stock repurchase program has no termination
date.
From the inception of the stock repurchase program through September 30, 2021,2022, the
 
Company repurchased a total of 5,685,5111,487,362
shares at an aggregate cost of approximately $40.4$44.8 million, including commissions
 
and fees, for a weighted average price of $30.12
per share. During the nine months ended September 30, 2022, the Company repurchased
a total of 350,260 shares of its common
stock at an aggregate cost of approximately $4.4 million, including commissions
and fees, for a weighted average price of $12.68 per
share. Subsequent to September 30, 2022, and through October 27, 2022, the Company
repurchased a total of 1,644,044 shares at an
aggregate cost of approximately $14.2 million, including commissions and fees, for a weighted
average price
of $7.10$8.64 per
share. The Company did not repurchase any shares of its common stock during the
nine and three months ended September 30, 2021.
The remaining authorization under the repurchase program as of September 30, 2021 was
837,311 shares.
Factors that Affect our Results of Operations and Financial Condition
A variety of industry and economic factors may impact our results of operations and
 
financial condition. These factors include:
●
interest rate trends;
●
the difference between Agency RMBS yields and our funding and hedging costs;
25
●
competition for, and supply of, investments in Agency RMBS;
●
actions taken by the U.S. government, including the presidential administration,
 
the Fed,Federal Reserve (the “Fed”), the Federal
Housing Financing
Agency (the “FHFA”), Federal Housing Administration (the “FHA”), the Federal Open
Market Committee (the
(the “FOMC”)
and the
U.S. Treasury;
 
●
prepayment rates on mortgages underlying our Agency RMBS and credit
 
trends insofar as they affect prepayment rates; and
●
other market developments.
In addition, a variety of factors relating to our business may also impact our results
 
of operations and financial condition. These
factors include:
●
our degree of leverage;
●
our access to funding and borrowing capacity;
●
our borrowing costs;
●
our hedging activities;
●
the market value of our investments;investments
●
increases in our cost of funds resulting from increases in the Fed Funds rate that
are controlled by the Fed which have
occurred, and are likely to continue to occur, in 2022; and
●
the requirements to qualify as a REIT and the requirements to qualify for
 
a registration exemption under the Investment
Company Act.
 
Results
 
of Operations
Described
 
below are
 
the Company’s
 
results of
 
operations
 
for the
 
nine and
 
three months
 
ended September
 
30, 2021,2022,
 
as compared
 
to
the Company’s
 
results of
 
operations
 
for the nine
 
and three
 
months ended
 
September
 
30, 2020.
Net (Loss)
Income Summary
Net loss for
the nine
months ended
September
30, 2021
was $20.2
million, or
$0.19 per
share. Net
loss for the
nine months
ended
September
30, 2020
was $14.4
million, or
$0.22 per
share.
Net income
for the three
months ended
September
30, 2021
was $26.0
million, or
$0.20 per
share. Net
income for
the three
months ended
September
30, 2020
was $28.1
million, or
$0.42 per
share.
The
components
of net (loss)
income for
the nine and
three months
ended September
30, 2021
and 2020,
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,
2021
2020
Change
2021
2020
Change
Interest income
$
90,279
$
90,152
$
127
$
34,169
$
27,223
$
6,946
Interest expense
(5,067)
(23,045)
17,978
(1,570)
(2,043)
473
Net interest income
85,212
67,107
18,105
32,599
25,180
7,419
(Losses) gains on RMBS and derivative contracts
(94,522)
(73,712)
(20,810)
(2,887)
5,745
(8,632)
Net portfolio (loss) income
(9,310)
(6,605)
(2,705)
29,712
30,925
(1,213)
Expenses
(10,886)
(7,746)
(3,140)
(3,674)
(2,849)
(825)
Net (loss) income
$
(20,196)
$
(14,351)
$
(5,845)
$
26,038
$
28,076
$
(2,038)
GAAP and Non-GAAP Reconciliations
In addition to the results presented in accordance with GAAP,
our results of operations discussed below include certain
non-GAAP financial information, including “Net Earnings Excluding Realized and Unrealized Gains and Losses”, “Economic
Interest Expense” and “Economic Net Interest Income.”
Net Earnings Excluding Realized and Unrealized Gains and Losses
26
We have elected to account for our Agency RMBS under the fair value option. Securities held under the fair value
option are recorded at estimated fair value, with changes in the fair value recorded as unrealized gains or losses through
the statements of operations.
In addition, we have not designated our derivative financial instruments used for hedging purposes as hedges for
accounting purposes, but rather hold them for economic hedging purposes. Changes in fair value of these instruments are
presented in a separate line item in the Company’s statements of operations and are not included in interest expense.
As
such, for financial reporting purposes, interest expense and cost of funds are not impacted by the fluctuation in value of the
derivative instruments.
Presenting net earnings excluding realized and unrealized gains and losses allows management to: (i) isolate the net
interest income and other expenses of the Company over time, free of all fair value adjustments and (ii) assess the
effectiveness of our funding and hedging strategies on our capital allocation decisions and our asset allocation performance.
Our funding and hedging strategies, capital allocation and asset selection are integral to our risk management strategy, and
therefore critical to the management of our portfolio.
We believe that the presentation of our net earnings excluding realized
and unrealized gains is useful to investors because it provides a means of comparing our results of operations to those of
our peers who have not elected the same accounting treatment. Our presentation of net earnings excluding realized and
unrealized gains and losses may not be comparable to similarly-titled measures of other companies, who may use different
calculations. As a result, net earnings excluding realized and unrealized gains and losses should not be considered as a
substitute for our GAAP net income (loss) as a measure of our financial performance or any measure of our liquidity under
GAAP.
The table below presents a reconciliation of our net income (loss) determined in accordance with GAAP and net
earnings excluding realized and unrealized gains and losses.
Net Earnings Excluding Realized and Unrealized Gains and Losses
(in thousands, except per share data)
Per Share
Net Earnings
Net Earnings
Excluding
Excluding
Realized and
Realized and
Realized and
Realized and
Net
Unrealized
Unrealized
Net
Unrealized
Unrealized
Income
Gains and
Gains and
Income
Gains and
Gains and
(GAAP)
Losses
(1)
Losses
(GAAP)
Losses
Losses
Three Months Ended
September 30, 2021
$
26,038
$
(2,887)
$
28,925
$
0.20
$
(0.02)
$
0.22
June 30, 2021
(16,865)
(40,844)
23,979
(0.17)
(0.41)
0.24
March 31, 2021
(29,369)
(50,791)
21,422
(0.34)
(0.60)
0.26
December 31, 2020
16,479
(4,605)
21,084
0.23
(0.07)
0.30
September 30, 2020
28,076
5,745
22,331
0.42
0.09
0.33
June 30, 2020
48,772
28,749
20,023
0.74
0.43
0.31
March 31, 2020
(91,199)
(108,206)
17,007
(1.41)
(1.68)
0.27
Nine Months Ended
September 30, 2021
$
(20,196)
$
(94,522)
$
74,326
$
(0.19)
$
(0.90)
$
0.71
September 30, 2020
(14,351)
(73,712)
59,361
(0.22)
(1.12)
0.90
(1)
Includes realized and unrealized gains (losses) on RMBS and derivative financial
instruments, including net interest income or expense on
interest rate swaps
.
Economic Interest Expense and Economic Net Interest Income
We use derivative and other hedging instruments, specifically Eurodollar,
Fed Funds and Treasury Note (“T-Note”)
futures contracts, short positions in U.S. Treasury securities, interest rate swaps and swaptions, to hedge a portion of the
interest rate risk on repurchase agreements in a rising rate environment.
27
We have not elected to designate our derivative holdings for hedge accounting treatment. Changes in fair value of these
instruments are presented in a separate line item in our statements of operations and not included in interest expense. As
such, for financial reporting purposes, interest expense and cost of funds are not impacted by the fluctuation in value of the
derivative instruments.
For the purpose of computing economic net interest income and ratios relating to cost of funds measures, GAAP
interest expense has been adjusted to reflect the realized and unrealized gains or losses on certain derivative instruments
the Company uses, specifically Eurodollar, Fed Funds and U.S. Treasury futures, and interest rate swaps and swaptions,
that pertain to each period presented. We believe that adjusting our interest expense for the periods presented by the gains
or losses on these derivative instruments would not accurately reflect our economic interest expense for these periods. The
reason is that these derivative instruments may cover periods that extend into the future, not just the current period. Any
realized or unrealized gains or losses on the instruments reflect the change in market value of the instrument caused by
changes in underlying interest rates applicable to the term covered by the instrument, not just the current period. For each
period presented, we have combined the effects of the derivative financial instruments in place for the respective period with
the actual interest expense incurred on borrowings to reflect total economic interest expense for the applicable period.
Interest expense, including the effect of derivative instruments for the period, is referred to as economic interest expense.
Net interest income, when calculated to include the effect of derivative instruments for the period, is referred to as economic
net interest income. This presentation includes gains or losses on all contracts in effect during the reporting period, covering
the current period as well as periods in the future.
The Company may invest in TBAs, which are forward contracts for the purchase or sale of Agency RMBS at a
predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific Agency
RMBS to be delivered into the contract are not known until shortly before the settlement date. We may choose, prior to
settlement, to move the settlement of these securities out to a later date by entering into a dollar roll transaction. The
Agency RMBS purchased or sold for a forward settlement date are typically priced at a discount to equivalent securities
settling in the current month. Consequently, forward purchases of Agency RMBS and dollar roll transactions represent a
form of off-balance sheet financing. These TBAs are accounted for as derivatives and marked to market through the income
statement. Gains or losses on TBAs are included with gains or losses on other derivative contracts and are not included in
interest income for purposes of the discussions below.
We believe that economic interest expense and economic net interest income provide meaningful information to
consider, in addition to the respective amounts prepared in accordance with GAAP.
The non-GAAP measures help
management to evaluate its financial position and performance without the effects of certain transactions and GAAP
adjustments that are not necessarily indicative of our current investment portfolio or operations. The unrealized gains or
losses on derivative instruments presented in our statements of operations are not necessarily representative of the total
interest rate expense that we will ultimately realize. This is because as interest rates move up or down in the future, the
gains or losses we ultimately realize, and which will affect our total interest rate expense in future periods, may differ from
the unrealized gains or losses recognized as of the reporting date.
Our presentation of the economic value of our hedging strategy has important limitations. First, other market
participants may calculate economic interest expense and economic net interest income differently than the way we
calculate them. Second, while we believe that the calculation of the economic value of our hedging strategy described
above helps to present our financial position and performance, it may be of limited usefulness as an analytical tool.
Therefore, the economic value of our investment strategy should not be viewed in isolation and is not a substitute for
interest expense and net interest income computed in accordance with GAAP.
The tables below present a reconciliation of the adjustments to interest expense shown for each period relative to our
derivative instruments, and the income statement line item, gains (losses) on derivative instruments, calculated in
accordance with GAAP for each quarter of 2021 to date and 2020.2021.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
29
Net (Loss)
Income Summary
Net loss
for the nine
months ended
September
30, 2022
was $293.4
million, or
$8.31 per
share. Net
loss for the
nine months
ended
September
30, 2021
was $20.2
million, or
$0.95 per
share.
Net loss
for the three
months ended
September
30, 2022
was $84.5
million, or
$2.40 per
share. Net
income for
the three
months ended
September
30, 2021
was $26.0
million, or
$1.00 per
share.
The components
of
net (loss)
income for
the nine and
three months
ended September
30, 2022
and 2021,
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,
2022
2021
Change
2022
2021
Change
Interest income
$
112,735
$
90,279
$
22,456
$
35,610
$
34,169
$
1,441
Interest expense
(32,196)
(5,067)
(27,129)
(21,361)
(1,570)
(19,791)
Net interest income
80,539
85,212
(4,673)
14,249
32,599
(18,350)
Losses on RMBS and derivative contracts
(359,059)
(94,522)
(264,537)
(93,544)
(2,887)
(90,657)
Net portfolio (loss) income
(278,520)
(9,310)
(269,210)
(79,295)
29,712
(109,007)
Expenses
(14,859)
(10,886)
(3,973)
(5,218)
(3,674)
(1,544)
Net (loss) income
$
(293,379)
$
(20,196)
$
(273,183)
$
(84,513)
$
26,038
$
(110,551)
GAAP and
Non-GAAP
Reconciliations
In addition
to the results
presented
in accordance
with GAAP, our results
of operations
discussed
below include
certain non-GAAP
financial
information,
including
“Net Earnings
Excluding
Realized
and Unrealized
Gains and Losses”,
“Economic
Interest
Expense”
and
“Economic
Net Interest
Income.”
Net Earnings
Excluding
Realized
and Unrealized
Gains and
Losses
We have elected
to account
for our
Agency RMBS
under the
fair value
option. Securities
held under
the fair
value option
are
recorded
at estimated
fair value,
with changes
in the fair
value recorded
as unrealized
gains or
losses through
the statements
of
operations.
In addition,
we have not
designated
our derivative
financial
instruments
used for
hedging purposes
as hedges for
accounting
purposes,
but rather
hold them
for economic
hedging purposes.
Changes in
fair value
of these
instruments
are presented
in a separate
line item
in the Company’s
statements
of operations
and are not
included in
interest
expense.
As such, for
financial
reporting
purposes,
interest
expense and
cost of funds
are not impacted
by the fluctuation
in value of
the derivative
instruments.
Presenting
net earnings
excluding
realized and
unrealized
gains and
losses allows
management
to: (i) isolate
the net interest
income
and other
expenses of
the Company
over time,
free of all
fair value
adjustments
and (ii)
assess the
effectiveness
of our funding
and
hedging strategies
on our capital
allocation
decisions
and our
asset allocation
performance.
Our funding
and hedging
strategies,
capital
allocation
and asset
selection
are integral
to our risk
management
strategy, and therefore
critical to
the management
of our portfolio.
We
believe that
the presentation
of our net
earnings
excluding
realized
and unrealized
gains is useful
to investors
because it
provides
a means
of comparing
our results
of operations
to those
of our peers
who have not
elected the
same accounting
treatment.
Our presentation
of net
earnings
excluding
realized and
unrealized
gains and
losses may
not be comparable
to similarly-titled
measures of
other companies,
who
may use different
calculations.
As a result,
net earnings
excluding
realized and
unrealized
gains and
losses should
not be considered
as a
substitute
for our GAAP
net income
(loss) as
a measure
of our financial
performance
or any measure
of our liquidity
under GAAP.
The
table below
presents
a reconciliation
of our net
income (loss)
determined
in accordance
with GAAP
and net earnings
excluding realized
and unrealized
gains and
losses.
Described
below are
the Company’s
results of
operations
for the
nine months
ended September
30, 2022
and 2021,
and for each
quarter in
2022 to date
and 2021.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
28
30
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, 2022
$
(84,513)
$
(93,544)
$
9,031
$
(2.40)
$
(2.66)
$
0.26
June 30, 2022
(60,139)
(82,283)
22,144
(1.70)
(2.32)
0.62
March 31, 2022
(148,727)
(183,232)
34,505
(4.20)
(5.18)
0.98
December 31, 2021
(44,564)
(82,597)
38,033
(1.33)
(2.46)
1.13
September 30, 2021
26,038
(2,887)
28,925
1.01
(0.11)
1.12
June 30, 2021
(16,865)
(40,844)
23,979
(0.85)
(2.05)
1.20
March 31, 2021
(29,369)
(50,791)
21,422
(1.72)
(2.98)
1.26
Nine Months Ended
September 30, 2022
$
(293,379)
$
(359,059)
$
65,680
$
(8.31)
$
(10.16)
$
1.85
September 30, 2021
(20,196)
(94,522)
74,326
(0.96)
(4.49)
3.53
(1)
Includes realized
and unrealized
gains (losses)
on RMBS and derivative
financial instruments,
including net
interest income
or expense on
interest
rate swaps.
Economic Interest
Expense and
Economic Net
Interest
Income
We use derivative
and other
hedging instruments,
specifically
Eurodollar, Fed
Funds and
T-Note futures
contracts,
short positions
in
U.S. Treasury
securities,
interest
rate swaps
and swaptions,
to hedge
a portion
of the interest
rate risk on
repurchase
agreements
in a
rising rate
environment.
We have not
elected to
designate
our derivative
holdings for
hedge accounting
treatment.
Changes in
fair value
of these
instruments
are presented
in a separate
line item
in our statements
of operations
and not included
in interest
expense. As
such, for
financial
reporting
purposes,
interest
expense and
cost of funds
are not impacted
by the fluctuation
in value of
the derivative
instruments.
For the purpose
of computing
economic net
interest
income and
ratios relating
to cost of
funds measures,
GAAP interest
expense
has been
adjusted to
reflect the
realized and
unrealized
gains or
losses on
certain derivative
instruments
the Company
uses, specifically
Eurodollar, Fed
Funds and
U.S. Treasury
futures,
and interest
rate swaps
and swaptions,
that pertain
to each period
presented.
We
believe that
adjusting
our interest
expense for
the periods
presented
by the gains
or losses
on these
derivative
instruments
would not
accurately
reflect our
economic
interest expense
for these
periods.
The reason
is that these
derivative
instruments
may cover
periods that
extend into
the future,
not just the
current period.
Any realized
or unrealized
gains or
losses on
the instruments
reflect the
change in
market value
of the instrument
caused by
changes in
underlying
interest
rates applicable
to the term
covered by
the instrument,
not just
the current
period. For
each period
presented,
we have combined
the effects
of the derivative
financial
instruments
in place for
the
respective
period with
the actual
interest
expense incurred
on borrowings
to reflect
total economic
interest
expense for
the applicable
period. Interest
expense, including
the effect
of derivative
instruments
for the period,
is referred
to as economic
interest expense.
Net
interest
income, when
calculated
to include
the effect
of derivative
instruments
for the period,
is referred
to as economic
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.
31
The Company
from time
to time invests
in TBAs,
which are
forward
contracts
for the purchase
or sale of
Agency RMBS
at a
predetermined
price, face
amount,
issuer, coupon
and stated
maturity on
an agreed-upon
future date.
The specific
Agency RMBS
to be
delivered
into the
contract
are not known
until shortly
before the
settlement
date. We may
choose, prior
to settlement,
to move the
settlement
of these
securities
out to a
later date
by entering
into a dollar
roll transaction.
The Agency
RMBS purchased
or sold for
a
forward
settlement
date are
typically priced
at a discount
to equivalent
securities
settling
in the current
month. Consequently,
forward
purchases
of Agency
RMBS and
dollar roll
transactions
represent
a form of
off-balance
sheet financing.
These TBAs
are accounted
for as
derivatives
and marked
to market
through the
income statement.
Gains or losses
on TBAs are
included with
gains or
losses on
other
derivative
contracts
and are not
included
in interest
income for
purposes
of the discussions
below.
We believe
that economic
interest
expense and
economic
net interest
income provide
meaningful
information
to consider, in
addition
to the respective
amounts prepared
in accordance
with GAAP. The non-GAAP
measures help
management
to evaluate
its financial
position and
performance
without the
effects of
certain transactions
and GAAP
adjustments
that are
not necessarily
indicative
of our
current investment
portfolio
or operations.
The unrealized
gains or
losses on
derivative
instruments
presented
in our statements
of
operations
are not necessarily
representative
of the total
interest
rate expense
that we will
ultimately
realize. This
is because
as interest
rates move
up or down
in the future,
the gains
or losses
we ultimately
realize, and
which will
affect our
total interest
rate expense
in future
periods,
may differ
from the
unrealized
gains or
losses recognized
as of the
reporting
date.
Our presentation
of the economic
value of our
hedging strategy
has important
limitations.
First, other
market participants
may
calculate
economic
interest
expense and
economic net
interest
income differently
than the
way we calculate
them. Second,
while we
believe that
the calculation
of the economic
value of our
hedging
strategy
described
above helps
to present
our financial
position
and
performance,
it may be
of limited
usefulness
as an analytical
tool. Therefore,
the economic
value of
our investment
strategy should
not be
viewed in
isolation
and is not
a substitute
for interest
expense and
net interest
income computed
in accordance
with GAAP.
The tables
below present
a reconciliation
of the adjustments
to interest
expense shown
for each
period relative
to our derivative
instruments,
and the income
statement
line item,
gains (losses)
on derivative
instruments,
calculated
in accordance
with GAAP
for each
quarter of
2022 to date
and 2021.
Gains (Losses) on Derivative Instruments
(in thousands)
Funding Hedges
Recognized in
Attributed to
Attributed to
Income
U.S. Treasury and TBA
Current
Future
Statement
Securities Gain (Loss)
Period
Periods
(GAAP)
(Short Positions)
(Long Positions)
(Non-GAAP)
(Non-GAAP)
Three Months Ended
September 30, 20212022
$
5,375184,819
$
(2,306)10,642
$
-106
$
(1,248)5,043
$
169,028
June 30, 2022
103,758
1,013
1,067
1,996
99,682
March 31, 2022
177,816
2,539
27
(1,287)
176,537
December 31, 2021
10,945
2,568
-
(7,949)
16,326
September 30, 2021
5,375
(2,306)
-
(1,248)
8,929
June 30, 2021
(34,915)
(5,963)
-
(5,104)
(23,848)
March 31, 2021
45,472
9,133
(8,559)
(4,044)
48,942
December 31, 2020
8,538
(436)
5,480
(5,790)
9,284
September 30, 2020
4,079
131
3,336
(6,900)
7,512
June 30, 2020
(8,851)
582
1,133
(5,751)
(4,815)
March 31, 2020
(82,858)
(7,090)
-
(4,900)
(70,868)
Nine Months Ended
September 30, 20212022
$
15,932466,393
$
86414,194
$
(8,559)1,200
$
(10,396)5,752
$
34,023445,247
September 30, 20202021
(87,630)15,932
(6,377)864
4,469(8,559)
(17,551)(10,396)
(68,171)34,023
32
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, 20212022
$
34,16935,610
$
1,57021,361
$
(1,248)5,043
$
2,81816,318
$
32,59914,249
$
19,292
June 30, 2022
35,268
8,180
1,996
6,184
27,088
$
29,084
March 31, 2022
41,857
2,655
(1,287)
3,942
39,202
37,915
December 31, 2021
44,421
2,023
(7,949)
9,972
42,398
34,449
September 30, 2021
34,169
1,570
(1,248)
2,818
32,599
31,351
June 30, 2021
29,254
1,556
(5,104)
6,660
27,698
22,594
March 31, 2021
26,856
1,941
(4,044)
5,985
24,915
20,871
December 31, 2020
25,893
2,011
(5,790)
7,801
23,882
18,092
September 30, 2020
27,223
2,043
(6,900)
8,943
25,180
18,280
June 30, 2020
27,258
4,479
(5,751)
10,230
22,779
17,028
March 31, 2020
35,671
16,523
(4,900)
21,423
19,148
14,248
Nine Months Ended
September 30, 20212022
$
90,279112,735
$
5,06732,196
$
(10,396)5,752
$
15,46326,444
$
85,21280,539
$
74,81686,291
September 30, 20202021
90,15290,279
23,0455,067
(17,551)(10,396)
40,59615,463
67,10785,212
49,55674,816
(1)
Reflects the effect of derivative instrument hedges for only the period
 
presented.
(2)
Calculated by adding the effect of derivative instrument hedges attributed
 
to the period presented to GAAP interest expense.
(3)
Calculated by adding the effect of derivative instrument hedges attributed
 
to the period presented to GAAP net interest income.
Net Interest Income
During the
 
nine months
 
ended September
 
30, 2022,
we generated
$80.5 million
of net interest
income, consisting
of $112.7 million
of
interest
income from
RMBS assets
offset by $32.2
million of
interest
expense on
borrowings.
For the comparable
period ended
September
30, 2021,
 
we generated
 
$85.2 million
 
of net interest
 
income, consisting
 
of $90.3
 
million of
interest
 
income from
 
RMBS assets
offset by $5.1
 
million of
 
interest
 
expense on
 
borrowings.
 
For the comparable
period ended
September
30, 2020,
we generated
$67.1 million
of net interest
income, consisting
of $90.2
million of
interest
income from
RMBS assets
offset by
$23.0 million
of interest
expense on
borrowings.
The $0.1$22.5
 
million increase
 
in interest
 
income was
 
due to a
 
$1,284.973 basis
 
million point ("bps")
increase in
 
inthe yield
on average
average
RMBS,
which was
 
partially
 
offset by a
 
103 basis point
("bps") decrease
in the yield
on average
RMBS. The
$18.098.8 million
 
decrease
 
in interestaverage
RMBS.
The $27.1
million
increase in
interest
expense was
 
due to a
 
8485 bps decreaseincrease
 
in the average
 
cost of funds,
 
partially
 
offset by a
 
$1,250.563.0 million
decrease
in
average outstanding
borrowings.
On an economic
basis, our
interest
expense on
borrowings
for the nine
months ended
September
30, 2022
and 2021
was $26.4
million and
$15.5 million,
respectively, resulting
in $86.3
million
and $74.8
million of
economic
net interest
income, respectively.
During the
three months
ended September
30, 2022,
we generated
$14.2 million
of net interest
income, consisting
of $35.6
million of
interest
income from
RMBS assets
offset by $21.4
million of
interest
expense on
borrowings.
For the three
months ended
September
30,
2021, we
generated
$32.6 million
of net interest
income, consisting
of $34.2
million of
interest
income from
RMBS assets
offset by $1.6
million of
interest
expense on
borrowings.
The $1.4
 
million increase
 
in interest
income was
due to a
133 bps increase
in the yield
on
average RMBS,
partially
offset by a
$1,565.3
million decrease
in average
RMBS.
The $19.8
million increase
in interest
expense
was due
to a 235
bps increase
in the average
cost of funds,
partially
offset by a
$1,417.9
million decrease
in average
 
outstanding
borrowings.
On an economic
basis, our
interest
expense on
borrowings
for the three
months ended
September
30, 2022
and 2021
was $16.3
million and
$2.8 million,
respectively, resulting
in $19.3 million
and $31.4
million of
economic
net interest
income, respectively.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
29
borrowings.
On an economic
basis, our
interest
expense on
borrowings
for the nine
months ended
September
30, 2021
and 2020
was $15.5
million and
$40.6 million,
respectively, resulting
in $74.8
million
and $49.6
million of
economic
net interest
income, respectively.
During the
three months
ended September
30, 2021,
we generated
$32.6 million
of net interest
income, consisting
of $34.2
million of
interest
income from
RMBS assets
offset by $1.6
million of
interest
expense on
borrowings.
For the three
months ended
September
30,
2020, we
generated
$25.2 million
of net interest
income, consisting
of $27.2
million of
interest
income from
RMBS assets
offset by $2.0
million of
interest
expense on
borrowings.
The $6.9
million increase
in interest
income was
due to a
$1,713.8
million increase
in average
RMBS,
partially
offset by a
52 bps decrease
in the yield
on average
RMBS. The
$0.5 million
decrease
in interest
expense was
due to a
12
bps decrease
in the average
cost of funds,
partially
offset by
a $1,636.3
million increase
in average
outstanding
borrowings.
On an economic
basis, our
interest
expense on
borrowings
for the three
months ended
September
30, 2021
and 2020
was $2.8
million and
$8.9 million,
respectively, resulting
in $31.4 million
and $18.3
million of
economic
net interest
income, respectively.
33
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 nine
 
months ended
 
September
 
30, 20212022
 
and 20202021 and
 
each
quarter of
 
20212022 to date
 
and 20202021 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, 20212022
$
5,136,3313,571,037
$
35,610
3.99%
$
3,446,420
$
21,361
$
16,318
2.48%
1.89%
June 30, 2022
4,260,727
35,268
3.31%
4,111,544
8,180
6,184
0.80%
0.60%
March 31, 2022
5,545,844
41,857
3.02%
5,354,107
2,655
3,942
0.20%
0.29%
December 31, 2021
6,056,259
44,421
2.93%
5,728,988
2,023
9,972
0.14%
0.70%
September 30, 2021
5,136,331
34,169
2.66%
$
4,864,287
$
1,570
$
2,818
0.13%
0.23%
June 30, 2021
4,504,887
29,254
2.60%
4,348,192
1,556
6,660
0.14%
0.61%
March 31, 2021
4,032,716
26,856
2.66%
3,888,633
1,941
5,985
0.20%
0.62%
December 31, 2020
3,633,631
25,893
2.85%
3,438,444
2,011
7,801
0.23%
0.91%
September 30, 2020
3,422,564
27,223
3.18%
3,228,021
2,043
8,943
0.25%
1.11%
June 30, 2020
3,126,779
27,258
3.49%
2,992,494
4,479
10,230
0.60%
1.37%
March 31, 2020
3,269,859
35,671
4.36%
3,129,178
16,523
21,423
2.11%
2.74%
Nine Months Ended
September 30, 20212022
$
4,557,9784,459,203
$
112,735
3.37%
$
4,304,024
$
32,196
$
26,444
1.00%
0.82%
September 30, 2021
4,557,978
90,279
2.64%
$
4,367,037
$
5,067
$
15,463
0.15%
0.47%
September 30, 2020
3,273,068
90,152
3.67%
3,116,564
23,045
40,596
0.99%
1.74%
($ in thousands)
Net Interest Income
Net Interest Spread
GAAP
Economic
GAAP
Economic
Basis
Basis
(2)
Basis
Basis
(4)
Three Months Ended
September 30, 20212022
$
32,59914,249
$
19,292
1.51%
2.10%
June 30, 2022
27,088
29,084
2.51%
2.71%
March 31, 2022
39,202
37,915
2.82%
2.73%
December 31, 2021
42,398
34,449
2.79%
2.23%
September 30, 2021
32,599
31,351
2.53%
2.43%
June 30, 2021
27,698
22,594
2.46%
1.99%
March 31, 2021
24,915
20,871
2.46%
2.04%
December 31, 2020
23,882
18,093
2.62%
1.94%
September 30, 2020
25,180
18,280
2.93%
2.07%
June 30, 2020
22,779
17,028
2.89%
2.12%
March 31, 2020
19,148
14,248
2.25%
1.62%
Nine Months Ended
September 30, 20212022
$
85,21280,539
$
86,291
2.37%
2.55%
September 30, 2021
85,212
74,816
2.49%
2.17%
September 30, 2020
67,107
49,556
2.68%
1.93%
(1)
Portfolio yields and costs of borrowings presented in the tables above and the
 
tables on pages 3034 and 3135 are calculated based on the
average balances of the underlying investment portfolio/borrowings balances
 
and are annualized for the periods presented. Average
balances for quarterly periods are calculated using two data points, the beginning
and ending balances.
(2)
Economic interest expense and economic net interest income
presented in the table above and the tables on page 35 includes the effect
of our derivative instrument hedges for only the periods presented.
(3)
Represents interest cost of our borrowings and the effect of derivative
instrument hedges attributed to the period divided by average
RMBS.
(4)
Economic net interest spread is calculated by subtracting average economic
cost of funds from realized yield on average RMBS.
Interest Income and Average Asset Yield
Our interest
income for
the nine
months ended
September
30, 2022
and 2021
was $112.7 million
and $90.3
million, respectively.
We
had average
RMBS holdings
of $4,459.2
million and
$4,558.0
million for
the nine
months ended
September
30, 2022
and 2021,
respectively.
The yield
on our portfolio
was 3.37%
and 2.64%
for the nine
months ended
September
30, 2022 and
2021, respectively.
For
the nine
months ended
September
30, 2022,
as compared
to the nine
months ended
September
30, 2021,
there was
a $22.5 million
increase in
interest
income due
to the 73
bps increase
in the yield
on average
RMBS,
partially
offset by the
$98.8 million
decrease
in
average RMBS.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30
balances for quarterly periods are calculated using two data points, the beginning
and ending balances.
(2)
Economic interest expense and economic net interest income
presented in the table above and the tables on page 31 includes the effect
of our derivative instrument hedges for only the periods presented.
(3)
Represents interest cost of our borrowings and the effect of derivative
instrument hedges attributed to the period divided by average
RMBS.
(4)
Economic net interest spread is calculated by subtracting average economic
cost of funds from realized yield on average RMBS.
Interest Income and Average Asset Yield
Our interest
income for
the nine
months ended
September
30, 2021
and 2020
was $90.3
million and
$90.2 million,
respectively.
We
had average
RMBS holdings
of $4,558.0
million and
$3,273.1
million for
the nine
months ended
September
30, 2021
and 2020,
respectively.
The yield
on our portfolio
was 2.64%
and 3.67%
for the nine
months ended
September
30, 2021 and
2020, respectively.
For
the nine
months ended
September
30, 2021
as compared
to the nine
months ended
September
30, 2020,
there was
a $0.1 million
increase in
interest
income due
to the $1,284.9
million increase
in average
RMBS,
partially
offset by the
103 bps decrease
in the yield
on
average RMBS.
34
Our interest
 
income for
 
the three
 
months ended
 
September
 
30, 20212022
 
and 20202021
 
was $34.2$35.6
 
million and
 
$27.234.2 million,
 
respectively.
 
We
had average
 
RMBS holdings
 
of $5,136.3$3,571.0
 
million and
 
$3,422.65,136.3
 
million for
 
the three
 
months ended
 
September
 
30, 20212022
 
and 2020,2021,
respectively.
 
The yield
 
on our portfolio
 
was 2.66%3.99%
 
and 3.18%2.66%
 
for the three
 
months ended
 
September
 
30, 20212022 and
 
and 2020,2021, respectively.
 
respectively. For
the three
months ended
September
30, 2022,
as compared
to the three
 
months ended
 
September
 
30, 2021,
 
as compared
to the three
months
ended September
30, 2020,
there was
 
a $6.9$1.4 million
increase in
 
interest
 
income due
 
to
the $1,713.8133 bps
 
million increase in
 
inthe yield
on average
 
RMBS,
 
partially
 
offset by the
 
52 bps$1,565.3
million decrease
 
in the 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 nine
 
months ended
 
September
 
30, 20212022
 
and 2020,2021,
 
and for each
 
quarter of
 
20212022 to date
 
and 2020.2021.
 
($ 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, 20212022
$
5,016,5503,458,277
$
119,781112,760
$
5,136,3313,571,037
$
33,11132,297
$
1,0583,313
$
35,610
3.74%
11.75%
3.99%
June 30, 2022
4,069,334
191,393
4,260,727
31,894
3,374
35,268
3.14%
7.05%
3.31%
March 31, 2022
5,335,353
210,491
5,545,844
40,066
1,791
41,857
3.00%
3.40%
3.02%
December 31, 2021
5,878,376
177,883
6,056,259
42,673
1,748
44,421
2.90%
3.93%
2.93%
September 30, 2021
5,016,550
119,781
5,136,331
33,111
1,058
34,169
2.64%
3.53%
2.66%
June 30, 2021
4,436,135
68,752
4,504,887
29,286
(32)
29,254
2.64%
(0.18)%
2.60%
March 31, 2021
3,997,965
34,751
4,032,716
26,869
(13)
26,856
2.69%
(0.15)%
2.66%
December 31, 2020
3,603,885
29,746
3,633,631
25,933
(40)
25,893
2.88%
(0.53)%
2.85%
September 30, 2020
3,389,037
33,527
3,422,564
27,021
202
27,223
3.19%
2.41%
3.18%
June 30, 2020
3,088,603
38,176
3,126,779
27,004
254
27,258
3.50%
2.67%
3.49%
March 31, 2020
3,207,467
62,392
3,269,859
35,286
385
35,671
4.40%
2.47%
4.36%
Nine Months Ended
September 30, 20212022
$
4,483,5504,287,655
$
74,428171,548
$
4,557,9784,459,203
$
89,266104,257
$
1,0138,478
$
112,735
3.24%
6.59%
3.37%
September 30, 2021
4,483,550
74,428
4,557,978
89,266
1,013
90,279
2.65%
1.81%
2.64%
September 30, 2020
3,228,369
44,699
3,273,068
89,311
841
90,152
3.69%
2.51%
3.67%
Interest Expense and the Cost of Funds
We had average
 
outstanding
 
borrowings
 
of $4,367.0$4,304.0
 
million and
 
$3,116.6 million4,367.0
 
million and total
 
total interest
 
expense of
 
$5.132.2 million
 
and $23.0$5.1
million for
 
the nine months
 
ended September
 
30, 20212022
 
and 2020,2021,
 
respectively. Our
 
average cost
 
of funds
 
was 0.15%1.00%
 
for the nine
 
months
ended September
 
30, 2021,2022,
 
compared
 
to 0.99%0.15%
 
for the comparable
 
period in
 
2020.2021.
 
The $18.0$27.1
 
million decreaseincrease
 
in interest
 
expense
was
due to the
 
8485 bps decreaseincrease
 
in the average
 
cost of funds,
 
partially
 
offset by the
 
$1,250.563.0 million
 
million increasedecrease
 
in average
 
outstanding
 
borrowings
during the
 
nine months
 
ended September
 
30, 20212022,
 
as compared
 
to the nine
 
months ended
 
September
 
30, 2020.2021.
Our economic
 
interest
 
expense
 
was $15.5$26.4
 
million and
 
$40.615.5 million
 
for the nine
 
months ended
 
September
 
30, 20212022
 
and 2020,2021,
respectively. There
was a 35
bps increase
in the average
economic
cost of funds
to 0.82%
for the nine
months ended
September
30,
2022,
from 0.47%
for the nine
months ended
September
30, 2021.
We had average
outstanding
borrowings
of $3,446.4
million and
$4,864.3
million and
total interest
expense of
$21.4 million
and $1.6
million for
the three
months ended
September
30, 2022
and 2021,
respectively. Our
average
cost of funds
was 2.48%
and 0.13%
for three
months ended
September
30, 2022
and 2021,
respectively. There
was a 235
bps increase
in the average
cost of funds
and a $1,417.9
million decrease
in average
outstanding
borrowings
during the
three months
ended September
30, 2022,
compared
to the three
months
ended September
30, 2021.
Our economic
interest
expense
was $16.3
million and
$2.8 million
for the three
months ended
September
30, 2022
and 2021,
respectively. There
was a 166
bps increase
in the average
economic
cost of funds
to 1.89%
for the
three months
ended September
30,
2022 from
0.23% for
the three
months ended
September
30, 2021.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31
respectively. There
 
was a 127
 
bps decrease
 
in the average
 
economic
 
cost of funds
 
to 0.47%
 
for the nine
 
months ended
September
30,
2021 from
1.74% for
the nine
months ended
September
30, 2020.
We had average
outstanding
borrowings
of $4,864.3
million and
$3,228.0
million and
total interest
expense of
$1.6 million
and $2.0
million for
the three
months ended
September
30, 2021
and 2020,
respectively. Our
average
cost of funds
was 0.13%
and 0.25%
for three
months ended
September
30, 2021
and 2020,
respectively. There
was a 12
bps decrease
in the average
cost of funds
and a $1,636.3
million increase
in average
outstanding
borrowings
during
the three
months ended
September
30, 2021,
compared
to the three
months
ended September
30, 2020.
Our economic
interest
expense
was $2.8
million and
$8.9 million
for the three
months ended
September
30, 2021
and 2020,
respectively. There
was a 88
bps decrease
in the average
economic
cost of funds
to 0.23%
for the
three months
ended September
30,
2021 from
1.11% for the three
months ended
September
30, 2020.35
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
 
429 bps above
 
the average
 
one-month
 
LIBOR and
 
381 bps below
 
the average
 
six-month
 
LIBOR for
for the quarter
 
ended September
 
30, 2021.2022.
 
Our average
 
economic cost
 
cost of funds
 
was 1430 bps
 
abovebelow the
 
average one-month
 
LIBOR and
140 bps below
 
7 bps
above the average
 
average six-month LIBOR
 
LIBOR for
the quarter
 
ended September
 
30, 2021.2022.
 
The average
 
term to maturity
 
of the outstanding
repurchase
 
agreements
 
decreased
to 30was 29 days
 
at September
 
30, 20212022
 
from 31and 27 days
 
at December
 
31, 2020.2021.
The tables
 
below present
 
the average
 
balance of
 
borrowings
 
outstanding,
 
interest
 
expense and
 
average cost
 
of funds,
 
and average
one-month
 
and six-month
 
LIBOR rates
 
for the nine
 
months ended
 
September
 
30, 2021
 
2022 and 2020,
 
2021, and
for each
 
quarter in
 
20212022 to date
 
and
20202021 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
September 30, 20212022
$
4,864,2873,446,420
$
1,57021,361
$
16,318
2.48%
1.89%
June 30, 2022
4,111,544
8,180
6,184
0.80%
0.60%
March 31, 2022
5,354,107
2,655
3,942
0.20%
0.29%
December 31, 2021
5,728,988
2,023
9,972
0.14%
0.70%
September 30, 2021
4,864,287
1,570
2,818
0.13%
0.23%
June 30, 2021
4,348,192
1,556
6,660
0.14%
0.61%
March 31, 2021
3,888,633
1,941
5,985
0.20%
0.62%
December 31, 2020
3,438,444
2,011
7,801
0.23%
0.91%
September 30, 2020
3,228,021
2,043
8,943
0.25%
1.11%
June 30, 2020
2,992,494
4,479
10,230
0.60%
1.37%
March 31, 2020
3,129,178
16,523
21,423
2.11%
2.74%
Nine Months Ended
September 30, 20212022
$
4,367,0374,304,024
$
5,06732,196
$
26,444
1.00%
0.82%
September 30, 2021
4,367,037
5,067
15,463
0.15%
0.47%
September 30, 2020
3,116,564
23,045
40,596
0.99%
1.74%
Average GAAP Cost of Funds
Average Economic Cost of Funds
Relative to Average
Relative to Average
Average LIBOR
One-Month
Six-Month
One-Month
Six-Month
One-Month
Six-Month
LIBOR
LIBOR
LIBOR
LIBOR
Three Months Ended
September 30, 2022
2.19%
3.29%
0.29%
(0.81)%
(0.30)%
(1.40)%
June 30, 2022
0.93%
1.90%
(0.13)%
(1.10)%
(0.33)%
(1.30)%
March 31, 2022
0.25%
0.76%
(0.05)%
(0.56)%
0.04%
(0.47)%
December 31, 2021
0.09%
0.23%
0.05%
(0.09)%
0.61%
0.47%
September 30, 2021
0.09%
0.16%
0.04%
(0.03)%
0.14%
0.07%
June 30, 2021
0.10%
0.18%
0.04%
(0.04)%
0.51%
0.43%
March 31, 2021
0.13%
0.23%
0.07%
(0.03)%
0.49%
0.39%
December 31, 2020Nine Months Ended
0.15%September 30, 2022
0.27%1.12%
0.08%1.98%
(0.12)%
(0.98)%
(0.30)%
(1.16)%
September 30, 2021
0.10%
0.19%
0.05%
(0.04)%
0.76%0.37%
0.64%0.28%
36
Gains or Losses
The table
below presents
our gains
or losses
for the nine
and three
months ended
September
30, 20202022
and 2021.
0.17%
0.35%
0.08%
(0.10)%
0.94%
0.76%
June 30, 2020
0.55%
0.70%
0.05%
(0.10)%
0.82%
0.67%
March 31, 2020
1.34%
1.43%
0.77%
0.68%
1.40%
1.31%(in thousands)
Nine Months Ended September 30,
Three Months Ended September 30,
2022
2021
Change
2022
2021
Change
Realized (losses) gains on sales of RMBS
$
(132,672)
$
(3,068)
$
(129,604)
$
(66,143)
$
2,977
$
(69,120)
Unrealized losses on RMBS
(692,781)
(107,386)
(585,395)
(212,221)
(11,239)
(200,982)
Total losses on
RMBS
(825,453)
(110,454)
(714,999)
(278,364)
(8,262)
(270,102)
Gains on interest rate futures
207,681
852
206,829
84,713
574
84,139
Gains on interest rate swaps
172,069
12,446
159,623
65,966
3,000
62,966
(Losses) gains on payer swaptions (short positions)
(80,183)
3,507
(83,690)
(35,239)
2,295
(37,534)
Gains on payer swaptions (long positions)
150,445
5,477
144,968
59,131
1,767
57,364
Gains (losses) on interest rate caps
988
-
988
(499)
-
(499)
Gains (losses) on interest rate floors
-
1,345
(1,345)
-
45
(45)
Gains (losses) on TBA securities (short positions)
14,194
864
13,330
10,642
(2,306)
12,948
Gains (losses) on TBA securities (long positions)
1,200
(8,559)
9,759
106
-
106
Total gains
from derivative instruments
466,394
15,932
450,462
184,820
5,375
179,445
We invest in
RMBS with
the intent
to earn net
income from
the realized
yield on those
assets over
their related
funding and
hedging
costs, and
not for the
purpose of
making short
term gains
from sales.
However, we
have sold,
and may continue
to sell,
existing
assets to
acquire new
assets, which
our management
believes might
have higher
risk-adjusted
returns in
light of current
or anticipated
interest
rates,
federal government
programs
or general
economic conditions
or to manage
our balance
sheet as part
of our asset/liability
management
strategy. During
the nine
months ended
September
30, 2022 and
2021, we
received proceeds
of $2,731.5
million and
$2,598.9
million,
respectively, from
the sales
of RMBS.
During the
three months
ended September
30, 2022
and 2021,
we received
proceeds
of $796.9
million and
$918.0 million,
respectively, from
the sales
of RMBS.
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
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 2022
to date and
2021.
5 Year
10 Year
15 Year
30 Year
Three
U.S. Treasury
U.S. Treasury
Fixed-Rate
Fixed-Rate
Month
Rate
(1)
Rate
(1)
Mortgage Rate
(2)
Mortgage Rate
(2)
LIBOR
(3)
September 30, 2022
4.04%
3.80%
5.35%
6.11%
3.45%
June 30, 2022
3.00%
2.97%
4.65%
5.52%
1.97%
March 31, 2022
2.42%
2.33%
3.39%
4.17%
0.84%
December 31, 2021
1.26%
1.51%
2.35%
3.10%
0.21%
September 30, 2021
1.00%
1.53%
2.18%
2.90%
0.12%
June 30, 2021
0.87%
1.44%
2.27%
2.98%
0.13%
March 31, 2021
0.94%
1.75%
2.39%
3.08%
0.19%
(1)
Historical 5 and 10 Year
U.S. Treasury Rates are obtained from quoted end
of day prices on the Chicago Board Options Exchange.
(2)
Historical 30 Year and
15 Year Fixed
Rate Mortgage Rates are obtained from Freddie Mac’s Primary
Mortgage Market Survey.
(3)
Historical LIBOR is obtained from the Intercontinental Exchange Benchmark
Administration Ltd.
37
Expenses
For the nine
and three
months ended
September
30, 2022,
the Company’s
total operating
expenses
were approximately
$14.9 million
and $5.2
million, respectively,
compared
to approximately
$10.9 million
and $3.7
million, respectively,
for the nine
and three
months ended
September
30, 2021.
The table
below presents
a breakdown
of operating
expenses for
the nine
and three
months ended
September
30,
2022 and
2021.
(in thousands)
Nine Months Ended September 30,
Three Months Ended September 30,
2022
2021
Change
2022
2021
Change
Management fees
$
7,881
$
5,569
$
2,312
$
2,616
$
2,156
$
460
Overhead allocation
1,482
1,189
293
522
390
132
Accrued incentive compensation
763
884
(121)
212
259
(47)
Directors fees and liability insurance
929
874
55
308
279
29
Audit, legal and other professional fees
899
832
67
293
212
81
Direct REIT operating expenses
2,281
1,024
1,257
1,064
309
755
Other administrative
624
514
110
203
69
134
Total expenses
$
14,859
$
10,886
$
3,973
$
5,218
$
3,674
$
1,544
Direct REIT operating expenses were higher in both the nine and three
month periods ended September 30, 2022, as compared to
the same periods in 2021 primarily due to increased commissions and fees related
to the Company’s interest rate derivative positions.
We are externally managed and advised by Bimini Advisors, LLC (the “Manager”) pursuant
to the terms of a management
agreement. The management agreement has been renewed through February
20, 2023 and provides for automatic one-year extension
options thereafter and is subject to certain termination rights.
Under the terms of the management agreement, the Manager is
responsible for administering the business activities and day-to-day operations of
the Company.
The Manager receives a monthly
management fee in the amount of:
●
One-twelfth of 1.5% of the first $250 million of the Company’s month end equity, as defined in the management agreement,
●
One-twelfth of 1.25% of the Company’s month end equity that is greater than $250 million
and less than or equal to $500
million, and
●
One-twelfth of 1.00% of the Company’s month end equity that is greater than $500 million.
Should the Company terminate the management agreement without cause,
it will pay the Manager a termination fee equal to three
times the average annual management fee, as defined in the management
agreement, before or on the last day of the term of the
agreement.
The Company is obligated to reimburse the Manager for any direct expenses incurred
on its behalf and to pay the Manager the
Company’s pro rata portion of certain overhead costs set forth in the management
agreement.
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
will pay 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 $10,000 per month.
38
The following table summarizes the management fee and overhead allocation
expenses for the nine months ended September 30,
2022 and 2021, and for each quarter in 2022 to date and 2021.
($ in thousands)
Average
Average
Advisory Services
Orchid
Orchid
Management
Overhead
Three Months Ended
MBS
Equity
Fee
Allocation
Total
September 30, 2022
$
3,571,037
$
839,935
$
2,616
$
522
$
3,138
June 30, 2022
4,260,727
866,539
2,631
519
3,150
March 31, 2022
5,545,844
853,576
2,634
441
3,075
December 31, 2021
6,056,259
806,382
2,587
443
3,030
September 30, 2021
5,136,331
672,384
2,156
390
2,546
June 30, 2021
4,504,887
542,679
1,792
395
2,187
March 31, 2021
4,032,716
456,687
1,621
404
2,025
Nine Months Ended
September 30, 2022
$
4,459,203
$
853,350
$
7,881
$
1,482
$
9,363
September 30, 2021
4,557,978
557,250
5,569
1,189
6,758
Financial
Condition:
Mortgage-Backed Securities
As of September
30, 2022,
our RMBS
portfolio
consisted
of $3,201.2
million of
Agency RMBS
at fair value
and had a
weighted
average coupon
on assets
of 3.31%.
During the
nine months
ended September
30, 2022,
we received
principal
repayments
of $376.2
million compared
to $413.0
million
for the nine
months ended
September
30, 2021.
The average
three month
prepayment
speeds for
the
quarters
ended September
30, 2022
and 2021
were 6.5%
and 12.4%,
respectively.
The following
table presents
the 3-month
constant prepayment
rate (“CPR”)
experienced
on our structured
and PT RMBS
sub-
portfolios,
on an annualized
basis, for
the quarterly
periods presented.
CPR is a
method of
expressing
the prepayment
rate for
a mortgage
pool that
assumes that
a constant
fraction
of the remaining
principal
is prepaid
each month
or year. Specifically,
the CPR
in the chart
below represents
the three
month prepayment
rate of the
securities
in the respective
asset category.
Structured
PT RMBS
RMBS
Total
Three Months Ended
Portfolio (%)
Portfolio (%)
Portfolio (%)
September 30, 2022
6.1
10.4
6.5
June 30, 2022
8.3
13.7
9.4
March 31, 2022
8.1
19.5
10.7
December 31, 2021
9.0
24.6
11.4
September 30, 2021
9.8
25.1
12.4
June 30, 2021
10.9
29.9
12.9
March 31, 2021
9.9
40.3
12.0
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
32
September 30, 2021
0.10%
0.19%
0.05%
(0.04)%
0.37%
0.28%
September 30, 2020
0.68%
0.83%
0.31%
0.16%
1.06%
0.91%
Gains or Losses39
The tablefollowing
 
below presentstables summarize
 
our gainscertain characteristics
 
or lossesof the Company’s
 
for the ninePT RMBS
 
and threestructured
 
months endedRMBS as of
 
September
 
30, 20212022
and December
 
and 2020.
31, 2021:
($ in thousands)
Nine Weighted
Percentage
Average
of
Weighted
Maturity
Fair
Entire
Average
in
Longest
Asset Category
Value
Portfolio
Coupon
Months Ended
Maturity
September 30, 2022
Three Months Ended September 30,
2021
2020
Change
2021
2020
Change
Realized (losses) gains on sales ofFixed Rate RMBS
$
(3,068)3,150,403
98.4%
3.30%
341
1-Aug-52
Interest-Only Securities
50,274
1.6%
3.72%
278
25-Nov-51
Inverse Interest-Only Securities
537
0.0%
1.51%
289
15-Jun-42
Total Mortgage Assets
$
(24,522)3,201,214
100.0%
3.31%
336
1-Aug-52
December 31, 2021
Fixed Rate RMBS
$
21,4546,298,189
96.7%
2.93%
342
1-Dec-51
Interest-Only Securities
210,382
3.2%
3.40%
263
25-Jan-52
Inverse Interest-Only Securities
2,524
0.1%
3.75%
300
15-Jun-42
Total Mortgage Assets
$
2,9776,511,095
100.0%
3.03%
325
25-Jan-52
($ in thousands)
September 30, 2022
December 31, 2021
Percentage of
Percentage of
Agency
Fair Value
Entire Portfolio
Fair Value
Entire Portfolio
Fannie Mae
$
4982,231,699
69.7%
$
2,4794,719,349
Unrealized (losses) gains on RMBS72.5%
(107,386)Freddie Mac
38,440969,515
(145,826)30.3%
(11,239)1,791,746
1,168
(12,407)27.5%
Total (losses)Portfolio
$
3,201,214
100.0%
$
6,511,095
100.0%
September 30, 2022
December 31, 2021
Weighted Average Pass-through Purchase Price
$
107.06
$
107.19
Weighted Average Structured Purchase Price
$
18.08
$
15.21
Weighted Average Pass-through Current Price
$
89.44
$
105.31
Weighted Average Structured Current Price
$
17.32
$
14.08
Effective Duration
(1)
5.800
3.390
(1)
Effective duration is the approximate percentage change in price
 
gains on RMBSfor a 100 bps change in rates.
An effective duration of 5.800 indicates that an
(110,454)
13,918
(124,372)
(8,262)
1,666
(9,928)
Gains (losses) on interest rate futuresincrease of 1.0% would be expected to cause a 5.800% decrease in the value
of the RMBS in the Company’s investment portfolio
852at September 30, 2022.
(13,161)
14,013
574
(119)
693
Gains (losses) onAn effective duration of 3.390 indicates that an interest rate swaps
12,446
(67,713)
80,159
3,000
489
2,511
Gains (losses) on payer swaptions (short positions)
3,507
(1,561)
5,068
2,295
(672)
2,967
Gains (losses) on payer swaptions (long positions)
5,477
(3,287)
8,764
1,767
914
853
Gains (losses) on interest rate floors
1,345
-
1,345
45
-
45
Gains (losses) on TBA securities (short positions)
864
(6,282)
7,146
(2,306)
95
(2,401)
(Losses) gains on TBA securities (long positions)
(8,559)
4,469
(13,028)
-
3,336
(3,336)
(Losses) gains on U.S. Treasury securities (short
-
(95)
95
-
36
(36)
Total (losses)increase
 
gainsof 1.0% would be expected to cause a 3.390%
decrease in the value of the RMBS in the Company’s investment portfolio
at December 31, 2021. These figures include the structured securities
in the portfolio, but do not include the effect of the Company’s funding
cost hedges.
Effective duration quotes for individual investments are
obtained from derivative instrumentsThe Yield Book, Inc.
15,932
(87,630)
103,562
5,375
4,079
1,296
We invest inThe following
 
RMBS withtable presents
 
the intenta summary
 
to earn net
income from
the realized
yield on thoseof portfolio
 
assets over
their related
funding and
hedging
costs, and
not for the
purpose of
making short
term gains
from sales.
However, we
have sold,
and may continue
to sell,
existing
assets to
acquire new
assets, which
our management
believes might
have higher
risk-adjusted
returns in
light of current
or anticipated
interest
rates,
federal government
programs
or general
economic conditions
or to manage
our balance
sheet as part
of our asset/liability
management
strategy. During
the nine
months ended
September
30, 2021
and 2020,
we received
proceeds
of $2,598.9
million and
$2,692.2
million,
respectively, from
the sales
of RMBS.
Most of these
sales during
the nine
months ended
September
30, 2020
occurredacquired
 
during the
 
second
half of March
2020 as we
sold assets
in order
to maintain
sufficient
cash and liquidity
and reduce
risk associated
with the
market turmoil
brought about
by COVID-19.
During the
threenine months
 
ended September
 
30, 20212022
 
and 2020,2021,
including
 
we receivedsecurities
 
proceedspurchased
 
of $918.0during the
 
million and
$668.9 million,period that
 
respectively, fromsettled after
 
the sales
end of RMBS.
Realized and
unrealized
gains and
losses on
RMBS are
driven in
part by changes
in yields
and interest
rates, which
affect the
pricing
of the securities
in our portfolio.
The unrealized
gains and
losses on
RMBS also
include the
premium lost
as a result
of prepayments
on
the underlying
mortgages,
decreasing
unrealized
gains or
increasing
unrealized
losses as
speeds or
premiums increase.
Gains and
losses
on interest
rate futures
contracts
are affected
by changes
in implied
forward
rates during
 
the reportingperiod,
 
period.if any.
The table
below presents($ in thousands)
historical
interest
rate data
for each
quarter end
during 2021
to date and
2020.2022
5 Year
10 Year
15 Year
30 Year
Three
U.S. Treasury
U.S. Treasury
Fixed-Rate
Fixed-Rate
Month
Rate
(1)
Rate
(1)
Mortgage Rate
(2)
Mortgage Rate
(2)
LIBOR
(3)
September 30, 2021
1.00%Total Cost
1.53%Average
2.18%Price
2.90%Weighted
0.12%Average
June 30, 2021Yield
0.87%Total Cost
1.44%Average
2.27%Price
2.98%Weighted
0.13%Average
March 31, 2021Yield
0.94%Pass-through RMBS
1.75%$
2.39%622,535
3.08%$
0.19%100.66
December 31, 20204.24%
0.36%$
0.92%4,871,121
2.22%$
2.68%106.96
0.23%1.56%
September 30, 2020Structured RMBS
0.27%-
0.68%-
2.39%-
2.89%125,728
0.24%13.04
June 30, 2020
0.29%
0.65%
2.60%
3.16%
0.31%
March 31, 2020
0.38%
0.70%
2.89%
3.45%
1.10%
(1)
Historical 5 and 10 Year
U.S. Treasury Rates are obtained from quoted end
of day prices on the Chicago Board Options Exchange.
(2)
Historical 30 Year and
15 Year Fixed
Rate Mortgage Rates are obtained from Freddie Mac’s
Primary Mortgage Market Survey.3.80%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
33
(3)
Historical LIBOR is obtained from the Intercontinental Exchange Benchmark
Administration Ltd.
Expenses
For the nine
and three months
ended September
30, 2021,
the Company’s
total operating
expenses were
approximately
$10.9 million
and $3.7 million,
respectively, compared
to approximately
$7.7 million
and $2.8 million,
respectively, for
the nine
and three months
ended September
30, 2020.
The table
below presents
a breakdown
of operating
expenses for
the nine and
three months
ended September
30, 2021 and
2020.
(in thousands)
Nine Months Ended September 30,
Three Months Ended September 30,
2021
2020
Change
2021
2020
Change
Management fees
$
5,569
$
3,897
$
1,672
$
2,156
$
1,252
$
904
Overhead allocation
1,189
1,072
117
390
377
13
Accrued incentive compensation
884
(117)
1,001
259
158
101
Directors fees and liability insurance
874
750
124
279
242
37
Audit, legal and other professional fees
832
841
(9)
212
240
(28)
Direct REIT operating expenses
1,024
852
172
309
406
(97)
Other administrative
514
451
63
69
174
(105)
Total expenses
$
10,886
$
7,746
$
3,140
$
3,674
$
2,849
$
825
We are externally managed and advised by Bimini Advisors, LLC (the “Manager”) pursuant
to the terms of a management
agreement. The management agreement has been renewed through February
20, 2022 and provides for automatic one-year extension
options thereafter and is subject to certain termination rights.
Under the terms of the management agreement, the Manager is
responsible for administering the business activities and day-to-day operations of
the Company.
The Manager receives a monthly
management fee in the amount of:
●
One-twelfth of 1.5% of the first $250 million of the Company’s month end equity, as defined in the management agreement,
●
One-twelfth of 1.25% of the Company’s month end equity that is greater than $250 million
and less than or equal to $500
million, and
●
One-twelfth of 1.00% of the Company’s month end equity that is greater than $500 million.
The Company is obligated to reimburse the Manager for any direct expenses incurred
on its behalf and to pay the Manager the
Company’s pro rata portion of certain overhead costs set forth in the management
agreement. Should the Company terminate the
management agreement without cause, it will pay the Manager a termination
fee equal to three times the average annual management
fee, as defined in the management agreement, before or on the last day of the
term of the agreement.
The following table summarizes the management fee and overhead allocation
expenses for each quarter in 2021 to date and
2020.
($ in thousands)
Average
Average
Advisory Services
Orchid
Orchid
Management
Overhead
Three Months Ended
MBS
Equity
Fee
Allocation
Total
September 30, 2021
$
5,136,331
$
672,384
$
2,156
$
390
$
2,546
June 30, 2021
4,504,887
542,679
1,792
395
2,187
March 31, 2021
4,032,716
456,687
1,621
404
2,025
December 31, 2020
3,633,631
387,503
1,384
442
1,826
September 30, 2020
3,422,564
368,588
1,252
377
1,629
June 30, 2020
3,126,779
361,093
1,268
348
1,616
March 31, 2020
3,269,859
376,673
1,377
347
1,724
34
Nine Months Ended
September 30, 2021
$
4,557,978
$
557,250
$
5,569
$
1,189
$
6,758
September 30, 2020
3,273,068
368,785
3,897
1,072
4,969
Financial
Condition:
Mortgage-Backed Securities
As of September
30, 2021,
our RMBS
portfolio
consisted
of $5,601.4
million of
Agency RMBS
at fair value
and had a
weighted
average coupon
on assets
of 3.02%.
During the
nine months
ended September
30, 2021,
we received
principal
repayments
of $413.0
million compared
to $384.3
million
for the nine
months ended
September
30, 2020.
The average
three month
prepayment
speeds for
the
quarters
ended September
30, 2021
and 2020
were 12.4%
and 17.0%,
respectively.
The following
table presents
the 3-month
constant prepayment
rate (“CPR”)
experienced
on our structured
and PT RMBS
sub-portfolios,
on an annualized
basis, for
the quarterly
periods presented.
CPR is a method
of expressing
the prepayment
rate for a
mortgage pool
that assumes
that a constant
fraction
of the remaining
principal is
prepaid each
month or year.
Specifically, the
CPR in the
chart below
represents
the three month
prepayment
rate of the
securities
in the respective
asset
category.
Structured
PT RMBS
RMBS
Total
Three Months Ended
Portfolio (%)
Portfolio (%)
Portfolio (%)
September 30, 2021
9.8
25.1
12.4
June 30, 2021
10.9
29.9
12.9
March 31, 2021
9.9
40.3
12.0
December 31, 2020
16.7
44.3
20.1
September 30, 2020
14.3
40.4
17.0
June 30, 2020
13.9
35.3
16.3
March 31, 2020
9.8
22.9
11.9
The following
tables summarize
certain characteristics
of the Company’s
PT RMBS
and structured
RMBS as of
September
30, 2021
and December
31, 2020:
($ in thousands)
Weighted
Percentage
Average
of
Weighted
Maturity
Fair
Entire
Average
in
Longest
Asset Category
Value
Portfolio
Coupon
Months
Maturity
September 30, 2021
Fixed Rate RMBS
$
5,458,562
97.4%
2.96%
342
1-Oct-51
Total Mortgage-backed Pass-through
5,458,562
97.4%
2.96%
342
1-Oct-51
Interest-Only Securities
140,078
2.5%
3.39%
250
25-Aug-51
Inverse Interest-Only Securities
2,783
0.1%
3.75%
304
15-Jun-42
Total Structured RMBS
142,861
2.6%
3.40%
253
25-Aug-51
Total Mortgage Assets
$
5,601,423
100.0%
3.02%
326
1-Oct-51
December 31, 2020
Fixed Rate RMBS
$
3,560,746
95.5%
3.09%
339
1-Jan-51
Fixed Rate CMOs
137,453
3.7%
4.00%
312
15-Dec-42
Total Mortgage-backed Pass-through
3,698,199
99.2%
3.13%
338
1-Jan-51
Interest-Only Securities
28,696
0.8%
3.98%
268
25-May-50
Total Structured RMBS
28,696
0.8%
3.98%
268
25-May-50
35
Total Mortgage Assets
$
3,726,895
100.0%
3.19%
333
1-Jan-51
($ in thousands)
September 30, 2021
December 31, 2020
Percentage of
Percentage of
Agency
Fair Value
Entire Portfolio
Fair Value
Entire Portfolio
Fannie Mae
$
4,315,090
77.0%
$
2,733,960
73.4%
Freddie Mac
1,286,333
23.0%
992,935
26.6%
Total Portfolio
$
5,601,423
100.0%
$
3,726,895
100.0%
September 30, 2021
December 31, 2020
Weighted Average Pass-through Purchase Price
$
107.61
$
107.43
Weighted Average Structured Purchase Price
$
15.53
$
20.06
Weighted Average Pass-through Current Price
$
106.88
$
108.94
Weighted Average Structured Current Price
$
13.40
$
10.87
Effective Duration
(1)
3.350
2.360
(1)
Effective duration is the approximate percentage change in price
for a 100 bps change in rates.
An effective duration of 3.350 indicates that an
interest rate increase of 1.0% would be expected to cause a 3.350% decrease in the value
of the RMBS in the Company’s investment portfolio
at September 30, 2021.
An effective duration of 2.360 indicates that an interest rate increase
of 1.0% would be expected to cause a 2.360%
decrease in the value of the RMBS in the Company’s investment portfolio
at December 31, 2020. These figures include the structured securities
in the portfolio, but do not include the effect of the Company’s funding
cost hedges.
Effective duration quotes for individual investments are
obtained from The Yield Book, Inc.
The following
table presents
a summary
of portfolio
assets acquired
during the
nine months
ended September
30, 2021
and 2020,
including
securities
purchased during
the period
that settled
after the
end of the
period, if
any.
($ in thousands)
2021
2020
Total Cost
Average
Price
Weighted
Average
Yield
Total Cost
Average
Price
Weighted
Average
Yield
Pass-through RMBS
$
4,871,121
$
106.96
1.56%
$
3,012,072
$
107.22
1.67%
Structured RMBS
125,728
13.04
3.80%
-
-
-40
Borrowings
As of September
 
30, 2021,2022,
 
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
 
2320 of these
 
counterparties.
 
None of these
 
lenders are
 
affiliated
 
with
the Company. These
 
borrowings
 
are secured
 
by the Company’s
 
RMBS and
 
cash, and
 
bear interest
 
at prevailing
 
market rates.
 
We believe
our established
 
repurchase
 
agreement
 
borrowing
 
facilities
 
provide borrowing
 
capacity in
 
excess of
 
our needs.
As of September
 
30, 2021,2022,
 
we had obligations
 
outstanding
 
under the
 
repurchase
 
agreements
 
of approximately
 
$5,213.93,133.9
 
million with
 
a
net weighted
 
average borrowing
 
cost of 0.13%3.00%.
 
The remaining
 
maturity of
 
our outstanding
 
repurchase
 
agreement
 
obligations
 
ranged from
13 to 349122
 
days, with
 
a weighted
 
average remaining
 
maturity of
 
3029 days.
 
Securing
 
the repurchase
 
agreement
 
obligations
 
as of September
30, 20212022
 
are RMBS
 
with an estimated
 
fair value,
 
including
 
accrued
 
interest,
 
of approximately
 
$5,430.33,206.4
 
million and
 
a weighted
 
average
maturity
 
of 344345 months,
 
and cash
 
pledged to
 
counterparties
 
of approximately
 
$47.549.4 million.
 
Through
 
October 28,27,
 
2021,2022, we
 
have been
able
able to maintain
 
our repurchase
 
facilities
 
with comparable
 
terms to
 
those that
 
existed at
 
September
 
30, 20212022,
 
with maturities
 
through January
September
14, 2022.30, 2023.
The table below presents information about our period end,
 
maximum and average balances of borrowings for each quarter in
36
20212022 to date and 2020.2021.
($ 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
September 30, 20212022
$
5,213,8693,133,861
$
5,214,2544,047,606
$
4,864,2873,446,420
$
(312,559)
(9.07)%
June 30, 2022
3,758,980
4,464,544
4,111,544
(352,564)
(8.57)%
March 31, 2022
4,464,109
6,244,106
5,354,107
(889,998)
(16.62)%
(1)
December 31, 2021
6,244,106
6,419,689
5,728,988
515,118
8.99%
September 30, 2021
5,213,869
5,214,254
4,864,287
349,582
7.19%
June 30, 2021
4,514,704
4,517,953
4,348,192
166,512
3.83%
March 31, 2021
4,181,680
4,204,935
3,888,633
293,047
7.54%
December 31, 2020
3,595,586
3,597,313
3,438,444
157,142
4.57%
September 30, 2020
3,281,303
3,286,454
3,228,021
53,282
1.65%
June 30, 2020
3,174,739
3,235,370
2,992,494
182,245
6.09%
March 31, 2020
2,810,250
4,297,621
3,129,178
(318,928)
(10.19)%
(1)
(1)
The lower ending balance relative to the average balance during the quarter
 
ended March 31, 20202022 reflects the disposal of RMBS pledged as
collateral in order to maintain cash and liquidity in response to the dislocations in the financial
and mortgage markets resulting from the
economic impacts of COVID-19.
collateral. During the quarter ended March 31, 2020,2022, the Company’s investment
 
in RMBS decreased $642.1$510.4 million.
Liquidity and Capital Resources
Liquidity
 
is our ability
 
to turn non-cash
 
assets into
 
cash, purchase
 
additional
 
investments,
 
repay principal
 
and interest
 
on borrowings,
fund overhead,
 
fulfill margin
 
calls and
 
pay dividends.
 
Our principalWe have both
 
immediateinternal
and external
 
sources of
 
liquidity. However,
our material
unused sources
of liquidity
 
include cash
 
balances,
 
unencumbered
assets and
 
borrowingsour ability
 
under repurchaseto sell encumbered
 
agreements.assets to
raise cash.
 
Our borrowing
balance sheet
 
capacity will
vary over
time as the
market value
of our interest
earning assets
varies.
Our balance
sheet also
generates
 
liquidity
 
on an on-going
 
basis through
 
payments of
 
principal
 
and interest
 
we
receive on
 
on our RMBS
 
portfolio.
 
Management
 
believes that
 
we currently
 
have sufficient
 
liquidity
 
and capital
 
resources
 
available
 
for (a) the
acquisition
 
of additional
investments
 
consistent
 
with the
 
size and nature
 
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
 
from time
to time by
 
selling our
equity or
 
debt securities
 
in public
 
offerings or
 
or private placements.
41
Internal
 
placements.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
difficulty converting
 
our assets
 
to cash should
 
our liquidity
 
needs ever
 
exceed our
 
immediately
 
available
 
sources of
 
cash.
 
Our structured
RMBS
RMBS portfolio
 
also consists
 
entirely of
 
of governmental
 
agency securities,
 
although
 
they typically
 
do not trade
 
with comparable
 
bid / ask
spreads as
 
as
PT RMBS.
 
However, we anticipate
 
that we would
 
be able to
 
liquidate such
 
such securities
 
readily, even in
 
in distressed
 
markets,
although
 
we
would likely
 
likely do
so at prices
 
prices below where
 
where such
securities
 
could be sold
 
sold in a more
 
more stable
market.
 
To enhance our liquidity
 
even
further, we may
 
we
may pledge a
 
a portion of
 
of our structured
 
RMBS as
 
part of a
 
repurchase
 
agreement
 
funding,
 
but retain
 
the cash in
 
lieu of acquiring
additional
 
additional
assets.
 
In this way
 
we can, at
 
a modest
 
cost, retain
 
higher levels
 
of cash on
 
hand and
 
decrease
 
the likelihood
 
we will have
 
to
sell assets
 
in
a distressed
 
market in
 
order to
 
raise cash.
Our strategy
 
for hedging
 
our funding
 
costs typically
 
involves
 
taking short
 
positions
 
in interest
 
rate futures,
 
treasury
 
futures,
 
interest
 
rate
swaps, interest
 
rate swaptions
 
or other
 
instruments.
 
When the
 
market causes
 
these short
 
positions
 
to decline
 
in value we
 
are required
 
to
meet margin
 
calls with
 
cash.
 
This can
 
reduce our
 
liquidity
 
position
 
to the extent
 
other securities
 
in our portfolio
 
move in price
 
in such a
 
way
that we do
 
not receive
 
enough cash
 
via margin
 
calls to
 
offset the
derivative
 
related margin
 
calls. If
 
this were
 
to occur
 
in sufficient
magnitude,
 
the loss of
 
liquidity
 
might force
 
us to reduce
 
the size
 
of the levered
 
portfolio,
 
pledge additional
 
structured
 
securities
 
to raise
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
 
stated expiration,
 
but can be
 
terminated
 
at
any time at
 
at our option
 
or at the
 
option of
 
the
counterparty. However,
 
However, once
a definitive
 
repurchase
 
agreement
 
under a master
 
repurchase
agreement
 
has been
 
entered into,
 
it generally
may not be
 
terminated
 
by either
 
party.
 
A negotiated
 
termination
 
can occur, but
 
may involve
a fee to
 
be paid by
 
the party
 
seeking to
terminate
 
the repurchase
 
agreement
 
transaction,
as it did
during the
three months
ended March
31, 2020.
37transaction.
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
 
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,
 
needed, as
do we.
 
Typically, but not
 
always, the
 
parties agree
 
to a minimum
threshold
 
amount for
 
margin calls
 
so as to avoid
 
the need
 
for nuisance
 
margin calls
 
on a daily
 
basis.
Our master
 
repurchase
 
agreements
do not specify
 
the haircut;
 
rather haircuts
 
are determined
 
on an individual
 
repurchase
 
transaction
 
basis. Throughout
 
the nine months
ended September
 
30, 2021,2022,
 
haircuts on
 
our pledged
 
collateral
 
remained
 
stable and
 
as of September
 
30, 2021,2022,
 
our weighted
 
average
haircut was
 
approximately
 
5.0%4.6% of
 
the value
 
of our collateral.
While we
did not have
any TBAs at
September
30, 2021,
we do acquire
TBAs from
time to time.
TBAs represent
 
a form of
 
off-balance
sheet financing
 
and are
accounted
 
for as derivative
 
instruments.
 
(See Note
 
4 to our Financial
 
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
 
or make physical
 
delivery
 
of the underlying
 
securities.
 
If we were
 
required to
take
physical delivery
 
to take physicalsettle
 
delivery toa long TBA,
 
settle a longwe would
 
TBA, we
would
have to fund
 
our total
 
purchase
 
commitment
 
with cash
 
or other
 
financing
 
sources and
 
our
liquidity
 
position could
 
be negatively
 
impacted.
 
42
Our TBAs
 
are also
 
subject to
 
margin requirements
 
governed
 
by the Mortgage-Backed
 
Securities
 
Division ("MBSD")
 
of the FICC
 
and
by our masterMaster
 
securitiesSecurities
 
forwardForward
 
transactionTransaction
 
agreements,Agreements
 
(“MSFTAs”), which may
 
may establish
 
margin levels
 
in excess
 
of the MBSD.
 
Such provisions
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
 
of our
TBAs and
 
of the pledged
 
collateral
 
securing such
 
contracts.
 
In the event
 
of a margin
 
call, we
 
must generally
 
provide additional
 
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.
As discussedWe invest a
 
earlier, we investportion of
 
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
 
repurchase
market.
 
This structured
 
RMBS strategy
 
has been a
 
a core element
 
of the Company’s
 
overall investment
 
strategy
 
since
inception.
 
However,
we have and
 
have and may continue
 
continue to pledge
 
pledge a
portion
 
of our structured
 
RMBS in order
 
order to raise
 
raise our
cash levels,
 
but generally
will not
 
pledge these
securities
 
in order
 
to acquire
 
additional
 
assets.
The following
table summarizes
the effect
on our liquidity
and cash
flows from
contractual
obligations
for repurchase
agreements
and
interest
expense on
repurchase
agreements.
(in thousands)
Obligations Maturing
Within One
Year
One to Three
Years
Three to Five
Years
More than
Five Years
Total
Repurchase agreements
$
5,213,869
$
-
$
-
$
-
$
5,213,869
Interest expense on repurchase agreements
(1)
1,281
-
-
-
1,281
Totals
$
5,215,150
$
-
$
-
$
-
$
5,215,150
(1)
Interest expense
on repurchase
agreements is
based on current
interest rates
as of September
30, 2021 and
the remaining
term of the liabilities
existing at
that date.
In future
 
periods,
 
we expect
 
to continue
 
to finance
 
our activities
 
in a manner
 
that is consistent
 
with our
 
current operations
 
through
38
repurchase
 
agreements.
 
As of September
 
30, 2021,2022,
 
we had cash
 
and cash equivalents
 
of $424.1$214.2
 
million.
 
We generated
 
cash flows
 
of
$497.8496.2 million
 
from principal
 
and interest
 
payments on
 
our RMBS
 
and had average
 
repurchase
 
agreements
 
outstanding
 
of $4,367.0$4,304.0
 
million
during the
 
nine months
 
ended September
 
30, 2021.2022.
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 January 23, 2020, we entered into the January 2020 Equity Distribution Agreement
with three sales agents pursuant to which
we could offer and sell, from time to time, up to an aggregate amount of $200,000,000 of
shares of our common stock in transactions
that were deemed to be “at the market” offerings and privately negotiated transactions.
We issued a total of 3,170,727 shares under
the January 2020 Equity Distribution Agreement for aggregate gross proceeds of $19.8
million, and net proceeds of approximately
$19.4 million, after commissions and fees, prior to its termination in August
2020.
On August 4, 2020, we entered into the August 2020 Equity Distribution Agreement with
 
four sales agents pursuant to which we
could offer and sell, from time to time, up to an aggregate amount of $150,000,000 of
 
shares of our common stock in transactions that
were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total
 
of 27,493,6505,538,730 shares under the
August 2020 Equity Distribution Agreement for aggregate gross proceeds of approximately
 
$150.0 million, and net proceeds of
approximately $147.4 million, after commissions and fees,
 
prior to its termination in June 2021.
On January 20, 2021, we entered into the January 2021 Underwriting Agreement
 
with J.P. Morgan Securities LLC (“J.P.
 
Morgan”),
relating to the offer and sale of 7,600,0001,520,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from
the Company pursuant to the January 2021 Underwriting Agreement at $5.20$26.00 per
 
share. In addition, we granted J.P. Morgan a 30-day
option to purchase up to an additional 1,140,000228,000 shares of our common stock
on the same
terms and conditions, which J.P. Morgan
exercised in full on January 21, 2021. The closing of the offering of 8,740,0001,748,000 shares of our
 
common stock occurred on January 25,
2021, with proceeds to us of approximately $45.2 million, net of offering expenses.
On March 2, 2021, we entered into the “MarchMarch 2021 Underwriting Agreement with
J.P.
Morgan, relating to the offer and sale of
8,000,0001,600,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from the Company pursuant to the
March 2021 Underwriting Agreement at $5.45$27.25 per share. In addition, we granted
 
J.P.
 
Morgan a 30-day option to purchase up to an
additional 1,200,000240,000 shares of our common stock on the same terms and conditions,
 
conditions, which J.P. Morgan exercised in full on March 3,
2021. The closing of the offering of 9,200,0001,840,000 shares of our common stock occurred on March
 
5, 2021, with proceeds to us of
approximately $50.0
 
million, net of offering expenses payable.
43
On June 22, 2021, we entered into an equity distribution agreement (the “Junethe June 2021
Equity Distribution Agreement”)Agreement with four
sales agents pursuant to which we may
could offer and sell, from time to time, up to an aggregate amount of $250,000,000 of
shares of our common stock in transactions that
were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total
of 9,881,467 shares under the
June 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately
$250.0 million, and net proceeds of
approximately $246.2 million, after commissions and fees, prior to its termination in October
2021.
On October 29, 2021, we entered into the October 2021 Equity Distribution
Agreement with four sales agents pursuant to which
we may offer and sell, from time to time, up to an aggregate
amount of $250,000,000 of shares
of our
common stock in transactions
that are deemed to be “at the market” offerings and privately
negotiated transactions. Through
September 30, 2021,2022, we issued a total
of 41,568,3383,167,140 shares under the JuneOctober 2021 Equity Distribution
Agreement for aggregate
gross
proceeds of approximately $211.0 $78.3
million, and net proceeds of approximately $207.5$77.0 million, after commissions and fees.
Subsequent
to September 30, 2021 and through October 29, 2021, we issued a total of 7,838,998
shares under the June 2021 Equity Distribution
Agreement for aggregate gross proceeds of approximately $39.0 million, and net proceeds
of approximately $38.4 million, after
commissions and fees.
Outlook
Economic Summary
The effects ofevolution
 
COVID-19 continued
to dominate
of economic
 
activity duringand market
developments
pivoted in
 
the third quarter
 
quarter of
2022.
Trends in place
since late
2021 particularlyhave
changed in
 
the Delta
variant thatthird
 
first emergedquarter.
 
in earnest duringThe outlook
 
July.for the domestic
 
Daily new infections
from the Delta
variant rose
rapidly during
the summer
but
appeared to
peak in early
September and
have been slowly
falling since.
COVID related
deaths have
followed a
similar
pattern.
Progress on
vaccinations
has slowed,
and mosteconomy of
 
the new casesUnited
 
were amongStates, particularly
with respect
to inflation,
 
the unvaccinated.level
 
This has ledof
interest
 
torates and
expectations
for monetary
policy from
the Fed changed
during the
quarter.
As the second
quarter of
2022 ended,
the
market expected
that the
39
monetary
various measures
tightening
policies implemented
 
by governments
and corporationsthe Fed
 
to mandate employeescontrol
 
receive vaccinations.inflation
 
The net effectwould soon
 
of a
spreading virussucceed, and
 
and a reluctancethat by
 
onearly in
2023 the part
 
of many toFed would
 
get vaccinatedlikely start
 
has been subduedto unwind
 
job growththeir rate
increases
in order
to avert
an economic
slowdown
resulting
from these
policies. The
catalyst for
the changes
that occurred
 
during the
 
third quarter
 
of
2021. 2022 was
 
This is particularlyclear evidence
 
true among workersthat not
 
with highonly was
 
exposure toinflation
 
customers,persisting,
 
such as thosebut that
 
init
was becoming
more broad
based and
entrenched.
As the leisureFed
 
and hospitality
industries.
Thethe various
forms of pandemic
related supplemental
unemployment
insurance
ended in early
September, so job
growth may
accelerate
in the fourth
quarter.
In the interim,
the combination
of a reluctance
to return to
work on the
part of
many individuals,
coupled with
sufficient income
via unemployment
insurance,
has resulted
in both robust
demand for
goods
and services
and shortages
of labor in
many industries.
Coupled with
a demand/supply
imbalance in
favor of demand
for
many commodities
and parts, the
combination
of the two
forces has
led to severe
supply shortages
across the
economy.
The
supply imbalances
for goods and
services
have in turn
led to price
pressures
for both, driving
inflation to
multi-decade highs.
The Fed chairman,
among other
 
members of
 
the FederalFOMC
 
Open Market
Committee
(“FOMC”) have
maintained
these
inflationary
forces are
temporary and
will ease once
the effectsbecame aware
 
of the COVIDthis, their
 
pandemicpublic
comments consistently
 
fade and workerssought to
 
can returndispel the
 
to work.notion that
 
Yet, as implied bythey would
 
market pricingbe easing
 
ofmonetary
policy in
early 2023
as the futures
markets were
pricing.
As the quarter
unfolded
and the inflation
 
linked U.S.
Treasury securities
and opinions
expressed by
various market
participants,
inflation
may prove to
be more than
transitory, and
of late even
FOMC members
themselves
have admitted
inflation has
remained high
longer than
they had anticipated.
Over the course
of the third
quarter and
into the fourth,
expectations
for growth
in the U.S.
economy during
the third
quarterdata continued
 
to decline.
On October
28, 2021, the
advanced read
on gross
domestic product
growth for
the U.S.
economy was
reported to
be 2.0%.
Expectations
for growth
during the
quarter were
approximately
4% to 7% at
the beginning
of the quarter. As
noted above,
job growth
has decelerated
and supply
constraints
of goods and
services
are keeping
activity
levels suppressed.
Over the course
of the balance
of the year
it should become
apparent whether
or not the
supply
constraints,
especially
with respect
to labor, are transitory
or not now
that essentially
all forms
of pandemic
related
unemployment
insurance
have ended and
the new cases
of the Delta
variant of
the COVID
virus are
subsiding. This
in turn
should also
answer the
question about
the transitory
nature of inflation.
The housing
market remains
robust as evidenced
by sales
of new and existing
homes, as
well as new
home construction.
However, as home
prices have
risen at 10%
– 20% over
the last year
and supply
shortages
of goods and
materials
are
constraining
new home construction,reflect
 
this trend,
 
may slow.the market
 
If this were
to occur,
it would be
beneficial
for the Company’s
RMBS
portfolio
as prepayments
related to housing
turnover may
decelerate.
Legislative
Response and
the Fed
Congress passed
the CARES Act
quickly in
responsegrew to
 
the pandemic’s
emergence in
the spring
of 2021and followed
with
additional
legislation
over the ensuing
months.
However, as certain
provisions
of the CARES
Act expired,
such as
supplemental
unemployment
insurance in
July of 2021,
there appeared
to be a need
for additional
stimulus
for the economy
to
deal with the
surge in the
pandemicaccept that
occurred as
cold weather
set in, particularly
over the Christmas
holiday.
As
mentioned above,
the Federal
government
eventually
passed an additional
stimulus
package in late
December of
2020 and
again in March
of 2021. In
addition,
 
the Fed haswould
 
provided,
and continues
have to provide,
as much support
to the markets
and the
economy as
it can within
the constraints
of its mandate.
During the
third quarter
of 2020,raise the
 
Fed unveiledFunds
 
a new monetary
policy frameworktarget further
 
focused on averageinto restrictive
 
territory.
The inflation
data for
September
of 2022,
released
in early October
of 2022,
was
again very
strong and
broad based.
The market
now expects
the terminal
 
rate targetingto approach
 
that allows5% and the
Fed to raise
 
the Fed Funds
 
rate to remainby
at least 125
 
quite low, evenbasis points
 
ifduring the
fourth quarter
of 2022 alone.
The incoming
economic data
– other than
inflationary
data – has
generally
been very
strong as
well, implying
the Fed rate
increases
have yet to
have an impact
on the economy
other than
the most rate
sensitive
sectors.
Contributing
to the change
in economic
and interest
rate trends
were developments
abroad, particularly
in Europe
and the United
Kingdom.
While inflation
has proven
to be more
robust and
challenging
to control
in the U.S.,
it has been
even more
so in Europe
and
most of the
world outside
of China,
which is grappling
with persistent
COVID-19
cases that
have forced
the government
to intermittently
lock down
various population
centers.
The war
in Ukraine
has contributed
significantly
to food
and energy
price pressures
globally, more
so than in
the U.S.
The result
is essentially
all central
banks across
the globe
– outside
of China
and Japan
– are raising
rates.
Like the
Fed, the
central banks’
efforts have
yet to slow
inflation
and more
rate hikes
are very likely.
Food and
energy inflation
poses additional
pressure
on governments
who are
eager to
ease the
burden of
elevated prices
for essentials
like food
and energy, but
are constrained
because their
efforts themselves
might increase
inflationary
pressures
and run counter
to central
bank actions
that are
attempting
to
constrain
economic activity
and demand.
A further
complicating
factor has
been the
U.S. dollar.
As the Fed
is forced
to continue
to raise
rates in
the U.S.,
the dollar
has
appreciated
against all
other currencies.
This in turn
forces other
central banks
to raise
rates to
protect their
own currencies,
often above
and beyond
what their
domestic economic
circumstances
might warrant.
Risk sentiment
is at extremely
depressed
levels and
all asset
classes across
the financial
markets have
generated
negative
year-to-
date returns
for 2022,
outside of
energy and
certain food
commodities.
Economic growth
is expected
 
to temporarilycontinue
 
surpassto slow over
the balance
of the year,
both in the
 
2% target level.U.S. and
 
Further,globally, and likely
contract
in 2023.
44
Interest
Rates
As the Fedmarket
 
has indicatedincorporated
 
that it willinflation
 
look pastdata and
the Fed’s response
through the
 
presence of
very
tight labor
markets, should
they be present
at the time.
This marks
a significant
shift from
their prior
policy framework,
which
was focused
on the unemployment
rate as a key
indicator
of impending
inflation.
Adherence to
this policy
could steepen
the
U.S. Treasury
curve as short-term
rates could
remain low
for a considerable
period but
longer-term
rates could
rise given the
Fed’s intention
to let inflation
potentially
run above 2%
in the future
as the economy
more fully
recovers.
The response
of U.S.
Treasury rates
appeared to
follow this
pattern precisely
during the first
quarter of
2021,
but have since
reversed since
early in
the second quarter
 
2021.
Interest Rates
Interest ratesof 2022,
 
across interest
rates began
to rise
materially.
On August
1, 2022,
the 10-year
 
U.S. Treasury
 
curve and U.S.Note closed
 
dollar swap
curve were
little changed
during the
third quarter
of
2021.
The only
notable development
within the
rates complex
was the slight
flattening of
both curves
between the
five-
and
40
30-year points
as the market
anticipates
the eventual
tapering of
asset purchases
beginning
in the fourth
quarter of
2021 and
increases
to the Fed funds
rate in either
the second
half of 2022
or early 2023.
As described
above, the Delta
variant of
the COVID virus
has dominated
economic
activity, both during
the third quarter
of
2021 and generally
since Marchwith a yield
 
of 2020.2.5759%,
 
However, shortly before
the FOMC
 
and the Fedbegan to
 
chairman have
looked through
the effects
of thetemper
pandemic and
see the impact
fading.
At the conclusion
of the September
FOMC meeting,
the Fed chairman
was not
ambiguous in
expressing
his viewmarket expectations
 
that the economy
 
had made “substantialFed would
 
further progress”pivot away
 
towards achievingfrom their
 
their dual
mandates of
price stabilitytightening
 
and full employment.
As a result,
the Fed appearedbegin
 
to indicate
that it was
close to commencing
the
tapering of
their asset
purchases.
More specifically,
the Fed chairman
indicated they
are likely
to begin the
tapering of
their
asset purchases
this year
and that they
would likely
complete the
tapering by
mid next year.
The Fed also
released their
summary of
economic projections,
or “Dot Plot”
as it is known,
at the conclusion
of the meeting
and, as was
the case with
the
June FOMC
Dot Plot,
the Dot Plot
indicated FOMC
members anticipated
increasinglower
 
the Fed Funds
 
rate soonerin early
 
and by a larger
amount than
the market
anticipated.
Nine of the
eighteen
FOMC members,
as evidenced
by the Dot
Plot released
in
September, expect
the Fed to
increase the
funds rate
at least once
in 2022.
This surprised
the market,
and the market
pricing
of forward
short-term
rates quickly
adjusted to
reflect these
expectations.
As the fourth
quarter has
unfolded and
inflationary
pressures
have continued
to build,
market pricing
of forward
short-term
rates have
continued to
reflect additional
increases to
the Fed Funds
rate. Further,
as inflation
persists at
higher levels
and
continues to
challenge the
Fed’s assertion
that it will
prove transitory,
longer maturity
rates have moved
higher so far
in the
fourth quarter.2023.
 
The levelyield
 
of on
the 10-year
 
U.S. Treasury
 
Note closed
just above
3.83% on
September
30,
2022, and
surpassed
4% in October
of 2022.
This increase
was much
less than
the increase
in short-term
rates.
Interest
rates on
U.S. Treasury
Note maturities
inside one
year increased
by well
over 100
basis points
and by more
than 160
basis points
for maturities
of three
months or
less – in
each case
by the end
of the third
quarter of
2022.
In the case
of U.S.
Treasury Note
maturities
of three
or fewer
months, such
increases
are over
230 basis points
as of
October 26,
2022.
As of September
30, 2022,
market pricing
implied the
terminal rate
for the current
cycle would
be approximately
4.53%,
which would
be reached
late in the
first quarter
of 2023.
As of October
26, 2022,
pricing is close
for a terminal
rate of approximately
4.85%
sometime late
in the second
quarter
of 2023 and
with the
Fed Funds
rate still
approximately
4.40%
in early 2024.
The Fed has
repeatedly
acknowledged
their efforts
to bring
inflation under
control and
taking the
Fed Funds
rate above
neutral may
cause the
economy to
 
matchingenter a recession.
They deem
these steps
as necessary
to prevent
inflation
from remaining
higher than
the Fed’s
target rate
of inflation.
However, as it
appears the
 
year-to-dateFed will
 
high yieldhave to increase
 
establishedthe Fed Funds
 
on March 31,rate considerably
higher than
was believed
to
2021.be the case
even a few
months ago,
and central
banks across
the globe
are doing
likewise,
financial
conditions
have begun
to deteriorate
and liquidity
in many financial
markets has
declined.
If such trends
persist and
evidence appears
that certain
financial
markets are
not
operating
smoothly, or financial
conditions
are prohibiting
economic
activity from
operating
smoothly, central
banks may
face a dilemma
of
continuing
to increase
the Fed
Funds rate
or implementing
accommodations
to permit
the smooth
operation
of financial
markets and
the
economy –
assuming
this were
to occur
before inflation
could be
brought under
control.
The outcome
in such a
scenario
cannot be
predicted
with any
confidence.
The Agency RMBS
 
RMBS Market
PerformanceReturns for
 
for the Agency
 
RMBS market
 
for the third
 
quarter wasof
 
a modest 0.01%,2022 were
 
generally in-line
with most
other
asset classes.
The excess
return to comparable
duration U.S.
Treasuries(5.4)% and
 
swaps for
the Agency RMBS
sub-index was
0.1% for both
for the quarter.
Within the
Agency RMBS
sector, higher coupon
fixed rate
securities
outperformed
lower
coupons, specifically
the coupon currently
in widespread
production.
Total returns for the
third quarter
for 2.0% and
2.5%
securities
were -0.4%
and 0.00%,
respectively.
For 3.0% and
3.5% coupons
thethese returns
 
were 0.6% and1.7%
 
0.5%, respectively.lower than
 
comparable
Thirty-yearduration
 
and fifteen-yearLIBOR swaps.
 
securitiesThe largest
 
both returnedRMBS investors
 
0.1% forhave generally
been selling
or decreasing
their exposure
to the sector.
Agency
RMBS spreads
relative to
benchmark
interest
rates increased
to levels
observed
in March of
2020 by the
 
quarter. As mentioned
above, at the
conclusion
end of the
September FOMC
meeting the
chairman made
it quite clear
the Fed was
likely to
begin to taper
their asset
purchases this
year
and conclude
the $40 billion
per month purchases
of Agency
RMBS assets
by mid-2022.
Given the length
of time the
Fed has
been supporting
the Agency
RMBS market,
coupled with
banks that are
flush with
deposits that
need to be
invested,
price
levels in
the Agency RMBS
market were
quite rich
prior to this
development,
especially
the coupons
the Fed routinely
purchases,
which have
been the 2.0%
and 2.5% coupons
predominantly. These
factors are
what drove
the relative
underperformance
of these two
coupons for
the quarter
and has continued
to do so into
the fourth quarter.
The second driver
of Agency RMBS
performance,
both for the
 
third quarter
 
of 2021 2022
and have
 
beyond, exceeded those
levels in
October of
2022.
The largest
investors
of Agency
RMBS, the
Fed via quantitative
easing (which
is now
quantitative
tightening
 
as always,the Fed
 
the levelallows their
 
holdings of
prepayments.
 
With interest
rates relatively
steady during
the third quarter
and, after
such a prolonged
period of low
interest
rates prepayment
speeds on higher
coupon, premium
priced securities
were expectedAgency RMBS
 
to eventuallyrun-off),
 
slow.large domestic
 
This appearsbanks (which
 
due to bequantitative
finally happening,
as evidencedtightening
 
by the AugustFed
are experiencing
declines in
reserves/deposits)
 
and Septemberlarge
 
prepaymentmoney managers
 
reports, released(which have
experienced
significant
outflows
as investors
leave fixed
income investments),
are collectively
causing demand
for Agency
RMBS to
decline materially
and driving
the spread
widening.
As the U.S.
dollar has
strengthened
against most
other currencies
across the
globe, there
is the chance
certain
central banks
– namely the
Bank of
Japan – may
be forced
to intervene
 
in Septemberthe currency
markets to
support their
local currency,
in this case
the Yen.
They would
do so by selling
U.S. dollar-denominated
assets and
buying Yen.
The only U.S.
dollar-denominated
assets they
own
are U.S.
Treasuries and
Agency RMBS,
 
and October,
respectively.selling
 
As interestthese would
 
ratesrepresent
 
have moved higheranother source
 
so farof downward
pressure
on Agency RMBS.
The
relative performance
across the
Agency RMBS
universe was
skewed in
 
the fourth quarter,favor of
 
approachinghigher coupon,
 
levels last30-year securities
 
seen at thethat are
 
conclusioncurrently
 
ofin
the firstproduction
 
quarter, marketby originators.
 
participantsLower coupon
 
expect thissecurities,
 
trend to continue,especially
those held
in large
amounts by
the Fed,
 
and which
 
is reflectedmay eventually
be sold
by the Fed,
have performed
the worst.
These results
are consistent
with the
relative duration
of the securities,
as higher
coupons have
shorter durations,
or less sensitivity
to movements
 
in interest
rates.
As both the
domestic and
the global
economies
appear to
be slowing,
the more
credit sensitive
sectors of
the fixed
income markets
have come
under pressure
and are
likely to weaken
further if
the economies
do indeed
contract.
Actions by
the Fed as
described
above
may prevent
the sector
from performing
well in the
near term
but, if the
economy does
contract
and enter
a recession,
the sector
could do
well on a
relative performance
 
of these coupons
quarter tobasis owing
 
date.to the lack
of credit
exposure
of Agency
RMBS.
This is consistent
with the
sector’s history
of
performance
in a counter-cyclical
manner –
doing well
when the
economy is
soft and
relatively
poorly when
the economy
is strong.
45
Recent Legislative
 
and Regulatory
 
Developments
The Fed conductedIn response
 
large scale
overnight repo
operations
from late
2019 until
July 2020 to
address disruptions the deterioration
 
in the markets
for U.S.
Treasuries, Agency
Treasury, Agency debt
RMBS and
other mortgage
 
and Agencyfixed
 
MBS financingincome markets
resulting
 
markets. These
operations
ceased in
July 2020 after
the central
bank
successfully
tamed volatile
funding costs
that had threatened
to cause disruption
acrossfrom the
 
financial
system.
41
The Fed has
taken a number
of other actions
to stabilize
markets as
a resultimpacts of
 
the impacts
of the COVID-19
 
pandemic.
In
March of 2020,pandemic,
 
the Fed announced
a $700 billion
asset purchase
program to
provide liquidity
to the U.S.
Treasury and Agency
RMBS markets.
The Fed also
lowered the
Fed Funds rate
to a range of
0.0% – 0.25%,
after having
already lowered
the Fed
Funds rate
by 50 bps earlier
in the month.
Later that
same month
the Fed announcedimplemented
 
a program to
 
acquire U.S.of quantitative
 
Treasuries
and Agencyeasing.
 
RMBS in theThrough November
 
amounts needed
to support
smooth market
functioning.
With these
purchases,
market conditionsof 2021,
improved substantially.
Currently, the Fed iswas
 
committed
 
to purchasing
 
$80 billion
 
of U.S. Treasuries
 
and $40 billion
 
of Agency
RMBS each month.
 
Chairman Powellmonth. In
November of
2021, it
began tapering
its net asset
purchases
each month
 
and the Fedended
 
have reiteratednet asset
 
their commitmentpurchases
 
to this levelentirely
by early March
 
of asset purchases2022.
 
at every
meeting sinceOn May 4,
 
their meeting2022, the
FOMC announced
 
on June 30,a plan for
 
2020. At 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
 
2021 meeting,21, 2022,
the FOMC
announced
 
the Fed generally
assessed that,
provided that
the economic
recovery remained
broadly on
track, a gradual
tapering process
that concluded
around the
middle of
next year
would likely
be appropriate.
The Fed noted
that if a
Fed’s decision
 
to begin taperingcontinue
 
purchases
occurred atreducing
 
the next meeting,balance
 
thesheet by a
processmaximum of
 
tapering could
commence with
the monthly
purchase calendars
beginning in
either mid-November
or mid-
December. The Fed
has taken various
other steps
to support
certain other
fixed income
markets, to
support mortgage
servicers
and to implement
various portions
of the Coronavirus
Aid, Relief,
and Economic
Security (“CARES”)
Act.
The CARES
Act was passed
by Congress
and signed into
law on March
27, 2020.
This over
$2 trillion
COVID-19 relief
bill, among
other things,
provided for
direct payments
to each American
making up to
$75,000 a year, increased
unemployment
benefits for
up to four
months (on
top of state
benefits),
funding to
hospitals
and health providers,
loans and
investments
to businesses,
states and municipalities
and grants
to the airline
industry. On April
24, 2020, President
Trump
signed an additional
funding bill
into law that
provided an
additional
$48460 billion
 
of funding
to individuals,
small businesses,
hospitals,
health care
providersU.S Treasuries
 
and additional$35
billion of
 
coronavirusAgency RMBS
 
testing efforts.
Various provisions
of the CARES
Act began to
expire in
July 2020,
including
a moratorium
on evictions,
expanded unemployment
benefits,
and a moratorium
on foreclosures.per month.
On August 8,January
 
2020, President
Trump issued
Executive Order
13945, directing29, 2021,
 
the DepartmentCDC issued
 
of Health and
Human Services,
the Centers
for Disease
Control and
Prevention
(“CDC”),
the Department
of Housing
and Urban Development,
and
Department
of the Treasury
to take measures
to temporarily
halt residential
evictions and
foreclosures,
including
through
temporary
financial
assistance.
On December
27, 2020, an
additional
$900 billion
coronavirus
aid package
was signed
into law as
part of the
Consolidated
Appropriations
Act of 2021,
providing for
extensions
of many of
the CARES Act
policies and
programs as
well as additional
relief. The
package provided
for, among other
things, direct
payments to
most Americans
with a gross
income of
less than
$75,000 a year, extension
of unemployment
benefits through
March 14, 2021,
funding for
procurement
of vaccines
and health
providers,
loans to qualified
businesses,
funding for
rental assistance
and funding for
schools. On
January 29,
2021, the CDC
issued guidance
extending
 
eviction
 
moratoriums
 
for covered
 
persons throughput
 
March 31,in place by
 
2021, whichthe CARES
 
was Act
through March
31, 2021.
The FHFA subsequently
extended
 
to July 31,
2021. On August
26, 2021, the
U.S. Supreme
Court issued
a decision
ending the
CDC eviction
moratorium.
In addition,
on
February 9,
2021, the FHFA announced
that the foreclosure
 
moratorium
begun under
the CARES Act
 
for loans
 
backed by
Fannie Mae
 
and Freddie
 
Mac
and the eviction
 
eviction moratorium
 
for real estate
 
estate owned
by Fannie
 
Mae and Freddie
 
Mac were
extended until
 
MarchJuly 31,
 
2021 which
was further
extended throughand
 
September
 
30, 2021. On2021,
respectively. The
 
July 30, 2021,U.S. Housing
and Urban
Development
Department
subsequently
extended
 
the FHA
announced an
 
extensionforeclosure
 
of theand eviction
 
moratoriummoratoria
 
throughto
July 31, 2021,
and September
 
30, 2021, for
 
foreclosedrespectively.
 
borrowersDespite
 
and other occupants
and noted the expirations
 
expirationof these
foreclosure
moratoria,
a final rule
adopted by
the
CFPB on
June 28,
2021, effectively
prohibited
servicers
from initiating
a foreclosure
before January
1, 2022,
in most instances.
Foreclosure
activity has
risen since
the end of
 
the moratorium,
with foreclosure
 
moratorium
on July 31, 2021.
On March 11, 2021,starts in
 
the $1.9 trillionthird
 
American Rescue
Plan Actquarter of
 
2021 was signed2022 up 167%
 
into law.from the
comparable
 
This stimulusperiod in
 
program2021, but
still remaining
slightly
below pre-pandemic
levels.
furtheredIn January
2019, the
 
Federal government’sTrump administration
 
efforts made statements
of its plans
to stabilizework with
Congress to
overhaul
Fannie Mae
and Freddie
Mac and expectations
to announce
a framework
for the development
of a policy
for comprehensive
housing finance
reform soon.
On
September
30, 2019,
 
the economy andFHFA announced
 
provide assistancethat Fannie
Mae and Freddie
Mac were
allowed to
increase their
capital buffers
 
to sectors$25 billion
and $20 billion,
 
of the population
still
sufferingrespectively, from
 
the variousprior
 
physical andlimit of $3
 
economic effectsbillion each.
 
of the pandemic.
On SeptemberThis step
 
30, 2019, thecould ultimately
 
FHFA announced thatlead to
 
Fannie Mae
 
and Freddie
 
Mac were allowedbeing
privatized
 
to increase
their capital
buffers to $25
billion and
$20 billion,
respectively, from represents
 
the prior limitfirst
 
of $3 billionconcrete
 
each. step on the
road to GSE
reform.
On June 30,
 
30, 2020, the
 
the FHFA released
 
a
proposed rule
 
rule on a
new
regulatory
 
framework for
 
for the GSEs which
 
which seeks
to implement
 
both a risk-based
 
capital framework
 
and minimum
minimum leverage
 
capital
requirements.
 
The final
 
rule on the
 
new capital
 
framework
 
for the GSEs
 
was published
 
in the federal
register in
 
register
in December
2020.
 
On
January 14,
 
14, 2021, the
 
U.S. Treasury
 
and the FHFA executed
 
executed letter
agreements
 
allowing
the GSEs
GSEs to continue
 
to retain capital
 
capital up
to their
regulatory
 
minimums,
 
including buffers,
 
buffers, as
prescribed
 
in the December
 
rule.
 
These letter
 
agreements
 
provide, in
 
in part, (i)
 
there will
 
be no
exit from
 
from conservatorship
 
until all
 
material litigation
 
is settled
 
and
the GSE has
 
has common equity
 
equity Tier
1 capital
 
of at least
 
3% of its
 
assets, (ii)
the GSEs
 
the GSEs will comply
 
comply with the
 
the FHFA’s regulatory capital
42
capital framework,
 
(iii) higher-risk
 
single-family
 
mortgage
acquisitions
 
will be
restricted
 
to
current levels,
 
levels,and (iv)
the U.S.
Treasury and
 
(iv) the U.S.
Treasury and theFHFA will
 
FHFA will establish
 
a timeline
 
and process
 
for future
 
GSE reform.
 
However, no definitive
proposals
 
or
legislation
 
have been
released
 
or enacted with
 
with respect to
 
to ending the
 
the conservatorship,
 
unwinding the
 
the GSEs,
or materially
reducing the
 
the roles
of the GSEs
 
GSEs in the U.S.
 
U.S. mortgage
 
market. On
 
June 23, 2021,
President Biden
removed the
director of
the
FHFA and appointed
an acting
director. On September
 
14, 2021, the
 
the U.S.
Treasury and
the FHFA suspended
 
certain
policy provisions
 
added toin the
letter
agreements
on January
 
14, 2021, agreement,
including
 
limits on
 
the enterprises'loans acquired
 
for cash windows,
consideration,
 
multifamily
 
lending,loans, loans
 
with higher
risk
risk characteristics
 
and second
 
homes and
investment
 
properties.
 
The enterprisesOn February
25, 2022,
the FHFA published
a final rule,
effective as
of
April 26,
2022, amending
the GSE capital
framework
established
in December
2020 by, among
other things,
replacing
the fixed
leverage
buffer equal
to 1.5% of
a GSE’s adjusted
total assets
with a dynamic
leverage
buffer equal
to 50% of
a GSE’s stability
capital buffer,
reducing
the risk weight
floor from
10% to 5%,
and removing
the requirement
that the
GSEs must
apply an overall
effectiveness
adjustment
to their
credit risk
transfer
exposures.
On June 14,
2022, the
GSEs announced
that they
 
will continueeach
charge a
50 bps fee
for
commingled
securities
issued on
or after
July 1, 2022
 
to build cover
the additional
capital required
for such
securities
 
under the
continuing
 
provisionsGSE capital
framework.
Industry
groups have
expressed
concern that
this poses
a risk to
the fungibility
 
of the letterUniform
 
agreements.Mortgage-Backed
 
Additionally, theSecurity
(“UMBS”),
 
FHFA is reviewingwhich could
 
the enterprisenegatively
 
regulatoryimpact liquidity
 
capital framework
and expects
to announce
further actionpricing
 
in the nearmarket
 
future.for TBA
securities.
46
In 2017,
policymakers
 
announced that
 
that LIBOR will
 
will be replaced by
 
by December 31,
 
31, 2021.
The directive
 
was spurred
 
by the
fact that banks
 
that
banks are
uncomfortable
 
contributing
 
to the LIBOR
 
panel given
 
the shortage
 
of underlying
 
transactions
 
on which
to
base levels
 
and the
liability
 
associated
 
with submitting
 
an unfounded
 
level. TheHowever,
 
the ICE Benchmark
 
Administration,
 
in its capacity
as administrator
of
USD LIBOR,
has announced
that it intends
to extend
publication
 
of USD LIBOR
 
has confirmed
that it will
cease publication
of (i) the(other than
 
one-week and
 
two-month USD
 
LIBOR
settings immediately
following the
LIBOR publication
on December
31, 2021, and
(ii) the overnight
and one, three,
six and 12-
month USD
LIBOR settings
immediately
following the
LIBOR publication
on June 30,
2023. A joint
statementtenors) by
 
18
months to
June 2023.
Notwithstanding
this extension,
a joint statement
by key regulatory
authorities
 
calls on banks
 
to cease
entering
 
into
new contracts
 
that use
USD LIBOR
as a reference
rate by no
later than
December
31, 2021.
On December
7, 2021,
the CFPB
released
a final rule
that amends
Regulation
Z, which
implemented
the Truth in
Lending Act,
aimed
at addressing
cessation
of LIBOR
for both
closed-end
(e.g., home
mortgage)
and open-end
(e.g., home
equity line
of credit)
products.
The
rule, which
mostly became
effective
in April
of 2022,
establishes
requirements
for the selection
of replacement
indices for
existing LIBOR-
linked consumer
loans. Although
the rule
does not
mandate the
use of SOFR
as the alternative
rate, it
identifies
SOFR as a
comparable
rate for
closed-end
products
and states
that for
open-end products,
the CFPB
has determined
that ARRC’s
recommended
spread-adjusted
indices based
on SOFR for
consumer products
to replace
the one-month,
three-month,
or six-month
USD LIBOR
index “have
historical
fluctuations
that are
substantially
similar to
those of
the LIBOR
indices that
they are
intended
to replace.”
The CFPB
reserved judgment,
however, on a
SOFR-based
spread-adjusted
replacement
index to
replace the
one-year USD
 
LIBOR as auntil
 
reference rateit obtained
 
by no lateradditional
information.
 
than
December 31,On March 15,
 
2021. The Alternative2022, the
 
Reference RatesAdjustable
 
Committee,Interest
 
a steeringRate (LIBOR)
 
committee comprisedAct (the “LIBOR
Act”) was
signed into
law as part
 
of large U.S.the Consolidated
Appropriations
 
financial
institutions,Act, 2022
 
has proposed(H.R. 2471).
 
replacing USD-LIBORThe LIBOR
 
withAct provides
for a new SOFR,statutory
 
a rate based
on U.S. repo
trading. Many
banks believe
that it may
take four to
five years
to complete
the transition
to SOFR, for
certain, despite
the 2021 deadline.
We will monitor
the
emergence of
this new rate
carefully
as it will
potentially
become the newreplacement
 
benchmark
 
rate for
contracts
that use LIBOR
as a benchmark
and do not
contain any
fallback mechanism
independent
of LIBOR.
Pursuant to
the LIBOR
Act, SOFR
becomes the
new
benchmark
rate by operation
of law for
any such contract.
The LIBOR
Act establishes
a safe harbor
from litigation
for hedgesclaims
arising out
of
or related
to the use
of SOFR
as the recommended
benchmark
replacement.
The LIBOR
Act makes
clear that
it should not
be construed
to disfavor
the use of
any benchmark
on a prospective
basis.
On July 28,
2022, the
Fed published
a proposed
rule to implement
the LIBOR
Act.
Since the
GSEs have
generally
been using
30-day
average SOFR
in their
newly issued
multifamily
loans and
 
other structured
products,
the Fed proposed
that the
benchmark
replacement
for Agency
RMBS be
the 30-day
average SOFR
plus the applicable
tenor spread
adjustment
specified
in the LIBOR
Act. Comments
for
the proposed
rule closed
August 29,
2022, and
any final
rule will
go into effect
30 days after
publication
in the Federal
Register.
The LIBOR
Act also
attempts
to forestall
challenges
that it is
impairing
contracts.
It provides
that the
discontinuance
of LIBOR
and the
automatic
statutory
transition
to a rangereplacement
rate neither
impairs or
affects the
rights of
 
interest rate
investments.a party to
 
At this time,receive payment
 
however, no consensusunder such
 
exists ascontracts,
nor allows
a party to
discharge
their performance
obligations
or to declare
a breach
of contract.
It amends
the Trust Indenture
Act of 1939
to state
that the
“the right
of any holder
of any indenture
security
 
to what ratereceive
payment of
the principal
of and interest
on such indenture
security shall
not be deemed
to be impaired
 
or rates mayaffected”
 
become acceptedby application
 
alternativesof the LIBOR
 
Act to LIBOR.any
indenture
security.
Effective January
 
1, 2021, Fannie
 
Fannie Mae,
in alignment
 
with Freddie
 
Mac, willextended
 
extend the timeframe
 
for its delinquent
 
loan
buyout policy
 
policy
for Single-Family
 
Uniform Mortgage-Backed
 
Securities
 
(UMBS) and
 
Mortgage-Backed
 
Securities
 
(MBS) from
four consecutively
 
missed
monthly payments
 
payments to
twenty-four
 
consecutively
 
missed monthly
 
payments (i.e.,
 
24 months past
due). This
 
past due).
This new
timeframe
 
will applyapplied to
to outstanding
 
single-family
 
pools and newly
 
newly issued
single-family
 
pools and was
 
was first
reflected when
 
January 2021reflected
 
factors werewhen January
 
released on2021 factors
 
were released
on
the fourth business
 
business day
in February
 
2021.
 
For Agency
 
RMBS investors,
 
when a delinquent
 
loan is bought
 
out of a pool
 
pool of mortgage
 
loans, the removal
 
removal of
the loan
from the pool
is the same
 
as a total
 
prepayment
 
of the loan.
 
The respective
 
GSEs currently
anticipate,anticipated,
 
however, that
delinquent loans
 
delinquent
loans will
be repurchased
 
in
most cases
 
before the
24-month
 
deadline under
 
one of the
following
 
exceptions
 
listed
below.
•
 
a loan that
 
is paid in
 
full, or where
 
where the related
 
related lien
is released
 
and/or the
 
note debt is
 
is satisfied
 
or forgiven;
•
 
a loan repurchased
 
by a seller/servicer
 
under applicable
 
selling and
 
and servicing
 
requirements;
•
 
a loan entering
 
a permanent
 
modification,
 
which generally
 
requires it
 
it to be removed
 
removed from the MBS.
 
During the MBS (during
any
modification
 
trial
period, the
 
the loan will
 
remain in the
 
the MBS until
 
the trial
 
period ends;ends);
47
•
 
a loan subject
 
to a short
 
sale or
deed-in-lieu
 
of foreclosure;
 
or
•
 
a loan referred
 
to foreclosure.
Because of these
 
these exceptions,
 
the GSEs currently
 
believe based
 
on prevailing
 
assumptions
 
and market
 
conditions
 
this
change will
 
will have
only a
marginal impact
 
on prepayment
 
speeds, in
 
aggregate.
 
Cohort level
 
impacts may
 
vary. For example,
more than half
 
half of loans referred
 
referred to
foreclosure
 
are historically
 
referred within
 
within six
months of
 
delinquency. The degree
 
degree to which
speeds are
 
affected dependswhich speeds
 
on delinquencyare affected
 
depends on
delinquency
levels, borrower
 
response, and
 
and referral
 
to foreclosure
 
timelines.
The scope and
 
and nature of
 
of the actions
 
the U.S.
government
 
or the Fed
 
will ultimately
 
undertake are
 
are unknown and
 
and will
continue to
 
evolve especially
in light of
the COVID-19
pandemic, President
Biden’s new
administration
and the new
Congress
in the United
States.
Effect on Us
43
Regulatory
 
developments,
 
movements
 
in interest
 
rates and
prepayment
 
rates affect
 
us in many
 
ways, including
 
the
following:
Effects on our
 
our Assets
A change in
 
in or elimination
 
of the guarantee
 
structure
 
of Agency
 
RMBS may
 
increase our
 
costs (if,
 
for example,
 
guarantee
fees
fees increase)
 
or require
 
us to change our
 
our investment
 
strategy
altogether.
 
For example,
 
the elimination
 
of the guarantee
structure
 
of Agency
RMBS may
 
may cause us to
 
to change our
 
investment
 
strategy to
 
to focus
on non-Agency
 
RMBS, which
 
in turn
would require
 
require us
to significantly
increase our
 
monitoring
 
of the credit
 
risks of our
 
our investments
 
in addition
 
to interest
 
rate and
prepayment
 
risks.
Lower long-term
 
interest rates
 
rates can
affect the
 
value of our
 
Agency RMBS
 
in a number
 
of ways. If
 
prepayment
 
rates are
relatively
 
low (due,
(due, in
 
in part, to
 
the refinancing
 
problems described
 
above), lower
 
long-term
interest
 
rates can increase
 
increase the
value
of higher-coupon
 
Agency
RMBS. This
 
This is because
 
investors typically
 
typically place
a premium
 
on assets with
 
with yields that
 
that are higher
 
higher than
market yields.
 
Although lower
 
long-termlower long-
term interest
 
rates may
increase
 
asset values
 
in our portfolio,
 
we may not
 
be able to
invest new
new funds in
similarly-yielding
 
assets.
If prepayment
 
levels increase,
 
the value of
 
of our Agency
 
RMBS 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
 
on the prepaid
 
asset is higher
 
higher than
 
market yields).
 
Also,
prepayment
 
proceeds may
 
may not
be able
to be reinvested
 
in similar-yielding
 
assets. Agency
 
RMBS backed
 
by mortgages
 
with high
high interest
 
rates are
 
more susceptible
 
to
prepayment
 
risk because
 
holders of
 
of those
mortgages
 
are most
likely to
refinance
 
to refinancea lower
 
to
a lower rate. IOs
 
IOs and IIOs,
 
however, may be
 
be the types
of Agency
 
Agency RMBS most
 
most sensitive
 
to increased
 
prepayment
 
rates.
Because the
 
the holder
of an IO
or IIO receives
no principal
payments,
the
values of
 
an IO or IIOIOs and IIOs
 
receives noare entirely
 
principal
payments, the
values of IOs
and IIOs are
entirely dependent
 
on the
existence of
 
of a principal
 
balance on the
 
the underlying
 
mortgages.
 
If the principal
 
balance
is eliminated
 
eliminated due
to prepayment,
 
IOs and IIOs
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.
 
POs. Because POs
 
POs act like
 
zero-coupon
 
bonds, meaning
 
they are
purchased
 
at a discount
 
to
their par
 
par value
and have
 
an effective
 
interest rate
 
rate based
on the discount
 
discount and
the term
 
of the underlying
 
loan, an
increase in
 
in
prepayment
 
rates would
 
reduce the effective
 
effective term
of our POs
 
POs and accelerate
 
the yields
 
earned on those
 
those assets, which
 
which would
increase our
 
net income.
Higher long-term
 
rates can also
 
also affect
the value
 
of our Agency
 
RMBS.
 
As long-term
 
rates rise,
 
rates available
 
to
borrowers
 
also rise.
 
This tends to
 
to cause prepayment
 
activity to
 
to slow and
 
extend the
 
expected average
 
life of mortgage
 
cash
flows.
 
As the expected
 
average
life of the
 
of the mortgage
 
cash flows
 
increases,
 
coupled with
 
higher discount
 
rates, the
 
value of
Agency RMBS
 
RMBS declines.
 
Some of the
instruments
 
the Company
 
uses 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
 
use such instruments
to hedge our
 
our Agency RMBS
 
RMBS assets, our
 
our hedges may
 
may not
adequately
 
protect us
 
from price
 
declines, and
 
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
 
average life
of these
 
securities
 
increases,
 
causing generally
 
positive price
 
price
movements
 
as the number
 
and size
of the cash
flows increase
 
the
cash flows longer
 
increase the
longer the
underlying
 
mortgages remain
 
remain outstanding.
 
This makes
interest
 
interest only
securities
 
desirable
hedge instruments
 
for pass-through
 
Agency RMBS.
 
48
As described
 
above, the Agency
 
Agency RMBS market
 
market began
to experience
 
severe dislocations
 
in mid-March
 
2020 as a result
 
result of
the
the economic,
 
health and
 
market turmoil
 
brought about
 
by COVID-19.
 
InOn March of23,
 
2020, the Fed
 
Fed announced that
 
that it would
purchase Agency
 
purchase
Agency
RMBS and U.S.
 
U.S. Treasuries in
 
in the amounts needed
 
needed to support
 
support smooth market
 
market functioning,
 
which largely
stabilized
 
the Agency RMBS
 
RMBS
market, abut
 
commitmentended these
 
it reaffirmedpurchases
 
at all subsequentin March 2022
 
Fed meetings.and announced
 
At the Septemberplans to reduce
 
2021its balance
sheet. The
Fed’s planned
reduction
of its
meeting,balance sheet
could negatively
impact our
investment
portfolio.
Further, the
 
Fed generally
assessed that,
provided that
the economic
recovery remained
broadly on
track, a gradual
tapering
process that
concluded around
the middle
of next year
would likely
be appropriate.
The Fed noted
that if a decision
to begin
tapering purchases
occurred at
the next meeting,
the process
of tapering
could commence
with the monthly
purchase
calendars beginning
in either
mid-November
or mid-December. If
the Fed modifies,
reduces or suspends
its purchases
of
Agency RMBS,
our investment
portfolio could
be negatively
impacted. Further,
the moratoriums
 
on foreclosures
 
described
44
above willand evictions
 
likely delaydescribed
 
above
will likely
delay potential
defaults
 
on loans that
 
would otherwise
 
be bought out
 
out of Agency MBS
 
RMBS pools
as described
above.
 
Depending
 
on
the ultimate
 
resolution
 
of the foreclosures,foreclosure
or evictions,
 
when and if
 
if it occurs,
 
these loans
 
may be removed
 
from the
pool into which
 
they
were securitized.
 
If this were
 
to occur, it would
 
have the effect
 
effect of delaying
 
a prepayment
 
on the Company’s
securities
 
until such
 
time. As To
the extent
 
majority
of the Company’s
 
Agency RMBS
 
assets were
 
acquired at
 
at a premium
 
to par, this will
tend to increase
the realized
yield on
the
asset in question.
To the extent they
were acquired
at a discount,
this will
tend to decrease
 
the realized
 
yield on the
 
asset in question.
Because we
 
base our
investment
 
decisions
 
on risk management
 
principles
 
rather than
 
anticipated
 
movements
 
in interest
rates, in
 
a
volatile interest
 
interest rate
environment
 
we may allocate
 
more capital
 
to structured
 
Agency RMBS
 
with shorter
 
durations.
We believe these
securities
 
have a lower
 
sensitivity
 
to changes in
 
in long-term
 
interest rates
 
rates than other
 
other asset
classes.
 
We may
attempt to
 
to mitigate our
 
our
exposure to
 
to changes in
 
in long-term
 
interest rates
 
rates by
investing
 
in IOs and IIOs,
 
IIOs, which
typically
 
have different
different sensitivities
 
to changes in
 
long-termin long-
term interest
 
interest rates than
 
than PT RMBS,
 
particularly
 
PT RMBS backed
 
by fixed-rate
mortgages.
Effects on our
 
our borrowing
 
costs
We leverage
 
our PT RMBS
 
portfolio and
 
a portion of
 
of our structured
 
Agency RMBS
 
with principal
 
balances through
 
the use
of short-term
 
short-
term repurchase
 
agreement
transactions.
 
The interest
 
rates on our
 
our debt are
determined
 
by the short
 
term interest
 
rate
markets. An
 
increase Increases
in the Fed
 
the Fed Funds rate,
 
rateSOFR or LIBOR
 
would increasetypically
 
increase our
borrowing
 
costs, which
 
could affect
 
our interest
 
rate spread
spread if there is
 
is no
corresponding
 
increase in
 
the interest
 
we earn on
 
on our assets.
 
This would
 
be most prevalent
 
with respect
 
to
our Agency
 
RMBS backed
 
by
fixed rate
 
mortgage loans
 
loans because the
 
the interest rate
 
rate on a
fixed-rate
 
mortgage loan
 
loan does not
change even
 
though marketnot change
 
rates mayeven though
 
market rates
may change.
In order to
 
to protect our
 
our net interest
 
margin against
 
increases in
 
in short-term
 
interest rates,
 
rates, we
may enter
 
into interest
 
rate
swaps, which
 
which
economically
 
convert our
 
floating-rate
 
repurchase
 
agreement debt
 
debt to fixed-rate
 
debt, or utilize
 
utilize other
hedging
instruments
 
such as
Eurodollar, Fed
 
Fed Funds and
 
T-Note futures
 
contracts
 
or interest
 
rate swaptions.
Summary
Once again COVID-19In a continuation
 
dominated economicof the extremely
 
activityturbulent
and volatile
market conditions
that have
existed since
the onset
of the COVID-19
pandemic,
during the
third quarter
of 2022 the
state of
the markets
and the outlook
changed
materially.
The perception
of inflation
on the
part of the
Fed has shaped
the rates
markets, currency
markets and
the outlook
for the economy
since the
spring of
2021.
This is when
inflation
first began
to accelerate
in the U.S.
During the
third quarter
the Fed’s outlook,
or more accurately,
the market’s
perception
of how
the Fed saw
inflation,
changed significantly.
Through early
August of
2022 the
markets perceived
that, while
inflation
was not transitory,
the Fed would
be able to
dampen demand
by raising
rates and
cause inflation
to decrease
back towards
the Fed’s long-term
target of
2%.
Further, the
market anticipated
 
this quarter.would
 
However, we mayhappen by
 
be at a crossroadsearly in 2023
 
as the effectsand that
 
of
the Delta variantFed would
 
appearsthen start
to loosen
monetary
policy shortly
thereafter.
The Fed,
through repeated
public comments
by various
Fed officials
and ultimately
by the Chairman
at the Fed’s
annual central
banker symposium
in Jackson
Hole, Wyoming
in late August,
stressed that
this was not
going to
 
be waningthe case.
Incoming economic
data
over the
period was
persistently
strong, indicating
the rate
increases
to date had
yet to slow
demand.
More importantly,
incoming inflation
data showed
no evidence
of slowing
at all and
 
was in fact
becoming more
widespread,
possibly
even well
entrenched.
This reinforced
the number
notion the
Fed will
have to take
rates higher
and for longer.
49
The result
 
of people withthese
 
either a vaccinationdevelopments
 
and/or priorwere significant
 
infectionsand widespread.
Germane to
Orchid Island
and levered
Agency RMBS
investors
were increases
in market
interest
rates and
a widening
in the spreads
that Agency
RMBS securities
trade relative
to comparable
duration
U.S. Treasuries
or swaps.
The yield on
the 10-year
U.S. Treasury
closed just
above 3.83%
on September
30,
2022, and
surpassed
4% in
October of
2022.
This increase
was much
less than
short-term
rates increased.
Interest
rates on
maturities
inside one
year increased
by
well over
100 basis
points and
by more than
160 basis
points for
maturities
of three
months
or less –
in each case
by the end
 
of the virus
grow.quarter.
 
Pandemic related
relief measures
such as supplemental
unemployment
insurance payments
and foreclosure
moratoriums
are essentially
over.
Hopefully
the combinationYields of maturities
 
of allthree
or fewer
months have
increased
by over 230
basis points
since the
end of thesethe
 
factors will
lead to surging
job growth
and act to
quickly lessen
the severe
supply shortagesecond quarter
 
of goods and2022
through October
 
labor.26, 2022.
 
This in turnAs of September
 
should slow30, 2022,
 
the stubbornlymarket pricing
 
high inflationimplied the
 
the
economy hasterminal rate
 
suffered.for the current
 
If these events
come to pass,
the economy
appears tocycle would
 
be positionedapproximately
4.53% - achieved
 
to performlate in the
 
very well,first quarter
 
and the Fed
has stated thatof 2023.
 
it willAs of October
 
slowly remove
the considerable
accommodation
they have provided26, 2022,
 
the market
 
viais pricing
in a taperingterminal
rate of approximately
4.85%
sometime late
in the second
quarter
 
of their
asset purchases2023 and
 
and eventuallywith the Fed
 
increasesFunds rate
still approximately
4.40% in
early 2024.
Agency RMBS
spreads relative
 
to the Fed Fundsbenchmark
 
rate. If theseinterest
 
events dorates increased
 
not unfoldto levels
observed
in March
of 2020 by
the end of
the third
quarter of
2022 and
 
the supplyhave exceeded
 
shortages of
goods and labor
remain, the
economy will
likely continue
to suffer from
elevatedthose levels
 
of inflation.
Under this
scenario the
path of economic
growth is
less certain,
and the pathin October
 
of monetary2022.
 
policy couldReturns for
 
prove to be
quite challenging
for the Fed.
The performance
of the Agency
 
RMBS market
 
was very modestfor the third
quarter of
2022
were (5.40)%
and these
returns were
1.7% lower
than comparable
duration LIBOR
swaps.
The relative
performance
across the
Agency
RMBS universe
is skewed
 
in absolutefavor
 
returns, atof higher
 
0.0% and 0.1%coupon, 30-year
 
versus comparable
duration interestsecurities
 
rates and swaps.that are
 
Performance
for the sector
was generallycurrently
 
in line withproduction
 
other sectorsby originators.
Lower coupon
securities,
especially
those held
in large
amounts by
the Fed,
and which
may eventually
be sold by
the Fed,
have performed
the worst.
These results
are consistent
with the
relative duration
 
of the fixedsecurities,
 
income
markets.as higher
 
Withincoupons have
shorter durations,
or less sensitivity
to
movements
in interest
rates. Actions
by the Fed
may prevent
the sector
from performing
well in the
 
Agency RMBSnear term
 
universe,but, if the
economy does
contract
and enter
a recession,
the sector
could do well
on a relative
 
performance
 
was skewedbasis owing
 
towards higherto the lack
 
coupons andof credit
 
away fromexposure of
 
lower couponsAgency
that compriseRMBS.
This is consistent
with the
sector’s
history of
performance
in a counter-cyclical
manner –
doing well
when the
economy is
soft and
relatively
poorly when
 
the bulk ofeconomy
 
recent productionis strong.
Critical
Accounting
Estimates
Our condensed
financial
statements
are prepared
in accordance
with GAAP. GAAP requires
our management
to make some
complex
and subjective
decisions
 
and Fed purchases.assessments.
 
This has continuedOur most critical
 
into the fourthaccounting
 
quarter, in largeestimates
 
part
because the Fed
has made it
quite clear
the hurdle
needed for
them to begin
to taper
their asset
purchases has
been met and
they plan to
commence doing
so this year, likely
ending in mid-2022.
Prepayment
speeds, particularly
on high coupon
securities,
have moderatedinvolve decisions
 
and are likelyassessments
 
to do so evenwhich could
significantly
 
more withaffect reported
 
rates higherassets, liabilities,
 
so far in therevenues
 
fourth quarter
and the typical
seasonal slow
down as we
approach the
winter months.
Critical Accounting Estimates
45
Our condensed 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 estimates involve decisions and
assessments which could significantly affect reported assets, liabilities, revenues and expenses.
 
There have
been no changes
changes to our critical
accounting
estimates
as
discussed
in our annual
report on
Form 10-K
for the year
ended December
31, 2020.2021.
Capital
Expenditures
At September
30, 2021, 2022,
we had no
material commitments
for capital expenditures.
Off-Balance Sheet Arrangements
 
At September 30, 2021, we did not have any off-balance sheet arrangements.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
 
These book to tax
differences
differences
primarily
relate to
the recognition
of
interest
income on
RMBS, unrealized
gains and
losses on
RMBS, and
the amortization
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
1.680
70,717
2018
1.070
55,814
2019
0.960
54,421
2020
0.790
53,570
2021 - YTD
(1)
0.650
74,045
Totals
$
12.305
$
416,008
(1)
On October 12, 2021, the Company declared a dividend of $0.065 per
share to be paid on November 26, 2021.
The effect of this dividend is
included in the table above, but is not reflected in the Company’s financial
statements as of September 30, 2021.
Inflation
Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors
influence our performance far more so than does inflation. Changes in interest rates do not necessarily correlate with
inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with GAAP and our
distributions will be determined by our Board of Directors consistent with our obligation to distribute to our stockholders at
least 90% of our REIT taxable income on an annual basis in order to maintain our REIT qualification; in each case, our
activities and balance sheet are measured with reference to historical cost and/or fair market value without considering
inflation.
46
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET
RISK
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, ability to realize gains from the sale of these assets and 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, interest rate swaps and swaptions. These
instruments are intended to serve as an 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”),
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,
and borrowers paying more than their scheduled loan
payments, which accelerates the amortization of the loans.
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) causes their price movements, and model duration, to be affected by changes in
both prepayments and one month LIBOR, 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
47
50
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
$
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 - YTD
(1)
2.155
76,024
Totals
$
64.330
$
515,588
(1)
On October 12, 2022, the Company declared a dividend of $0.16 per
share to be paid on November 28, 2022.
The effect of this dividend is
included in the table above, but is not reflected in the Company’s financial
statements as of September 30, 2022.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET
RISK
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,
ability to
realize gains
from the
sale of these
assets and
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,
interest
rate swaps
and swaptions.
These instruments
are intended
to serve as
an 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.
51
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”),
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, and
borrowers
paying more
than
their scheduled
loan payments,
which accelerates
the amortization
of the loans.
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) causes
their price
movements,
and model
duration,
to be affected
by changes
in both
prepayments
and one month
LIBOR, 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
interest
rates and
the fact
that cash
flows to
a
mortgage
related security
are altered
when interest
rates move.
Accordingly, when
when the contract
interest
rate on a
mortgage
loan is
substantially
above prevailing
interest
rates in
the market,
the effective
duration
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
our structured RMBS or
liabilities,
including
our hedging
instruments.
Accordingly, we
assess our
interest
rate risk
by estimating
estimating the duration
of our assets
and the duration
of our liabilities.
We generally
calculate
duration
using various
third party
party models.
 
However, empirical
results and
various
third party
models may
produce
different duration
numbers for
the same
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, 2021 2022
and December
31, 2020, 2021,
assuming rates
instantaneously
fall 200 bps,
fall
100 bps,
fall 50 bps,
rise 50
bps, rise
100 bps and
rise 200
bps, adjusted
to reflect
the impact
of convexity, which
is the measure
measure of the sensitivity
of our hedge
positions
and Agency
RMBS’ effective
duration
to movements
in interest
rates. We
have a negatively
convex asset
profile and
a linear
to
slightly positively
convex hedge
portfolio
(short positions).
It is not
uncommon for
us to have
losses in
both directions.
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
projections
as of September
30, 2021
2022 and
December
31, 2020.2021.
 
Actual results
could differ
materially
from estimates,
especially
in the current
market environment. To
 
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
different models were
employed in
the
analysis,
materially
different projections
could result. Lastly,
 
Lastly, while
the table
below reflects
reflects the estimated
impact of
interest rate
increases
and decreases
on a static
portfolio,
we may from
time to time
sell any of
of our agency
securities
as a part
of the overall
management
of our
investment portfolio.
 
portfolio.
52
Interest Rate Sensitivity
(1)
Portfolio
Market
Book
Change in Interest Rate
Value
(2)(3)
Value
(2)(4)
As of September 30, 20212022
-200 Basis Points
(1.30)%0.23%
(9.94)%1.87%
-100 Basis Points
(0.07)%0.54%
(0.50)%4.32%
-50 Basis Points
0.26%0.38%
1.99%3.04%
+50 Basis Points
(1.40)(0.47)%
(10.70)(3.73)%
+100 Basis Points
(2.89)(1.00)%
(22.14)(8.01)%
+200 Basis Points
(7.37)(2.18)%
(56.54)(17.46)%
As of December 31, 20202021
-200 Basis Points
2.43%(2.01)%
21.85%(17.00)%
-100 Basis Points
1.35%(0.33)%
12.08%(2.76)%
-50 Basis Points
0.69%0.19%
6.18%1.59%
+50 Basis Points
(0.90)(0.48)%
(8.03)(4.04)%
+100 Basis Points
(2.39)(1.64)%
(21.42)(13.91)%
+200 Basis Points
(6.60)(4.79)%
(59.22)(40.64)%
(1)
Interest rate
sensitivity is
derived from models
that are dependent on
 
on inputs and
assumptions provided
by third parties
as well as by
our Manager,
Manager, and assumes
there are no changes
 
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.
 
(4)
Estimated dollar
change in portfolio
value expressed
as a percent
48
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
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
mortgage prepayments occur, including
changes in
the level
of and directional
trends in
housing prices,
interest
rates, general
general economic conditions,
loan age
and
size, loan-to-value
ratio, the
location
of the property
and social
and demographic
conditions.
conditions.
Additionally, changes
to government
sponsored
entity underwriting
practices
or other
governmental
programs
could also
significantly
impact prepayment
rates or
expectations.
Generally, prepayments
on Agency
RMBS increase
during periods
periods of falling
mortgage
interest
rates and
decrease
during periods
of rising
mortgage
interest
rates. However,
this may not
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,
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 falls
by more than
the offsetting
fair value
increases
on our hedging
instruments
instruments
tied to
the
underlying
benchmark
interest
rates. We
refer to
this as "spread
risk" or "basis
risk." The
spread risk
associated
associated
with our
mortgage
assets
and the resulting
fluctuations
in fair
value of these
securities
can occur
independent
of changes
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
and interest
rate
swaps and
swaptions
to attempt
to protect
against moves
in interest
rates, such
instruments
typically
will not
protect our
net book value
against spread
risk.
53
Liquidity
Risk
The primary
liquidity
risk for
us arises
from financing
long-term
assets with
shorter-term
borrowings
through repurchase
agreements.
agreements. Our assets
that are
pledged to
secure repurchase
agreements
are Agency
RMBS and
cash. As of
September
30, 2021, 2022,
we had
unrestricted
cash and cash
equivalents
of $424.1 $214.2
million and
unpledged
securities
of approximately $5.4
$5.4 million
(not including
unsettled
million (not including unsettled securities
purchases
or securities
pledged to
us) available
to meet
margin calls
on our repurchase
agreements
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
there is no assurance
that we will
always be
able to renew (or
(or roll)
our repurchase
agreements.
In addition, our
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
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
(or interest
rate sensitivity)
of our investments
is based on
our Manager's
Manager's assumptions
regarding
the rate
at which
the borrowers
will prepay
the underlying
mortgage
loans. In
general,
we
use futures
contracts and
interest
rate swaps
and swaptions
to help manage
our funding
cost on our
investments
in the event
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.
49
However, if prepayment
rates decrease
in a rising
interest
rate environment,
the average
life or
duration
of our fixed-fixed-rate
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
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 funding exposure on our mortgage assets to the extent that their average lives increase due to slower prepayments.hedging
instruments
This situation may also cause the market value of our Agency 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
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
counterparties to our repurchase
agreements
and derivative
contracts
fail to perform
their obligations
under such
agreements.
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
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
transactions
is largely
mitigated
through
daily adjustments
to collateral
pledged based
on changes
in market
value and
we limit
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
guarantee our efforts
to manage
counterparty
credit risk
will be successful
and we could
suffer significant
losses if
unsuccessful.
 
unsuccessful.
54
ITEM 4. CONTROLS
AND PROCEDURES
Evaluation
of Disclosure
Controls
and Procedures
 
As of the
end of the
period covered
by this report (the
(the “evaluation
date”), we
carried out
an evaluation,
under the
supervision
supervision
and with
the participation
of our management,
including
our Chief
Executive
Officer (the “CEO”
“CEO”) and
Chief Financial
Financial Officer (the “CFO”
“CFO”),
of the
effectiveness
of the design
and operation
of our disclosure
controls
and procedures,
as defined
defined in Rule 13a-15(e)
under the
Exchange
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
information regarding
the Company
is accumulated
and communicated
to our
management,
including
our CEO
and CFO,
by our employees,
as appropriate
to allow
timely decisions
regarding
required
disclosure
and
(2) in providing
reasonable
assurance
assurance
that information
we must disclose
in our periodic
reports
under the
Exchange
Act is recorded, processed,
processed,
summarized
and reported
within the
time periods
prescribed
by the SEC’s
rules and
forms.
Changes
in Internal Controls
Control over
Financial
Reporting
There were
no significant
changes in
the Company’s
internal
control
over financial
reporting
that occurred
during the
Company’s most
recent fiscal
quarter that
have materially
affected, or
are reasonably
likely to
materially
affect, the
Company’s internal
control over financial reporting that occurred during the
Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
 
financial
reporting.
50
55
PART II. OTHER
 
INFORMATION
ITEM 1.
 
LEGAL PROCEEDINGS
We are not party to any material pending legal proceedings as described in Item 103
of Regulation
S-K.
ITEM 1A.
RISK FACTORS
A description
of certain
factors that
may affect our
future results
and risk factors
 
is set forth
in our Annual Report on Form 10-K for
the year ended December 31, 2021. As of September 30, 2022,
 
there have been no material changes in our risk factors from those set
forth in our Annual Report on
Form
10-K for the
year ended December
31, 2020. As
of September
30, 2021, there
have been no
material
changes in
our risk
factors from
those set forth
in our Annual
Report on Form
10-K for the
year ended December
31, 2020.2021.
ITEM 2. UNREGISTERED
SALES OF
EQUITY SECURITIES
AND USE
OF PROCEEDS
On July 29,The Company did not have any unregistered sales of its equity securities during the
 
2015,three months ended September 30, 2022.
The table below presents the Company'sCompany’s share repurchase activity for the three months
 
Boardended September 30, 2022.
Shares Purchased
Maximum Number
Total Number
Weighted-Average
as Part of DirectorsPublicly
of Shares That May Yet
authorized
of Shares
Price Paid
Announced
Be Repurchased Under
Repurchased
(1)
Per Share
Programs
the repurchaseAuthorization
(2)
of up to 2,000,000
July 1, 2022 - July 31, 2022
-
$
-
-
3,364,601
August 1, 2022 - August 31, 2022
-
-
-
3,364,601
September 1, 2022 - September 30, 2022
186,249
12.73
175,000
3,189,601
Totals / Weighted Average
186,249
$
12.73
175,000
3,189,601
(1)
Includes 452
 
shares of the
Company's
 
Company’s common stock.
 
On Februarystock acquired
 
8, 2018,by the Company
in connection
with the satisfaction
of tax withholding
obligations on
vested employment
related awards
under equity
incentive plans
and cash paid
for 10,796.6
fractional shares
as a result
of the Company’s
1-for-5
reverse stock
split effected
on August 30,
2022. These repurchases
do not reduce
the number of
shares available
under the stock
repurchase
program authorization.
(2)
On October
12, 2022, the
 
Board of Directors
 
approved an increase
 
increasein the number
of shares of
the Company’s
common stock
available in
 
the stock repurchase
repurchase
program for
 
up to an additional
 
4,522,822 shares
of the Company's
common stock.4,300,000 shares.
 
The Company
did not repurchase
any
shareseffect of its
common stock
during the
three months
ended September
30, 2021. As
of September
30, 2021, the
maximum
remaining
number of shares
that may be
repurchased
under this
 
authorizationincrease in
 
is 837,311 shares.not reflected
 
Unless modified
or revoked
byin the Board,
the authorization
does not expire.
The Company
did not have
any unregistered
sales of its
equity securities
during the
three months
ended September
30,
2021.
table.
ITEM 3.
 
DEFAULTS UPON SENIOR
 
UPON SENIOR SECURITIES
None.
ITEM 4.
 
MINE SAFETY
 
DISCLOSURES
Not Applicable.
ITEM 5.
 
OTHER INFORMATION
None.
56
51
ITEM 6. EXHIBITS
Exhibit No.
3.1
3.2
3.3
3.4
4.1
31.1
31.2
32.1
32.2
Exhibit 101.INS XBRL
Inline XBRL Instance Document – the instance document does not appear
 
in the
Interactive Data File because its XBRL tags are embedded within the Inline XBRL
document.***
Exhibit 101.SCH XBRL
Taxonomy Extension Schema Document ***
Exhibit 101.CAL XBRL
Taxonomy Extension Calculation Linkbase Document***
Exhibit 101.DEF XBRL
Additional Taxonomy Extension Definition Linkbase Document Created***
Exhibit 101.LAB XBRL
Taxonomy Extension Label Linkbase Document ***
Exhibit 101.PRE XBRL
Taxonomy Extension Presentation Linkbase Document ***
Exhibit 104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
*
 
Filed herewith.
**
 
Furnished
herewith.
***
 
Submitted
electronically
herewith.
†
 
Management
contract
or compensatory
plan.
 
 
5257
Signatures
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:
 
October 29, 202128, 2022
By:
/s/ Robert E. Cauley
Robert E. Cauley
Chief Executive Officer, President and Chairman of the Board
(Principal Executive Officer)
Date:
 
October 29, 202128, 2022
By:
/s/ George H. Haas, IV
George H. Haas,
IV
Secretary, Chief Financial Officer, Chief Investment Officer and
Director (Principal Financial and Accounting Officer)