UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number
:
001-35236
Orchid Island Capital, Inc.
(Exact name of registrant as specified in its charter)
Maryland
27-3269228
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
3305 Flamingo Drive
,
Vero Beach
,
Florida
32963
(Address of principal executive offices) (Zip Code)
(
772
)
231-1400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol:
Name of Each Exchange on Which
Registered
Common Stock, $0.01 par value
ORC
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes
☒
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files).
Yes
☒
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company", and "emerging growth
company" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
☐
☒
Number of shares outstanding at August 4,October 27, 2022:
ORCHID ISLAND CAPITAL, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
1
Condensed Balance Sheets (unaudited)
1
Condensed Statements of Operations (unaudited)
2
Condensed Statements of Stockholders’ Equity (unaudited)
3
Condensed Statements of Cash Flows (unaudited)
4
Notes to Condensed Financial Statements (unaudited)
5
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
26
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
50
ITEM 4. Controls and Procedures
54
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
55
ITEM 1A. Risk Factors
55
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
55
ITEM 3. Defaults upon Senior Securities
55
ITEM 4. Mine Safety Disclosures
55
ITEM 5. Other Information
55
ITEM 6. Exhibits
56
SIGNATURES
57
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORCHID ISLAND CAPITAL, INC.
CONDENSED BALANCE SHEETS
($ in thousands, except per share data)
(Unaudited)
December 31,
2022
2021
ASSETS:
Mortgage-backed securities, at fair value (includes pledged assets of $
and $
6,506,372
, respectively)
$
$
6,511,095
U.S. Treasury Notes, at fair value (includes pledged assets of $
29,740
, respectively)
37,175
Cash and cash equivalents
385,143
Restricted cash
65,299
Accrued interest receivable
18,859
Derivative assets
50,786
Receivable for securities sold, pledged to counterparties
13,684
-
Other assets
320
Total Assets
$
$
7,068,677
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements
$
$
6,244,106
Dividends payable
11,530
Derivative liabilities
7,589
Accrued interest payable
788
Due to affiliates
1,062
Other liabilities
35,505
Total Liabilities
6,300,580
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $
0.01
and outstanding as of JuneSeptember 30, 2022 and December 31, 2021
Common Stock, $
0.01
shares issued and outstanding as of JuneSeptember 30, 2022 and
and outstanding as of December 31, 2021
Additional paid-in capital
Accumulated deficit
(82,754)
Total Stockholders' Equity
768,097
Total Liabilities and Stockholders' Equity
$
$
7,068,677
See Notes to Financial Statements
2
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three and SixNine Months Ended JuneSeptember 30, 2022 and 2021
($ in thousands, except per share data)
Three Months Ended JuneSeptember 30,
2022
2021
2022
2021
Interest income
$
$
$
$
Interest expense
Net interest income
Realized (losses) gains on mortgage-backed securities
Unrealized (losses) gains on mortgage-backed securities and
U.S. Treasury Notes
Gains (losses) on derivative and other hedging instruments
Net portfolio loss(loss) income
Expenses:
Management fees
Allocated overhead
Incentive compensation
Directors' fees and liability insurance
Audit, legal and other professional fees
Direct REIT operating expenses
Other administrative
Total expenses
Net loss(loss) income
$
$
$
$
Basic and diluted net loss(loss) income per share
$
$
$
$
Weighted Average Shares Outstanding
Dividends declared per common share
$
$
$
$
See Notes to Financial Statements
3
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
For the SixNine Months Ended JuneSeptember 30, 2022 and 2021
(in thousands)
Additional
Retained
Common Stock
Paid-in
Earnings
Shares
Par Value
Capital
(Deficit)
Total
Balances, January 1, 2021
$
$
$
(17,994)
$
415,291
Net loss
-
(29,369)
(29,369)
Cash dividends declared
-
(17,226)
(17,226)
Issuance of common stock pursuant to public offerings, net
96,908
Stock based awards and amortization
572
Balances, March 31, 2021
$
$
$
(47,363)
$
466,176
Net income
-
(16,865)
(16,865)
Cash dividends declared
-
(20,416)
(20,416)
Issuance of common stock pursuant to public offerings, net
124,746
Stock based awards and amortization
180
180
Balances, June 30, 2021
$
$
$
(64,228)
$
553,821
Net income
-
-
-
26,038
26,038
Cash dividends declared
-
-
(26,420)
-
(26,420)
Issuance of common stock pursuant to public offerings, net
7,164
71
176,936
-
177,007
Stock based awards and amortization
-
-
183
-
183
Balances, September 30, 2021
30,664
$
306
$
768,513
$
(38,190)
$
730,629
Balances, January 1, 2022
$
$
$
(82,754)
$
768,097
Net loss
-
(148,727)
(148,727)
Cash dividends declared
-
(27,492)
(27,492)
Stock based awards and amortization
540
Balances, March 31, 2022
$
$
$
(231,481)
$
592,418
Net loss
-
(60,139)
(60,139)
Cash dividends declared
-
(23,936)
(23,936)
Stock based awards and amortization
237
237
Shares repurchased and retired
(2,218)
Balances, June 30, 2022
$
$
$
(291,620)
$
506,362
Net income
-
-
-
(84,513)
(84,513)
Cash dividends declared
-
-
(19,231)
-
(19,231)
Stock based awards and amortization
1
-
143
-
143
Shares repurchased and retired
(186)
(2)
(2,382)
-
(2,384)
Balances, September 30, 2022
35,066
$
351
$
776,159
$
(376,133)
$
400,377
See Notes to Financial Statements
4
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the SixNine Months Ended JuneSeptember 30, 2022 and 2021
($ in thousands)
2022
2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
$
$
Adjustments to reconcile net loss to net cash provided by operating activities:
Stock based compensation
Realized losses on mortgage-backed securities
Unrealized losses on mortgage-backed securities and U.S. Treasury Notes
Realized and unrealized gains on derivative instruments
Changes in operating assets and liabilities:
Accrued interest receivable
Other assets
Accrued interest payable
Other liabilities
Due to affiliates
NET CASH PROVIDED BY OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases
Sales
Principal repayments
Purchases of U.S. Treasury Notes
-
(37,440)
Net proceeds from (payments on) derivative instruments
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements
Principal payments on repurchase agreements
Cash dividends
Proceeds from issuance of common stock, net of issuance costs
Shares repurchased and retired
Shares withheld from employee stock awards for payment of taxes
(299)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the period
450,442
299,506
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the period
$
$
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest
$
$
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Securities soldacquired settled in later period
$
$
See Notes to Financial Statements
5
ORCHID ISLAND CAPITAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Description
Orchid Island Capital, Inc. (“Orchid” or the “Company”), was incorporated in Maryland on August 17, 2010 for the purpose of creating
and managing a leveraged investment portfolio consisting of residential mortgage-backed securities (“RMBS”). From incorporation to the
completionof Orchid’sinitial publicoffering ofits commonstock onFebruary 20, 2013, Orchid was a wholly owned subsidiary of Bimini
Capital Management,November 24, 2010 (the date of commencement of operations). From
incorporation through November 24, 2010, Orchid’s only activity of27,493,6505,538,730 shares under the August 2020 Equity Distribution Agreement for aggregate million, and net proceeds of approximately $ million, after commissions and fees, prior to7,600,0001,520,000 shares of the Company’s common stock. J.P.5.2026.00 per share. In addition, the Company granted J.P. Morgan a 30-day option to purchase up to an additional1,140,000228,000 shares of the Company’s common stock on the same terms and conditions, whichJ.P.Morgan exercised in full on January 21,21, 2021. The closing of the offering of8,740,0001,748,000 shares of the Company’s common stock occurred on January 25, 2021, with million, net of offering expenses.8,000,0001,600,000 shares of the Company’s common stock. J.P. Morgan purchased the shares of the5.4527.25 per share. In addition, the1,200,000240,000 shares of the Company’s common stock on9,200,0001,840,000 shares million, net of of49,407,3369,881,467 shares under the June 2021 Equity Distribution Agreement for aggregate grossgross proceeds of approximately $ million, and net proceeds of approximately $ million, after commissions and fees, prior to itsits termination in October 2021.
was the issuance of common stock toBimini.
On August 4, 2020, Orchid entered into an equity distribution agreement (the “August 2020 Equity Distribution Agreement”) with
four sales agents pursuant to which the Company could offer and sell, from time to time, up to an aggregate amount of $
150,000,000
shares of the Company’s common stock in transactions that were deemed to be “at the market” offerings and privately negotiated
transactions. The Company issued a total of
gross proceeds of
approximately $
150.0
147.4
its termination in June 2021.
On January 20, 2021, Orchid entered into an underwritingagreement (the “January2021 Underwriting Agreement”) withJ.P.
Morgan Securities LLC (“J.P. Morgan”), relating to the offer and sale of
Morgan purchased the shares of the Company’s common stock from the Company pursuant to the January 2021 Underwriting
Agreement at $
proceeds to
the Company of approximately $
45.2
On March 2, 2021, Orchid entered into an underwriting agreement (the “March 2021 Underwriting Agreement”) with J.P. Morgan,
relating to the offer and sale of
Company’s common stock from the Company pursuant to the March 2021 Underwriting Agreement at $
the Company granted J.P. Morgan a 30-day option to purchase up to an additional
the same terms and conditions, which J.P. Morgan exercised in full on March 3, 2021. The closing of the offering of
of the Company’s common stock occurred on March 5, 2021, with proceeds to the Company of approximately $
50.0
offering expenses.
On June 22, 2021, Orchid entered into an equity distribution agreement (the “June 2021 Equity Distribution Agreement”) with four
sales agents pursuant to which the Company could offer and sell, from time to time, up to an aggregate amount of $
250,000,000
shares of the Company’s common stock in transactions that were deemed to be “at the market” offerings and privatelynegotiated
transactions. The Company issued a total of
250.0
246.0
6
On October 29, 2021, Orchid entered into an equity distribution agreement (the “October 2021 Equity Distribution Agreement”) with
four sales agents pursuant to which the Company may offer and sell, from time to time, up to an aggregate amount of $
250,000,000
shares of the Company’s common stock in transactions that are deemed to be “at the market” offerings and privately negotiated
transactions. Through JuneSeptember 30, 2022, the Company issued a total of
Distribution Agreement for aggregate gross proceeds of approximately $
78.3
77.0
after commissions and fees. No shares were issued under the October 2021 Equity Equity Distribution Agreement during the sixnine months ended
Basis of Presentation and Use of Estimates
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted
in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
Operating results for the sixnine and three month period endedperiods June 30,ended September 30, 2022 are are not necessarily indicative of the results that may be
expected for the year ending December 31, 2022.
The balance sheet atDecember 31, 2021 has been derived from the audited financial statements at that date but does not include all
of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the financial
statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The
significant estimates affecting the accompanying financial statements are the fair values of RMBS and derivatives. Management believes
the estimates and assumptions underlying the financial statements are reasonable based on the information available as as of JuneSeptember 30,
2022.
Common StockReverseSplit
On August 30, 2022, the Company effected a 1-for-5 reverse stock split of its commonstock and proportionately decreased the
number of authorized shares of common stock.All share, per share, deferred stock unit (“DSU”) and performance unit (“PU”)
information has been retroactively adjusted to reflect the reverse split.The shares of common stock retain a par value of $0.01 per
share.
Variable Interest Entities (“VIEs”)
The Company obtains interests in VIEs through its investments in mortgage-backed securities. The Company’s interests in these
VIEs are passive in nature and are not expected to result in the Company obtaining a controlling financial interest in these VIEs in the
future. As a result, the Company does not consolidate these VIEs and accounts for these interests in these VIEs as mortgage-backed
securities. See Note 2 for additional information regarding the Company’s investments in mortgage-backed securities. The maximum
exposure to loss for these VIEs is the carrying value of the mortgage-backed securities.
7
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash on deposit with financial institutions and highly liquid investments with original maturities of
three months or less at the time of purchase. Restricted cash includes cash pledged as collateral for repurchase agreements and other
borrowings, and interest rate swaps and other derivative instruments.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial
position that sum to the total of the same such such amounts shown shown inthe statement of cash flows.
(in thousands)
December 31, 2021
Cash and cash equivalents
$
$
385,143
Restricted cash
65,299
Total cash, cash equivalents and restricted cash
$
$
450,442
The Company maintains cash balances at three banks and excess margin on account with two exchange clearing members. At times,
balances may exceed federally insured limits. The Company has not experienced any losses related to these balances. The Federal
Deposit Insurance Corporation insures eligible accounts up to $250,000 per depositor at each financial institution. Restricted cash
balances are uninsured, but are held in separate customer accounts that are segregated from the general funds of the counterparty. The
Company limits uninsured balances to only large, well-known banks and exchange clearing members and believes that it is not exposed to
any significant credit risk on cash and cash equivalents or restricted cash balances.
Mortgage-Backed Securities and U.S. Treasury Notes
The Company invests primarily in mortgage pass-through (“PT”) residential mortgage backed securities (“RMBS”) and collateralized
mortgage obligations (“CMOs”) issued by Freddie Mac, Fannie Mae or Ginnie Mae, interest-only (“IO”) securities and inverse interest-only
(“IIO”) securities representing interest in or obligations backed by pools of RMBS. The Company refers to RMBS and CMOs as PT
RMBS. The Company refers to IO and IIO securities as structured RMBS. The Company also invests in U.S. Treasury Notes, primarily
to satisfy collateral requirements of derivative counterparties. The Company has elected to account for its investment in RMBS and
U.S. Treasury Notesunder the fair value option. Electing the fair value option requires theCompany to recordchanges in fair value in
the statement of operations, which, in management’s view, more appropriately reflects the results of the Company’s operations for a
particular reporting period and is consistent with the underlying economics and how the how the portfolio is managed.
The Company records securities transactions on the trade date. Security purchases that have not settled as of the balance sheet date
are included in the portfolio balance with an offsetting liability recorded, whereas securities sold that have not settled as of the balance
sheet date are removed removed fromthe portfolio balance with an offsetting receivable recorded.
Fair value is defined as the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction
between market participants at the measurement date. The fair value measurement assumes that the transaction to sell the asset or
transfer the liability either occurs in the principal market for the asset or liability, or in the absence of a principal market, occurs in the most
advantageous market for the asset or liability. Estimated fair values for RMBS are based on independent pricing sources and/or third party
broker quotes, when available. Estimated fair values for U.S. Treasury Notes are based on quoted prices for identical assets in active
markets.
8
Income on PT RMBS and U.S. Treasury Notes is based on the stated interest rate of the security. Premiums or discounts present at
the date of purchase are not amortized. Premium lost and discount accretion resulting from monthly principal repayments are reflected in
unrealized gains (losses) on RMBS in the statements of operations. For IO securities, the income is accrued based on the carrying value
and the effective yield. The difference between income accrued and the interest received on the security is characterized as a return of
investment and serves to reduce the asset’s carrying value. At each reporting date, the effective yield is adjusted prospectively for future
reporting periods based on the new estimate of prepayments and the contractual terms of the security. For IIO securities, effective yield
and income recognition calculations also take into account the index value applicable to the security. Changes in fair value of RMBSduring
each reporting period are recorded in earnings and reported as unrealized gains or losses on mortgage-backed securities in the
accompanying statements of operations.
Derivative and Other Hedging Instruments
The Company uses derivative and other hedging instruments to manage interest rate risk, facilitate asset/liability strategies and
manage other exposures, and it may continue to do so in the future. The principal instruments that the Company has used to date are
Treasury Note (“T-Note”), federal funds (“Fed Funds”) and Eurodollar futures contracts, short positions in U.S. Treasury securities, interest
rate swaps, options to enter in interest rate swaps (“interest rate swaptions”) and “to-be-announced” (“TBA”) securities transactions, but the
Company may enter into other derivative and other hedging instruments in the future.
The Company accounts for TBA securities as derivative instruments. Gains and losses associated with TBA securities transactions
are reported in gain (loss) on derivative instruments in the accompanying statements of operations.
Derivative and other hedging instruments are carried at fair value, and changes in fair value are recorded in earnings for each period.
The Company’s derivative financial instruments are not designated as hedge accounting relationships, but rather are used as economic
hedges of its portfolio assets and liabilities. Gains and losses on derivatives, except those that result in cash receipts or payments, are
included in operating activities on the statement of cash flows. Cash payments and cash receipts from settlements of derivatives, including
current period net cash settlements on interest rates swaps, are classified as an investing activity on the statements of cash flows.
Holding derivatives creates exposure to credit risk related to the potential for failure on the part of counterparties and exchanges to
honor their commitments. In the event of default by a counterparty, the Company may have difficulty recovering its collateral and may not
receive payments payments provided for under the terms of the agreement. The Company’s derivative agreements require it to post or receive
collateral to mitigate such risk. In addition, the Company uses only registered central clearing exchanges and well-established commercial
banks as counterparties, monitors positions with individual counterparties and adjusts posted collateral as required.
Financial Instruments
The fair value of financial instruments for which it is practicable to estimate that value is disclosed either in the body of the financial
statements or in the accompanying notes. RMBS, Eurodollar, Fed Funds and T-Note futures contracts, interest rate swaps, interest rate
swaptions and TBA securities are accounted for at fair value in the balance sheets. The methods and assumptions used to estimate fair
value for these instruments are presented in Note 12 of the financial statements.
The estimated fair value of cash and cash equivalents, restricted cash, accrued interest receivable, receivable for securities sold,
other assets, due to affiliates, repurchase agreements, payable for for unsettled securities purchased, accrued interest payable and other
liabilities generally approximates their carrying values as of JuneSeptember 30, 2022 and December 31, 2021 due due to theshort-term nature ofthese
these financial instruments.