UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
☒
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
☐
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number
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,
(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, $0.01 par value | ORC | New York Stock Exchange |
Indicate by
check markwhether theregistrant (1) hasfiled allreports requiredto befiled bySection 13 or15(d) ofthe SecuritiesExchange ActofIndicate by check
mark whether the registranthas submitted electronically everyInteractive Data File requiredto be submitted pursuantto Rule 405Indicate by check mark whether the registrant is
a large accelerated filer,an accelerated filer, a non-accelerated filer,a smaller reporting company,orLarge accelerated filer | ☐ | Accelerated filer | ☒ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
Emerging growth company | ☐ |
If an emerging growth company,
indicate by check mark if the registrant haselected not to use the extended transition periodfor complying with anyIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YesNumber of shares outstanding at August 4, 2022:
TABLE OF CONTENTS
ITEM1. FINANCIAL STATEMENTS
ORCHID ISLAND CAPITAL, INC.
CONDENSED BALANCE SHEETS
($ in thousands, except per share data)
(Unaudited) | ||||||||
March 31, | December 31, | |||||||
2023 | 2022 | |||||||
ASSETS: | ||||||||
Mortgage-backed securities, at fair value (includes pledged assets of $3,946,156 and $3,512,640, respectively) | $ | 3,999,906 | $ | 3,540,002 | ||||
U.S. Treasury Notes, at fair value (includes pledged assets of $36,806 and $36,382, respectively) | 36,806 | 36,382 | ||||||
Cash and cash equivalents | 143,220 | 205,651 | ||||||
Restricted cash | 42,738 | 31,568 | ||||||
Accrued interest receivable | 13,120 | 11,519 | ||||||
Derivative assets | 29,315 | 40,172 | ||||||
Other assets | 907 | 442 | ||||||
Total Assets | $ | 4,266,012 | $ | 3,865,736 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
LIABILITIES: | ||||||||
Repurchase agreements | $ | 3,769,437 | $ | 3,378,445 | ||||
Dividends payable | 6,279 | 5,908 | ||||||
Derivative liabilities | 19,582 | 7,161 | ||||||
Accrued interest payable | 14,753 | 9,209 | ||||||
Due to affiliates | 1,229 | 1,131 | ||||||
Other liabilities | 3,371 | 25,119 | ||||||
Total Liabilities | 3,814,651 | 3,426,973 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS' EQUITY: | ||||||||
Preferred stock, $0.01 par value; 20,000,000 shares authorized; no shares issued and outstanding as of March 31, 2023 and December 31, 2022 | - | - | ||||||
Common Stock, $0.01 par value; 100,000,000 shares authorized, 39,085,756 shares issued and outstanding as of March 31, 2023 and 36,764,983 shares issued and outstanding as of December 31, 2022 | 391 | 368 | ||||||
Additional paid-in capital | 788,647 | 779,602 | ||||||
Accumulated deficit | (337,677 | ) | (341,207 | ) | ||||
Total Stockholders' Equity | 451,361 | 438,763 | ||||||
Total Liabilities and Stockholders' Equity | $ | 4,266,012 | $ | 3,865,736 |
See Notes to Financial Statements
CONDENSED STATEMENTS
OF OPERATIONS(Unaudited)
For the Three and Six Months Ended June 30,March 31, 2023 and 2022 and 2021
($ in thousands, except per share data)
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Interest income | $ | 38,012 | $ | 41,857 | ||||
Interest expense | (42,217 | ) | (2,655 | ) | ||||
Net interest (expense) income | (4,205 | ) | 39,202 | |||||
Realized losses on mortgage-backed securities | - | (51,086 | ) | |||||
Unrealized gains (losses) on mortgage-backed securities and U.S. Treasury Notes | 53,895 | (309,962 | ) | |||||
(Losses) gains on derivative and other hedging instruments | (41,156 | ) | 177,498 | |||||
Net portfolio income (loss) | 8,534 | (144,348 | ) | |||||
Expenses: | ||||||||
Management fees | 2,642 | 2,634 | ||||||
Allocated overhead | 576 | 441 | ||||||
Incentive compensation | 470 | 237 | ||||||
Directors' fees and liability insurance | 323 | 311 | ||||||
Audit, legal and other professional fees | 451 | 304 | ||||||
Direct REIT operating expenses | 165 | 325 | ||||||
Other administrative | 377 | 127 | ||||||
Total expenses | 5,004 | 4,379 | ||||||
Net income (loss) | $ | 3,530 | $ | (148,727 | ) | |||
Basic and diluted net income (loss) per share | $ | 0.09 | $ | (4.20 | ) | |||
Weighted Average Shares Outstanding | 38,491,767 | 35,399,513 | ||||||
Dividends declared per common share | $ | 0.480 | $ | 0.775 |
See Notes to Financial Statements
CONDENSED STATEMENTS
OF STOCKHOLDERS' EQUITY(Unaudited)
For the SixThree Months Ended June 30,March 31, 2023 and 2022 and 2021
(in thousands)
Additional | Retained | |||||||||||||||||||
Common Stock | Paid-in | Earnings | ||||||||||||||||||
Shares | Par Value | Capital | (Deficit) | Total | ||||||||||||||||
Balances, January 1, 2023 | 36,765 | $ | 368 | $ | 779,602 | $ | (341,207 | ) | $ | 438,763 | ||||||||||
Net income | - | - | - | 3,530 | 3,530 | |||||||||||||||
Cash dividends declared | - | - | (18,807 | ) | - | (18,807 | ) | |||||||||||||
Stock based awards and amortization | 4 | - | 181 | - | 181 | |||||||||||||||
Issuance of common stock pursuant to public offerings, net | 2,690 | 26 | 31,631 | - | 31,657 | |||||||||||||||
Shares repurchased and retired | (373 | ) | (3 | ) | (3,960 | ) | - | (3,963 | ) | |||||||||||
Balances, March 31, 2023 | 39,086 | $ | 391 | $ | 788,647 | $ | (337,677 | ) | $ | 451,361 | ||||||||||
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 |
See Notes to Financial Statements
CONDENSED STATEMENTS
OF CASH FLOWS(Unaudited)
For the SixThree Months Ended June 30,March 31, 2023 and 2022 and 2021
($ in thousands)
2023 | 2022 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income (loss) | $ | 3,530 | $ | (148,727 | ) | |||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Stock based compensation | 409 | 162 | ||||||
Realized losses on mortgage-backed securities | - | 51,086 | ||||||
Unrealized (gains) losses on mortgage-backed securities and U.S. Treasury Notes | (53,895 | ) | 309,962 | |||||
Realized and unrealized losses (gains) on derivative instruments | 43,563 | (101,921 | ) | |||||
Changes in operating assets and liabilities: | ||||||||
Accrued interest receivable | (1,601 | ) | 4,006 | |||||
Other assets | (459 | ) | (833 | ) | ||||
Accrued interest payable | 5,544 | 230 | ||||||
Other liabilities | 182 | 204 | ||||||
Due to affiliates | 98 | 4 | ||||||
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES | (2,629 | ) | 114,173 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
From mortgage-backed securities investments: | ||||||||
Purchases | (467,460 | ) | - | |||||
Sales | - | 1,413,039 | ||||||
Principal repayments | 61,021 | 157,112 | ||||||
Net (payments on) proceeds from derivative instruments | (42,450 | ) | 103,900 | |||||
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES | (448,889 | ) | 1,674,051 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from repurchase agreements | 7,849,145 | 12,861,900 | ||||||
Principal payments on repurchase agreements | (7,458,153 | ) | (14,641,897 | ) | ||||
Cash dividends | (18,422 | ) | (31,010 | ) | ||||
Proceeds from issuance of common stock, net of issuance costs | 31,657 | - | ||||||
Common stock repurchases, including shares withheld from employee stock awards for payment of taxes | (3,970 | ) | (214 | ) | ||||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | 400,257 | (1,811,221 | ) | |||||
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | (51,261 | ) | (22,997 | ) | ||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the period | 237,219 | 450,442 | ||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the period | $ | 185,958 | $ | 427,445 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 36,673 | $ | 2,425 | ||||
See Notes to Financial Statements
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2023
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Description
Orchid Island Capital, Inc. (“Orchid” or the “Company”) was incorporated in Maryland on mortgage-backed securities
On August 4, 2020, October 29, 2021, Orchid entered into an equity distribution agreement (the “August2020 “October 2021 Equity Distribution Agreement”) with
On January 20, 2021, Orchid entered into an underwriting agreement (the “January2021 Underwriting Agreement”) with J.P.
Basis of
Presentationand Use ofEstimatesThe accompanying
unauditedfinancialstatementshave beenpreparedin accordancewith accountingprinciplesgenerallyacceptedThe balance
sheet atDecember31,The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant estimates affecting the accompanying financial statements are the fair values of RMBS and derivatives. Management believes the estimates and assumptions underlying the financial statements are reasonable based on the information available as of March 31, 2023.
Reclassification of Comparative Period Information
The Company previously reported $0.3 million of commissions, fees and other expenses associated with its derivative holdings for the three months ended March 31, 2022 in 'Direct REIT operating expenses' in the statement of operations. These expenses have been reclassified as part of 'Gains (losses) on derivative and other hedging instruments' to conform with the presentation in the current period.
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 preparation
Variable Interest Entities (“VIEs”(“VIEs”)
The Company obtains interests in VIEs through its investments in mortgage-backed
securities.The Company’s interests in theseCash and Cash Equivalents and Restricted Cash
Cash and cash equivalents
The following table provides a reconciliation of cash, cash equivalents,
and restricted cash(in thousands) | ||||||||
March 31, 2023 | December 31, 2022 | |||||||
Cash and cash equivalents | $ | 143,220 | $ | 205,651 | ||||
Restricted cash | 42,738 | 31,568 | ||||||
Total cash, cash equivalents and restricted cash | $ | 185,958 | $ | 237,219 |
The Company
maintainscash balancesat threebanks, a government securities backed overnight sweep fund, andexcess marginon accountwith twoexchange clearingmembers.At times,Mortgage-Backed
Securitiesand U.S.Treasury NotesThe Company
invests primarilyin mortgagepass-through(“PT”) residentialmortgagebacked securities(“RMBS”)and collateralizedThe Company
records securitiestransactionson the tradedate. Securitypurchasesthat havenot settledas of thebalance sheetdateFair value
is definedas the pricethat wouldbe receivedto sell theasset orpaid to transferthe liabilityin an orderlytransactionIncome on
PT RMBSand U.S. TreasuryNotes is basedon the statedinterestrate of thesecurity. Premiumsor discountspresentatDerivative and Other Hedging Instruments
The Company
uses derivativeand otherhedging instrumentsto manageinterestrate risk,facilitateasset/liabilitystrategiesandThe Company
accounts forTBA securitiesas derivativeinstruments.Gains andlosses associatedwith TBAsecuritiestransactionsDerivative
and otherhedging instrumentsare carriedat fair value,and changesin fair valueare recordedin earningsfor eachperiod.Holding derivatives
creates exposureto creditrisk relatedto the potentialfor failureon the partof counterpartiesand exchangestoFinancial 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, 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 as Level 2 assets under the fair value hierarchy as of March 31, 2023 and December 31, 2022 due to the short-term nature of these financial instruments.
Repurchase
AgreementsThe Company
finances theacquisitionof the majorityof its RMBSthrough theuse of repurchaseagreementsunder masterManager Compensation
The Company
is externallymanagedby BiminiAdvisors,LLC (theEarnings
Per ShareBasic earnings
per share(“EPS”)is calculatedas net incomeor loss attributableto commonstockholdersdivided bythe weightedStock-Based
CompensationThe Company
may grantequity-basedcompensationto non-employeemembers ofits Boardof Directorsand to theexecutiveofficersIncome Taxes
Orchid has elected and is organized and operated so as to qualify to be taxed as a
real estate investment trust (“REIT”) under theOrchid assesses the likelihood, based on their technical merit, that uncertain tax
positions will be sustained upon examinationRecent Accounting
PronouncementsIn March 2020, the FASB issued ASU 2020-042020-04 “
In January 2021, the FASB issued ASU 2021-012021-01 “
NOTE 2.MORTGAGE-BACKED SECURITIES AND U.S. TREASURY NOTES
The following
table presentsthe Company’sRMBS portfolioas of(in thousands) | ||||||||
March 31, 2023 | December 31, 2022 | |||||||
Pass-Through RMBS Certificates: | ||||||||
Fixed-rate Mortgages | $ | 3,980,462 | $ | 3,519,906 | ||||
Total Pass-Through Certificates | 3,980,462 | 3,519,906 | ||||||
Structured RMBS Certificates: | ||||||||
Interest-Only Securities | 18,962 | 19,669 | ||||||
Inverse Interest-Only Securities | 482 | 427 | ||||||
Total Structured RMBS Certificates | 19,444 | 20,096 | ||||||
Total | $ | 3,999,906 | $ | 3,540,002 |
As of June
The following
table is asummary ofthe Company’snet gain(loss) fromthe sale of RMBS for the three months ended March 31, 2023 and 2022.Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Proceeds from sales of RMBS | $ | - | $ | 1,413,039 | ||||
Carrying value of RMBS sold | - | (1,464,125 | ) | |||||
Net loss on sales of RMBS | $ | - | $ | (51,086 | ) | |||
Gross gain on sales of RMBS | $ | - | $ | 709 | ||||
Gross loss on sales of RMBS | - | (51,795 | ) | |||||
Net loss on sales of RMBS | $ | - | $ | (51,086 | ) |
NOTE 3. REPURCHASE AGREEMENTS
The Company pledges certain of its RMBS
As of June
($ in thousands) | ||||||||||||||||||||
OVERNIGHT | BETWEEN 2 | BETWEEN 31 | GREATER | |||||||||||||||||
(1 DAY OR | AND | AND | THAN | |||||||||||||||||
LESS) | 30 DAYS | 90 DAYS | 90 DAYS | TOTAL | ||||||||||||||||
March 31, 2023 | ||||||||||||||||||||
Fair market value of securities pledged, including accrued interest receivable | $ | - | $ | 2,760,937 | $ | 1,070,036 | $ | 128,049 | $ | 3,959,022 | ||||||||||
Repurchase agreement liabilities associated with these securities | $ | - | $ | 2,632,522 | $ | 1,017,354 | $ | 119,561 | $ | 3,769,437 | ||||||||||
Net weighted average borrowing rate | - | 4.88 | % | 4.96 | % | 4.70 | % | 4.90 | % | |||||||||||
December 31, 2022 | ||||||||||||||||||||
Fair market value of securities pledged, including accrued interest receivable | $ | - | $ | 2,496,769 | $ | 884,632 | $ | 142,658 | $ | 3,524,059 | ||||||||||
Repurchase agreement liabilities associated with these securities | $ | - | $ | 2,404,329 | $ | 837,299 | $ | 136,817 | $ | 3,378,445 | ||||||||||
Net weighted average borrowing rate | - | 4.43 | % | 4.51 | % | 4.15 | % | 4.44 | % |
Included in the table above are repurchase agreements with
In addition, cash pledged to counterparties for repurchase agreements was approximately
If, during
the termof a repurchaseagreement,a lenderfiles forbankruptcy, theCompany mightexperiencedifficulty recoveringitsNOTE 4. DERIVATIVE AND OTHER HEDGING INSTRUMENTS
The table
below summarizesfair valueinformationabout theCompany’s derivativeand otherhedging instrumentsassets and(in thousands) | |||||||||
Derivative and Other Hedging Instruments | Balance Sheet Location | March 31, 2023 | December 31, 2022 | ||||||
Assets | |||||||||
Interest rate swaps | Derivative assets, at fair value | $ | 13,972 | $ | 4,983 | ||||
Payer swaptions (long positions) | Derivative assets, at fair value | 14,849 | 33,398 | ||||||
Interest rate caps | Derivative assets, at fair value | 474 | 1,119 | ||||||
TBA securities | Derivative assets, at fair value | 20 | 672 | ||||||
Total derivative assets, at fair value | $ | 29,315 | $ | 40,172 | |||||
Liabilities | |||||||||
Payer swaptions (short positions) | Derivative liabilities, at fair value | $ | 8,528 | $ | 5,982 | ||||
TBA securities | Derivative liabilities, at fair value | 11,054 | 1,179 | ||||||
Total derivative liabilities, at fair value | $ | 19,582 | $ | 7,161 | |||||
Margin Balances Posted to (from) Counterparties | |||||||||
Futures contracts | Restricted cash | $ | 15,547 | $ | 16,493 | ||||
TBA securities | Restricted cash | 9,119 | 1,734 | ||||||
TBA securities | Other liabilities | (372 | ) | (532 | ) | ||||
Interest rate swaption contracts | Other liabilities | (1,505 | ) | (12,489 | ) | ||||
Total margin balances on derivative contracts | $ | 22,789 | $ | 5,206 |
Fed
Funds andT-Note futuresare cashsettled futurescontractson an interestrate, withgains andlosses creditedor($ in thousands) | ||||||||||||||||
March 31, 2023 | ||||||||||||||||
Average | Weighted | Weighted | ||||||||||||||
Contract | Average | Average | ||||||||||||||
Notional | Entry | Effective | Open | |||||||||||||
Expiration Year | Amount | Rate | Rate | Equity(1) | ||||||||||||
Treasury Note Futures Contracts (Short Positions)(2) | ||||||||||||||||
June 2023 5-year T-Note futures (Jun 2023 - Jun 2028 Hedge Period) | $ | 926,500 | 4.17 | % | 3.89 | % | $ | (20,719 | ) | |||||||
June 2023 10-year Ultra futures (Jun 2023 - Jun 2033 Hedge Period) | $ | 54,200 | 3.91 | % | 3.48 | % | $ | (2,181 | ) |
($ in thousands) | ||||||||||||||||
December 31, 2022 | ||||||||||||||||
Average | Weighted | Weighted | ||||||||||||||
Contract | Average | Average | ||||||||||||||
Notional | Entry | Effective | Open | |||||||||||||
Expiration Year | Amount | Rate | Rate | Equity(1) | ||||||||||||
Treasury Note Futures Contracts (Short Position)(2) | ||||||||||||||||
March 2023 5-year T-Note futures (Mar 2023 - Mar 2028 Hedge Period) | $ | 750,500 | 4.20 | % | 4.22 | % | $ | (100 | ) | |||||||
March 2023 10-year Ultra futures (Mar 2023 - Mar 2033 Hedge Period) | $ | 174,500 | 3.66 | % | 3.79 | % | $ | 965 |
(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 $109.5 at March 31, 2023 and $107.9 at December 31, 2022. The contract values of the short positions were $1,014.6 million and $810.0 million at March 31, 2023 and December 31, 2022, respectively. 10-Year Ultra futures contracts were valued at a price of $121.1 at March 31, 2023 and $118.3 at December 31, 2022. The contract value of the short position was $65.7 million and $206.4 million at March 31, 2023 and December 31, 2022, respectively |
Under its interest rate swap agreements, the cumulative gains (losses) recorded on open
($ in thousands) | ||||||||||||||||
Average | ||||||||||||||||
Fixed | Average | Average | ||||||||||||||
Notional | Pay | Receive | Maturity | |||||||||||||
Amount | Rate | Rate | (Years) | |||||||||||||
March 31, 2023 | ||||||||||||||||
Expiration > 3 to ≤ 5 years | $ | 500,000 | 0.84 | % | 5.02 | % | 3.5 | |||||||||
Expiration > 5 years | 1,174,000 | 2.10 | % | 4.88 | % | 7.2 | ||||||||||
$ | 1,674,000 | 1.72 | % | 4.92 | % | 6.1 | ||||||||||
December 31, 2022 | ||||||||||||||||
Expiration > 3 to ≤ 5 years | $ | 500,000 | 0.84 | % | 4.75 | % | 3.7 | |||||||||
Expiration > 5 years | 900,000 | 1.70 | % | 4.23 | % | 6.6 | ||||||||||
$ | 1,400,000 | 1.39 | % | 4.41 | % | 5.6 |
The table below presents our open payer swap positions by receive index, as a percentage of notional amount.
March 31, 2023 | December 31, 2022 | |||||||
Overnight SOFR | 58 | % | 50 | % | ||||
Three Month LIBOR | 42 | % | 50 | % | ||||
100 | % | 100 | % |
As of March 31, 2023, the table above includes a swap with a notional amount of $274.0 million that begins accruing interest on February 24, 2024 with a fixed pay rate of 3.43% and a receive rate indexed to ≤ 5 years
Our interest rate swaps are centrally cleared through two registered commodities exchanges, the Chicago Mercantile Exchange ("CME") and the London Clearing House (“LCH”). The clearing exchanges require that we post an "initial margin" amount determined by the exchanges. The initial margin amount is intended to be set at a level sufficient to protect the exchange from the interest rate swap's maximum estimated single-day price movement and is subject to adjustment based on changes in market volatility and other factors. We also exchange daily settlements of "variation margin" based upon changes in fair value, as measured by the exchanges.
The table
below presentsinformationrelated tothe Company’sinterestrate cap positionsat($ in thousands) | |||||||||||||||||
Net | |||||||||||||||||
Strike | Estimated | ||||||||||||||||
Notional | Swap | Curve | Fair | ||||||||||||||
Amount | Cost | Rate | Spread | Value | |||||||||||||
March 31, 2023 | |||||||||||||||||
February 8, 2024 | $ | 200,000 | $ | 1,450 | 0.09 | % | 2Y10Y | $ | 474 | ||||||||
December 31, 2022 | |||||||||||||||||
February 8, 2024 | $ | 200,000 | $ | 1,450 | 0.09 | % | 2Y10Y | $ | 1,119 |
The table below presents information related to the Company’s interest rate swaption positions at March 31, 2023 and December 31, 2022.
($ in thousands) | |||||||||||||||||||||||||
Option | Underlying Swap | ||||||||||||||||||||||||
Weighted | Weighted | ||||||||||||||||||||||||
Average | Average | Average | Average | ||||||||||||||||||||||
Fair | Months to | Notional | Fixed | Adjustable | Term | ||||||||||||||||||||
Expiration | Cost | Value | Expiration | Amount | Rate | Rate | (Years) | ||||||||||||||||||
March 31, 2023 | |||||||||||||||||||||||||
Payer Swaptions - long | |||||||||||||||||||||||||
≤ 1 year | $ | 36,685 | $ | 6,548 | 6.6 | $ | 1,250,000 | 4.09 | % | SOFR | 10.0 | ||||||||||||||
>1 year | 10,115 | 8,301 | 21.7 | 1,000,000 | 3.49 | % | SOFR | 2.0 | |||||||||||||||||
$ | 46,800 | $ | 14,849 | 13.3 | $ | 2,250,000 | 3.82 | % | 6.4 | ||||||||||||||||
Payer Swaptions - short | |||||||||||||||||||||||||
>1 year | $ | (12,252 | ) | $ | (8,528 | ) | 13.0 | $ | (1,917,000 | ) | 3.91 | % | SOFR | 5.8 | |||||||||||
December 31, 2022 | |||||||||||||||||||||||||
Payer Swaptions (long positions) | |||||||||||||||||||||||||
≤ 1 year | $ | 36,685 | $ | 21,253 | 9.6 | $ | 1,250,000 | 4.09 | % | SOFR | 10.0 | ||||||||||||||
> 10 years | 11,021 | 12,145 | 239.5 | 120,000 | 2.05 | % | SOFR | 10.0 | |||||||||||||||||
$ | 47,706 | $ | 33,398 | 29.8 | $ | 1,370,000 | 3.91 | % | 10.0 | ||||||||||||||||
Payer Swaptions (short positions) | |||||||||||||||||||||||||
≤ 1 year | $ | (17,800 | ) | $ | (5,982 | ) | 3.6 | $ | (917,000 | ) | 4.09 | % | SOFR | 10.0 |
The following table summarizes
the Company’s contracts topurchase and sell($ in thousands) | ||||||||||||||||
Notional | Net | |||||||||||||||
Amount | Cost | Market | Carrying | |||||||||||||
Long (Short)(1) | Basis(2) | Value(3) | Value(4) | |||||||||||||
March 31, 2023 | ||||||||||||||||
30-Year TBA securities: | ||||||||||||||||
2.0% | $ | (175,000 | ) | $ | (144,511 | ) | $ | (144,526 | ) | $ | (15 | ) | ||||
3.0% | (700,000 | ) | (616,438 | ) | (627,457 | ) | (11,019 | ) | ||||||||
Total | $ | (875,000 | ) | $ | (760,949 | ) | $ | (771,983 | ) | $ | (11,034 | ) | ||||
December 31, 2022 | ||||||||||||||||
30-Year TBA securities: | ||||||||||||||||
2.0% | $ | (175,000 | ) | $ | (142,268 | ) | $ | (143,145 | ) | $ | (877 | ) | ||||
3.0% | (500,000 | ) | (440,644 | ) | (440,274 | ) | 370 | |||||||||
Total | $ | (675,000 | ) | $ | (582,912 | ) | $ | (583,419 | ) | $ | (507 | ) |
(1) | Notional amount represents the par value (or principal balance) of the underlying Agency RMBS. |
(2) | Cost basis represents the forward price to be paid (received) for the underlying Agency RMBS. |
(3) | Market value represents the current market value of the TBA securities (or of the underlying Agency RMBS) as of period-end. |
(4) | Net carrying value represents the difference between the market value and the cost basis of the TBA securities as of period-end and is reported in derivative assets (liabilities) at fair value in the balance sheets. |
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
(in thousands) | ||||||||
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
T-Note futures contracts (short position) | $ | (4,038 | ) | $ | 79,691 | |||
Interest rate swaps | (26,144 | ) | 66,170 | |||||
Payer swaptions (short positions) | 6,585 | (10,908 | ) | |||||
Payer swaptions (long positions) | (12,109 | ) | 40,975 | |||||
Interest rate caps | (645 | ) | (996 | ) | ||||
Interest rate floors | 1,185 | - | ||||||
TBA securities (short positions) | (5,990 | ) | 2,539 | |||||
TBA securities (long positions) | - | 27 | ||||||
Total | $ | (41,156 | ) | $ | 177,498 |
Credit Risk-Related Contingent Features
The
useofderivativesandotherhedginginstrumentscreatesexposuretocreditriskrelatingtopotentiallossesthatcouldbeIt is the Company's policy notto offset assets and liabilities associated
with open derivative contracts. However,NOTE 5. PLEDGED ASSETS
Assets Pledged to Counterparties
The table below summarizes the Company’s assets pledged as collateral under repurchase agreements and derivative agreements by type, including securities
(in thousands) | ||||||||||||||||||||||||
March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||
Repurchase | Derivative | Repurchase | Derivative | |||||||||||||||||||||
Assets Pledged to Counterparties | Agreements | Agreements | Total | Agreements | Agreements | Total | ||||||||||||||||||
PT RMBS - fair value | $ | 3,926,711 | $ | - | $ | 3,926,711 | $ | 3,492,544 | $ | - | $ | 3,492,544 | ||||||||||||
Structured RMBS - fair value | $ | 19,445 | - | 19,445 | 20,096 | - | 20,096 | |||||||||||||||||
U.S. Treasury Notes | - | 36,806 | 36,806 | - | 36,382 | 36,382 | ||||||||||||||||||
Accrued interest on pledged securities | 12,867 | 4 | 12,871 | 11,419 | 16 | 11,435 | ||||||||||||||||||
Restricted cash | 18,072 | 24,666 | 42,738 | 13,341 | 18,227 | 31,568 | ||||||||||||||||||
Total | $ | 3,977,095 | $ | 61,476 | $ | 4,038,571 | $ | 3,537,400 | $ | 54,625 | $ | 3,592,025 |
Assets Pledged
from CounterpartiesThe table
below summarizesassets pledgedto the Companyfrom counterpartiesunder repurchaseagreementsand derivative(in thousands) | ||||||||||||||||||||||||
March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||
Repurchase | Derivative | Repurchase | Derivative | |||||||||||||||||||||
Assets Pledged to Orchid | Agreements | Agreements | Total | Agreements | Agreements | Total | ||||||||||||||||||
Cash | $ | 4,053 | $ | 1,877 | $ | 5,930 | $ | 3,075 | $ | 13,021 | $ | 16,096 | ||||||||||||
U.S. Treasury securities - fair value | 5,000 | - | $ | 5,000 | 197 | - | 197 | |||||||||||||||||
Total | $ | 9,053 | $ | 1,877 | $ | 10,930 | $ | 3,272 | $ | 13,021 | $ | 16,293 |
Cash received
as marginis recognizedas cash andcash equivalentswith a correspondingamount recognizedas an increaseinNOTE 6. OFFSETTING ASSETS AND LIABILITIES
The Company’s
derivativeagreementsand repurchaseagreementsThe following
table presentsinformationregardingthose assetsand liabilitiessubject tosuch arrangementsas if theCompany had(in thousands) | ||||||||||||||||||||||||
Offsetting of Assets | ||||||||||||||||||||||||
Gross Amount Not | ||||||||||||||||||||||||
Net Amount | Offset in the Balance Sheet | |||||||||||||||||||||||
of Assets | Financial | |||||||||||||||||||||||
Gross Amount | Gross Amount | Presented | Instruments | Cash | ||||||||||||||||||||
of Recognized | Offset in the | in the | Received as | Received as | Net | |||||||||||||||||||
Assets | Balance Sheet | Balance Sheet | Collateral | Collateral | Amount | |||||||||||||||||||
March 31, 2023 | ||||||||||||||||||||||||
Interest rate swaps | $ | 13,972 | $ | - | $ | 13,972 | $ | - | $ | - | $ | 13,972 | ||||||||||||
Interest rate swaptions | 14,849 | - | 14,849 | - | (1,505 | ) | 13,344 | |||||||||||||||||
Interest rate caps | 474 | - | 474 | - | - | 474 | ||||||||||||||||||
TBA securities | 20 | - | 20 | - | (20 | ) | - | |||||||||||||||||
$ | 29,315 | $ | - | $ | 29,315 | $ | - | $ | (1,525 | ) | $ | 27,790 | ||||||||||||
December 31, 2022 | ||||||||||||||||||||||||
Interest rate swaps | $ | 4,983 | $ | - | $ | 4,983 | $ | - | $ | - | $ | 4,983 | ||||||||||||
Interest rate swaptions | 33,398 | - | 33,398 | - | (12,489 | ) | 20,909 | |||||||||||||||||
Interest rate caps | 1,119 | - | 1,119 | - | - | 1,119 | ||||||||||||||||||
TBA securities | 672 | - | 672 | - | (532 | ) | 140 | |||||||||||||||||
$ | 40,172 | $ | - | $ | 40,172 | $ | - | $ | (13,021 | ) | $ | 27,151 |
(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 | |||||||||||||||||||
March 31, 2023 | ||||||||||||||||||||||||
Repurchase Agreements | $ | 3,769,437 | $ | - | $ | 3,769,437 | $ | (3,751,365 | ) | $ | (18,072 | ) | $ | - | ||||||||||
Interest rate swaptions | 8,528 | - | 8,528 | - | - | 8,528 | ||||||||||||||||||
TBA securities | 11,054 | - | 11,054 | - | (9,119 | ) | 1,935 | |||||||||||||||||
$ | 3,789,019 | $ | - | $ | 3,789,019 | $ | (3,751,365 | ) | $ | (27,191 | ) | $ | 10,463 | |||||||||||
December 31, 2022 | ||||||||||||||||||||||||
Repurchase Agreements | $ | 3,378,445 | $ | - | $ | 3,378,445 | $ | (3,365,104 | ) | $ | (13,341 | ) | $ | - | ||||||||||
Interest rate swaps | - | - | - | - | - | - | ||||||||||||||||||
Interest rate swaptions | 5,982 | - | 5,982 | - | - | 5,982 | ||||||||||||||||||
TBA securities | 1,179 | - | 1,179 | - | (1,179 | ) | - | |||||||||||||||||
$ | 3,385,606 | $ | - | $ | 3,385,606 | $ | (3,365,104 | ) | $ | (14,520 | ) | $ | 5,982 |
The amounts
disclosedfor collateralreceived byor postedto the samecounterpartyup to andnot exceedingthe net amountof theNOTE 7.CAPITAL STOCK
Reverse Stock
On August 30, 2022.During theyear
Common Stock Issuances
During the Market Offering Program
($ in thousands, except per share amounts) | |||||||||||||
Weighted | |||||||||||||
Average | |||||||||||||
Price | |||||||||||||
Received | Net | ||||||||||||
Type of Offering | Period | Per Share(1) | Shares | Proceeds(2) | |||||||||
2023 | |||||||||||||
At the Market Offering Program(3) | First Quarter | $ | 11.77 | 2,690,000 | $ | 31,657 | |||||||
2,690,000 | $ | 31,657 | |||||||||||
2022 | |||||||||||||
At the Market Offering Program(3) | First Quarter | $ | - | - | $ | - | |||||||
At the Market Offering Program(3) | Second Quarter | - | - | - | |||||||||
At the Market Offering Program(3) | Third Quarter | - | - | - | |||||||||
At the Market Offering Program(3) | Fourth Quarter | 10.45 | 3,885,048 | 40,580 | |||||||||
3,885,048 | $ | 40,580 |
(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 eleven equity distribution agreements, ten 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
On December 9, 2021, the Board of Directors approved an increase in the number
of shares of the Company’s common stockOn October 12, 2022, the Board of Directors approved an increase in the number of shares of the Company’s common stock available in the stock repurchase program for up to an additional 4,300,000 shares, bringing the remaining authorization under the stock repurchase program to 6,183,601 shares, representing approximately 18% of the Company’s then outstanding shares of common stock.
As part of the stock repurchase program, shares may be purchased in open market
transactions, block purchases, throughFrom the inception of the stock repurchase program through June 30, 2022,March 31, 2023, the Companyrepurchased a total of
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 | $ | 6.975 | $ | 4,662 | ||||
2014 | 10.800 | 22,643 | ||||||
2015 | 9.600 | 38,748 | ||||||
2016 | 8.400 | 41,388 | ||||||
2017 | 8.400 | 70,717 | ||||||
2018 | 5.350 | 55,814 | ||||||
2019 | 4.800 | 54,421 | ||||||
2020 | 3.950 | 53,570 | ||||||
2021 | 3.900 | 97,601 | ||||||
2022 | 2.475 | 87,906 | ||||||
2023 - YTD(1) | 0.640 | 25,098 | ||||||
Totals | $ | 65.290 | $ | 552,568 |
(1) | On April 12, 2023, the Company declared a dividend of $0.16 per share to be paid on May 26, 2023. The effect of this dividend is included in the table above but is not reflected in the Company’s financial statements as of March 31, 2023. |
NOTE 8. STOCK INCENTIVE PLAN
In 2021, the Company’s Board of Directors adopted, and the stockholders approved, the Orchid Island Capital, Inc. 2021 Equity Incentive Plan (the “2021 Incentive Plan”) to replace the Orchid Island Capital, Inc. 2012 Equity Incentive Plan (the “2012 Incentive Plan” and together with the 2021 Incentive Plan, the “Incentive Plans”). The 2021 Incentive Plan provides for the award of stock options, stock appreciation rights, stock awards, PUs, other equity-based awards (and dividend equivalents with respect to awards of PUs and other equity-based awards) and incentive awards. The 2021 Incentive Plan is administered by the Compensation Committee of the Company’s Board of Directors except per share amounts)
Performance Units
The Company has issued, and may in the future issue additional, PUs under the Incentive Plans to certain executive officers and employees of its Manager. PUs vest after the end of a defined performance period, based on satisfaction of the performance conditions set forth in the PU agreement. When earned, each PU will administer
The following table presents information related to PUs outstanding during the three months ended March 31, 2023 and 2022.
($ in thousands, except per share data) | ||||||||||||||||
Three Months Ended March 31, | ||||||||||||||||
2023 | 2022 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Grant Date | Grant Date | |||||||||||||||
Shares | Fair Value | Shares | Fair Value | |||||||||||||
Unvested, beginning of period | 36,921 | $ | 20.57 | 26,645 | $ | 29.40 | ||||||||||
Granted | - | - | 35,114 | 16.55 | ||||||||||||
Vested and issued | (4,462 | ) | 22.09 | (2,664 | ) | 29.40 | ||||||||||
Unvested, end of period | 32,459 | $ | 20.36 | 59,095 | $ | 21.75 | ||||||||||
Compensation expense during period | $ | 90 | $ | 106 | ||||||||||||
Unrecognized compensation expense, end of period | $ | 267 | $ | 942 | ||||||||||||
Intrinsic value, end of period | $ | 348 | $ | 960 | ||||||||||||
Weighted-average remaining vesting term (in years) | 1.1 | 1.8 |
Subsequent to March 31, 2023, the Company granted 76,696 PUs to its affiliates.
Stock Awards
The Company
has issued,and mayin the futureissue additional,($ in thousands, except per share data) | ||||||||
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Fully vested shares granted | - | 35,114 | ||||||
Weighted average grant date price per share | $ | - | $ | 16.55 | ||||
Compensation expense related to fully vested shares of common stock awards | $ | - | $ | 581 |
Deferred
Stock UnitsNon-employee
directorsreceive aportion oftheir compensationin the formofThe following table presents information related to the DSUs outstanding during the three months ended March 31, 2023 and 2022.
($ in thousands, except per share data) | ||||||||||||||||
Three Months Ended March 31, | ||||||||||||||||
2023 | 2022 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Grant Date | Grant Date | |||||||||||||||
Shares | Fair Value | Shares | Fair Value | |||||||||||||
Outstanding, beginning of period | 54,197 | $ | 20.29 | 28,595 | $ | 26.92 | ||||||||||
Granted and vested | 9,302 | 10.59 | 3,055 | 21.95 | ||||||||||||
Outstanding, end of period | 63,499 | $ | 18.87 | 31,650 | $ | 26.45 | ||||||||||
Compensation expense during period | $ | 89 | $ | 75 | ||||||||||||
Intrinsic value, end of period | $ | 681 | $ | 514 |
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 ofNOTE 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 itsNOTE 11.EARNINGS PER SHARE (EPS)
The Company
had dividendeligibleThe table below reconciles the numerator and denominator of EPS for the three months ended March 31, 2023 and 2022.
(in thousands, except per share information) | ||||||||
Three Months Ended March 31, | ||||||||
2023 | 2022 | |||||||
Basic and diluted EPS per common share: | ||||||||
Numerator for basic and diluted EPS per share of common stock: | ||||||||
Net income (loss) - Basic and diluted | $ | 3,530 | $ | (148,727 | ) | |||
Weighted average shares of common stock: | ||||||||
Shares of common stock outstanding at the balance sheet date | 39,086 | 35,423 | ||||||
Unvested dividend eligible share based compensation outstanding at the balance sheet date | 96 | - | ||||||
Effect of weighting | (690 | ) | (23 | ) | ||||
Weighted average shares-basic and diluted | 38,492 | 35,400 | ||||||
Net income (loss) per common share: | ||||||||
Basic and diluted | $ | 0.09 | $ | (4.20 | ) | |||
Anti-dilutive incentive shares not included in calculation | - | 91 |
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 a restriction on the sale or use of an asset and the risk of non-performance. Required disclosures include stratification of balance sheet date
● | Level 1 valuations, where the valuation is based on quoted market prices for identical assets or liabilities traded in active markets (which include exchanges and over-the-counter markets with sufficient volume), |
● | Level 2 valuations, where the valuation is based on quoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market, and |
● | Level 3 valuations, where the valuation is generated from model-based techniques that use significant assumptions not observable in the market, but observable based on Company-specific data. These unobservable assumptions reflect the Company’s own estimates for assumptions that market participants would use in pricing the asset or liability. Valuation techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability. |
The Company's RMBS and TBA securities are Level 12 valuations,
The Company’s
U.S. TreasuryNotes arebased onquoted pricesfor identicalinstrumentsin activemarkets andare classifiedasThe Company’s
futures contractsare Level1 valuations,as they areexchange-tradedinstrumentsand quotedmarket pricesareRMBS (based
on the fairvalue option),derivativesand TBA securitieswere recordedat fair valueon a recurringbasis duringtheThe following
table presentsfinancialassets (liabilities)measuredat fair valueon a recurringbasis as of(in thousands) | ||||||||||||
Quoted Prices | ||||||||||||
in Active | Significant | |||||||||||
Markets for | Other | Significant | ||||||||||
Identical | Observable | Unobservable | ||||||||||
Assets | Inputs | Inputs | ||||||||||
(Level 1) | (Level 2) | (Level 3) | ||||||||||
March 31, 2023 | ||||||||||||
Mortgage-backed securities | $ | - | $ | 3,999,906 | $ | - | ||||||
U.S. Treasury Notes | 36,806 | - | - | |||||||||
Interest rate swaps | - | 13,972 | - | |||||||||
Interest rate swaptions | - | 6,321 | - | |||||||||
Interest rate caps | - | 474 | - | |||||||||
TBA securities | - | (11,034 | ) | - | ||||||||
December 31, 2022 | ||||||||||||
Mortgage-backed securities | $ | - | $ | 3,540,002 | $ | - | ||||||
U.S. Treasury Notes | 36,382 | - | - | |||||||||
Interest rate swaps | - | 4,983 | - | |||||||||
Interest rate swaptions | - | 27,416 | - | |||||||||
Interest rate caps | - | 1,119 | - | |||||||||
TBA securities | - | (507 | ) | - |
During the six and three months ended June 30, 2022 March 31, 2023 and 2021,2022, there were
NOTE 13. RELATED PARTY TRANSACTIONS
Management Agreement
The Company is externally managed and advised by Bimini Advisors, LLC
● | 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● | 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 theTotalexpenses recorded for the management fee, and allocated overhead incurredand repurchase agreement trading, clearing and administrative services were approximately $
Other Relationships with Bimini
Robert Cauley, the Company’s Chief Executive Officer and Chairman of the Board of Directors, also serves as Chief Executive
ITEM 2. MANAGEMENT’SMANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIALCONDITIONAND RESULTS OFOPERATIONS
The following discussion of our financial condition and results of operations should
be read in conjunction with the financialCommon 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 andOur business objective is to provide attractive risk-adjusted total returns over
the long term through a combination of capitalWe operate so as to qualify to be taxed as a real estate investment trust (“REIT”)REIT under the
The Company’s common stock trades on the New York Stock Exchange under the symbol “ORC”.
Capital Raising Activities
On August 4, 2020,October 29, 2021, we entered into an equity distribution agreement (the “August2020“October 2021 Equity Distribution Agreement”) with four
Stock Repurchase Agreement
On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to 2,000,000
On December 9, 2021, the Board of Directors
approved an increase in the number of sharesOn 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 June 30, 2022,March 31, 2023, the Companyrepurchased a total of 6,561,8104,048,613 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; |
increases in our cost of funds resulting from increases in the Federal Funds rate that are controlled by the Federal Reserve (the "Fed") that occurred in 2022 and the first quarter of 2023, and may continue to occur during 2023; | ||
● | the difference between Agency RMBS yields and our funding and hedging costs; |
● | competition for, and supply of, investments in Agency RMBS; |
● | actions taken by the U.S. government, including the presidential administration, the Fed, the Federal Housing Financing Agency (the “FHFA”), The Federal Deposit Insurance Corporation ("FDIC"), Federal Housing Administration (the “FHA”), the Federal Open Market Committee (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, including bank failures. |
In addition, a variety of factors relating to our business may also impact our results
of operations and financial condition. These● | our degree of leverage; |
● | our access to funding and borrowing capacity; |
● | our borrowing costs; |
● | our hedging activities; |
● | the market value of our investments; and |
● | the requirements to 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 three months ended March 31, 2023, as compared to fundingthe Company’s results of operations for the three months ended March 31, 2022.
Net Income (Loss) Summary
Net income for the three months ended March 31, 2023 was $3.5 million, or $0.09 per share. Net loss for the three months ended March 31, 2022 was $148.7 million, or $4.20 per share. The components of net (loss) income for the three months ended March 31, 2023 and borrowing capacity;
(in thousands) | ||||||||||||
Three Months Ended March 31, | ||||||||||||
2023 | 2022 | Change | ||||||||||
Interest income | $ | 38,012 | $ | 41,857 | $ | (3,845 | ) | |||||
Interest expense | (42,217 | ) | (2,655 | ) | (39,562 | ) | ||||||
Net interest expense | (4,205 | ) | 39,202 | (43,407 | ) | |||||||
Gains (losses) on RMBS and derivative contracts | 12,739 | (183,550 | ) | 196,289 | ||||||||
Net portfolio income (loss) | 8,534 | (144,348 | ) | 152,882 | ||||||||
Expenses | (5,004 | ) | (4,379 | ) | (625 | ) | ||||||
Net income (loss) | $ | 3,530 | $ | (148,727 | ) | $ | 152,257 |
GAAP and are likely to continue to occur, in 2022; and
In addition
to the resultspresentedin accordancewith GAAP, our resultsof operationsdiscussedbelow includecertain non-GAAPNet Earnings Excluding Realized and Unrealized Gains and Losses
We have not
In addition, we have not designated our derivative
Presenting net earnings excluding realized and unrealized gains and losses allows management to: (i) isolate the purpose
Described below are the effects
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 | ||||||||||||||||||||||||
March 31, 2023 | $ | 3,530 | $ | 12,739 | $ | (9,209 | ) | $ | 0.09 | $ | 0.33 | $ | (0.24 | ) | ||||||||||
December 31, 2022 | 34,926 | 36,727 | (1,801 | ) | 0.95 | 1.00 | (0.05 | ) | ||||||||||||||||
September 30, 2022 | (84,513 | ) | (94,433 | ) | 9,920 | (2.40 | ) | (2.68 | ) | 0.28 | ||||||||||||||
June 30, 2022 | (60,139 | ) | (82,673 | ) | 22,534 | (1.70 | ) | (2.33 | ) | 0.63 | ||||||||||||||
March 31, 2022 | (148,727 | ) | (183,550 | ) | 34,823 | (4.20 | ) | (5.19 | ) | 0.99 |
(1) | Includes realized and unrealized gains (losses) on RMBS and derivative financial instruments, including net interest income or expense on interest rate swaps. |
Prior to be delivered
Realized and Unrealized Gains and Losses - Reclassification of Derivative Transaction Expenses | ||||||||||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||||||
Net Earnings Excluding | ||||||||||||||||||||||||
Realized and Unrealized | Realized and Unrealized | |||||||||||||||||||||||
Gains and Losses | Gains and Losses | |||||||||||||||||||||||
Prior | Reclassified | Current | Prior | Reclassified | Current | |||||||||||||||||||
Presentation | Expenses | Presentation | Presentation | Expenses | Presentation | |||||||||||||||||||
Three Months Ended | ||||||||||||||||||||||||
December 31, 2022 | $ | 38,389 | $ | (1,662 | ) | $ | 36,727 | $ | (3,463 | ) | $ | (1,662 | ) | $ | (1,801 | ) | ||||||||
September 30, 2022 | (93,544 | ) | (889 | ) | (94,433 | ) | 9,031 | (889 | ) | 9,920 | ||||||||||||||
June 30, 2022 | (82,282 | ) | (391 | ) | (82,673 | ) | 22,143 | (391 | ) | 22,534 | ||||||||||||||
March 31, 2022 | (183,232 | ) | (318 | ) | (183,550 | ) | 34,505 | (318 | ) | 34,823 | ||||||||||||||
Per Share | ||||||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||||||
December 31, 2022 | $ | 1.04 | $ | (0.04 | ) | $ | 1.00 | $ | (0.09 | ) | $ | (0.04 | ) | $ | (0.05 | ) | ||||||||
September 30, 2022 | (2.66 | ) | (0.02 | ) | (2.68 | ) | 0.26 | (0.02 | ) | 0.28 | ||||||||||||||
June 30, 2022 | (2.32 | ) | (0.01 | ) | (2.33 | ) | 0.62 | (0.01 | ) | 0.63 | ||||||||||||||
March 31, 2022 | (5.18 | ) | (0.01 | ) | (5.19 | ) | 0.98 | (0.01 | ) | 0.99 |
Economic Interest Expense and Economic Net Interest Income
We use derivative and other hedging instruments, specifically Fed Funds and T-Note futures contracts, short positions in thousands)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 on Borrowings
We believe that economic interest expense and economic net interest income
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 tablesincome statement line item, gains (losses) on page 35 includes the effect
Gains (Losses) on Derivative Instruments | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Funding Hedges | ||||||||||||||||||||
Recognized in | TBA Securities | Attributed to | Attributed to | |||||||||||||||||
Income | Gain (Loss) | Current | Future | |||||||||||||||||
Statement | (Short | (Long | Period | Periods | ||||||||||||||||
(GAAP) | Positions) | Positions) | (Non-GAAP) | (Non-GAAP) | ||||||||||||||||
Three Months Ended | ||||||||||||||||||||
March 31, 2023 | $ | (41,156 | ) | $ | (5,990 | ) | $ | - | $ | 19,211 | $ | (54,377 | ) | |||||||
December 31, 2022 | (12,319 | ) | (9,700 | ) | - | 9,414 | (12,033 | ) | ||||||||||||
September 30, 2022 | 183,930 | 10,642 | 106 | 4,154 | 169,028 | |||||||||||||||
June 30, 2022 | 103,367 | 1,013 | 1,067 | 1,605 | 99,682 | |||||||||||||||
March 31, 2022 | 177,498 | 2,539 | 27 | (1,605 | ) | 176,537 |
The table below presents the effect of the reclassification of derivative
expenses discussed above for each quarter in 2022.Gains (Losses) on Derivative Instruments - Reclassification of Derivative Transaction Expenses | ||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Recognized in Income Statement | Attributed to Current Period | |||||||||||||||||||||||
Prior | Reclassified | Current | Prior | Reclassified | Current | |||||||||||||||||||
Presentation | Expenses | Presentation | Presentation | Expenses | Presentation | |||||||||||||||||||
Three Months Ended | ||||||||||||||||||||||||
December 31, 2022 | $ | (10,657 | ) | $ | 1,662 | $ | (12,319 | ) | $ | 11,076 | $ | 1,662 | $ | 9,414 | ||||||||||
September 30, 2022 | 184,819 | 889 | 183,930 | 5,043 | 889 | 4,154 | ||||||||||||||||||
June 30, 2022 | 103,758 | 391 | 103,367 | 1,996 | 391 | 1,605 | ||||||||||||||||||
March 31, 2022 | 177,816 | 318 | 177,498 | (1,287 | ) | 318 | (1,605 | ) |
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 | ||||||||||||||||||||||||
March 31, 2023 | $ | 38,012 | $ | 42,217 | $ | 19,211 | $ | 23,006 | $ | (4,205 | ) | $ | 15,006 | |||||||||||
December 31, 2022 | 31,897 | 29,512 | 9,414 | 20,098 | 2,385 | 11,799 | ||||||||||||||||||
September 30, 2022 | 35,611 | 21,361 | 4,154 | 17,207 | 14,250 | 18,404 | ||||||||||||||||||
June 30, 2022 | 35,268 | 8,180 | 1,605 | 6,575 | 27,088 | 28,693 | ||||||||||||||||||
March 31, 2022 | 41,857 | 2,655 | (1,605 | ) | 4,260 | 39,202 | 37,597 |
(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 three months ended March 31, 2023, we generated a net interest loss of $4.2 million consisting of $38.0 million of interest income from RMBS assets offset by $42.2 million of interest expense on borrowings. For the comparable period ended March 31, 2022, we generated $39.2 million of net interest income, consisting of $41.9 million of interest income from RMBS assets offset by $2.7 million of interest expense on borrowings. The $3.9 milliondecrease in interest income was due to a $1,775.9 milliondecrease in average RMBS, which was partially offset by a 101 basis point ("bps") increase in the period dividedyield on average RMBS. The $39.6 millionincrease in interest expense was due to a 452 bps increase in the average cost of funds, partially offset by a $1,780.2 milliondecrease in average
On an economic basis, our interest expense on borrowings for the three months ended March 31, 2023 and 2022 was $23.0 million and $4.3 million, respectively, resulting in $15.0 million and $37.6 million of economic net interest income, respectively.
The tables below provide information on our portfolio average balances, interest income, yield on assets, average borrowings, interest expense, cost of funds, net interest income and net interest spread is calculated by subtracting averagefor the three months ended March 31, 2023 and each quarter of 2022 on both a GAAP and economic basis.
($ 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 | ||||||||||||||||||||||||||||||||
March 31, 2023 | $ | 3,769,954 | $ | 38,012 | 4.03 | % | $ | 3,573,941 | $ | 42,217 | $ | 23,006 | 4.72 | % | 2.57 | % | ||||||||||||||||
December 31, 2022 | 3,370,608 | 31,897 | 3.79 | % | 3,256,153 | 29,512 | 20,098 | 3.63 | % | 2.47 | % | |||||||||||||||||||||
September 30, 2022 | 3,571,037 | 35,611 | 3.99 | % | 3,446,420 | 21,361 | 17,207 | 2.48 | % | 2.00 | % | |||||||||||||||||||||
June 30, 2022 | 4,260,727 | 35,268 | 3.31 | % | 4,111,544 | 8,180 | 6,575 | 0.80 | % | 0.64 | % | |||||||||||||||||||||
March 31, 2022 | 5,545,844 | 41,857 | 3.02 | % | 5,354,107 | 2,655 | 4,260 | 0.20 | % | 0.32 | % |
($ in thousands) | ||||||||||||||||
Net Interest Income | Net Interest Spread | |||||||||||||||
GAAP | Economic | GAAP | Economic | |||||||||||||
Basis | Basis(2) | Basis | Basis(4) | |||||||||||||
Three Months Ended | ||||||||||||||||
March 31, 2023 | $ | (4,205 | ) | $ | 15,006 | (0.69 | )% | 1.46 | % | |||||||
December 31, 2022 | 2,385 | 11,799 | 0.16 | % | 1.32 | % | ||||||||||
September 30, 2022 | 14,250 | 18,404 | 1.51 | % | 1.99 | % | ||||||||||
June 30, 2022 | 27,088 | 28,693 | 2.51 | % | 2.67 | % | ||||||||||
March 31, 2022 | 39,202 | 37,597 | 2.82 | % | 2.70 | % |
(1) | Portfolio yields and costs of borrowings presented in the tables above and the tables on pages 30-31 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 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 fortheThe table
below presentsthe averageportfoliosize, incomeand yieldsof our respectivesub-portfolios,consistingof structuredRMBS($ in thousands) | ||||||||||||||||||||||||||||||||||||
Average RMBS Held | Interest Income | Realized Yield on Average RMBS | ||||||||||||||||||||||||||||||||||
PT | Structured | PT | Structured | PT | Structured | |||||||||||||||||||||||||||||||
RMBS | RMBS | Total | RMBS | RMBS | Total | RMBS | RMBS | Total | ||||||||||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||||||||||||||||||
March 31, 2023 | $ | 3,750,184 | $ | 19,770 | $ | 3,769,954 | $ | 37,594 | $ | 418 | $ | 38,012 | 4.01 | % | 8.44 | % | 4.03 | % | ||||||||||||||||||
December 31, 2022 | 3,335,154 | 35,454 | 3,370,608 | 31,204 | 693 | 31,897 | 3.74 | % | 7.83 | % | 3.79 | % | ||||||||||||||||||||||||
September 30, 2022 | 3,458,277 | 112,760 | 3,571,037 | 32,297 | 3,314 | 35,611 | 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 | % |
Interest Expense and the Cost of Funds
We had average
outstandingborrowingsofOur economic
interestexpensewasSince all of our repurchase agreements are short-term, changes in
The tables below present the three
($ in thousands) | ||||||||||||||||||||
Average | Interest Expense | Average Cost of Funds | ||||||||||||||||||
Balance of | GAAP | Economic | GAAP | Economic | ||||||||||||||||
Borrowings | Basis | Basis | Basis | Basis | ||||||||||||||||
Three Months Ended | ||||||||||||||||||||
March 31, 2023 | $ | 3,573,941 | $ | 42,217 | $ | 23,006 | 4.72 | % | 2.57 | % | ||||||||||
December 31, 2022 | 3,256,153 | 29,512 | 20,098 | 3.63 | % | 2.47 | % | |||||||||||||
September 30, 2022 | 3,446,420 | 21,361 | 17,207 | 2.48 | % | 2.00 | % | |||||||||||||
June 30, 2022 | 4,111,544 | 8,180 | 6,575 | 0.80 | % | 0.64 | % | |||||||||||||
March 31, 2022 | 5,354,107 | 2,655 | 4,260 | 0.20 | % | 0.32 | % |
Average GAAP Cost of Funds | Average Economic Cost of Funds | |||||||||||||||||||||||
Relative to Average | Relative to Average | |||||||||||||||||||||||
Average SOFR | One-Month | Six-Month | One-Month | Six-Month | ||||||||||||||||||||
One-Month | Six-Month | SOFR | SOFR | SOFR | SOFR | |||||||||||||||||||
Three Months Ended | ||||||||||||||||||||||||
March 31, 2023 | 4.63 | % | 4.09 | % | 0.09 | % | 0.63 | % | (2.06 | )% | (1.52 | )% | ||||||||||||
December 31, 2022 | 4.06 | % | 2.89 | % | (0.43 | )% | 0.74 | % | (1.59 | )% | (0.42 | )% | ||||||||||||
September 30, 2022 | 2.47 | % | 1.43 | % | 0.01 | % | 1.05 | % | (0.47 | )% | 0.57 | % | ||||||||||||
June 30, 2022 | 1.09 | % | 0.39 | % | (0.29 | )% | 0.41 | % | (0.45 | )% | 0.25 | % | ||||||||||||
March 31, 2022 | 0.16 | % | 0.07 | % | 0.04 | % | 0.13 | % | 0.16 | % | 0.25 | % |
Gains or Losses
The table below presents our gains or losses for the three
months ended March 31, 2023 and 2022.(in thousands) | ||||||||||||
Three Months Ended March 31, | ||||||||||||
2023 | 2022 | Change | ||||||||||
Realized losses on sales of RMBS | $ | - | $ | (51,086 | ) | $ | 51,086 | |||||
Unrealized gains (losses) on RMBS and U.S. Treasury Notes | 53,895 | (309,962 | ) | 363,857 | ||||||||
Total gains (losses) on RMBS and U.S. Treasury Notes | 53,895 | (361,048 | ) | 414,943 | ||||||||
(Losses) gains on interest rate futures | (4,038 | ) | 79,691 | (83,729 | ) | |||||||
(Losses) gains on interest rate swaps | (26,144 | ) | 66,170 | (92,314 | ) | |||||||
Gains (losses) on payer swaptions (short positions) | 6,585 | (10,908 | ) | 17,493 | ||||||||
(Losses) gains on payer swaptions (long positions) | (12,109 | ) | 40,975 | (53,084 | ) | |||||||
Losses on interest rate caps | (645 | ) | (996 | ) | 351 | |||||||
Gains (losses) on interest rate floors | 1,185 | - | 1,185 | |||||||||
(Losses) gains on TBA securities (short positions) | (5,990 | ) | 2,539 | (8,529 | ) | |||||||
(Losses) gains on TBA securities (long positions) | - | 27 | (27 | ) | ||||||||
Total (losses) gains from derivative instruments | $ | (41,156 | ) | $ | 177,498 | $ | (218,654 | ) |
Realized and unrealized gains
5 Year | 10 Year | 15 Year | 30 Year | 90 Day | ||||||||||||||||
U.S. Treasury | U.S. Treasury | Fixed-Rate | Fixed-Rate | Average | ||||||||||||||||
Rate(1) | Rate(1) | Mortgage Rate(2) | Mortgage Rate(2) | SOFR(3) | ||||||||||||||||
March 31, 2023 | 3.61 | % | 3.49 | % | 5.56 | % | 6.32 | % | 4.51 | % | ||||||||||
December 31, 2022 | 4.00 | % | 3.88 | % | 5.68 | % | 6.42 | % | 3.62 | % | ||||||||||
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 | % |
(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 SOFR is obtained from the Federal Reserve Bank of New York. |
Expenses
For the three months ended March 31, 2022
(in thousands) | ||||||||||||
Three Months Ended March 31, | ||||||||||||
2023 | 2022 | Change | ||||||||||
Management fees | $ | 2,642 | $ | 2,634 | $ | 8 | ||||||
Overhead allocation | 576 | 441 | 135 | |||||||||
Accrued incentive compensation | 470 | 237 | 233 | |||||||||
Directors fees and liability insurance | 323 | 311 | 12 | |||||||||
Audit, legal and other professional fees | 451 | 304 | 147 | |||||||||
Direct REIT operating expenses | 165 | 325 | (160 | ) | ||||||||
Other administrative | 377 | 127 | 250 | |||||||||
Total expenses | $ | 5,004 | $ | 4,379 | $ | 625 |
We are externally managed and advised by Bimini Advisors, LLC (the “Manager”) pursuant
to the terms of a management● | 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 theOn April 1, 2022, pursuant to the third amendment to the management agreement entered into on November 16, 2021,
● | A daily fee equal to the outstanding principal balance of repurchase agreement funding in place as of the end of such day multiplied by 1.5 basis points for the amount of aggregate outstanding principal balance less than or equal to $5 billion, and multiplied by 1.0 basis point for any amount of aggregate outstanding principal balance in excess of $5 billion, and |
● | A fee for the clearing and operational services provided by personnel of the Manager equal to $10,000 per month. |
Should the Company terminate the management agreement without cause, it will pay the Manager a termination fee equal to three times the outstanding principal balance of repurchaseaverage annual management fee, as defined in the management agreement, funding
The following table summarizes the management fee and overhead allocation
expenses for the($ in thousands) | ||||||||||||||||||||
Average | Average | Advisory Services | ||||||||||||||||||
Orchid | Orchid | Management | Overhead | |||||||||||||||||
Three Months Ended | MBS | Equity | Fee | Allocation | Total | |||||||||||||||
March 31, 2023 | $ | 3,769,954 | $ | 865,722 | $ | 2,642 | $ | 576 | $ | 3,218 | ||||||||||
December 31, 2022 | 3,370,608 | 823,516 | 2,566 | 560 | 3,126 | |||||||||||||||
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 |
Financial Condition:
Mortgage-Backed Securities
As of March 31, 2022
The following
table presentsthe 3-monthconstant prepaymentrate (“CPR”)experiencedon our structuredand PT RMBSStructured | |||||||||
PT RMBS | RMBS | Total | |||||||
Three Months Ended | Portfolio (%) | Portfolio (%) | Portfolio (%) | ||||||
March 31, 2023 | 3.9 | 5.7 | 4.0 | ||||||
December 31, 2022 | 4.9 | 6.0 | 5.0 | ||||||
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 |
The following
tables summarizecertain characteristics($ in thousands) | |||||||||||||||||
Weighted | |||||||||||||||||
Percentage | Average | ||||||||||||||||
of | Weighted | Maturity | |||||||||||||||
Fair | Entire | Average | in | Longest | |||||||||||||
Asset Category | Value | Portfolio | Coupon | Months | Maturity | ||||||||||||
March 31, 2023 | |||||||||||||||||
Fixed Rate RMBS | $ | 3,980,462 | 99.5 | % | 3.56 | % | 338 | 1-Feb-53 | |||||||||
Interest-Only Securities | 18,962 | 0.5 | % | 4.01 | % | 231 | 25-Jul-48 | ||||||||||
Inverse Interest-Only Securities | 482 | 0.0 | % | 0.00 | % | 283 | 15-Jun-42 | ||||||||||
Total Mortgage Assets | $ | 3,999,906 | 100.0 | % | 3.55 | % | 335 | 1-Feb-53 | |||||||||
December 31, 2022 | |||||||||||||||||
Fixed Rate RMBS | $ | 3,519,906 | 99.4 | % | 3.47 | % | 339 | 1-Nov-52 | |||||||||
Interest-Only Securities | 19,669 | 0.6 | % | 4.01 | % | 234 | 25-Jul-48 | ||||||||||
Inverse Interest-Only Securities | 427 | 0.0 | % | 0.00 | % | 286 | 15-Jun-42 | ||||||||||
Total Mortgage Assets | $ | 3,540,002 | 100.0 | % | 3.46 | % | 336 | 1-Nov-52 |
($ in thousands) | ||||||||||||||||
March 31, 2023 | December 31, 2022 | |||||||||||||||
Percentage of | Percentage of | |||||||||||||||
Agency | Fair Value | Entire Portfolio | Fair Value | Entire Portfolio | ||||||||||||
Fannie Mae | $ | 2,630,153 | 65.8 | % | $ | 2,320,960 | 65.6 | % | ||||||||
Freddie Mac | 1,369,753 | 34.2 | % | 1,219,042 | 34.4 | % | ||||||||||
Total Portfolio | $ | 3,999,906 | 100.0 | % | $ | 3,540,002 | 100.0 | % |
March 31, 2023 | December 31, 2022 | |||||||
Weighted Average Pass-through Purchase Price | $ | 105.59 | $ | 106.41 | ||||
Weighted Average Structured Purchase Price | $ | 18.74 | $ | 18.74 | ||||
Weighted Average Pass-through Current Price | $ | 93.32 | $ | 91.46 | ||||
Weighted Average Structured Current Price | $ | 14.02 | $ | 14.05 | ||||
Effective Duration (1) | 5.500 | 5.580 |
(1) | Effective duration is the approximate percentage change in price for a 100 bps change in rates. An effective duration of 5.500 indicates that an interest rate increase of 1.0% would be expected to cause a 5.500% decrease in the value of the RMBS in the Company’s investment portfolio at March 31, 2023. An effective duration of 5.580 indicates that an interest rate increase of 1.0% would be expected to cause a 5.580% decrease in the value of the RMBS in the Company’s investment portfolio at December 31, 2022. 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 presentsa summaryof portfolioassets acquiredduring thethree monthsended($ in thousands) | ||||||||||||||||||||||||
2023 | 2022 | |||||||||||||||||||||||
Total Cost | Average Price | Weighted Average Yield | Total Cost | Average Price | Weighted Average Yield | |||||||||||||||||||
Pass-through RMBS | $ | 467,460 | $ | 97.97 | 4.59 | % | $ | - | $ | - | - | |||||||||||||
Structured RMBS | - | - | - | - | - | - |
Borrowings
As of June
As of June
The table below presents information about our period end,
maximum and average balances of borrowings for each quarter in($ in thousands) | |||||||||||||||||||||
Difference Between Ending | |||||||||||||||||||||
Ending | Maximum | Average | Borrowings and | ||||||||||||||||||
Balance of | Balance of | Balance of | Average Borrowings | ||||||||||||||||||
Three Months Ended | Borrowings | Borrowings | Borrowings | Amount | Percent | ||||||||||||||||
March 31, 2023 | $ | 3,769,437 | $ | 3,849,137 | $ | 3,573,941 | $ | 195,496 | 5.47 | % | |||||||||||
December 31, 2022 | 3,378,445 | 3,414,950 | 3,256,153 | 122,292 | 3.76 | % | |||||||||||||||
September 30, 2022 | 3,133,861 | 4,047,606 | 3,446,420 | (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) |
(1) | The lower ending balance relative to the average balance during the quarter ended March 31, 2022 reflects the disposal of RMBS pledged as collateral. During the quarter ended March 31, 2022, the Company’s investment in RMBS decreased $510.4 million. |
Liquidity and Capital Resources
Liquidity
is our abilityto turn non-cashassets intocash, purchaseadditionalinvestments,repay principaland intereston borrowings,InternalSources ofLiquidity
Our internal
sources ofliquidityinclude ourcash balances,unencumberedassets andour abilityto liquidateour encumberedsecurityOur strategy
for hedgingour fundingcosts typicallyinvolvestaking shortpositions ininterestrate futures,treasuryfutures,interestrateExternalSources ofLiquidity
Our primary
externalsources ofliquidityare our abilityto (i) borrowunder masterrepurchaseagreements,(ii) usethe TBA securityUnder our
repurchaseagreementfunding arrangements,we are requiredto post marginat the initiationof the borrowing.The marginTBAs represent
a form ofoff-balancesheet financingand areaccountedfor as derivativeinstruments.Our TBAs
are alsosubject tomargin requirementsgovernedby the Mortgage-BackedSecuritiesDivision ("MBSD")of the FICCandSettlement
of our TBAobligationsby takingdelivery ofthe underlyingsecuritiesas well assatisfyingmargin requirementscouldWe invest
a portionof our capitalin structuredAgency RMBS.We generallydo not applyleverageto this portionIn future
periods,we expectto continueto financeour activitiesin a mannerthat is consistentwith ourcurrent operationsthroughAs described
more fullybelow, we mayalso accessliquidityby sellingour equityor debt securitiesin publicofferings or private placements.On August 4, 2020,October 29, 2021, we entered into the August 2020an equity distribution agreement (the “October 2021 Equity Distribution AgreementAgreement”) withfour sales agents pursuant to which we
Outlook
Economic Summary
As 2022 came to a close and the calendar turned to 2023, there was clear divergence in the outlook for aggregatemonetary policy between the Federal Reserve (the “Fed”) and the market. Market pricing in the Fed Funds futures market implied the Fed would increase the Fed Funds rate by 25 bps one or possibly two more times in early 2023 and then begin to lower the Fed Funds rate in late 2023 and continue doing so in 2024 as inflation moderated towards the Fed’s 2% target rate and the economy slowed. The Fed, as reflected in their “dot plot” and frequent public statements, implied they would hold the Fed Funds rate steady throughout 2023 after the expected hikes early in the year. The divergence persisted through January of 2023 and into early February until the incoming economic data began to change and clearly supported the Fed’s case that inflation was not slowing and that monetary policy would need to be restrictive until the data warranted such a change.
The January non-farm payroll report released on February 3, 2023 indicated the economy added over 500,000 jobs in January. The inflation data released in late 2022 was revised higher. It was becoming clear that market pricing of future Fed Funds levels was too optimistic and that the Fed had more work to do. Measures of inflation related to goods had clearly slowed, reflecting the easing of supply constraints brought about by the pandemic, coupled with a shift in consumption patterns away from goods and towards services. However, the Fed’s focus was on service-related inflation, particularly service-related inflation excluding shelter related costs. This measure of inflation was not declining. Further, the Fed sees service inflation as being strongly influenced by wage pressures. With the unemployment rate near historical lows and wage inflation high, there was no reason to believe service-related inflation was about to abruptly slow. In fact, data released in the first months of 2023 for this measure, what is now referred to as “super core” inflation, appears to have accelerated. Strong job growth will only exacerbate the problem. The market pricing for Fed Funds futures moved higher starting in early February and the terminal rate for Fed Funds moved above 5.5% in early March.
This was not the last time the outlook for the economy, inflation and Fed Funds levels would change during the first quarter. In early March there were two large regional bank failures that required the Federal Deposit Insurance Corporation (“FDIC”) to intervene. The speed with which the banks failed caught the market by surprise and required rapid responses by monetary authorities. The Fed introduced a bank term lending facility (“BTLF”) and the FDIC announced they would guarantee all deposits at both banks, regardless of size. The cause for both failures was deposit withdrawals. With short-term rates having risen by well over 400 bps in approximately 1 year, the banks that could not afford to pay correspondingly high rates on their deposits were vulnerable to losing previously cheap funding. The market expected further problems across the industry and anticipated the Fed would not be able to continue to increase rates and risk exacerbating the problem. Market pricing in the Fed Funds futures market moved from a terminal rate above 5.5% to pricing in multiple cuts to the Fed Funds rate by year-end. Interest rates across the curve moved quickly lower.
As the first quarter of 2023 came to a close it appeared the macroprudential policies imposed by the FDIC, U.S. Treasury and Fed were containing the deposit problem in the banking industry. Once again, the market outlook shifted and the outlook for monetary pricing has shifted as well. Economic data, particularly labor market and inflation related data has remained supportive of the notion that the Fed would have to move policy to more restrictive levels and keep it there longer. The brief banking crisis initially appeared to have been contained; however, additional bank failures are possible.
Interest Rates
The two-year U.S. Treasury note is the most sensitive to anticipated Fed Funds levels. The yield on the 2-year U.S. Treasury note was approximately 4.43% on December 31, 2022, declined to just above 4% in early February, increased rapidly after the payroll report on February 3, 2023, to a high of 5.07% on March 8, 2023, then declined to a low of approximately $78.3 million,
Mortgage rates available to borrowers for Agency RMBS were more stable during the first quarter of
The Agency RMBS Market
The Agency RMBS market generated a total return of 2.5% for the first quarter of 2023. The sector underperformed comparable duration SOFR swaps by 0.2% for the first quarter. Performance for the quarter was meaningfully impacted by the extreme volatility in March. For the month of March, the sector returns were 2.0% and -1.2% versus comparable duration SOFR swaps. Performance across the 30-year sector versus comparable duration SOFR swaps was uneven, as lower (2.0% and 2.5% securities) and higher coupons (5.0% and 5.5% securities) underperformed intermediate coupon securities.
The Agency RMBS sector underperformed investment grade and sub-investment grade corporates both on an absolute and relative basis (to comparable duration swaps) for the quarter. Performance versus most other sectors of the domestic fixed income markets was generally comparable.
Recent Legislative and Regulatory Developments
In response to the deterioration in the markets for U.S. Treasuries, Agency RMBS and other mortgage and fixed income markets resulting from the impacts of the COVID-19 pandemic, the Fed implemented a program of quantitative easing. Through November of 2021, the Fed was committed to purchasing $80 billion of U.S. Treasuries and $40 billion of Agency RMBS each month. In November of 2021, it began tapering its net asset purchases each month, ended net asset purchases by early March of 2022, and ended asset purchases entirely in September of 2022. On May 4, 2022, the FOMC announced a plan for reducing the Fed’s balance sheet. In June of 2022, in accordance with this plan, the Fed began reducing its balance sheet by a maximum of $30 billion of U.S. Treasuries and $17.5 billion of Agency RMBS each month. On September 21, 2022, the FOMC announced the Fed’s decision to continue reducing the balance sheet by a maximum of $60 billion of U.S. Treasuries and $35 billion of Agency RMBS per month.
On January 29, 2021, the Center for Disease Control and Prevention issued guidance extending eviction moratoriums for covered persons put in place by the CARES Act through March 31, 2021. The FHFA subsequently extended the foreclosure moratorium for loans backed by the Enterprisesand the eviction moratorium for real estate owned by the Enterprisesuntil July 31, 2021 and September 30, 2021, respectively. The U.S. Housing and Urban Development Department subsequently extended the FHA foreclosure and eviction moratoria to July 31, 2021, and September 30, 2021, respectively. Despite the expirations of 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 starts in the first quarter of 2023 up 22% year over year, but still remaining lower than pre-pandemic levels.
On September 30, 2019, the FHFA announced that the Enterpriseswere allowed to increase their capital buffers to $25 billion and $20 billion, respectively, from the prior limit of $3 billion each. This step could ultimately lead to the Enterprisesbeing privatized and represents the first concrete step on the road to Enterprise reform. In December 2020, the FHFA released a final rule on a new regulatory framework for the Enterpriseswhich seeks to implement both a risk-based capital framework and minimum leverage capital requirements. On January 14, 2021, the U.S. Treasury and the FHFA executed letter agreements allowing the Enterprisesto continue to retain capital up to their regulatory minimums, including buffers, as prescribed in the December rule. These letter agreements provide, in part, (i) there will be no exit from conservatorship until all material litigation is settled and the Enterprise has common equity Tier 1 capital of at least 3% of its assets, (ii) the Enterpriseswill comply with the FHFA’s regulatory capital framework, (iii) higher-risk single-family mortgage acquisitions will be restricted to current levels, and (iv) the U.S. Treasury and the FHFA will establish a timeline and process for future Enterprise reform. However, no definitive proposals or legislation have been released or enacted with respect to ending the conservatorship, unwinding the Enterprises, or materially reducing the roles of the Enterprises in the U.S.
In 2017,
policymakersannouncedthat LIBORwill be replacedby December31, 2021.The directivewas spurredby the factthatOn December
7, 2021,the CFPBreleaseda final rulethat amendsRegulationZ, whichimplementedthe Truth inLending Act,aimedOn March 15,
2022,the AdjustableInterestRate (LIBOR)Act (the “LIBORAct”) wassigned intolaw as partof the ConsolidatedOn July 28, 2022, the Fed published a proposed rule to implement the LIBOR Act, which was adopted on December 16, 2022. The final rule, which went into effect on February 27, 2023, sets benchmark SOFR rates to replace overnight, one-month, three-month, six-month and 12-month LIBOR contracts and provides mechanisms for converting most existing LIBOR contracts, including Agency RMBS, to SOFR no later than June 30, 2023.
The LIBOR
Act alsoattemptsto forestallchallengesthat it isimpairingcontracts.It providesthat thediscontinuanceof LIBORand theThe scope
and natureof the actionsthe U.S.governmentor the Fedwill ultimatelyundertakeare unknownand willcontinue toEffect on Us
Regulatory
developments,movementsin interestrates andprepaymentrates affectus in manyways, includingthe following:Effects onour Assets
A change
in or eliminationof the guaranteestructureof AgencyRMBS mayincrease ourcosts (if,for example,guaranteefeesIf prepayment rates are relatively low (due, in part, to the refinancing problems described above), lower long-term
interestrates canIf prepayment
levels increase,the value of any of our AgencyRMBS that are carried at a premium to par that are affectedby such prepaymentsmay decline.This is becausea principalHigher long-term
rates canalso affectthe valueof our AgencyRMBS.As long-termrates rise,rates availableto borrowersalso rise.The Agency RMBS
market beganto experiencesevere dislocationsin mid-March2020 as aresult oftheBecause we base our investment decisions on foreclosures
Effects on our borrowing costs
We leverage our PT RMBS portfolio and a portion of our structured Agency RMBS with principal balances through the use of short-term repurchase agreement transactions. The interest rates on our debt are determined by the short term interest rate markets. Increases in the Fed Funds rate, SOFR or LIBOR typically increase our borrowing costs, which could affect our interest rate spread if there is no corresponding increase in the interest we earn on our assets. This would be most prevalent with respect to our Agency RMBS backed by fixed rate mortgage loans because the interest rate on a fixed-rate mortgage loan does not change even though market rates may change.
In order to protect our net interest margin against increases in short-term interest rates, we may enter into interest rate swaps, which economically convert our floating-rate repurchase agreement debt to fixed-rate debt or utilize other hedging instruments such as Fed Funds and T-Note futures contracts or interest rate swaptions.
Summary
The economy and the outlook for monetary policy during the first quarter were very volatile. While it is likely
As the first quarter began the market, as reflected in Fed Funds futures pricing, anticipated the Fed would hike the Fed Funds rate one or evictions,
The volatility continued, and in interest
The performance for the Agency RMBS market was in line with most prevalent
The failure of Silicon Valley Bank and Signature Bank led to pivot
Critical
AccountingEstimatesOur condensed
financialstatementsare preparedin accordancewith GAAP. GAAP requiresour managementto make somecomplexCapital
ExpendituresAt June 30,
Dividends
In addition
to otherrequirementsthat mustbe satisfiedto continueto qualifyas a REIT, we mustpay annualdividendsto ourWe intend
to pay regularmonthly dividendsto our stockholdersand havedeclaredthe followingdividendssince thecompletionof our(in thousands, except per share amounts) | ||||||||
Year | Per Share Amount | Total | ||||||
2013 | $ | 6.975 | $ | 4,662 | ||||
2014 | 10.800 | 22,643 | ||||||
2015 | 9.600 | 38,748 | ||||||
2016 | 8.400 | 41,388 | ||||||
2017 | 8.400 | 70,717 | ||||||
2018 | 5.350 | 55,814 | ||||||
2019 | 4.800 | 54,421 | ||||||
2020 | 3.950 | 53,570 | ||||||
2021 | 3.900 | 97,601 | ||||||
2022 | 2.475 | 87,906 | ||||||
2023 - YTD(1) | 0.640 | 25,098 | ||||||
Totals | $ | 65.290 | $ | 552,568 |
(1) | On April 12, 2023, the Company declared a dividend of $0.16 per share to be paid on May 26, 2023. The effect of this dividend is included in the table above but is not reflected in the Company’s financial statements as of March 31, 2023. |
Market risk
is the exposureto loss resultingfrom changesin marketfactors suchas interestrates, foreigncurrency exchangerates,InterestRate Risk
Interest
rate riskis highlysensitiveto many factors,includinggovernmentalmonetaryand taxpolicies,domesticand internationalChanges in
the generallevel of interestrates canaffect ournet interestincome, whichis the differencebetween theinterest incomeWe may utilize
a varietyof financialinstrumentsin orderto limitthe effectsof changesin interestrates onour operations.The principalOur profitability
and the valueof our investmentportfolioOur portfolio
of PT RMBSis typicallycomprisedof adjustable-rateRMBS (“ARMs”),fixed-rateRMBS andhybrid adjustable-rateThe duration
of our IOand IIO portfolioswill varygreatly dependingon the structuralfeaturesof the securities.While prepaymentPrepayments
on the loansunderlyingour RMBScan alterthe timingof the cashflows fromthe underlyingloans to us.As a result,weWe face the
risk thatthe marketvalue of ourPT RMBSassets willincrease ordecreaseat differentrates thanthat of ourstructuredThe following
sensitivityanalysisshows theestimatedimpact onthe fairvalue of ourinterestrate-sensitiveinvestmentsand hedgeAll changes
in value inthe tablebelow aremeasuredas percentagechanges fromthe investmentportfoliovalue andnet assetvalueActual results
could differmateriallyfrom estimates,especiallyin the currentmarket environment.To the extent thatthese estimatesInterest Rate Sensitivity(1) | ||||||||
Portfolio | ||||||||
Market | Book | |||||||
Change in Interest Rate | Value(2)(3) | Value(2)(4) | ||||||
As of March 31, 2023 | ||||||||
-200 Basis Points | 0.11 | % | 0.99 | % | ||||
-100 Basis Points | 0.42 | % | 3.72 | % | ||||
-50 Basis Points | 0.28 | % | 2.51 | % | ||||
+50 Basis Points | (0.47 | )% | (4.14 | )% | ||||
+100 Basis Points | (1.03 | )% | (9.13 | )% | ||||
+200 Basis Points | (2.41 | )% | (21.39 | )% | ||||
As of December 31, 2022 | ||||||||
-200 Basis Points | 0.52 | % | 4.18 | % | ||||
-100 Basis Points | 0.61 | % | 4.92 | % | ||||
-50 Basis Points | 0.40 | % | 3.25 | % | ||||
+50 Basis Points | (0.43 | )% | (3.47 | )% | ||||
+100 Basis Points | (1.04 | )% | (8.38 | )% | ||||
+200 Basis Points | (2.51 | )% | (20.27 | )% |
(1) | Interest rate sensitivity is derived from models that are dependent on inputs and assumptions provided by third parties as well as by our Manager, and assumes there are no changes in mortgage spreads and assumes a static portfolio. Actual results could differ materially from these estimates. |
(2) | Includes the effect of derivatives and other securities used for hedging purposes. |
(3) | Estimated dollar change in investment portfolio value expressed as a percent of the total fair value of our investment portfolio as of such date. |
(4) | Estimated dollar change in portfolio value expressed as a percent of stockholders' equity as of such date. |
In addition to changes in interest rates, other factors impact the fair value of our interest rate-sensitive investments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, in the event of changes in actual interest rates, the change in the fair value of our assets would likely differ from that shown above and such difference might be material and adverse to our stockholders.
Prepayment Risk
Because residential borrowers have the option to prepay their mortgage loans at par at any time, we face the risk that we will experience a return of principal on our investments faster than anticipated. Various factors affect the rate at which mortgage prepayments occur, including changes in Interest Rate
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 tied to the underlying benchmark interest rates. We refer to this as "spread risk" or "basis risk." The spread risk associated with our mortgage assets and the resulting fluctuations in fair value of these securities can occur independent of changes in benchmark interest rates and may relate to other factors impacting the mortgage and fixed income markets, such as actual or anticipated monetary policy actions by the Fed, market liquidity, or changes in required rates of return on different assets. Consequently, while we use futures contracts 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.
Liquidity Risk
The primary liquidity risk for us arises from financing long-term assets with shorter-term borrowings through repurchase agreements. Our assets that are pledged to secure repurchase agreements are Agency RMBS and cash. As of June 30, 2022
Extension Risk
The projected weighted average life and the duration (or interest rate
However, if prepayment rates decrease in a rising interest rate environment, the average life or duration of our fixed-rate assets or the fixed-rate portion of the ARMs or other assets generally extends. This could have a negative impact on our results from models
Counterparty Credit Risk
We are dependent
Evaluation
of DisclosureControlsand ProceduresAs of the
end of theperiod coveredby this reportChanges
in InternalControl overFinancialReportingThere were
no significantchanges inthe Company’sinternalcontrolover financialreportingthat occurredduring theCompany’s mostWe are not party to any material pending legal proceedings as described in Item 103
of Regulation S-K.A description of certain factors that may affect our future results and risk factors
is set forthITEM 2. UNREGISTEREDSALES OFEQUITY SECURITIESAND USEOF PROCEEDS
The Company did not have any unregistered sales of its equity securities during the
three months endedThe table below presents the Company’s share repurchase activity for the three months
endedShares Purchased | Maximum Number | |||||||||||||||
Total Number | Weighted-Average | as Part of Publicly | of Shares That May Yet | |||||||||||||
of Shares | Price Paid | Announced | Be Repurchased Under | |||||||||||||
Repurchased(1) | Per Share | Programs | the Authorization | |||||||||||||
January 1, 2023 - January 31, 2023 | 373,041 | $ | 10.62 | 373,041 | 4,928,350 | |||||||||||
February 1, 2023 - February 28, 2023 | - | - | - | 4,928,350 | ||||||||||||
March 1, 2023 - March 31, 2023 | 645 | 10.56 | - | 4,928,350 | ||||||||||||
Totals / Weighted Average | 373,686 | $ | 10.62 | 373,041 | 4,928,350 |
(1) | Includes 645 shares of the Company’s common stock acquired by the Company in connection with the satisfaction of tax withholding obligations on vested employment related awards under equity incentive plans. These repurchases do not reduce the number of shares available under the stock repurchase program authorization. |
None.
Not Applicable.
None.
Exhibit No.
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. |
Pursuant
to the requirementsof Section13 or 15(d)of the SecuritiesExchangeAct of 1934,as amended,the registranthas duly causedOrchid Island Capital, Inc. | ||||
Registrant | ||||
Date: April 28, 2023 | By: | /s/ Robert E. Cauley | ||
Robert E. Cauley Chief Executive Officer, President and Chairman of the Board (Principal Executive Officer) | ||||
Date: April 28, 2023 | By: | /s/ George H. Haas, IV | ||
George H. Haas, IV Secretary, Chief Financial Officer, Chief Investment Officer and Director (Principal Financial and Accounting Officer) |