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, $0.01 par value | ORC | New York Stock Exchange |
Indicate by
check markwhether theregistrant (1) hasfiled allreports requiredto befiled bySection 13 or15(d) ofthe SecuritiesExchange ActofIndicate by check
mark whether the registranthas submitted electronically everyInteractive Data File requiredto be submitted pursuantto Rule 405Indicate by check mark whether the registrant is
a large accelerated filer,an accelerated filer, a non-accelerated filer,a smaller reporting company,orLarge accelerated filer | ☐ | Accelerated filer | ☒ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
Emerging growth company | ☐ |
If an emerging growth company,
indicate by check mark if the registrant haselected not to use the extended transition periodfor complying with anyIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YesNumber of shares outstanding at October 27, 2022:
TABLE OF CONTENTS
ITEM1. FINANCIAL STATEMENTS
ORCHID ISLAND CAPITAL, INC.
CONDENSED BALANCE SHEETS
($ in thousands, except per share data)
(Unaudited) | ||||||||
September 30, | December 31, | |||||||
2023 | 2022 | |||||||
ASSETS: | ||||||||
Mortgage-backed securities, at fair value (includes pledged assets of $4,515,127 and $3,512,640, respectively) | $ | 4,520,225 | $ | 3,540,002 | ||||
U.S. Treasury securities, at fair value (includes pledged assets of $36,382 at December 31, 2022) | - | 36,382 | ||||||
U.S. Treasury securities, available-for-sale (includes pledged assets of $95,076 at September 30, 2023) | 98,326 | - | ||||||
Cash and cash equivalents | 158,603 | 205,651 | ||||||
Restricted cash | 119,614 | 31,568 | ||||||
Accrued interest receivable | 17,316 | 11,519 | ||||||
Derivative assets | 20,605 | 40,172 | ||||||
Other assets | 2,204 | 442 | ||||||
Total Assets | $ | 4,936,893 | $ | 3,865,736 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
LIABILITIES: | ||||||||
Repurchase agreements | $ | 4,426,947 | $ | 3,378,445 | ||||
Dividends payable | 8,398 | 5,908 | ||||||
Derivative liabilities | 2,731 | 7,161 | ||||||
Accrued interest payable | 15,836 | 9,209 | ||||||
Due to affiliates | 1,252 | 1,131 | ||||||
Other liabilities | 14,888 | 25,119 | ||||||
Total Liabilities | 4,470,052 | 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 September 30, 2023 and December 31, 2022 | - | - | ||||||
Common Stock, $0.01 par value; 100,000,000 shares authorized, 52,332,306 shares issued and outstanding as of September 30, 2023 and 36,764,983 shares issued and outstanding as of December 31, 2022 | 523 | 368 | ||||||
Additional paid-in capital | 873,862 | 779,602 | ||||||
Accumulated deficit | (407,560 | ) | (341,207 | ) | ||||
Accumulated other comprehensive income | 16 | - | ||||||
Total Stockholders' Equity | 466,841 | 438,763 | ||||||
Total Liabilities and Stockholders' Equity | $ | 4,936,893 | $ | 3,865,736 |
See Notes to Financial Statements
CONDENSED STATEMENTS
OF(Unaudited)
For the ThreeNine and NineThree Months Ended September 30, 20222023 and 2021
($ in thousands, except per share data)
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Interest income | $ | 128,030 | $ | 112,735 | $ | 50,107 | $ | 35,610 | ||||||||
Interest expense | (149,593 | ) | (32,196 | ) | (58,705 | ) | (21,361 | ) | ||||||||
Net interest (expense) income | (21,563 | ) | 80,539 | (8,598 | ) | 14,249 | ||||||||||
Realized losses on mortgage-backed securities | - | (132,672 | ) | - | (66,143 | ) | ||||||||||
Unrealized losses on mortgage-backed securities and U.S. Treasury securities | (224,576 | ) | (692,781 | ) | (208,932 | ) | (212,221 | ) | ||||||||
Gains on derivative and other hedging instruments | 194,253 | 464,796 | 142,042 | 183,931 | ||||||||||||
Net portfolio loss | (51,886 | ) | (280,118 | ) | (75,488 | ) | (80,184 | ) | ||||||||
Expenses: | ||||||||||||||||
Management fees | 8,216 | 7,881 | 2,870 | 2,616 | ||||||||||||
Allocated overhead | 1,772 | 1,482 | 557 | 522 | ||||||||||||
Incentive compensation | 1,110 | 763 | 322 | 212 | ||||||||||||
Directors' fees and liability insurance | 986 | 929 | 345 | 308 | ||||||||||||
Audit, legal and other professional fees | 1,200 | 899 | 301 | 293 | ||||||||||||
Direct REIT operating expenses | 531 | 683 | 193 | 175 | ||||||||||||
Other administrative | 652 | 624 | 56 | 203 | ||||||||||||
Total expenses | 14,467 | 13,261 | 4,644 | 4,329 | ||||||||||||
Net loss | $ | (66,353 | ) | $ | (293,379 | ) | $ | (80,132 | ) | $ | (84,513 | ) | ||||
Unrealized gains on U.S. Treasury securities measured at fair value through other comprehensive net loss | 16 | - | 16 | - | ||||||||||||
Comprehensive net loss | $ | (66,337 | ) | $ | (293,379 | ) | $ | (80,116 | ) | $ | (84,513 | ) | ||||
Basic and diluted net loss per share | $ | (1.58 | ) | $ | (8.31 | ) | $ | (1.68 | ) | $ | (2.40 | ) | ||||
Weighted Average Shares Outstanding | 42,103,532 | 35,336,702 | 47,773,409 | 35,205,888 | ||||||||||||
Dividends declared per common share | $ | 1.440 | $ | 1.995 | $ | 0.480 | $ | 0.545 |
See Notes to Financial Statements
CONDENSED STATEMENTS
OF STOCKHOLDERS' EQUITY(Unaudited)
For the Nine Months Ended September 30, 20222023 and 2021
(in thousands)
Accumulated | ||||||||||||||||||||||||
Additional | Retained | Other | ||||||||||||||||||||||
Common Stock | Paid-in | Earnings | Comprehensive | |||||||||||||||||||||
Shares | Par Value | Capital | (Deficit) | Income | 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 | ||||||||||||
Net income | - | - | - | 10,249 | - | 10,249 | ||||||||||||||||||
Cash dividends declared | - | - | (19,671 | ) | - | - | (19,671 | ) | ||||||||||||||||
Stock based awards and amortization | 53 | 1 | 790 | - | - | 791 | ||||||||||||||||||
Issuance of common stock pursuant to public offerings, net | 4,758 | 47 | 47,308 | - | - | 47,355 | ||||||||||||||||||
Balances, June 30, 2023 | 43,897 | $ | 439 | $ | 817,074 | $ | (327,428 | ) | $ | - | $ | 490,085 | ||||||||||||
Net loss | - | - | - | (80,132 | ) | - | (80,132 | ) | ||||||||||||||||
Unrealized gain on available-for-sale securities | - | - | - | - | 16 | 16 | ||||||||||||||||||
Cash dividends declared | - | - | (23,823 | ) | - | - | (23,823 | ) | ||||||||||||||||
Stock based awards and amortization | 3 | - | 269 | - | - | 269 | ||||||||||||||||||
Issuance of common stock pursuant to public offerings, net | 8,432 | 84 | 80,342 | - | - | 80,426 | ||||||||||||||||||
Balances, September 30, 2023 | 52,332 | $ | 523 | $ | 873,862 | $ | (407,560 | ) | $ | 16 | $ | 466,841 | ||||||||||||
Balances, January 1, 2022 | 35,399 | $ | 354 | $ | 850,497 | $ | (82,754 | ) | $ | - | $ | 768,097 | ||||||||||||
Net loss | - | - | - | (148,727 | ) | - | (148,727 | ) | ||||||||||||||||
Cash dividends declared | - | - | (27,492 | ) | - | - | (27,492 | ) | ||||||||||||||||
Stock based awards and amortization | 25 | - | 540 | - | - | 540 | ||||||||||||||||||
Balances, March 31, 2022 | 35,424 | $ | 354 | $ | 823,545 | $ | (231,481 | ) | $ | - | $ | 592,418 | ||||||||||||
Net loss | - | - | - | (60,139 | ) | - | (60,139 | ) | ||||||||||||||||
Cash dividends declared | - | - | (23,936 | ) | - | - | (23,936 | ) | ||||||||||||||||
Stock based awards and amortization | 2 | - | 237 | - | - | 237 | ||||||||||||||||||
Shares repurchased and retired | (175 | ) | (1 | ) | (2,217 | ) | - | - | (2,218 | ) | ||||||||||||||
Balances, June 30, 2022 | 35,251 | $ | 353 | $ | 797,629 | $ | (291,620 | ) | $ | - | $ | 506,362 | ||||||||||||
Net loss | - | - | - | (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
CONDENSED STATEMENTS
OF CASH FLOWS(Unaudited)
For the Nine Months Ended September 30, 20222023 and 2021
($ in thousands)
2023 | 2022 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (66,353 | ) | $ | (293,379 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Stock based compensation | 939 | 552 | ||||||
Discount accretion on U.S. Treasury Bills | (521 | ) | - | |||||
Realized losses on mortgage-backed securities | - | 132,672 | ||||||
Unrealized losses on mortgage-backed securities and U.S. Treasury securities | 224,576 | 692,781 | ||||||
Realized and unrealized gains on derivative instruments | (111,100 | ) | (261,364 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accrued interest receivable | (5,797 | ) | 8,332 | |||||
Other assets | (108 | ) | (353 | ) | ||||
Accrued interest payable | 6,627 | 3,636 | ||||||
Other liabilities | 441 | 7,770 | ||||||
Due to affiliates | 121 | 13 | ||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES | 48,825 | 290,660 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
From mortgage-backed securities investments: | ||||||||
Purchases | (1,443,827 | ) | (622,535 | ) | ||||
Sales and maturities | - | 2,731,497 | ||||||
Principal repayments | 237,904 | 376,169 | ||||||
Purchases of U.S. Treasury securities, available-for-sale | (97,789 | ) | - | |||||
Proceeds from maturity of U.S. Treasury securities | 37,500 | - | ||||||
Net proceeds from derivative instruments | 114,494 | 246,321 | ||||||
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES | (1,151,718 | ) | 2,731,452 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from repurchase agreements | 27,780,008 | 32,427,448 | ||||||
Principal payments on repurchase agreements | (26,731,506 | ) | (35,537,693 | ) | ||||
Cash dividends | (59,762 | ) | (76,527 | ) | ||||
Proceeds from issuance of common stock, net of issuance costs | 159,438 | - | ||||||
Common stock repurchases, including shares withheld from employee stock awards for payment of taxes | (4,287 | ) | (4,830 | ) | ||||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | 1,143,891 | (3,191,602 | ) | |||||
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | 40,998 | (169,490 | ) | |||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the period | 237,219 | 450,442 | ||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the period | $ | 278,217 | $ | 280,952 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 142,965 | $ | 28,560 |
See Notes to Financial Statements
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
September 30, 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 Equity Distribution Agreement”) with
On October 29, 2021, March 7, 2023, Orchid entered into an equity distribution agreement (the“October 2021 March 2023 Equity Distribution Agreement”) with
Basis of Presentation and Use of Estimates
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the October 2021
The balance sheet at December 31, 2022 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, 2022.
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 nine months
Reclassification of Comparative Period Information
The Company previously reported $1.6 million and $0.9 million of commissions, fees and other expenses associated with its derivative holdings for the nine and three month periods ended September 30, 2022, respectively, in "Direct REIT operating expenses" in the statements of comprehensive income. 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
ReverseSplitOn August 30, 2022, the Company effected a 1-for-51-for-5 reverse stock split of its common
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) | ||||||||
September 30, 2023 | December 31, 2022 | |||||||
Cash and cash equivalents | $ | 158,603 | $ | 205,651 | ||||
Restricted cash | 119,614 | 31,568 | ||||||
Total cash, cash equivalents and restricted cash | $ | 278,217 | $ | 237,219 |
The Company
maintainscash balancesat threebanks, a government securities backed overnight sweep fund, andexcess marginon accountwithMortgage-Backed
Securitiesand U.S.TreasuryThe Company
invests primarilyin mortgagepass-through(“PT”) residentialmortgagebacked securities(“RMBS”)and collateralizedThe Company records securities
transactionson 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 discountspresentatU.S. Treasury Bills are zero-coupon bonds that are purchased at a discount to the par amount. This discount is accreted into income over the life of the investment and reported in the statements of comprehensive income as interest income. Changes in fair value of U.S. Treasury Bills that are classified as available-for-sale are reported in accumulated other comprehensive income ("OCI"). Upon the sale of a security designated as available-for-sale, we determine the cost of the security and the amount of unrealized gain or loss to reclassify out of accumulated OCI into earnings based on the specific identification method. Since all of the Company's available-for-sale securities designated investments consist of U.S. Treasury securities, which are backed by the full faith and credit of the U.S. government, the Company does not record an allowance for credit losses.
Derivative 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 recordedinHolding derivatives
creates exposureto creditrisk relatedto the potentialfor failureon the partof counterpartiesand exchangestoFinancial
InstrumentsThe fair
value of financialinstrumentsfor whichit is practicableto estimatethat valueis disclosedeither inthe bodyof the financialRepurchase
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 portfolio that are remeasured at fair value through earnings as of(in thousands) | ||||||||
September 30, 2023 | December 31, 2022 | |||||||
Pass-Through RMBS Certificates: | ||||||||
Fixed-rate Mortgages | $ | 4,502,115 | $ | 3,519,906 | ||||
Total Pass-Through Certificates | 4,502,115 | 3,519,906 | ||||||
Structured RMBS Certificates: | ||||||||
Interest-Only Securities | 17,833 | 19,669 | ||||||
Inverse Interest-Only Securities | 277 | 427 | ||||||
Total Structured RMBS Certificates | 18,110 | 20,096 | ||||||
Total | $ | 4,520,225 | $ | 3,540,002 |
As of September
The following table is a summary of the Company’s net gain (loss) from the sale of RMBS for the nine months ended September 30, 2023 and 2022.
(in thousands) | ||||||||
Nine Months Ended September 30, | ||||||||
2023 | 2022 | |||||||
Proceeds from sales of RMBS | $ | - | $ | 2,731,497 | ||||
Carrying value of RMBS sold | - | (2,864,169 | ) | |||||
Net loss on sales of RMBS | $ | - | $ | (132,672 | ) | |||
Gross gain on sales of RMBS | $ | - | $ | 2,705 | ||||
Gross loss on sales of RMBS | - | (135,377 | ) | |||||
Net loss on sales of RMBS | $ | - | $ | (132,672 | ) |
NOTE 3. U.S. TREASURY SECURITIES, AVAILABLE-FOR-SALE
As of September 30, 2023, the Company held U.S. Treasury securities with a fair value of approximately
The amortized cost, gross unrealized holding gains and losses, and fair value of RMBS sold
(in thousands) | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
U.S. Treasury Bills maturing 1/2/2024 and 2/15/2024 | $ | 98,310 | $ | 16 | $ | - | $ | 98,326 |
The Company had no securities classified as available-for-sale that were in an unrealized loss position as of RMBS
NOTE 3.4.REPURCHASE AGREEMENTS
The Company
pledges certainof its RMBSas collateralunder repurchaseagreementswith financialinstitutions.Interestrates areAs of September
($ in thousands) | ||||||||||||||||||||
OVERNIGHT | BETWEEN 2 | BETWEEN 31 | GREATER | |||||||||||||||||
(1 DAY OR | AND | AND | THAN | |||||||||||||||||
LESS) | 30 DAYS | 90 DAYS | 90 DAYS | TOTAL | ||||||||||||||||
September 30, 2023 | ||||||||||||||||||||
Fair market value of securities pledged, including accrued interest receivable | $ | - | $ | 2,346,245 | $ | 2,190,822 | $ | - | $ | 4,537,067 | ||||||||||
Repurchase agreement liabilities associated with these securities | $ | - | $ | 2,287,107 | $ | 2,139,840 | $ | - | $ | 4,426,947 | ||||||||||
Net weighted average borrowing rate | - | 5.47 | % | 5.52 | % | - | 5.49 | % | ||||||||||||
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 outstanding principal balances of approximately
In addition, cash pledged to counterparties for repurchase agreements was approximately
$If, during
the termof a repurchaseagreement,a lenderfiles forbankruptcy, theCompany mightexperiencedifficulty recoveringitsNOTE 4.5. 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 | September 30, 2023 | December 31, 2022 | ||||||
Assets | |||||||||
Interest rate swaps | Derivative assets, at fair value | $ | 5,286 | $ | 4,983 | ||||
Payer swaptions (long positions) | Derivative assets, at fair value | 1,418 | 33,398 | ||||||
Interest rate caps | Derivative assets, at fair value | 704 | 1,119 | ||||||
Interest rate floors (long positions) | Derivative assets, at fair value | 3,981 | - | ||||||
TBA securities | Derivative assets, at fair value | 9,216 | 672 | ||||||
Total derivative assets, at fair value | $ | 20,605 | $ | 40,172 | |||||
Liabilities | |||||||||
Payer swaptions (short positions) | Derivative liabilities, at fair value | $ | - | $ | 5,982 | ||||
Interest rate floors (short positions) | Derivative liabilities, at fair value | 2,500 | - | ||||||
TBA securities | Derivative liabilities, at fair value | 231 | 1,179 | ||||||
Total derivative liabilities, at fair value | $ | 2,731 | $ | 7,161 | |||||
Margin Balances Posted to (from) Counterparties | |||||||||
Futures contracts | Restricted cash | $ | 3,067 | $ | 16,493 | ||||
TBA securities | Restricted cash | 1,670 | 1,734 | ||||||
TBA securities | Other liabilities | (11,052 | ) | (532 | ) | ||||
Interest rate swaptions | Restricted cash | 1,530 | - | ||||||
Interest rate swaptions | Other liabilities | (1,520 | ) | (12,489 | ) | ||||
Total margin balances on derivative contracts | $ | (6,305 | ) | $ | 5,206 |
Fed
Funds andT-Note futuresare cashsettled futurescontractson an interestrate, withgains andlosses creditedor($ in thousands) | ||||||||||||||||
September 30, 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) | ||||||||||||||||
December 2023 5-year T-Note futures (Dec 2023 - Feb 2028 Hedge Period) | $ | 471,500 | 4.33 | % | 4.78 | % | $ | 5,414 | ||||||||
December 2023 10-year T-Note futures (Dec 2023 - Aug 2030 Hedge Period) | $ | 395,000 | 4.24 | % | 4.97 | % | $ | 9,069 |
($ 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 $105.4 at September 30, 2023 and $107.9 at December 31, 2022. The contract values of the short positions were $496.7 million and $810.0 million at September 30, 2023 and December 31, 2022, respectively. 10-Year T-Note futures contracts were valued at a price of $108.1 at September 30, 2023. The contract values of the short positions were $426.8 million at September 30, 2023. |
Under its interest rate swap agreements, the cumulative gains (losses) recorded on open
($ in thousands) | ||||||||||||||||
Average | ||||||||||||||||
Fixed | Average | Average | ||||||||||||||
Notional | Pay | Receive | �� | Maturity | ||||||||||||
Amount | Rate | Rate | (Years) | |||||||||||||
September 30, 2023 | ||||||||||||||||
Expiration > 1 to ≤ 5 years | $ | 500,000 | 0.84 | % | 5.31 | % | 3.0 | |||||||||
Expiration > 5 years | 2,126,500 | 2.84 | % | 5.31 | % | 7.4 | ||||||||||
$ | 2,626,500 | 2.46 | % | 5.31 | % | 6.6 | ||||||||||
December 31, 2022 | ||||||||||||||||
Expiration > 1 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 |
As of September 30, 2023, the table above includes swaps with aggregate notional amounts of $175.0 million that begin accruing interest October 23, 2023 with a weighted fixed pay rate of 3.53% and a receive rate indexed to ≤ 5 years
Our interest rate swaps are centrally cleared through two registered commodities exchanges, the CME and the London Clearing House (“LCH”). The clearing exchanges require that we post an "initial margin" amount determined by the exchanges. The initial margin amount is intended to be set at a level sufficient to protect the exchange from the interest rate swap's maximum estimated single-day price movement and is subject to adjustment based on changes in market volatility and other factors. We also exchange daily settlements of "variation margin" based upon changes in fair value, as measured by the exchanges.
The table
below presentsinformationrelated tothe Company’sinterestrate cap positionsat($ in thousands) | |||||||||||||||||
Strike | |||||||||||||||||
Notional | Swap | Curve | Fair | ||||||||||||||
Amount | Cost | Rate | Spread | Value | |||||||||||||
September 30, 2023 | |||||||||||||||||
February 8, 2024 | $ | 200,000 | $ | 1,450 | 0.09 | % | 2Y10Y | $ | 704 | ||||||||
December 31, 2022 | |||||||||||||||||
February 8, 2024 | $ | 200,000 | $ | 1,450 | 0.09 | % | 2Y10Y | $ | 1,119 |
The
($ in thousands) | |||||||||||||||||
Strike | |||||||||||||||||
Notional | Swap | Fair | |||||||||||||||
Amount | Cost | Rate | Terms | Value | |||||||||||||
September 30, 2023 | |||||||||||||||||
Long Position | $ | 1,000,000 | $ | 2,500 | 0.13 | % | 2Y_2s30s | $ | 3,981 | ||||||||
Short Position | $ | (1,000,000 | ) | $ | (1,358 | ) | (0.37 | )% | 2Y_2s30s | $ | (2,500 | ) |
The table below presents information related to
($ 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) | ||||||||||||||||||
September 30, 2023 | |||||||||||||||||||||||||
Payer Swaptions (long positions) | |||||||||||||||||||||||||
≤ 1 year | $ | 1,619 | $ | 1,418 | 8.0 | $ | 800,000 | 5.40 | % | SOFR | 1.0 | ||||||||||||||
$ | 1,619 | $ | 1,418 | 8.0 | $ | 800,000 | 5.40 | % | 1.0 | ||||||||||||||||
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 par value (or principal balance) of the underlying
($ in thousands) | ||||||||||||||||
Notional | Net | |||||||||||||||
Amount | Cost | Market | Carrying | |||||||||||||
Long (Short)(1) | Basis(2) | Value(3) | Value(4) | |||||||||||||
September 30, 2023 | ||||||||||||||||
15-Year TBA securities: | ||||||||||||||||
5.0% | $ | 100,000 | $ | 97,617 | $ | 97,386 | $ | (231 | ) | |||||||
30-Year TBA securities: | ||||||||||||||||
3.0% | (350,000 | ) | (297,154 | ) | (290,116 | ) | 7,038 | |||||||||
6.0% | (100,000 | ) | (99,872 | ) | (98,766 | ) | 1,106 | |||||||||
6.5% | (152,500 | ) | (154,382 | ) | (153,310 | ) | 1,072 | |||||||||
Total | $ | (502,500 | ) | $ | (453,791 | ) | $ | (444,806 | ) | $ | 8,985 | |||||
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 operationscomprehensive income for
(in thousands) | ||||||||||||||||
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
T-Note futures contracts (short position) | $ | 66,642 | $ | 207,165 | $ | 42,640 | $ | 84,543 | ||||||||
Interest rate swaps | 101,257 | 170,987 | 78,317 | 65,247 | ||||||||||||
Payer swaptions (short positions) | 4,113 | (80,183 | ) | (718 | ) | (35,239 | ) | |||||||||
Payer swaptions (long positions) | (7,389 | ) | 150,445 | 1,613 | 59,131 | |||||||||||
Interest rate caps | (415 | ) | 988 | 493 | (499 | ) | ||||||||||
Interest rate floors (short positions) | (1,143 | ) | - | 73 | - | |||||||||||
Interest rate floors (long positions) | 2,666 | 137 | ||||||||||||||
TBA securities (short positions) | 31,120 | 14,194 | 21,511 | 10,642 | ||||||||||||
TBA securities (long positions) | (2,598 | ) | 1,200 | (2,024 | ) | 106 | ||||||||||
Total | $ | 194,253 | $ | 464,796 | $ | 142,042 | $ | 183,931 |
Credit Risk-Related Contingent Features
The
useofderivativesandotherhedginginstrumentscreatesexposuretocreditriskrelatingtopotentiallossesthatcouldbeIt is the Company's policy notto offset assets and liabilities associated
with open derivative contracts. However,NOTE 5.6. 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) | ||||||||||||||||||||||||
September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||
Repurchase | Derivative | Repurchase | Derivative | |||||||||||||||||||||
Assets Pledged to Counterparties | Agreements | Agreements | Total | Agreements | Agreements | Total | ||||||||||||||||||
PT RMBS - fair value | $ | 4,497,017 | $ | - | $ | 4,497,017 | $ | 3,492,544 | $ | - | $ | 3,492,544 | ||||||||||||
Structured RMBS - fair value | 18,110 | - | 18,110 | 20,096 | - | 20,096 | ||||||||||||||||||
U.S. Treasury securities | 4,641 | 90,435 | 95,076 | - | 36,382 | 36,382 | ||||||||||||||||||
Accrued interest on pledged securities | 17,299 | - | 17,299 | 11,419 | 16 | 11,435 | ||||||||||||||||||
Restricted cash | 113,347 | 6,267 | 119,614 | 13,341 | 18,227 | 31,568 | ||||||||||||||||||
Total | $ | 4,650,414 | $ | 96,702 | $ | 4,747,116 | $ | 3,537,400 | $ | 54,625 | $ | 3,592,025 |
Assets Pledged
from CounterpartiesThe table
below summarizesassets pledgedto the Companyfrom counterpartiesunder repurchaseagreementsand derivative(in thousands) | ||||||||||||||||||||||||
September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||
Repurchase | Derivative | Repurchase | Derivative | |||||||||||||||||||||
Assets Pledged to Orchid | Agreements | Agreements | Total | Agreements | Agreements | Total | ||||||||||||||||||
Cash | $ | - | $ | 12,572 | $ | 12,572 | $ | 3,075 | $ | 13,021 | $ | 16,096 | ||||||||||||
U.S. Treasury securities - fair value | - | - | $ | - | 197 | - | 197 | |||||||||||||||||
Total | $ | - | $ | 12,572 | $ | 12,572 | $ | 3,272 | $ | 13,021 | $ | 16,293 |
Cash received
as marginis recognizedas cash andcash equivalentswith a correspondingamount recognizedas an increaseinNOTE 6.7. 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 | |||||||||||||||||||
September 30, 2023 | ||||||||||||||||||||||||
Interest rate swaps | $ | 5,286 | $ | - | $ | 5,286 | $ | - | $ | - | $ | 5,286 | ||||||||||||
Interest rate swaptions | 1,418 | - | 1,418 | - | (1,418 | ) | - | |||||||||||||||||
Interest rate caps | 704 | - | 704 | - | - | 704 | ||||||||||||||||||
Interest rate floors | 3,981 | - | 3,981 | - | - | 3,981 | ||||||||||||||||||
TBA securities | 9,216 | - | 9,216 | - | (9,216 | ) | - | |||||||||||||||||
$ | 20,605 | $ | - | $ | 20,605 | $ | - | $ | (10,634 | ) | $ | 9,971 | ||||||||||||
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 | |||||||||||||||||||
September 30, 2023 | ||||||||||||||||||||||||
Repurchase Agreements | $ | 4,426,947 | $ | - | $ | 4,426,947 | $ | (4,313,600 | ) | $ | (113,347 | ) | $ | - | ||||||||||
Interest rate swaptions | - | - | - | - | - | - | ||||||||||||||||||
Interest rate floors | 2,500 | - | 2,500 | - | (1,530 | ) | 970 | |||||||||||||||||
TBA securities | 231 | - | 231 | - | (231 | ) | - | |||||||||||||||||
$ | 4,429,678 | $ | - | $ | 4,429,678 | $ | (4,313,600 | ) | $ | (115,108 | ) | $ | 970 | |||||||||||
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 7.8.CAPITAL STOCK
Reverse
Stock SplitOn August30, 2022,the Company
effected aCommon Stock
IssuancesDuring the nine months ended September 30, 2023 and the year ended December 31, 2022, the Company
($ 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 | |||||||
At the Market Offering Program(3) | Second Quarter | 9.95 | 4,757,953 | 47,355 | |||||||||
At the Market Offering Program(3) | Third Quarter | 9.54 | 8,432,086 | 80,426 | |||||||||
15,880,039 | $ | 159,438 | |||||||||||
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 stockAs 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 September 30, 2022,2023, the Company repurchased 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) | 1.560 | 68,604 | ||||||
Totals | $ | 66.210 | $ | 596,074 |
(1) | On October 11, 2023, the Company declared a dividend of $0.12 per share to be paid on November 28, 2023. The effect of this dividend is included in the table above but is not reflected in the Company’s financial statements as of September 30, 2023. |
NOTE 9. STOCK INCENTIVE PLAN
In 2021, the Company’s Board of Directors adopted, and the stockholders approved, the Orchid Island Capital, Inc. 2021 Equity Incentive Plan (the “2021 Incentive Plan”) to replace the Orchid Island Capital, Inc. 2012 Equity Incentive Plan (the “2012 Incentive Plan” and together with the 2021 Incentive Plan, the “Incentive Plans”). The 2021 Incentive Plan provides for the award of stock options, stock appreciation rights, stock awards, PUs, other equity-based awards (and dividend equivalents with respect to awards of PUs and other equity-based awards) and incentive awards. The 2021 Incentive Plan is administered by the Compensation Committee of the Company’s Board of Directors except per share amounts)
Performance Units
The Company has issued, and may in the future issue additional, PUs under the Incentive Plans to certain executive officers and employees of its Manager. PUs vest after the end of a defined performance period, based on satisfaction of the performance conditions set forth in the PU agreement. When earned, each PU will administer
The 2021
($ in thousands, except per share data) | ||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||
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 | 76,696 | 10.82 | 35,114 | 16.55 | ||||||||||||
Forfeited(1) | - | - | (8,464 | ) | 21.40 | |||||||||||
Vested and issued | (13,386 | ) | 22.09 | (7,594 | ) | 29.40 | ||||||||||
Unvested, end of period | 100,231 | $ | 12.91 | 45,701 | $ | 21.01 | ||||||||||
Compensation expense during period | $ | 430 | $ | 331 | ||||||||||||
Unrecognized compensation expense, end of period | $ | 757 | $ | 535 | ||||||||||||
Intrinsic value, end of period | $ | 853 | $ | 375 | ||||||||||||
Weighted-average remaining vesting term (in years) | 1.4 | 1.4 |
(1) | The number of shares of common stock issuable upon the vesting of the remaining outstanding PUs was reduced as a result of the book value impairment event that occurred pursuant to the terms of the long term equity incentive compensation plans (the “Plans”) established under the Company’s Incentive Plans. The book value impairment event occurred when the Company's book value per share declined by more than 15% during the quarter ended March 31, 2022 and the Company’s book value per share decline from January 1, 2022 to June 30, 2022 was more than 10%. The Plans provide that if such a book value impairment event occurs, then the number of outstanding PUs that are outstanding as of the last day of such two quarter period shall be reduced by 15%. |
Stock Awards
The Company has issued, and
($ in thousands, except per share data) | ||||||||
Nine Months Ended September 30, | ||||||||
2023 | 2022 | |||||||
Fully vested shares granted | 76,696 | 35,114 | ||||||
Weighted average grant date price per share | $ | 10.82 | $ | 16.55 | ||||
Compensation expense related to fully vested shares of common stock awards | $ | 830 | $ | 581 |
Deferred
Stock UnitsNon-employee
directorsreceive aportion oftheir compensationin the formof DSU awardspursuantto the IncentivePlans.EachThe following table presents information related to the DSUs outstanding during the nine months ended September 30, 2023 and 2022.
($ in thousands, except per share data) | ||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||
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 | 29,091 | 10.50 | 14,227 | 16.52 | ||||||||||||
Outstanding, end of period | 83,288 | $ | 16.87 | 42,822 | $ | 23.46 | ||||||||||
Compensation expense during period | $ | 279 | $ | 239 | ||||||||||||
Intrinsic value, end of period | $ | 709 | $ | 351 |
NOTE 9.10.COMMITMENTS AND CONTINGENCIES
From time to time, the Company may become involved in various claims and
legal actions arising in the ordinary course ofNOTE 10.11. INCOME TAXES
The Company will generally not be subject to U.S. federal income tax on
its REIT taxable income to the extent that it distributes itsNOTE 11.12.EARNINGS PER SHARE (EPS)
The Company
had dividendeligibleThe table below reconciles the numerator and denominator of EPS for the nine and three months ended September 30, 2023 and 2022.
(in thousands, except per share information) | ||||||||||||||||
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
Basic and diluted EPS per common share: | ||||||||||||||||
Numerator for basic and diluted EPS per share of common stock: | ||||||||||||||||
Net loss - Basic and diluted | $ | (66,353 | ) | $ | (293,379 | ) | $ | (80,132 | ) | $ | (84,513 | ) | ||||
Weighted average shares of common stock: | ||||||||||||||||
Shares of common stock outstanding at the balance sheet date | 52,332 | 35,066 | 52,332 | 35,066 | ||||||||||||
Effect of weighting | (10,228 | ) | 271 | (4,559 | ) | 140 | ||||||||||
Weighted average shares-basic and diluted | 42,104 | 35,337 | 47,773 | 35,206 | ||||||||||||
Net loss per common share: | ||||||||||||||||
Basic and diluted | $ | (1.58 | ) | $ | (8.31 | ) | $ | (1.68 | ) | $ | (2.40 | ) | ||||
Anti-dilutive incentive shares not included in calculation | 184 | 89 | 184 | 79 |
NOTE 13. 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. TreasuryThe 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 duringthe nineThe 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 Level 2 assets under the fair value hierarchy as of September 30, 2023 and December 31, 2022 due to the short-term nature of these financial instruments.
The following
table presentsfinancialassets (liabilities)measuredat fair valueon a recurringbasis as ofSeptember30,(in thousands) | ||||||||||||
Quoted Prices | ||||||||||||
in Active | Significant | |||||||||||
Markets for | Other | Significant | ||||||||||
Identical | Observable | Unobservable | ||||||||||
Assets | Inputs | Inputs | ||||||||||
(Level 1) | (Level 2) | (Level 3) | ||||||||||
September 30, 2023 | ||||||||||||
Mortgage-backed securities | $ | - | $ | 4,520,225 | $ | - | ||||||
U.S. Treasury securities | 98,326 | - | - | |||||||||
Interest rate swaps | - | 5,286 | - | |||||||||
Payer swaptions | - | 1,418 | - | |||||||||
Interest rate caps | - | 704 | - | |||||||||
Interest rate floors | 1,481 | |||||||||||
TBA securities | - | 8,985 | - | |||||||||
December 31, 2022 | ||||||||||||
Mortgage-backed securities | $ | - | $ | 3,540,002 | $ | - | ||||||
U.S. Treasury Notes | 36,382 | - | - | |||||||||
Interest rate swaps | - | 4,983 | - | |||||||||
Payer swaptions | - | 27,416 | - | |||||||||
Interest rate caps | - | 1,119 | - | |||||||||
TBA securities | - | (507 | ) | - |
During the nine and three months ended September 30, 2022
NOTE 13.14. RELATED PARTY TRANSACTIONS
Management Agreement
The Company is externally managed and advised by Bimini Advisors, LLC (the
● | 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
ReverseSplitOn August 30, 2022, the Company effected a 1-for-5 reverse stock split of its common
stock and proportionately decreased theOverview
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
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 400,000
shares of our common stock. TheOn 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 stockFrom the inception of the stock repurchase program through September 30, 2022,2023, theCompany repurchased a total of 1,487,362
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 three quarters of 2023, and may continue to occur; | |
● | 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 nine and three months ended September 30, 2023, as compared to fundingthe Company’s results of operations for the nine and borrowing capacity;
Net Loss Summary
Net loss for the market valuenine months ended September 30, 2023 was $66.4 million or $1.58 per share. Net loss for the nine months ended September 30, 2022 was $293.4 million, or $8.31 per share. Net loss for the three months ended September 30, 2023 was $80.1 million, or $1.68 per share. Net loss for the three months ended September 30, 2022 was $84.5 million, or $2.40 per share. The components of our investments
(in thousands) | ||||||||||||||||||||||||
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||||||
2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||||
Interest income | $ | 128,030 | $ | 112,735 | $ | 15,295 | $ | 50,107 | $ | 35,610 | $ | 14,497 | ||||||||||||
Interest expense | (149,593 | ) | (32,196 | ) | (117,397 | ) | (58,705 | ) | (21,361 | ) | (37,344 | ) | ||||||||||||
Net interest (expense) income | (21,563 | ) | 80,539 | (102,102 | ) | (8,598 | ) | 14,249 | (22,847 | ) | ||||||||||||||
Losses on RMBS and derivative contracts | (30,323 | ) | (360,657 | ) | 330,334 | (66,890 | ) | (94,433 | ) | 27,543 | ||||||||||||||
Net portfolio loss | (51,886 | ) | (280,118 | ) | 228,232 | (75,488 | ) | (80,184 | ) | 4,696 | ||||||||||||||
Expenses | (14,467 | ) | (13,261 | ) | (1,206 | ) | (4,644 | ) | (4,329 | ) | (315 | ) | ||||||||||||
Net loss | $ | (66,353 | ) | $ | (293,379 | ) | $ | 227,026 | $ | (80,132 | ) | $ | (84,513 | ) | $ | 4,381 |
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 | ||||||||||||||||||||||||
September 30, 2023 | $ | (80,132 | ) | $ | (66,890 | ) | $ | (13,242 | ) | $ | (1.68 | ) | $ | (1.40 | ) | $ | (0.28 | ) | ||||||
June 30, 2023 | 10,249 | 23,828 | (13,579 | ) | 0.25 | 0.59 | (0.34 | ) | ||||||||||||||||
March 31, 2023 | 3,530 | 12,739 | (9,209 | ) | 0.09 | 0.33 | (0.24 | ) | ||||||||||||||||
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 | ||||||||||||||
Nine Months Ended | ||||||||||||||||||||||||
September 30, 2023 | $ | (66,353 | ) | $ | (30,323 | ) | $ | (36,030 | ) | $ | (1.58 | ) | $ | (0.72 | ) | $ | (0.86 | ) | ||||||
September 30, 2022 | (293,379 | ) | (360,656 | ) | 67,277 | (8.31 | ) | (10.21 | ) | 1.90 |
(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 2023, we included certain expenses related to our derivative
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 comprehensive income and not included in interest expense. As such, for financial reporting purposes, interest expense and cost of funds are not impacted by the fluctuation in value of the derivative instruments.
For the purpose of computing economic net interest income and ratios relating to cost of funds measures, GAAP interest expense has been adjusted to reflect the realized and unrealized gains or losses on 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
From time to time, we invest in
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 includesderivative instruments, calculated in accordance with GAAP for 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 | ||||||||||||||||||||
September 30, 2023 | $ | 142,042 | $ | 21,511 | $ | (2,024 | ) | $ | 24,440 | $ | 98,115 | |||||||||
June 30, 2023 | 93,367 | 15,599 | (574 | ) | 23,482 | 54,860 | ||||||||||||||
March 31, 2023 | (41,156 | ) | (5,990 | ) | - | 19,211 | (54,377 | ) | ||||||||||||
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 | ||||||||||||||
Nine Months Ended | ||||||||||||||||||||
September 30, 2023 | $ | 194,253 | $ | 31,120 | $ | (2,598 | ) | $ | 67,133 | $ | 98,598 | |||||||||
September 30, 2022 | 464,795 | 14,194 | 1,200 | 4,154 | 445,247 |
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 | GAAP | Attributed | Economic | GAAP | Economic | |||||||||||||||||||
Interest | Interest | to Current | Interest | Net Interest | Net Interest | |||||||||||||||||||
Income | Expense | Period(1) | Expense(2) | Income | Income(3) | |||||||||||||||||||
Three Months Ended | ||||||||||||||||||||||||
September 30, 2023 | $ | 50,107 | $ | 58,705 | $ | 24,440 | $ | 34,265 | $ | (8,598 | ) | $ | 15,842 | |||||||||||
June 30, 2023 | 39,911 | 48,671 | 23,482 | 25,189 | (8,760 | ) | 14,722 | |||||||||||||||||
March 31, 2023 | 38,012 | 42,217 | 19,211 | 23,006 | (4,205 | ) | 15,006 | |||||||||||||||||
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 | |||||||||||||||||
Nine Months Ended | ||||||||||||||||||||||||
September 30, 2023 | $ | 128,030 | $ | 149,593 | $ | 67,133 | $ | 82,460 | $ | (21,563 | ) | $ | 45,570 | |||||||||||
September 30, 2022 | 112,736 | 32,196 | 4,154 | 28,042 | 80,540 | 84,694 |
(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 (Expense)
During the nine months ended September 30, 2023, we incurred net interest expense of $21.6 million consisting of $128.0 million of interest income from RMBS assets offset by $149.6 million of interest expense on borrowings. For the comparable period ended September 30, 2022, we generated $80.5 million of net interest income, consisting of $112.7 million of interest income from RMBS assets offset by $32.2 million of interest expense on borrowings. The $15.3 million increase in interest income was due to a 76 basis point ("bps") increase in the yield on average RMBS, partially offset by a $324.5 million decrease in average RMBS. The $117.4 million increase in interest expense was due to a 404 bps increase in the average cost of funds, partially offset by a $346.0 million decrease in average outstanding borrowings.
On an economic basis, our interest expense on borrowings for the nine months ended September 30, 2023 and 2022 was $82.5 million and $28.0 million, respectively, resulting in $45.6 million and $84.7 million of economic net interest income, respectively.
During the three months ended September 30, 2023, we incurred net interest expense of $8.6 million consisting of $50.1 million of interest income from RMBS assets offset by $58.7 million of interest expense on borrowings. For the comparable period dividedended September 30, 2022, we generated $14.3 million of net interest income, consisting of $35.6 million of interest income from RMBS assets offset by $21.4 million of interest expense on borrowings. The $14.5 millionincrease in interest income was due to a 52 bps increase in the yield on average
On an economic basis, our interest expense on borrowings for the three months ended September 30, 2023 and 2022 was $34.3 million and $17.2 million, respectively, resulting in $15.8 million and $18.4 million of economic net interest income, respectively.
The tables below provide information on our portfolio average balances, interest income, yield on assets, average borrowings, interest expense, cost of funds, net interest income and net interest spread is calculated by subtracting averagefor the nine months ended September 30, 2023 and 2022, and each quarter of 2023 to date and 2022 on both a GAAP and economic basis.
($ 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 | ||||||||||||||||||||||||||||||||
September 30, 2023 | $ | 4,447,098 | $ | 50,107 | 4.51 | % | $ | 4,314,332 | $ | 58,705 | $ | 34,265 | 5.44 | % | 3.18 | % | ||||||||||||||||
June 30, 2023 | 4,186,939 | 39,911 | 3.81 | % | 3,985,577 | 48,671 | 25,189 | 4.88 | % | 2.53 | % | |||||||||||||||||||||
March 31, 2023 | 3,769,954 | 38,012 | 4.03 | % | 3,573,941 | 42,217 | 23,006 | 4.72 | % | 2.57 | % | |||||||||||||||||||||
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 | % | |||||||||||||||||||||
Nine Months Ended | ||||||||||||||||||||||||||||||||
September 30, 2023 | $ | 4,134,664 | $ | 128,030 | 4.13 | % | $ | 3,957,950 | $ | 149,593 | $ | 82,460 | 5.04 | % | 2.78 | % | ||||||||||||||||
September 30, 2022 | 4,459,203 | 112,736 | 3.37 | % | 4,304,024 | 32,196 | 28,042 | 1.00 | % | 0.87 | % |
($ in thousands) | ||||||||||||||||
Net Interest Income | Net Interest Spread | |||||||||||||||
GAAP | Economic | GAAP | Economic | |||||||||||||
Basis | Basis(2) | Basis | Basis(4) | |||||||||||||
Three Months Ended | ||||||||||||||||
September 30, 2023 | $ | (8,598 | ) | $ | 15,842 | (0.93 | )% | 1.33 | % | |||||||
June 30, 2023 | (8,760 | ) | 14,722 | (1.07 | )% | 1.28 | % | |||||||||
March 31, 2023 | (4,205 | ) | 15,006 | (0.69 | )% | 1.46 | % | |||||||||
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 | % | ||||||||||
Nine Months Ended | ||||||||||||||||
September 30, 2023 | $ | (21,563 | ) | $ | 45,570 | (0.91 | )% | 1.35 | % | |||||||
September 30, 2022 | 80,540 | 84,694 | 2.37 | % | 2.50 | % |
(1) | Portfolio yields and costs of borrowings presented in the tables above and the tables on pages 31-32 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 32 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. |
Average Asset Yield
The table below presents the average portfolio size, income for
($ in thousands) | ||||||||||||||||||||||||||||||||||||
Average RMBS Held | Interest Income | Realized Yield on Average RMBS | ||||||||||||||||||||||||||||||||||
PT | Structured | PT | Structured | PT | Structured | |||||||||||||||||||||||||||||||
RMBS | RMBS | Total | RMBS | RMBS | Total | RMBS | RMBS | Total | ||||||||||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||||||||||||||||||
September 30, 2023 | $ | 4,429,159 | $ | 17,939 | $ | 4,447,098 | $ | 49,661 | $ | 446 | $ | 50,107 | 4.48 | % | 9.96 | % | 4.51 | % | ||||||||||||||||||
June 30, 2023 | 4,168,333 | 18,606 | 4,186,939 | 39,495 | 416 | 39,911 | 3.79 | % | 8.95 | % | 3.81 | % | ||||||||||||||||||||||||
March 31, 2023 | 3,750,184 | 19,770 | 3,769,954 | 37,594 | 418 | 38,012 | 4.01 | % | 8.44 | % | 4.03 | % | ||||||||||||||||||||||||
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 | % | ||||||||||||||||||||||||
Nine Months Ended | ||||||||||||||||||||||||||||||||||||
September 30, 2023 | $ | 4,115,892 | $ | 18,772 | $ | 4,134,664 | $ | 126,750 | $ | 1,280 | $ | 128,030 | 4.11 | % | 9.09 | % | 4.13 | % | ||||||||||||||||||
September 30, 2022 | 4,287,655 | 171,548 | 4,459,203 | 108,293 | 1,527 | 109,820 | 3.24 | % | 6.59 | % | 3.37 | % |
Interest Expense and the Cost of Funds
We had average
outstandingborrowingsofOur economic
interestexpensewasWe had average
outstandingborrowingsofOur economic
interestexpensewasSince all
of our repurchaseagreementsare short-term,changes inmarket ratesdirectly affectour interestexpense. OuraveragecostThe tables
below presentthe averagebalance ofborrowingsoutstanding,interestexpense andaverage costof funds,and average($ in thousands) | ||||||||||||||||||||
Average | Interest Expense | Average Cost of Funds | ||||||||||||||||||
Balance of | GAAP | Economic | GAAP | Economic | ||||||||||||||||
Borrowings | Basis | Basis | Basis | Basis | ||||||||||||||||
Three Months Ended | ||||||||||||||||||||
September 30, 2023 | $ | 4,314,332 | $ | 58,705 | $ | 34,265 | 5.44 | % | 3.18 | % | ||||||||||
June 30, 2023 | 3,985,577 | 48,671 | 25,189 | 4.88 | % | 2.53 | % | |||||||||||||
March 31, 2023 | 3,573,941 | 42,217 | 23,006 | 4.72 | % | 2.57 | % | |||||||||||||
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 | % | |||||||||||||
Nine Months Ended | ||||||||||||||||||||
September 30, 2023 | $ | 3,957,950 | $ | 149,593 | $ | 82,460 | 5.04 | % | 2.78 | % | ||||||||||
September 30, 2022 | 4,304,024 | 32,196 | 28,042 | 1.00 | % | 0.87 | % |
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 | ||||||||||||||||||||||||
September 30, 2023 | 5.32 | % | 5.17 | % | 0.12 | % | 0.27 | % | (2.14 | )% | (1.99 | )% | ||||||||||||
June 30, 2023 | 5.07 | % | 4.78 | % | (0.19 | )% | 0.10 | % | (2.54 | )% | (2.25 | )% | ||||||||||||
March 31, 2023 | 4.63 | % | 4.09 | % | 0.09 | % | 0.63 | % | (2.06 | )% | (1.52 | )% | ||||||||||||
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 | % | ||||||||||||
Nine Months Ended | ||||||||||||||||||||||||
September 30, 2023 | 5.00 | % | 4.68 | % | 0.04 | % | 0.36 | % | (2.22 | )% | (1.90 | )% | ||||||||||||
September 30, 2022 | 1.24 | % | 0.63 | % | (0.24 | )% | 0.37 | % | (0.37 | )% | 0.24 | % |
Gains or Losses
The table below presents our gains or losses for the nine
and three months endedSeptember30,(in thousands) | ||||||||||||||||||||||||
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||||||
2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||||
Realized losses on sales of RMBS | $ | - | $ | (132,672 | ) | $ | 132,672 | $ | - | $ | (66,143 | ) | $ | 66,143 | ||||||||||
Unrealized losses on RMBS and U.S. Treasury securities | (224,576 | ) | (692,781 | ) | 468,205 | (208,932 | ) | (212,221 | ) | 3,289 | ||||||||||||||
Total losses on RMBS and U.S. Treasury securities | (224,576 | ) | (825,453 | ) | 600,877 | (208,932 | ) | (278,364 | ) | 69,432 | ||||||||||||||
Gains on T-Note futures | 66,642 | 207,165 | (140,523 | ) | 42,640 | 84,543 | (41,903 | ) | ||||||||||||||||
Gains on interest rate swaps | 101,257 | 170,987 | (69,730 | ) | 78,317 | 65,247 | 13,070 | |||||||||||||||||
Gains (losses) on payer swaptions (short positions) | 4,113 | (80,183 | ) | 84,296 | (718 | ) | (35,239 | ) | 34,521 | |||||||||||||||
(Losses) gains on payer swaptions (long positions) | (7,389 | ) | 150,445 | (157,834 | ) | 1,613 | 59,131 | (57,518 | ) | |||||||||||||||
(Losses) gains on interest rate caps | (415 | ) | 988 | (1,403 | ) | 493 | (499 | ) | 992 | |||||||||||||||
(Losses) gains on interest rate floors (short positions) | (1,143 | ) | - | (1,143 | ) | 73 | - | 73 | ||||||||||||||||
Gains on interest rate floors (long positions) | 2,666 | - | 2,666 | 137 | - | 137 | ||||||||||||||||||
Gains on TBA securities (short positions) | 31,120 | 14,194 | 16,926 | 21,511 | 10,642 | 10,869 | ||||||||||||||||||
(Losses) gains on TBA securities (long positions) | (2,598 | ) | 1,200 | (3,798 | ) | (2,024 | ) | 106 | (2,130 | ) | ||||||||||||||
Total gains from derivative instruments | $ | 194,253 | $ | 464,796 | $ | (270,543 | ) | $ | 142,042 | $ | 183,931 | $ | (41,889 | ) |
We invest in RMBS with the intent to earn net income from the realized yield on those assets over their related funding and
hedging costs, and not forRealized 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) | ||||||||||||||||
September 30, 2023 | 4.61 | % | 4.57 | % | 6.72 | % | 7.31 | % | 5.27 | % | ||||||||||
June 30, 2023 | 4.13 | % | 3.82 | % | 6.06 | % | 6.71 | % | 5.00 | % | ||||||||||
March 31, 2023 | 3.61 | % | 3.49 | % | 5.56 | % | 6.32 | % | 4.51 | % | ||||||||||
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. The SOFR averages are compounded averages of the SOFR over rolling 30 and 180 calendar day periods. |
Expenses
For the nine
and threemonths endedSeptember30,(in thousands) | ||||||||||||||||||||||||
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||||||
2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||||
Management fees | $ | 8,216 | $ | 7,881 | $ | 335 | $ | 2,870 | $ | 2,616 | $ | 254 | ||||||||||||
Overhead allocation | 1,772 | 1,482 | 290 | 557 | 522 | 35 | ||||||||||||||||||
Accrued incentive compensation | 1,110 | 763 | 347 | 322 | 212 | 110 | ||||||||||||||||||
Directors fees and liability insurance | 986 | 929 | 57 | 345 | 308 | 37 | ||||||||||||||||||
Audit, legal and other professional fees | 1,200 | 899 | 301 | 301 | 293 | 8 | ||||||||||||||||||
Direct REIT operating expenses | 531 | 683 | (152 | ) | 193 | 175 | 18 | |||||||||||||||||
Other administrative | 652 | 624 | 28 | 56 | 203 | (147 | ) | |||||||||||||||||
Total expenses | $ | 14,467 | $ | 13,261 | $ | 1,206 | $ | 4,644 | $ | 4,329 | $ | 315 |
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, 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 $10,000 per month. |
Should the Company terminate the management agreement without cause, it will pay the Manager a termination fee equal to three times the outstanding principal balance of repurchaseaverage annual management fee, as defined in the management agreement, funding
The following table summarizes the management fee and overhead allocation
expenses for the nine months ended September 30,($ in thousands) | ||||||||||||||||||||
Average | Average | Advisory Services | ||||||||||||||||||
Orchid | Orchid | Management | Overhead | |||||||||||||||||
Three Months Ended | MBS | Equity | Fee | Allocation | Total | |||||||||||||||
September 30, 2023 | $ | 4,447,098 | $ | 964,230 | $ | 2,870 | $ | 557 | $ | 3,427 | ||||||||||
June 30, 2023 | 4,186,939 | 899,109 | 2,704 | 639 | 3,343 | |||||||||||||||
March 31, 2023 | 3,769,954 | 865,722 | 2,642 | 576 | 3,218 | |||||||||||||||
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 | |||||||||||||||
Nine Months Ended | ||||||||||||||||||||
September 30, 2023 | $ | 4,134,664 | $ | 909,687 | $ | 8,216 | $ | 1,772 | $ | 9,988 | ||||||||||
September 30, 2022 | 4,459,203 | 853,350 | 7,881 | 1,482 | 9,363 |
Financial
Condition:Mortgage-Backed Securities
As of September
30,The following
table presentsthe 3-monthconstant prepaymentrate (“CPR”)experiencedon our structuredand PT RMBSStructured | |||||||||
PT RMBS | RMBS | Total | |||||||
Three Months Ended | Portfolio (%) | Portfolio (%) | Portfolio (%) | ||||||
September 30, 2022 | 6.1 | 5.7 | 6.0 | ||||||
June 30, 2023 | 5.6 | 7.0 | 5.6 | ||||||
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 characteristicsof the Company’sPT RMBSand structuredRMBS as of($ in thousands) | |||||||||||||||||
Weighted | |||||||||||||||||
Percentage | Average | ||||||||||||||||
of | Weighted | Maturity | |||||||||||||||
Fair | Entire | Average | in | Longest | |||||||||||||
Asset Category | Value | Portfolio | Coupon | Months | Maturity | ||||||||||||
September 30, 2023 | |||||||||||||||||
Fixed Rate RMBS | $ | 4,502,115 | 99.6 | % | 4.03 | % | 335 | 1-Sep-53 | |||||||||
Interest-Only Securities | 17,833 | 0.4 | % | 4.01 | % | 225 | 25-Jul-48 | ||||||||||
Inverse Interest-Only Securities | 277 | 0.0 | % | 0.00 | % | 277 | 15-Jun-42 | ||||||||||
Total Mortgage Assets | $ | 4,520,225 | 100.0 | % | 4.01 | % | 333 | 1-Sep-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) | ||||||||||||||||
September 30, 2023 | December 31, 2022 | |||||||||||||||
Percentage of | Percentage of | |||||||||||||||
Agency | Fair Value | Entire Portfolio | Fair Value | Entire Portfolio | ||||||||||||
Fannie Mae | $ | 2,989,840 | 66.1 | % | $ | 2,320,960 | 65.6 | % | ||||||||
Freddie Mac | 1,530,385 | 33.9 | % | 1,219,042 | 34.4 | % | ||||||||||
Total Portfolio | $ | 4,520,225 | 100.0 | % | $ | 3,540,002 | 100.0 | % |
September 30, 2023 | December 31, 2022 | |||||||
Weighted Average Pass-through Purchase Price | $ | 104.87 | $ | 106.41 | ||||
Weighted Average Structured Purchase Price | $ | 18.74 | $ | 18.74 | ||||
Weighted Average Pass-through Current Price | $ | 89.08 | $ | 91.46 | ||||
Weighted Average Structured Current Price | $ | 13.92 | $ | 14.05 | ||||
Effective Duration (1) | 5.460 | 5.580 |
(1) | Effective duration is the approximate percentage change in price for a 100 bps change in rates. An effective duration of 5.460 indicates that an interest rate increase of 1.0% would be expected to cause a 5.460% decrease in the value of the RMBS in the Company’s investment portfolio at September 30, 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 presents a summary of portfolio assets acquired during the nine months ended September 30, 2023 and 2022,
($ in thousands) | ||||||||||||||||||||||||
2023 | 2022 | |||||||||||||||||||||||
Total Cost | Average Price | Weighted Average Yield | Total Cost | Average Price | Weighted Average Yield | |||||||||||||||||||
Pass-through RMBS | $ | 1,443,827 | $ | 100.16 | 5.34 | % | $ | 622,535 | $ | 100.66 | 4.24 | % | ||||||||||||
Structured RMBS | - | - | - | - | - | - |
Borrowings
As of
As of September 30, 2023, we had obligations outstanding under the repurchase agreements of approximately $4,427.0 million with a net weighted average borrowing cost of 5.49%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 2 to 83 days, with a weighted average remaining maturity of 32 days. Securing the repurchase agreement obligations as of September 30, 2023 are RMBS and U.S. Treasury securities with an estimated fair value, including accrued interest, of approximately $4,537.1 million, and cash pledged to counterparties of approximately $113.4 million. Through October 27, 2023, we have been able to maintain our repurchase facilities with comparable terms to those that existed at September 30, 2022.
The table below presents information about our period end,
maximum and average balances of borrowings for each quarter in($ 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 | ||||||||||||||||
September 30, 2023 | $ | 4,426,947 | $ | 4,494,858 | $ | 4,314,332 | $ | 112,615 | 2.61 | % | |||||||||||
June 30, 2023 | 4,201,717 | 4,201,717 | 3,985,577 | 216,140 | 5.42 | % | |||||||||||||||
March 31, 2023 | 3,769,437 | 3,849,137 | 3,573,941 | 195,496 | 5.47 | % | |||||||||||||||
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 $510.4 million. |
Leverage
We use two primary measures of leverage. Economic leverage is calculated by dividing the sum of total liabilities and
($ in thousands) | ||||||||||||||||||||||||
Ending | Ending | Ending | Ending | |||||||||||||||||||||
Repurchase | Total | Net TBA | Stockholders' | Adjusted | Economic | |||||||||||||||||||
Agreements | Liabilities | Positions | Equity | Leverage | Leverage | |||||||||||||||||||
September 30, 2023 | $ | 4,426,947 | $ | 4,470,052 | $ | (502,500 | ) | $ | 466,841 | 9.5:1 | 8.5:1 | |||||||||||||
June 30, 2023 | 4,201,717 | 4,240,845 | (250,000 | ) | 490,086 | 8.6:1 | 8.1:1 | |||||||||||||||||
March 31, 2023 | 3,769,437 | 3,814,651 | (875,000 | ) | 451,361 | 8.4:1 | 6.5:1 | |||||||||||||||||
December 31, 2022 | 3,378,445 | 3,426,973 | (675,000 | ) | 438,763 | 7.7:1 | 6.3:1 | |||||||||||||||||
September 30, 2022 | 3,133,861 | 3,405,463 | (475,000 | ) | 400,377 | 7.8:1 | 7.3:1 | |||||||||||||||||
June 30, 2022 | 3,758,980 | 3,968,007 | - | 506,362 | 7.4:1 | 7.8:1 | ||||||||||||||||||
March 31, 2022 | 4,464,109 | 4,595,014 | - | 592,418 | 7.5:1 | 7.8:1 |
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 shortpositionsin interestrate 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
portion ofour capitalin structuredAgency RMBS.We generallydo not applyleverageto this portionof our portfolio.TheIn future
periods,we expectto continueto financeour activitiesin a mannerthat is consistentwith ourcurrent operationsthroughAs described
more fullybelow, we mayalso accessliquidityby sellingour equityor debt securitiesin publicofferings orprivateStockholders’Equity
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
The evolution
Consumer spending in the
Interest Rates
Interest rate movements during the third quarter of 2023 were driven by two significant developments. The first may have implications for the economy for the foreseeable future, not just near-term monetary policy. At the end of July Fitch Ratings downgraded the credit rating of the United States and Moody’s Investor Services announced the credit rating of the U.S. was becoming
A second development during the market
The developments above also increased volatility across both the fixed income and equity markets, with both realizing levels of volatility and market pricing assumptions of volatility going forward.
The Agency RMBS Market
The regional banking crisis that occurred in March of 2023 led to the liquidation of the holdings of the institutions taken over by the FDIC. The liquidation auctions of over $60 billion of Agency RMBS concluded during the third quarter and did not have the outsized negative impact on the market most feared. However, the developments in the rates market described above did have an impact on the Agency RMBS market, especially the Fed meeting in September. As risk sentiment across markets collapsed and volatility across the equity and rates markets increased market participants largely remained on the sidelines as the events unfolded and most asset classes performed very poorly. This was the case
with the Agency RMBS market as well. Spreads on Agency RMBS to comparable duration U.S. Treasuries or swaps increased markedly, and in the case of the current coupon 30-year conventional security with a coupon of approximately 6.5%, the spread to the 5-year U.S.TreasuryBased on ICE Bank of September
The Agency
Recent Legislativeand RegulatoryDevelopments
In response
to the deteriorationin the marketsfor U.S.Treasuries, AgencyRMBS andother mortgageand fixedincome marketsOn January
On March 15, 2022, the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”) was signed into law as part of the Consolidated Appropriations Act, 2022 (H.R. 2471). The LIBOR Act provides for a statutory replacement benchmark rate for contracts that use LIBOR
On July 28,
2022, theFed publisheda proposedrule to implementthe LIBORThe 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 Agency RMBS that are carried at a premium to par that are affected by such prepayments may decline. This is because a principal prepayment accelerates the effective term of an Agency RMBS, which would shorten the period during which an investor would receive above-market returns (assuming the yield on the prepaid asset is higher than market yields). Also, prepayment proceeds may not be able to be reinvested in similar-yielding assets. Agency RMBS backed by mortgages with high interest rates are more susceptible to prepayment risk because holders of those mortgages are most likely to refinance to a lower rate. If prepayment levels decrease, the value of any of our Agency RMBS that are carried at a discount
to par that are affected by such prepayments may increase. This is because a principal prepayment accelerates the effective term of an Agency RMBS, which would shorten the timeframe over which an investor would receive the principal of the underlying loans. Agency RMBS backed by mortgages with low interest rates are less susceptible to prepayment risk because holders of those mortgages are less likely to refinance to a higher rate. IOs and IIOs, however, may be the types of Agency RMBS most sensitive to increased prepayment rates. Because the holder of an IO or IIO receives no principal payments, the values of IOs and IIOs are entirely dependent on the existence of a principal balance on the underlying mortgages. If the principal balance is eliminated due to prepayment, IOs and IIOs essentially become worthless. Although increased prepayment rates can negatively affect the value of our IOs and IIOs, they have the opposite effect on POs. Because POs act like zero-coupon bonds, meaning they are purchased at a discount to their par value and have an effective interest rate based on the discount and the term of the underlying loan, an increase in prepayment rates would reduce the effective term of our POs and accelerate the yields earned on those assets, which would increase our net income.Higher long-term rates can also affect the value of our Agency RMBS. As long-term rates rise, rates available to borrowers also rise. This tends to cause prepayment activity to slow and extend the expected average life of mortgage cash flows. As the expected average life of the mortgage cash flows increases, coupled with higher discount rates, the value of Agency RMBS declines. Some of the instruments we use to hedge our Agency RMBS assets, such as interest rate futures, swaps and swaptions, are stable average life instruments. This means that to the extent we use such instruments to hedge our Agency RMBS assets, our hedges may not adequately protect us from price declines, and therefore may negatively impact our book value. It is for this will
The Agency RMBS market began to decrease
Because we base our investment decisions on risk management principles rather than anticipated movements in interest rates, in a volatile interest rate environment we may allocate more capital to structured Agency RMBS with shorter durations. We believe these securities have a lower sensitivity to changes in long-term interest rates than other asset classes. We may attempt to mitigate our exposure to changes in long-term interest rates by investing in IOs and IIOs, which typically have different sensitivities to changes in long-term interest rates than PT RMBS, particularly PT RMBS backed by fixed-rate mortgages.
Effects on our borrowing costs
We leverage our PT RMBS portfolio and a portion of our structured Agency RMBS with principal balances through the use of short-term repurchase agreement transactions. The interest rates on our debt are determined by 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 third quarter of 2023 was a very challenging period for the financial markets, especially the fixed income markets in the U.S. The U.S. economy proved incredibly resilient in the face of continued rate increases by the Fed since March of 2022 of 500 basis points of Fed policy tightening in the aggregate. Growth for the third quarter was a surprising 4.9%, as measured by GDP. The Fed recognizes its goal of bringing inflation back to its 2% target is likely going to require tight monetary policy for an extended period, likely well into 2024. Fiscal deficits in the U.S. continue to grow and are expected to remain at elevated levels for the next few years. The deficits, coupled with the dysfunction in Washington, led Fitch to downgrade the debt of the U.S. and Moody’s has indicated it may do the same. The combination of these factors, among others, drove long-term U.S. Treasury rates much higher and steepened the yield curve, as short-term rates remained fairly steady as the market expects the Fed is at or near the end of their tightening cycle.
The Agency RMBS market was meaningfully impacted by these developments, particularly late in the third quarter. From mid-July through early October, the yield on the
Critical
AccountingEstimatesOur condensed
financialstatementsare preparedin accordancewith GAAP. GAAP requiresour managementto make somecomplexCapital
ExpendituresAt September
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) | 1.560 | 68,604 | ||||||
Totals | $ | 66.210 | $ | 596,074 |
(1) | On October 11, 2023, the Company declared a dividend of $0.12 per share to be paid on November 28, 2023. The effect of this dividend is included in the table above but is not reflected in the Company’s financial statements as of September 30, 2023. |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in thousands, except per share amounts)
Interest Rate Risk
Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.
Changes in the Company declaredgeneral level of interest rates can affect our net interest income, which is the difference between the interest income earned on interest-earning assets and the interest expense incurred in connection with our interest-bearing liabilities, by affecting the spread between our interest-earning assets and interest-bearing liabilities. Changes in the level of interest rates can also affect the rate of prepayments of our securities and the value of the RMBS that constitute our investment portfolio, which affects our net income, ability to realize gains from the sale of these assets and ability to borrow, and the amount that we can borrow against these securities.
We may utilize a dividendvariety of $0.16 perfinancial instruments in order to limit the effects of changes in interest rates on our operations. The principal instruments that we use are futures contracts, interest rate swaps and swaptions. These instruments are intended to serve as an economic hedge against future interest rate increases on our repurchase agreement borrowings. Hedging techniques are partly based on assumed levels of prepayments of our Agency RMBS. If prepayments are slower or faster than assumed, the life of the Agency RMBS will be longer or shorter, which would reduce the effectiveness of any hedging strategies we may use and may cause losses on such transactions. Hedging strategies involving the use of derivative securities are highly complex and may produce volatile returns. Hedging techniques are also limited by the rules relating to REIT qualification. In order to preserve our REIT status, we may be forced to terminate a hedging transaction at a time when the transaction is most needed.
Our profitability and the value of our investment portfolio (including derivatives used for hedging purposes) may be adversely affected during any period as a result of changing interest rates, including changes in the forward yield curve.
Our portfolio of PT RMBS is typically comprised of adjustable-rate RMBS (“ARMs”), fixed-rate RMBS and hybrid adjustable-rate RMBS. We generally seek to acquire low duration assets that offer high levels of protection from mortgage prepayments provided that they are reasonably priced by the market. Although the duration of an individual asset can change as a result of changes in interest rates, we strive to maintain a hedged PT RMBS portfolio with an effective duration of less than 2.0. The stated contractual final maturity of the mortgage loans underlying our portfolio of PT RMBS generally ranges up to 30 years. However, the effect of prepayments of the underlying mortgage loans tends to shorten the resulting cash flows from our investments substantially. Prepayments occur for various reasons, including refinancing of underlying mortgages and loan payoffs in connection with home sales, and borrowers paying more than their scheduled loan payments, which accelerates the amortization of the loans.
The duration of our IO and IIO portfolios will vary greatly depending on the structural features of the securities. While prepayment activity will always affect the cash flows associated with the securities, the interest only nature of IOs may cause their durations to become extremely negative when prepayments are high, and less negative when prepayments are low. Prepayments affect the durations of IIOs similarly, but the floating rate nature of the coupon of IIOs (which is inversely related to the level of one month LIBOR) causes their price movements, and model duration, to be paidaffected by changes in both prepayments and one month LIBOR, both current and anticipated levels. As a result, the duration of IIO securities will also vary greatly.
Prepayments on November 28, 2022.
We face the risk that the market value of our PT RMBS assets will increase or decrease at different rates than that of our structured RMBS or liabilities, including our hedging instruments. Accordingly, we assess our interest rate risk by estimating the duration of our assets and the duration of our liabilities. We generally calculate duration using various third party models. However, empirical results and various third party models may produce different duration numbers for the same securities.
The following sensitivity analysis shows the estimated impact on the fair value of our interest rate-sensitive investments and hedge positions as of September 30, 2022.
All changes in value ofin the
Actual 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 September 30, 2023 | ||||||||
-200 Basis Points | 0.09 | % | 0.84 | % | ||||
-100 Basis Points | 0.47 | % | 4.58 | % | ||||
-50 Basis Points | 0.32 | % | 3.10 | % | ||||
+50 Basis Points | (0.46 | )% | (4.46 | )% | ||||
+100 Basis Points | (1.04 | )% | (10.06 | )% | ||||
+200 Basis Points | (2.43 | )% | (23.51 | )% | ||||
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 Rateinterest rates, other factors impact the fair value of our interest rate-sensitive investments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, in the event of changes in actual interest rates, the change in the fair value of our assets would likely differ from that shown above and such difference might be material and adverse to our stockholders.
Prepayment Risk
Because residential borrowers have the option to prepay their mortgage loans at par at any time, we face the risk that we will experience a return of principal on our investments faster than anticipated. Various factors affect the rate at which mortgage prepayments occur, including changes in the level of and directional trends in housing prices, interest rates, general economic conditions, loan age and size, loan-to-value ratio, the location of the property and social and demographic conditions. Additionally, changes to government sponsored entity underwriting practices or other governmental programs could also significantly impact prepayment rates or expectations. Generally, prepayments on Agency RMBS increase during periods of falling mortgage interest rates and decrease during periods of rising mortgage interest rates. However, this may not always be the case. We may reinvest principal repayments at a yield that is lower or higher than the yield on the repaid investment, thus affecting our net interest income by altering the average yield on our assets.
Spread Risk
When the market spread widens between the yield on our Agency RMBS and benchmark interest rates, our net book value could decline if the value of our Agency RMBS 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 September 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 setITEM 2. UNREGISTEREDSALES OFEQUITY SECURITIESAND USEOF PROCEEDS
The Company did not have any unregistered sales of its equity securities during the
three months ended September 30,The table below presents the Company’s share repurchase activity for the three months
ended September 30,Shares Purchased | Maximum Number | |||||||||||||||
Total Number | Weighted-Average | as Part of Publicly | of Shares That May Yet | |||||||||||||
of Shares | Price Paid | Announced | Be Repurchased Under | |||||||||||||
Repurchased(1) | Per Share | Programs | the Authorization | |||||||||||||
July 1, 2023 - July 31, 2023 | - | $ | - | - | 4,928,350 | |||||||||||
August 1, 2023 - August 31, 2023 | - | - | - | 4,928,350 | ||||||||||||
September 1, 2023 - September 30, 2023 | 948 | 8.99 | - | 4,928,350 | ||||||||||||
Totals / Weighted Average | 948 | $ | 8.99 | - | 4,928,350 |
(1) | Includes 948 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 | 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 | Inline XBRL Taxonomy Extension Schema Document *** |
Exhibit 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document*** |
Exhibit 101.DEF | Inline XBRL Additional Taxonomy Extension Definition Linkbase Document Created*** |
Exhibit 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document *** |
Exhibit 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document *** |
Exhibit 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* | Filed herewith. |
** | Furnished herewith. |
*** | Submitted electronically herewith. |
† | Management contract or compensatory plan. |
Pursuant
to the requirementsof Section13 or 15(d)of the SecuritiesExchangeAct of 1934,as amended,the registranthas duly causedOrchid Island Capital, Inc. | ||||
Registrant | ||||
Date: October 27, 2023 | By: | /s/ Robert E. Cauley | ||
Robert E. Cauley Chief Executive Officer, President and Chairman of the Board (Principal Executive Officer) | ||||
Date: October 27, 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) |