SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
☒
For the fiscal year ended
☐
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 |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YesIndicate 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 alarge accelerated filer,an accelerated filer, anon-accelerated filer, asmaller 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 theregistrant has fileda report on andattestation to itsmanagement's assessment ofthe effectiveness ofits internalIf securities are registered pursuant to Section 12(b) of the Exchange Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to Section 240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
YesAs of June 30, 20212023 the aggregate market value of the common stock held by nonaffiliates was $
Number of shares outstanding at February 25, 2022:
DOCUMENTS INCORPORATED
BY REFERENCE:Portions of the Registrant'sdefinitive Proxy Statement, to beissued in connection withthe 20222024 Annual Meetingof Stockholders
TABLE OF CONTENTS
INDEX
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this Report that are subject to risks and uncertainties.
These forward-looking statements● | our business and investment strategy; |
● | our expected operating results; |
● | our ability to acquire investments on attractive terms; |
● | the effect of actual, anticipated or proposed actions of the U.S. government, including the U.S. Federal Reserve (the "Fed"), the Federal Housing Finance Agency (the "FHFA"), the Federal Housing Administration (the "FHA"), the Federal Open Market Committee (the "FOMC") and the U.S. Treasury, on interest rates, monetary policy, fiscal policy and the housing and credit markets; |
● | the effect of interest rate changes on inflation, unemployment, and mortgage supply and demand; |
● | the effect of prepayment rates on the value of our assets; |
● | our ability to access the capital markets; |
● | our ability to obtain future financing arrangements; |
● | our ability to successfully hedge the interest rate risk and prepayment risk associated with our portfolio; | |
● | market trends; |
● | the federal conservatorship of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac” and together with Fannie Mae, the "Enterprises") and related efforts, along with any changes in laws and regulations affecting the relationship between the Enterprises and the U.S. government; |
● | our ability to make distributions to our stockholders in the future; |
● | our understanding of our competition and our ability to compete effectively; |
● | our ability to quantify risk based on historical experience; |
● | our ability to maintain our qualification as a real estate investment trust (“REIT”) for U.S. federal income tax purposes; |
● | our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or the Investment Company Act; |
● | our ability to maintain the listing of our common stock on the New York Stock Exchange ("NYSE"); |
● | geo-political events, government responses to such events and the related impact on the economy both nationally and internationally; |
● | the effect of the coronavirus (COVID-19) pandemic and the potential future outbreak of other highly infectious or contagious diseases on the Agency RMBS market and on our results of future operations, financial position, and liquidity; | |
● | expected capital expenditures; and | |
● | the impact of technology on our operations and business. |
The forward-looking statements are based on our beliefs, assumptions
and expectations of our future performance, taking intoITEM1. BUSINESS
Our Company
Orchid Island Capital, Inc., a Maryland corporation (“Orchid,” the “Company,” “we” or “us”), is a specialty finance
company thatWe are organized and conduct our operations to qualify to be taxed as a REIT for U.S.
federal income tax purposes.As such,Our Manager
Bimini Capital Management, Inc. (sometimes referred to herein as “Bimini”) managed
our portfolio from our inception through theOur Manager is responsible for administering our business activities and day-to-day
operations.Pursuant to the terms of theOur Investment and Capital Allocation Strategy
Investment Strategy
Our business objective is to provide attractive risk-adjusted total returns to our investors
over the long term through aWe fund our pass-through Agency RMBS and certain of our structured Agency RMBS through
repurchase agreements.Our target asset categories and principal assets in which we intend to
invest are as follows:Pass-through Agency RMBS
We invest in pass-through securities, which are securities secured by residential real property
in which payments of both interestThe payment of principal and interest on mortgage pass-through securities
issued by Ginnie Mae, but not the market value, isA key feature of most mortgage loans is the ability of the borrower to repay principal
earlier than scheduled. This is called aIn general, declining interest rates tend to increase prepayments, and
rising interest rates tend to slow prepayments. Like otherWe may also invest in To-Be-Announced Forward Contracts ("TBAs"). A TBA security is a forward contract for the purchase or
The mortgage loans underlying pass-through certificates can generally be classified
into the following categories:● | Fixed-Rate Mortgages. Fixed-rate mortgages are those where the borrower pays an interest rate that is constant throughout the term of the loan. Traditionally, most fixed-rate mortgages have an original term of 30 years. However, shorter terms (also referred to as “final maturity dates”) are also common. Because the interest rate on the loan never changes, even when market interest rates change, there can be a divergence between the interest rate on the loan and current market interest rates over time. This in turn can make fixed-rate mortgages price-sensitive to market fluctuations in interest rates. In general, the longer the remaining term on the mortgage loan, the greater the price sensitivity to movements in interest rates and, therefore, the likelihood for greater price variability. |
● | ARMs. Adjustable-Rate Mortgages (“ARMs”) are mortgages for which the borrower pays an interest rate that varies over the term of the loan. The interest rate usually resets based on market interest rates, although the adjustment of such an interest rate may be subject to certain limitations. Traditionally, interest rate resets occur at regular intervals (for example, once per year). We refer to such ARMs as “traditional” ARMs. Because the interest rates on ARMs fluctuate based on market conditions, ARMs tend to have interest rates that do not deviate from current market rates by a large amount. This in turn can mean that ARMs have less price sensitivity to interest rates and, consequently, are less likely to experience significant price volatility. |
● | Hybrid Adjustable-Rate Mortgages. Hybrid ARMs have a fixed-rate for the first few years of the loan, often three, five, seven or ten years, and thereafter reset periodically like a traditional ARM. Effectively, such mortgages are hybrids, combining the features of a pure fixed-rate mortgage and a traditional ARM. Hybrid ARMs have price sensitivity to interest rates similar to that of a fixed-rate mortgage during the period when the interest rate is fixed and similar to that of an ARM when the interest rate is in its periodic reset stage. However, because many hybrid ARMs are structured with a relatively short initial time span during which the interest rate is fixed, even during that segment of its existence, the price sensitivity may be high. |
Collateral Mortgage Obligation RMBS
CMOs are a type of RMBS, the principal and interest of which are paid,
in most cases, on a monthly basis. CMOs may beStructured Agency RMBS
We also invest in structured Agency RMBS, which include IOs, IIOs and POs. The payment
of principal and interest,● | IOs. IOs represent the stream of interest payments on a pool of mortgages, either fixed-rate mortgages or hybrid ARMs. Holders of IOs have no claim to any principal payments. The value of IOs depends primarily on two factors, which are prepayments and interest rates. Prepayments on the underlying pool of mortgages reduce the stream of interest payments going forward, hence IOs are highly sensitive to prepayment rates. IOs are also sensitive to changes in interest rates. An increase in interest rates reduces the present value of future interest payments on a pool of mortgages. On the other hand, an increase in interest rates has a tendency to reduce prepayments, which increases the expected absolute amount of future interest payments. |
● | IIOs. IIOs represent the stream of interest payments on a pool of mortgages that underlie RMBS, either fixed-rate mortgages or hybrid ARMs. Holders of IIOs have no claim to any principal payments. The value of IIOs depends primarily on three factors, which are prepayments, the coupon interest rate (i.e. the Secured Overnight Funding Rate ("SOFR")), and term interest rates. Prepayments on the underlying pool of mortgages reduce the stream of interest payments, making IIOs highly sensitive to prepayment rates. The coupon on IIOs is derived from both the coupon interest rate on the underlying pool of mortgages and 30-day SOFR. IIOs are typically created in conjunction with a floating rate CMO that has a principal balance and which is entitled to receive all of the principal payments on the underlying pool of mortgages. The coupon on the floating rate CMO is also based on 30-day SOFR. Typically, the coupon on the floating rate CMO and the IIO, when combined, equal the coupon on the pool of underlying mortgages. The coupon on the pool of underlying mortgages typically represents a cap or ceiling on the combined coupons of the floating rate CMO and the IIO. Accordingly, when the value of 30-day SOFR increases, the coupon of the floating rate CMO will increase and the coupon on the IIO will decrease. When the value of 30-day SOFR falls, the opposite is true. Accordingly, the value of IIOs are sensitive to the level of 30-day SOFR and expectations by market participants of future movements in the level of 30-day SOFR. IIOs are also sensitive to changes in interest rates. An increase in interest rates reduces the present value of future interest payments on a pool of mortgages. On the other hand, an increase in interest rates has a tendency to reduce prepayments, which increases the expected absolute amount of future interest payments. |
● | POs. POs represent the stream of principal payments on a pool of mortgages. Holders of POs have no claim to any interest payments, although the ultimate amount of principal to be received over time is known, equaling the principal balance of the underlying pool of mortgages. The timing of the receipt of the principal payments is not known. The value of POs depends primarily on two factors, which are prepayments and interest rates. Prepayments on the underlying pool of mortgages accelerate the stream of principal repayments, making POs highly sensitive to the rate at which the mortgages in the pool are prepaid. POs are also sensitive to changes in interest rates. An increase in interest rates reduces the present value of future principal payments on a pool of mortgages. Further, an increase in interest rates has a tendency to reduce prepayments, which decelerates, or pushes further out in time, the ultimate receipt of the principal payments. The opposite is true when interest rates decline. |
Our investment strategy consists of the following components:
● | investing in pass-through Agency RMBS, CMOs and certain structured Agency RMBS on a leveraged basis to increase returns on the capital allocated to this portfolio; |
● | investing in certain structured Agency RMBS, such as IOs and IIOs, generally on an unleveraged basis in order to (i) increase returns due to the structural leverage contained in such securities, (ii) enhance liquidity due to the fact that these securities will be unencumbered or, when encumbered, retain the cash from such borrowings and (iii) diversify portfolio interest rate risk due to the different interest rate sensitivity these securities have compared to pass-through Agency RMBS; |
● | investing in TBAs; |
● | investing in Agency RMBS in order to minimize credit risk; |
● | investing in assets that will cause us to maintain our exclusion from regulation as an investment company under the Investment Company Act; and |
● | investing in assets that will allow us to maintain our qualification as a REIT. |
We rely on our Manager’s expertise in identifying assets within our target
asset class.Our Manager makes investmentOver time, we will modify our investment strategy as market conditions
change to seek to maximize the returns from ourCapital Allocation Strategy
The percentage of capital invested in our two asset categories will vary
and will be managed in an effort to maintain the level ofWe allocate our capital to assist our interest rate risk management efforts. The unleveraged portfolio does
not requireDuring periods of rising interest rates, refinancing opportunities available to borrowers typically
decrease because borrowers areWe intend to operate in a manner that will not subject us to regulation under the Investment
Company Act. In order to rely on theFinancing Strategy
We borrow against our Agency RMBS using short term repurchase agreements. A
repurchase agreement (or "repo")We may use other sources of leverage, such as secured or unsecured debt or issuances
of preferred stock. We do not have aWe allocate our capital between two sub-portfolios. The pass-through Agency RMBS
portfolio, which includes CMOs issued by the Enterprises, will be leveraged generally throughThe amount of leverage typically will be a function of the capital allocated to the
pass-through Agency RMBS portfolio and the● | The relative durations of the respective portfolios — We generally seek to have a combined hedged duration at or near zero. If our pass-through securities have a longer duration, we will allocate more capital to the structured security portfolio or hedges to achieve a combined duration close to zero. |
● | The relative attractiveness of pass-through securities versus structured securities — To the extent we believe the expected returns of one type of security are higher than the other, we will allocate more capital to the more attractive securities, subject to the caveat that its combined duration remains at or near zero and subject to maintaining our qualification for exemption under the Investment Company Act. |
● | Liquidity — We seek to maintain adequate cash and unencumbered securities relative to our repurchase agreement borrowings to ensure we can meet any price or prepayment related margin calls from our lenders. To the extent we feel price or prepayment related margin calls will be higher/lower, we will typically allocate less/more capital to the pass-through Agency RMBS portfolio. Our pass-through Agency RMBS portfolio likely will be our only source of price or prepayment related margin calls because we generally will not apply leverage to our structured Agency RMBS portfolio. From time to time we may pledge a portion of our structured securities and retain the cash derived so it can be used to enhance our liquidity. |
Risk Management
We invest in Agency RMBS to mitigate credit risk. Additionally, our Agency RMBS are backed by a diversified base of mortgage
Interest Rate Risk Management
We believe that the risk of adverse interest rate movements represents the most significant
risk to our portfolio. This risk arisesAgency RMBS Backed by ARMs
Agency RMBS Backed by Fixed-Rate Mortgages
Agency RMBS Backed by Hybrid ARMs
Derivative Instruments.
A futures contract is a legally binding agreement to buy or sell a financial instrument
in a designated future month at a price agreedWe engage in interest rate swaps as a means of managing our interest rate risk on forecasted
interest expense associated withInterest rate swaptions provide us the option to enter into an interest rate
swap agreement for a predetermined notional amount,An interest rate cap is a contract protecting us against a rise in interest rates above a fixed level. Interest rate caps are often used by borrowers to hedge against floating rate risk.
Additionally, our structured Agency RMBS generally exhibit sensitivities to movements in interest rates different than our pass-
The Company
accountsfor TBAsecuritiesas derivativeinstruments.Gains andlosses associatedwith TBAsecuritiestransactionsPrepayment Risk Management
The risk of mortgage prepayments is another significant risk to our portfolio.
When prevailing interest rates fall below the currentWhen prepayment rates increase, we may not be able to reinvest the money received
from prepayments at yields comparable toA decrease in prepayment rates may also have an adverse effect on our portfolio. For example,
if we invest in POs, the purchasePrepayment risk also affects our hedging activities. When an Agency RMBS backed by
a fixed-rate mortgage or hybrid ARM isBecause our business may be adversely affected if prepayment rates are different than our
projections, we seek to invest inLiquidity Management Strategy
Because of our use of leverage, we manage liquidity to meet our lenders’ margin
calls by maintaining cash balances orWe also attempt to minimize the number of margin calls we receive by:
● | deploying capital from our leveraged Agency RMBS portfolio to our unleveraged Agency RMBS portfolio; |
● | investing in TBAs in lieu of leveraged Agency RMBS to reduce margin calls from our lenders associated with monthly prepayments; |
● | investing in Agency RMBS backed by mortgages that we believe are less likely to be prepaid to decrease the risk of excessive margin calls when monthly prepayments are announced. Prepayments are declared, and the market value of the related security declines, before the receipt of the related cash flows. Prepayment declarations give rise to a temporary collateral deficiency and generally result in margin calls by lenders; and |
● | reducing our overall amount of leverage. |
To the risk of excessive
Tax Structure
We have elected to be taxed as a REIT for U.S. federal income tax purposes. Our ability to maintain our qualification
as a REITAs a REIT, we generally will not be subject to U.S. federal income tax on the REIT taxable income that we currently distribute to
Investment Company Act Exemption
We operate our business so that we are exempt from registration under the Investment Company
Act. We rely on the exemptionWe treat whole-pool pass-through Agency RMBS as qualifying real estate assets based
on no-action letters issued by the staff ofEmployees and Human Capital Resources
We have no employees.
We are externally managed and advised by our Manager pursuant to a managementagreement asCompetition
Our net income largely depends on our ability to acquire Agency RMBS at favorable
spreads over our borrowing costs.When weDistributions
To maintain our qualification as a REIT,
we must distribute at least 90% of our REIT taxable income, determined withoutregard toCommon Stock Reverse Split
On August 30, 2022, the Company effected a 1-for-5 reverse stock split of its common stock and proportionately decreased the number of authorized shares of common stock. All share, per share, deferred stock unit and performance unit information has been retroactively adjusted to reflect the reverse split.
Available Information
Our investor relations website is www.orchidislandcapital.com.
We make available on the website under “Financials/SEC filings,"SummaryofRiskFactors
Below is a summary of the principal factors that make an investment in our commonstock speculative or risky. This summary
● | Increases in interest rates may negatively affect the value of our investments and increase the cost of our borrowings, which could result in reduced earnings or losses and materially adversely affect our ability to pay distributions to our stockholders. |
● | An increase in interest rates may also cause a decrease in the volume of newly issued, or investor demand for, Agency RMBS, which could materially adversely affect our ability to acquire assets that satisfy our investment objectives and our business, financial condition and results of operations and our ability to pay distributions to our stockholders. |
● | Interest rate mismatches between our Agency RMBS and our borrowings may reduce our net interest margin during periods of changing interest rates, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders. |
● | Further downgrades of the U.S. credit rating, automatic spending cuts, mounting budget deficits or another government shutdown could negatively impact our liquidity, financial condition and earnings. |
● | Although structured Agency RMBS are generally subject to the same risks as our pass-through Agency RMBS, certain types of risks may be enhanced depending on the type of structured Agency RMBS in which we invest. |
● | Differences in the stated maturity of our fixed rate assets, or in the timing of interest rate adjustments on our adjustable-rate assets, and our borrowings may adversely affect our profitability. |
● | Changes in the levels of prepayments on the mortgages underlying our Agency RMBS might decrease net interest income or result in a net loss, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders. |
● | Volatile market conditions for mortgages and mortgage-related assets as well as the broader financial markets can result in a significant contraction in liquidity for mortgages and mortgage-related assets, which may adversely affect the value of the assets in which we invest. |
● | Failure to procure adequate repurchase agreement financing, or to renew or replace existing repurchase agreement financing as it matures, could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders. |
● | Adverse market developments could cause our lenders to require us to pledge additional assets as collateral. If our assets were insufficient to meet these collateral requirements, we might be compelled to liquidate particular assets at inopportune times and at unfavorable prices, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders. |
● | Hedging against interest rate exposure may not completely insulate us from interest rate risk and could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders. |
● | Our use of leverage could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders. |
● | It may be uneconomical to "roll" our TBA dollar roll transactions or we may be unable to meet margin calls on our TBA contracts, which could negatively affect our financial condition and results of operations. |
● | Our forward settling transactions, including TBA transactions, subject us to certain risks, including price risks and counterparty risks. |
● | We rely on analytical models and other data to analyze potential asset acquisition and disposition opportunities and to manage our portfolio. Such models and other data may be incorrect, misleading or incomplete, which could cause us to purchase assets that do not meet our expectations or to make asset management decisions that are not in line with our strategy. |
● | Valuations of some of our assets are inherently uncertain, may be based on estimates, may fluctuate over short periods of time and may differ from the values that would have been used if a ready market for these assets existed. As a result, the values of some of our assets are uncertain. |
● | If our lenders default on their obligations to resell the Agency RMBS back to us at the end of the repo transaction term, if the value of the Agency RMBS has declined by the end of the repo transaction term or if we default on our obligations under the repo transaction, we will lose money on these transactions, which, in turn, may materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders. |
● | Clearing facilities or exchanges upon which some of our hedging instruments are traded may increase margin requirements on our hedging instruments in the event of adverse economic developments. |
● | We may change our investment strategy, investment guidelines and asset allocation without notice or stockholder consent, which may result in riskier investments. |
● | The management agreement with our Manager was not negotiated on an arm’s-length basis and the terms, including fees payable and our inability to terminate, or our election not to renew, the management agreement based on our Manager’s poor performance without paying our Manager a significant termination fee, except for a termination of the Manager with cause, may not be as favorable to us as if it were negotiated with an unaffiliated third party. |
● | We have no employees, and our Manager is responsible for making all of our investment decisions. None of our or our Manager’s officers are required to devote any specific amount of time to our business, and each of them may provide their services to Bimini, which could result in conflicts of interest. |
● | We are completely dependent upon our Manager and certain key personnel of Bimini who provide services to us through the management agreement, and we may not find suitable replacements for our Manager and these personnel if the management agreement is terminated or such key personnel are no longer available to us. |
● | If we elect to not renew the management agreement without cause, we would be required to pay our Manager a substantial termination fee. These and other provisions in our management agreement make non-renewal of our management agreement difficult and costly. |
● | We have not established a minimum distribution payment level, and we cannot assure you of our ability to make distributions to our stockholders in the future. |
● | Loss of our exemption from regulation under the Investment Company Act would negatively affect the value of shares of our common stock and our ability to pay distributions to our stockholders. |
● | Failure to obtain and maintain an exemption from being regulated as a commodity pool operator could subject us to additional regulation and compliance requirements and may result in fines and other penalties which could materially adversely affect our business and financial condition. |
● | Our ownership limitations and certain other provisions of applicable law and our charter and bylaws may restrict business combination opportunities that would otherwise be favorable to our stockholders. |
● | Our failure to maintain our qualification as a REIT would subject us to U.S. federal income tax, which could adversely affect the value of the shares of our common stock and would substantially reduce the cash available for distribution to our stockholders. |
● | We cannot predict the effect that government policies, laws and plans adopted in response to geopolitical events, a global pandemic, or global recessionary economic conditions will have on us. |
Risk Factors
You should carefully consider the risks described below and all other information contained in this Report, including our annual
Risks Related to Our Business
Increases in interest rates may negatively affect the value of our investments and increasethe cost of our borrowings, which
Under normal market conditions,
an investment in Agency RMBS will decline in value if interest rates increase.In addition, netSignificant increases in both long-term and short-term interest rates pose a substantial
risk associated with our investment inAn increase in interest rates may also cause a decrease in the volume ofnewly issued, or investor demand for, Agency RMBS,
Rising interest rates generally reduce the demand for consumer credit, including
mortgage loans, due to the higher cost ofInterest rate mismatches between our Agency RMBS and our borrowings mayreduce our net interest margin during periods of
Our portfolio includes Agency RMBS backed by ARMs, hybrid ARMs and
fixed-rate mortgages, and the mix of these securities inWe finance our acquisitions of pass-through Agency RMBS with short-term financing. During
periods of rising short-term interestFurther downgrades of the U.S. credit rating, automatic spending cuts, mounting budget deficits or another government shutdown could negatively impact our liquidity, financial condition and earnings.
U.S. debt ceiling and budget deficit concerns have increased the possibility of additional credit-rating downgrades and economic slowdowns, or a recession in the United States. Although U.S. lawmakers passed legislation to raise the federal debt ceiling on multiple occasions, ratings agencies have lowered or threatened to lower the long-term sovereign credit rating on the United States. The impact of this or any further downgrades to the U.S. government’s sovereign credit rating or its perceived creditworthiness could adversely affect the U.S. and global financial markets and economic conditions. In addition, disagreement over the federal budget has caused the U.S. federal government to shut down for periods of time. Continued adverse political and economic conditions could have a material adverse effect on our business, financial condition and results of operations.
We invest in structured Agency RMBS, including IOs, IIOs and POs. Although structured Agency RMBSare generally subject to
The structured Agency RMBS in which we invest are securitizations (i)
issued byDifferences in the stated maturity of our fixed rate assets, or in the timing of interest rate adjustmentson our adjustable-rate
We rely primarily on short-term and/or variable rate borrowings to acquire fixed-rate securities with
long-term maturities. InThe relationship between short-term and longer-term interest rates is often
referred to as the "yield curve." Ordinarily, short-termPurchases and sales of Agency RMBS by the Fed may adversely affect the supply, price and returnreturns associatedwith Agency RMBS.
The Fed owns approximately $2.6$2.4 trillion of Agency RMBS as of December 31,
Short-term interest rates are currently higher than long-term interest rates.This phenomenon, typically referred to as an inverted U.S. Treasury or yield curve, occurred during 2022 and 2023, and may continue well into the future.Under such conditions our funding costs may equal or exceed yields available on our assets, adversely impacting our financial condition and results of operations and our ability to pay dividends to our stockholders.
As the Fed began to increase over-night funding rates during 2022 short-term interest rates began to rise faster than longer-term interest rates and eventually the U.S. Treasury yield curve became inverted, whereby yields on short-terms rates exceeded yields on long-term interest rates. This condition continued into 2023 and 2024, and may continue into the future. Consistent with this development, funding costs associated with our borrowings have increased relative to yields on our Agency RMBS securities. As a result, our net interest income has declined. We have employed various hedging strategies to off-set the phenomenon. However, such hedges may not be adequate to protect our interest income in the future, adversely affecting our financial condition, results of operations and our ability to pay dividends to our stockholders.
Increased levels of prepayments on the mortgages underlying our Agency RMBSmight decrease net interest income or result in
In the case of residential mortgages, there are seldom any restrictions on borrowers’
ability to prepay their loans. Prepayment● | A portion of our pass-through Agency RMBS backed by ARMs and hybrid ARMs may initially bear interest at rates that are lower than their fully indexed rates, which are equivalent to the applicable index rate plus a margin. If a pass-through Agency RMBS backed by ARMs or hybrid ARMs is prepaid prior to or soon after the time of adjustment to a fully-indexed rate, we will have held that Agency RMBS while it was less profitable and lost the opportunity to receive interest at the fully-indexed rate over the remainder of its expected life. |
● | If we are unable to acquire new Agency RMBS to replace the prepaid Agency RMBS, our returns on capital may be lower than if we were able to quickly acquire new Agency RMBS. |
When we acquire structured Agency RMBS, we anticipate that the underlying
mortgages will prepay at a projected rate,While we seek to minimize prepayment risk, we must balance prepayment risk
against other risks and the potential returns ofA decrease in prepayment rates on the mortgages underlying our AgencyRMBS might decrease net interest income or result in
Certain of our structured Agency RMBS may be adversely affected by a decrease in prepayment
rates. For example, becauseWhile we seek to minimize prepayment risk, we must balance prepayment risk
against other risks and the potential returns ofFailure to procure adequate repurchase agreement financing, or to renewor replace existing repurchase agreement financing as
We intend to maintain master repurchase agreements with several counterparties. We cannot assure you
that any, or sufficient,Furthermore, because we intend to rely primarily on short-term borrowings to fund
our acquisition of Agency RMBS, our ability toAdverse market developments could cause our lenders to require us to pledgeadditional assets as collateral. If our assets were
Adverse market developments, including a sharp or prolonged rise
in interest rates, a change in prepayment rates or increasingHedging against interest rate exposure may not completely insulate us frominterest rate risk and could materially adversely
To the
extent consistent with maintaining our qualification as a REIT, we may enter into interest rate cap or swap agreements or● | hedging can be expensive, particularly during periods of rising and volatile interest rates; |
● | available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought; |
● | the duration of the hedge may not match the duration of the related liability; |
● | certain types of hedges may expose us to risk of loss beyond the fee paid to initiate the hedge; |
● | the amount of gross income that a REIT may earn from hedging transactions, other than hedging transactions that satisfy certain requirements of the Code, is limited by the U.S. federal income tax provisions governing REITs; |
● | the credit quality of the counterparty on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and |
● | the counterparty in the hedging transaction may default on its obligation to pay. |
There are no perfect hedging strategies, and interest rate hedging may fail to protect
us from loss. Alternatively, we may fail toBecause of the foregoing risks, our hedging activity could materially adversely affect our business,
financial condition and resultsOur use of certain hedging techniques may expose us to counterparty risks.
To the
extent that our hedging instruments are not traded on regulated exchanges,guaranteed by an exchange or itsFor example, if a swap exchange utilized in an interest rate swap agreement that
we enter into as part of our hedging strategyOur use of leverage could materially adversely affect our business, financial conditionand results of operations and our ability to
We calculate our leverage ratio by dividing our total liabilities, adjusted for net notional TBA positions, by total stockholders' equity at the end of each period.
Under normal market● | our borrowings are secured by our pass-through Agency RMBS and a portion of our structured Agency RMBS under repurchase agreements. A decline in the market value of the pass-through Agency RMBS or structured Agency RMBS used to secure these debt obligations could limit our ability to borrow or result in lenders requiring us to pledge additional collateral to secure our borrowings. In that situation, we could be required to sell Agency RMBS under adverse market conditions in order to obtain the additional collateral required by the lender. If these sales are made at prices lower than the carrying value of the Agency RMBS, we would experience losses. |
● | to the extent we are compelled to liquidate qualifying real estate assets to repay debts, our compliance with the REIT rules regarding our assets and our sources of gross income could be negatively affected, which could jeopardize our qualification as a REIT. Losing our REIT qualification would cause us to be subject to U.S. federal income tax (and any applicable state and local taxes) on all of our income and would decrease profitability and cash available for distributions to stockholders. |
If we experience losses as a result of our use of leverage, such losses
could materially adversely affect our business, results ofIt may be uneconomical to "roll" our TBA dollar roll transactions or we may beunable to meet margin calls on our TBA contracts,
We may utilize TBA dollar roll transactions as a means of investing in and financing Agency
RMBS. TBA contracts enable us toUnder certain market conditions, TBA dollar roll transactions may result in negative
carry income whereby the Agency RMBSInterest rate caps on the ARMs and hybrid ARMs backing our Agency RMBS may reduceour net interest margin during periods
ARMs and hybrid ARMs are typically subject to periodic and lifetime interest rate
caps. Periodic interest rate caps limit theVolatile market conditions for mortgages and mortgage-related assets as well as the broader financial marketscan result in a
Our results of operations are materially affected by conditions in the markets for mortgages
and mortgage-related assets,Significant adverse changes in financial market conditions can result in a
deleveraging of the global financial system and theIncreased volatility and deterioration in the markets for mortgages and mortgage-related
assets as well as the broader financialOur forward settling transactions, including TBA transactions, subject us tocertain risks, including price risks and counterparty
We purchase some of our Agency RMBS through forward settling transactions, including
TBAs. In a forward settling transaction,We rely on analytical models and other data to analyze potential asset acquisition and dispositionopportunities and to manage
We rely on analytical models, and information and other data supplied by third parties.
These models and data may be used toOur reliance on models and data may induce us to purchase certain assets
at prices that are too high, to sell certain other assetsSome models, such as prepayment models, may be predictive in nature. The
use of predictive models has inherent risks. ForAll valuation models rely on correct market data input. If incorrect market data
is entered into even a well-founded valuationValuations of some of our assets are inherently uncertain, may be based on estimates, may fluctuate over short periods of time
While in many cases our determination of the fair value of our assets is
based on valuations provided by third-party dealers andOur business, financial condition and results of operations and our ability to
make distributions to our stockholders could beBecause the assets that we acquire might experience periods of illiquidity, we might be prevented from selling our Agency RMBS
Agency RMBS might experience periods of illiquidity. Such conditions are more likely to occur for structured Agency RMBS
Our use of repurchase agreements may give our lenders greater rights inthe event that either we or any of our lenders file for
Our borrowings under repurchase agreements may qualify for special treatment
under the bankruptcy code, giving our lendersIf our lenders default on their obligations to resell the Agency RMBS back to us atthe end of the repurchaserepo transaction term, or
When we engage in a repurchaserepo transaction, we initially sell securities to the
If we default on one of our obligations under a repurchaserepo transaction, the
Clearing facilities or exchanges upon which some of our hedging instrumentsare traded may increase margin requirements on
In response to events having or expected to have adverse economic consequences
or which create market uncertainty, clearingOur inability to access funding or the terms on which such funding is available could have a material adverse effect on our financial condition, particularly in times of significant market dislocations.
Our ability to fund our operations, meet financial obligations and finance asset acquisitions is dependent upon our ability to secure and maintain our repurchase agreements with our counterparties. Because repurchase agreements are short-term commitments of capital, lenders may respond to market conditions in ways that make it more difficult for us to renew or replace on a continuous basis our maturing short-term borrowings and have imposed and may continue to impose more onerous terms when rolling such financings. If we are not able to renew our existing repurchase agreements or arrange for new financing on terms acceptable to us, or if we are required to post more collateral or face larger haircuts, we may have to curtail our asset acquisition activities and/or dispose of assets.
Issues related to financing are exacerbated in times of significant dislocation in the financial markets, for example, such as those experienced related to the COVID-19 pandemic. It is possible our lenders will become unwilling or unable to provide us with financing, and we could be forced to sell our assets at an inopportune time when prices are depressed. In addition, if the regulatory capital requirements imposed on our lenders change, they may be required to significantly increase the cost of the financing that they provide to us. Our lenders also have revised and may continue to revise the terms of such financings, including haircuts and requiring additional collateral in the form of cash, based on, among other factors, the regulatory environment and their management of actual and perceived risk. Moreover, the amount of financing we receive under our repurchase agreements will be directly related to our lenders’ valuation of our assets that collateralize the outstanding borrowings. Typically, repurchase agreements grant the lender the absolute right to re-evaluate the fair market value of the assets that cover outstanding borrowings at any time. If a lender determines in its sole discretion that the value of the assets has decreased, the lender has the right to initiate a margin call. These valuations may be different than the values that we ascribe to these assets and may be influenced by recent asset sales at distressed levels by forced sellers. A margin call requires us to transfer additional assets to a lender without any advance of funds from the lender for such transfer or to repay a portion of the outstanding borrowings. Significant margin calls could have a material adverse effect on our results of operations, financial condition, business, liquidity and ability to make distributions to our stockholders, and could cause the value of our common stock to decline. In addition, we experienced an increase in haircuts on financings we have rolled. As haircuts are increased, we are required to post additional collateral. We may also be forced to sell assets at significantly depressed prices to meet such margin calls and to maintain adequate liquidity. As a result of the COVID-19 pandemic, we experienced margin calls in 2020 well beyond historical norms. As of December 31, 2023, we had met all margin call requirements, but a sufficiently deep and/or rapid increase in margin calls or haircuts could have an adverse impact on our liquidity.
We may change our investment strategy, investment guidelines and asset allocation without notice or stockholder consent, which
Our Board of Directors has the authority to change our investment strategy
or asset allocation at any time without notice to orIn addition, our charter provides that our Board of Directors may revoke or otherwise
terminate our REIT election, without theA prolonged economic slowdown, a lengthy or severe recession or declining real estatevalues could impair our investments and
We believe the risks associated with our business willmay be more severe during periods
Market disruptions in a single country could cause a worsening of conditions
on a regional and even global level, and economicCompetition might prevent us from acquiring Agency RMBS at favorable yields, whichcould materially adversely affect our
We operate in a highly competitive market for investment opportunities. Our net income
largely depends on our ability to acquireWe are highly dependent on communications and information systems operated by thirdparties, and systems failures could
Our business is highly dependent on communications and information systems
that allow us to monitor, value, buy, sell, financeComputer malware, ransomware, viruses, and computer hacking and
phishing attacks have become more prevalent in theWe invest in banks’ inter-bank lending rate reporting practices orsecurities guaranteed by the method pursuanttoEnterprises which LIBORare currently under conservatorship by the FHFA. The ultimate impact on the operations of the Enterprises from the conservatorships and the support they receive from the U.S. government is determined may
As conservator, the FHFA has assumed all the powers of the financial obligations to be held or issued by us that are linked
All of the guarantees provided
Risks Related to Conflicts of Interest in Our Relationship with OurManager and Bimini
The management agreement with our Manager was not negotiatedon an arm’s-lengtharm’s-length basis and the terms, including fees
The management agreement with our Manager was negotiated between related
parties, and we did not have the benefit ofWe have no employees and our Manager is responsible for making all of our investment decisions.None of our or our Manager’s
Our Manager is responsible for making all of our investments. We do not have any employees,
and we are completely reliant onOur Board of Directors has adopted investment guidelines that require that any investment
transaction between us and Bimini orWe are completely dependent upon our Manager and certain key personnel of Bimini who provideservices to us through the
We are completely dependent on our Manager to conduct our operations pursuant to the
management agreement. Because weOur management agreement is automatically renewed in accordance with the
terms of the agreement, each year, on FebruaryWe, Bimini and other accounts managed by our Manager may compete for opportunities toacquire assets, which are allocated in
From time to time Bimini may seek to purchase for itself the same or similar
assets that our Manager seeks to purchase for us, orBecause many of our targeted assets are typically available only in specified quantities
and because many of our targeted assetsThere are conflicts of interest in our relationships with our Manager and Bimini, whichcould result in decisions that are not in the
We are subject to conflicts of interest arising out of our relationships with Bimini and our Manager. All of our executive officers are
We may acquire or sell assets in which Bimini or its affiliates have or may have an interest. Similarly, Bimini or its affiliates may
The officers of Bimini and our Manager devote as much time to us as our Manager deems
appropriate. However, these officersMr. Cauley,
our Chief Executive Officer and Chairman of our Board of Directors, alsoserves as Chief Executive Officer andAs of February 25, 2022,23, 2024, Bimini owned approximately 1.5%1.1% of our outstanding
If we elect to not renew the management agreement without cause, we wouldbe required to pay our Manager a substantial
Electing not to renew the management agreement without cause would be difficult
and costly for us. Our managementOur Manager’sManager’s management fee is payable regardless of ourperformance.
Our Manager is entitled to receive a management fee from us that is based on
the amount of our equity (as defined in theOur Manager will not be liable to us for any acts or omissions performedin accordance with the management agreement,
Our Manager has not assumed any responsibility other than to render the services
called for under the management agreementRisks Related to Our Common Stock
Investing in our common stock may involve a high degree of risk.
The investments we make in accordance with our investment objectives
may result in a high amount of risk when compared toWe have not established a minimum distribution payment level, and we cannot assure youof our ability to make distributions to
We intend to continue to make monthly distributions to our stockholders in amounts such that
we distribute all or substantially allShares of our common stock eligible for future sale may harm our share price.
We cannot predict the effect, if any, of future sales of shares of our common stock, or the availability of shares for future sales,
We may be subject to adverse legislative or regulatory changes that could reduce the marketprice of our common stock.
At any time, laws or regulations, or the administrative or judicial interpretations of those
laws or regulations, which impact our business andIn addition, at any time, the U.S. federal income tax laws or regulations
governing REITs or the administrative interpretations ofThe market value of our common stock may be volatile.
The market value of shares of our common stock may be based primarily upon current and expected future cash dividends and our book value. The market price of shares of our common stock may be influenced by the dividends on those shares relative to market interest rates. Rising interest rates may lead potential buyers of our common stock to expect a higher dividend rate, which could adversely affect the market price of shares of our common stock. In addition, our book value could decrease, which could reduce the market price of our common stock to the extent our common stock trades relative to our book value. As a result, the market price of our common stock may be highly volatile and subject to wide price fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. Some of the factors that could negatively affect the share price or trading volume of our common stock include:
● | actual or anticipated variations in our operating results or distributions; |
● | changes in our earnings estimates or publication of research reports about us or the real estate or specialty finance industry; |
● | the market valuations of Agency RMBS; |
● | increases in market interest rates that lead purchasers of our common stock to expect a higher dividend yield; |
● | government action or regulation; |
● | changes in our book value; |
● | changes in market valuations of similar companies; |
● | adverse market reaction to any increased indebtedness we incur in the future; |
● | a change in our Manager or additions or departures of key management personnel; |
● | actions by institutional stockholders; |
● | speculation in the press or investment community; and |
● | general market and economic conditions. |
We cannot make any assurances that the market price of our common stock will not fluctuate or decline significantly in the future.
There may not be an active market for our common stock, which may cause our common stock to trade at a discount and make it difficult to sell the common stock you purchase.
Our common stock is listed on the NYSE under the symbol “ORC.” Trading on the NYSE does not ensure that there will continue to be an actual market for our common stock. Accordingly, no assurance can be given as to:
● | the likelihood that an actual market for our common stock will continue; |
● | the liquidity of any such market; |
● | the ability of any holder to sell shares of our common stock; or |
● | the prices that may be obtained for our common stock. |
Risks Related to Our Organization and Structure
Loss of our exemption from regulation under the Investment Company Act wouldnegatively affect the value of shares of our
We have operated and intend to continue to operate our business so as to be exempt from
registration under the InvestmentIf we fail to qualify for this exemption, we could be required to restructure
our activities in a manner that, or at a time when, weAlternatively, if we fail to qualify for this exemption, we may have to register under the Investment Company Act and we
couldWe may be required at times to adopt less efficient methods of financing certain of our securities, and we
may be precluded fromFailure to obtain and maintain an exemption from being regulated as a commoditypool operator could subject us to additional
The Dodd-Frank Act established a comprehensive new regulatory framework
for derivative contracts commonly referred to asWe use hedging instruments in conjunction with our investment portfolio and related borrowings
to reduce or mitigate risksThe CFTC has substantial enforcement power with respect to violations of the laws
over which it has jurisdiction, including theirOur ownership limitations and certain other provisions of applicable lawand our charter and bylaws may restrict business
Our charter and bylaws and Maryland law contain provisions that may delay, defer or prevent a change in control or other
To assist
us in qualifying as a REIT, among other purposes, ownership of our stock by any person will generally be limited toOur Board of Directors may, without stockholder approval, amend our charter to increase or decrease the aggregate number
ofOur rights and the rights of our stockholders to take action against our directorsand officers are limited, which could limit your
Our charter limits the liability of our directors and officers to us and our stockholders for money
damages, except for liability● | actual receipt of an improper benefit or profit in money, property or services; or |
● | a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated. |
We have entered into indemnification agreements with our directors and executive officers that obligate
us to indemnify them toCertain provisions of Maryland law could inhibit changes in control.
Certain provisions of the Maryland General Corporation Law (the “MGCL”),
may have the effect of inhibiting a third party from● | “business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock or an affiliate or associate of ours who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then-outstanding stock) or an affiliate of an interested stockholder for five years after the most recent date on which the stockholder became an interested stockholder, and thereafter require two supermajority stockholder votes to approve any such combination; and |
● | “control share” provisions that provide that a holder of “control shares” of the Company (defined as voting shares of stock which, when aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), entitle the acquiror to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control |
We have elected to opt-out of these provisions of the MGCL, in the case of the business
combination provisions, by resolution ofOur bylaws designate the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for certain types of actions
Our bylaws provide that, unless we consent in writing to the selection
of an alternative forum, the Circuit Court for Baltimore City,This exclusive forum provision may limit the ability of our stockholders to
bring a claim in a judicial forum that such stockholdersU.S. Federal Income Tax Risks
Your investment has various U.S. federal income tax risks.
This summary of certain tax risks is limited to the U.S. federal income tax risks
addressed below. Additional risks or issues mayOur failure to maintain our qualification as a REIT would subject us to U.S. federal incometax, which could adversely affect the
We believe that commencing with our short taxable year ended December 31, 2013,
we have been organized and have operatedIf we fail to qualify as a REIT in any calendar year, we would be required to pay U.S. federal income tax
Complying with REIT requirements may cause us to forego or liquidate otherwiseattractive investments.
To
In particular, we must ensure that at the end of each calendar quarter, at least 75% of the value of our total assets consists of
Failure to make required distributions would subject us to tax, whichwould reduce the cash available for distribution to our
To continue to qualify as a REIT,
we must distribute to our stockholders each calendar year at least 90%of our REIT taxable● | 85% of our REIT ordinary income for that year; |
● | 95% of our REIT capital gain net income for that year; and |
● | any undistributed taxable income from prior years |
We intend to distribute our REIT taxable income to our stockholders in a manner intended tosatisfy the 90% distribution
Our taxable income may be substantially different than our net income as determined based
on generally accepted accountingEven if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows.
Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and
The failure of Agency RMBS subject to a repurchase agreement to qualify as realestate assets would adversely affect our ability
We have entered and intend to continue to enter into repurchase agreements under which
we nominally sell certain of ourOur ability to invest in and dispose of forward settling contracts, includingTBA securities, could be limited by the requirements
We may purchase Agency RMBS through forward settling contracts, including TBA
securities transactions. We may recognizeUntil we receive a favorable private letter ruling from the IRS or we
are advised by counsel that forward settling contracts shouldMoreover, even if we are advised by counsel that forward settling contracts should be treated as qualifying assets
or that incomeComplying with REIT requirements may limit our ability to hedge effectively.
The REIT provisions of the Code substantially limit our ability to hedge.
Our aggregate gross income from non-qualifying hedges,Our ownership of and relationship with any TRSs that we form will belimited and a failure to comply with the limits would
A REIT may own up to 100% of the stock of one or more TRSs. A
TRS may earn income that would not be qualifying income ifWe may pay taxable dividends in cash and our common stock, in which case stockholdersmay sell shares of our common stock
We may make taxable dividends that are payable partly in cash and partly in our common
stock. The IRS has issued RevenueOur ownership limitations may restrict change of control or business combination opportunitiesin which our stockholders might
In order for us to qualify as a REIT for each taxable year after 2013, no more
than 50% in value of our outstanding stock may beThese ownership limitations could have the effect of discouraging a takeover or other transaction
in which holders of our commonDividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
The maximum tax rate applicable to “qualified dividend income” payable to U.S.
stockholders that are taxed at individual ratesLiquidation of our assets may jeopardize our REIT qualification.
To maintain our qualification as a REIT,
we must comply with requirements regarding our assets and our sourcesof income. IfOur qualification as a REIT and exemption from U.S. federal income tax with respectto certain assets may be dependent on the
When purchasing securities, we may rely on opinions or advice of counsel for the issuer
of such securities, or statements madeGeneral Risk Factors
The market and economic disruptions caused by COVID-19 have negatively impactedoccurrence of cyber-incidents, or a deficiency in our business.
A cyber-incident is considered to be any adverse event that threatens the confidentiality, integrity, or availability of our information resources or the information resources of our third party service providers. More specifically, a cyber-incident is an intentional attack or an unintentional event that can include gaining unauthorized access to systems to disrupt operations, corrupt data, or steal confidential information. As our reliance on technology has increased, so have the risks posed to our systems, both internal and those we have outsourced. The primary risks that could directly result from the occurrence of a cyber-incident include operational interruption and private data exposure. We have implemented processes, procedures and controls to help mitigate these repurchase agreements. These fluctuationsrisks, but these measures, as well as our focus on mitigating the risk of a cyber-incident, do not guarantee that our business and requirements to post additional
We face possible risks associated with the effects of climate change and financial condition.
We cannot predict the terms onrate at which such funding is available
If we issue debt securities, our operations may be restricted and we will be exposed to additional risk.
If we decide to issue debt securities in the future, it is likely that such securities will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock. We, and indirectly our stockholders, will bear the cost of issuing and servicing such securities. Holders of debt securities may be granted specific rights, including but not limited to, the right to hold a perfected security interest in certain of our assets, the right to accelerate payments due under the indenture, rights to restrict dividend payments, and rights to approve the sale of assets. Such additional restrictive covenants and operating restrictions could have a material adverse effect on our business, financial condition and results of operations financialand our ability to pay distributions to our stockholders.
Future offerings of debt securities, which would be senior to our common stock upon liquidation, or equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of distributions, may harm the value of our common stock.
In the future, we may attempt to increase our capital resources by making additional offerings of debt or equity securities, including commercial paper, medium-term notes, senior or subordinated notes and classes of preferred stock or common stock, as well as warrants to purchase shares of common stock or convertible preferred stock or units consisting of any combination of the foregoing securities. Upon the liquidation of the Company, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings by us may dilute the holdings of our existing stockholders or reduce the market value of our common stock, or both. Our preferred stock, if issued, would have a preference on distributions that could limit our ability to make distributions to the holders of our common stock. Furthermore, our Board of Directors may, without stockholder approval, amend our charter to increase the aggregate number of shares or the number of shares of any class or series that we have the authority to issue, and to classify or reclassify any unissued shares of common stock or preferred stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future securities offerings. Our stockholders and
We are subject to
Our business faces public scrutiny related to environmental, social and governance (“ESG”) activities. We risk damage to our reputation if we experienced an increaseor our Manager fail to act responsibly in haircuts on financings we have rolled.
We cannot predict the effect that government policies, laws and plans adopted in response to geopolitical events, a global pandemic, or the COVID-19pandemic and the
Governments have adopted, and may continue to adopt, policies, laws and plans
intended to address geopolitical events such as war, including theThere can be no assurance as to how, in the long term, these and other actions by the U.S. government will
affect the efficiency,As an externally managed company, the Company relies on our Manager’s information systems in connection with the Company’s day-to-day operations. Consequently, the Company also relies on our Manager’s processes for assessing, identifying, and managing material risks from cybersecurity threats undertaken by our Manager. All of the Company’s executive officers are executive officers, directors and employees of Bimini.
Our Manager’s cybersecurity processes and practices are integrated into the Company’s risk management and oversight program. In general, the Company seeks to address cybersecurity risks through a comprehensive, cross-functional approach that is focused on preserving the confidentiality, security and availability of the information that the Company collects and stores by identifying, preventing and mitigating cybersecurity threats and effectively responding to cybersecurity incidents when they occur. The Company has adopted a cybersecurity incident response plan to enable rapid response, curtail further security breaches, mitigate and manage costs, and facilitate timely disclosure of material cyber incidents as required by the SEC.
Risk Management and Strategy
The Company, our Manager and our Board place a high priority on maintaining security over our financial information that can be accessed via the Internet and mitigating information security risks. The Company engages a third-party security firm to provide threat detection and reports, conduct annual testing of our Manager’s systems, train the Manager’s employees and generally advise on cybersecurity processes. At least annually, our Manager has its information technology team make a formal presentation to our Audit Committee and the federalBoard to keep them apprised of the level of cybersecurity that exists to protect our financial information, training of the Company’s officers and state mandates implemented
The Company’s cybersecurity program is focused on the following key areas:
● | Governance: As discussed in more detail under “Item 1C. Cybersecurity—Governance,” the Audit Committee and the Board oversee cybersecurity risk management by regularly interacting with the Company’s management team, our Manager’s information technology team and a third-party security firm. |
● | Collaborative Approach: The Company has implemented a comprehensive, cross-functional approach to identifying, preventing and mitigating cybersecurity threats and incidents, while also implementing controls and procedures that provide for the prompt escalation of certain cybersecurity incidents so that decisions regarding the public disclosure and reporting of such incidents can be made by management in a timely manner. |
● | Technical Safeguards: The Company deploys technical safeguards that are designed to protect information systems from cybersecurity threats, including firewalls, intrusion prevention and detection systems, redundant data storage and retention methods, anti-malware functionality and access controls, which are evaluated and improved through vulnerability and exposure assessments and cybersecurity threat intelligence. With the help of the third-party security firm, the Company has implemented several layers of physical security, digital security and data backup. |
● | Incident Response and Recovery Planning: The Company has established a comprehensive incident response and recovery plan that addresses the response to a cybersecurity incident and plans to test and evaluate that plan on a regular basis. |
● | Third-Party Risk Management: The Company maintains a comprehensive, risk-based approach to identifying and overseeing cybersecurity risks presented by third parties, including counterparties, service providers or other external users of our Manager’s systems, as well as the systems of third parties that could adversely impact the Company’s business in the event of a cybersecurity incident affecting those third-party systems. |
● | Education and Awareness: A third-party security firm provides training to our Manager’s employees, helping our Manager’s information technology team to maintain a state-of-the-art cybersecurity system and stay up to date on the latest threats and counter measures available. The third-party security firm places a high priority on employee threat education through automated internal phishing tests. Our Manager’s information technology team attends continuing education seminars and receives timely alerts to any new viruses or cyber threats as they occur as a means to equip personnel with effective tools to address cybersecurity threats, and to communicate evolving information security policies, standards, processes and practices. |
Governance
The Company believes oversight of cybersecurity risk is the responsibility of the Audit Committee and the full Board. Accordingly, the Audit Committee and the Board oversee the Company’scybersecurity risk management process. The Board considers the Company’s cybersecurity posture and risk exposure with management taking into consideration the Company’s operations and the types of data retained on its systems as part of its and the Audit Committee’s periodic review of the Company’s risk management. The Company’s primary business involves investments in Agency RMBS, which are securities backed primarily by single-family residential mortgage loans. The Company does not receive personal information on individual mortgage borrowers. The Board reviews the Company’s cybersecurity program and risk exposure with management on at least an annual basis and receives reports from management, the Manager’s information technology team, and the Company’s third-party security firm on these matters from time to time. The Board may also conduct additional cybersecurity reviews or receive additional updates or reports as it deems necessary.
As noted above, the Company relies on its Manager’s information systems in connection with the Company’s day-to-day operations. Consequently, the Company also relies on the processes for assessing, identifying, and managing material risks from cybersecurity threats undertaken by its Manager. Messrs. Cauley and Haas work collaboratively to implement a program designed to protect our Manager’s employees are unableinformation systems from cybersecurity threats and to work effectivelypromptly respond to any cybersecurity incidents in accordance with the Company’s incident response and recovery plan. These members of the Company’s management team monitor the prevention, detection, mitigation and remediation of cybersecurity threats and incidents and report such threats and incidents to the Board when appropriate.
Messrs. Cauley and Haas each hold undergraduate and graduate degrees in their respective fields, and each have approximately twenty years of experience managing risks at the Company and at similar companies, including risks arising from cybersecurity threats.
Cybersecurity threats, including as a result
ofWe do not own any real property. Our offices are owned by Bimini, the parent of our Manager, and are located at 3305 Flamingo
We are not party to any material pending legal proceedings as described in Item 103
of Regulation S-K.Not Applicable.
Market Information
and HoldersOur common stock trades on the NYSE under the symbol “ORC.”
As of FebruaryDividend
DistributionPolicyWe intend to continue to make regular monthly cash distributions to our stockholders, as more
fully described below. TomaintainAny additional distributions we make will be authorized by and at the discretion
of our Board of Directors based upon a variety of● | actual results of operations; |
● | our financial condition; |
● | our level of retained cash flows; |
● | our capital requirements; |
● | any debt service requirements; |
● | our taxable income; |
● | the annual distribution requirements under the REIT provisions of the Code; |
● | applicable provisions of Maryland law; and |
● | other factors that our Board of Directors may deem relevant. |
We have not established a minimum distribution payment level, and we cannot assure
you of our ability to make distributions toOur charter authorizes us to issue preferred stock that could have a
preference over our common stock with respect toOur ability to make distributions to our stockholders will depend upon the
performance of our investment portfolio, and, in turn,Performance
Set forth below is a graph comparing the yearly percentage change in
the cumulative total return on our common stock, with theThe information in the performance chart and the table below has been obtained
from sources believed to be reliable, but its12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 | 12/31/2022 | 12/31/2023 | |||||||||||||||||||
Orchid Island Capital, Inc. | 100.00 | 106.86 | 112.47 | 112.63 | 62.93 | 61.01 | ||||||||||||||||||
Agency REIT Peer Group | 100.00 | 102.20 | 90.93 | 92.41 | 73.83 | 80.55 | ||||||||||||||||||
NAREIT Mortgage REIT TRR Index | 100.00 | 121.33 | 98.56 | 113.97 | 83.64 | 96.48 | ||||||||||||||||||
S&P 500 Total Return Index | 100.00 | 131.49 | 155.68 | 200.37 | 164.08 | 207.21 |
Securities Authorized for Issuance under Equity Compensation Plans
Information about securities authorized for issuance under our equity
compensation plans required for this Item 5 is incorporatedUnregistered Sales of Equity Securities
The Company
did not issueor sell equitysecuritiesthat werenot registeredunder theSecuritiesAct duringthe yearended DecemberIssuer Purchases
of EquitySecuritiesOn July 29,
2015, theCompany'sBoard ofDirectorsauthorizedthe repurchaseof up toThe table below presents the Company's share repurchase activity for the three
months endedDecember31,Maximum | ||||||||||||||||
Number of | ||||||||||||||||
Shares | Shares That | |||||||||||||||
Total | Weighted- | Purchased as | May Yet Be | |||||||||||||
Number | Average | Part of Publicly | Repurchased | |||||||||||||
of Shares | Price Paid | Announced | Under the | |||||||||||||
Repurchased(1) | Per Share | Programs | Authorization | |||||||||||||
October 1, 2023 - October 31, 2023 | - | $ | - | - | 4,928,350 | |||||||||||
November 1, 2023 - November 30, 2023 | - | $ | - | - | 4,928,350 | |||||||||||
December 1, 2023 - December 31, 2023 | 700,691 | $ | 7.81 | 699,748 | 4,228,602 | |||||||||||
Totals / Weighted Average | 700,691 | $ | 7.81 | 699,748 | 4,228,602 |
(1) | Includes 943 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. |
ITEM 7. MANAGEMENT’SMANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIALCONDITIONAND RESULTS OFOPERATIONS
The following discussion of our financial condition and results of operations should
be read in conjunction with the financialCommon Stock Reverse Split
On August 30, 2022, the Company effected a 1-for-5 reverse stock split of its common stock and proportionately decreased the number of authorized shares of common stock. All share and per share information has been retroactively adjusted to reflect the reverse split.
Overview
We are a specialty finance company that invests in residential mortgage-backed securities
(“RMBS”) which are issued andOur business objective is to provide attractive risk-adjusted total returns over the
long term through a combination of capitalWe operate so as to qualify to be taxed as a real estate investment trust (“REIT”("REIT") under the
The Company’s common stock trades on the New York Stock Exchange under the symbol “ORC”.
Capital Raising Activities
On August 2, 2017, we entered
On August 4, 2020,January 20, 2021, we entered into an underwriting agreement (the “January 2021 Underwriting Agreement”) with J.P. Morgan Securities LLC (“J.P. Morgan”), relating to the offer and sale of 1,520,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from the Company pursuant to the January 2021 Underwriting Agreement at $26.00 per share. In addition, we granted J.P. Morgan a 30-day option to purchase up to an additional 228,000 shares of our common stock on the same terms and conditions, which J.P. Morgan exercised in full on January 21, 2021. The closing of the offering of 1,748,000 shares of our common stock occurred on January 25, 2021, with proceeds to us of approximately $45.2 million, net of offering expenses.
On March 2, 2021, we entered into an underwriting agreement (the “March 2021 Underwriting Agreement”) with J.P. Morgan, relating to the offer and sale of 1,600,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from the Company pursuant to the March 2021 Underwriting Agreement at $27.25 per share. In addition, we granted J.P. Morgan a 30-day option to purchase up to an additional 240,000 shares of our common stock on the same terms and conditions, which J.P. Morgan exercised in full on March 3, 2021. The closing of the offering of 1,840,000 shares of our common stock occurred on March 5, 2021, with proceeds to us of approximately $50.0 million, net of offering expenses.
On June 22, 2021, we entered into an equity distribution agreement (the “August
On January 20, 2021, we entered into an underwriting agreement (the “January 2021
On October 29, 2021,March 7, 2023, we entered into an equity distribution agreement (the “October
Stock Repurchase Program
On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to 2,000,000
On December 9, 2021, the Board of Directors approved an
increase in the number of shares of theOn October 12, 2022, the Board of Directors approved an increase in the number of shares of the Company’s common stock available in the stock repurchase program for up to an additional 4,300,000 shares, bringing the remaining authorization under the stock repurchase program to 6,183,601 shares, representing approximately 18% of the Company’s then outstanding shares of common stock. This stock repurchase program has no
termination date.From the inception of the stock repurchase program through December 31, 2021,
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 2023; | |
● | the difference between Agency RMBS yields and our funding and hedging costs; |
● | competition for, and supply of, investments in Agency RMBS; |
● | actions taken by the U.S. government, including the presidential administration, the Fed, the Federal Housing Financing Agency (the “FHFA”), the Federal Deposit Insurance Corporation (the "FDIC"), the 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 maintain our qualification as a REIT and the requirements to qualify for a registration exemption under the Investment Company Act. |
Results of leverage;
Described
below arethe Company’sresults ofoperationsfor theNet (Loss)
Net loss
for the yearended December31,(in thousands) | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
Interest income | $ | 177,569 | $ | 144,633 | $ | 134,700 | ||||||
Interest expense | (201,918 | ) | (61,708 | ) | (7,090 | ) | ||||||
Net interest income | (24,349 | ) | 82,925 | 127,610 | ||||||||
Gains (losses) on RMBS and derivative contracts | 3,654 | (323,929 | ) | (177,504 | ) | |||||||
Net portfolio loss | (20,695 | ) | (241,004 | ) | (49,894 | ) | ||||||
Expenses | (18,531 | ) | (17,449 | ) | (14,866 | ) | ||||||
Net loss | $ | (39,226 | ) | $ | (258,453 | ) | $ | (64,760 | ) |
GAAP and derivative contracts
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
Net Earnings (Loss) Excluding Realized and Unrealized Gains and Losses | ||||||||||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||||||
Per Share | ||||||||||||||||||||||||
Net | Net | |||||||||||||||||||||||
Earnings | Earnings | |||||||||||||||||||||||
(Loss) | (Loss) | |||||||||||||||||||||||
Excluding | Excluding | |||||||||||||||||||||||
Net | Realized and | Realized and | Net | Realized and | Realized and | |||||||||||||||||||
Income | Unrealized | Unrealized | Income | Unrealized | Unrealized | |||||||||||||||||||
(Loss) | Gains and | Gains and | (Loss) | Gains and | Gains and | |||||||||||||||||||
(GAAP) | Losses(1) | Losses | (GAAP) | Losses(1) | Losses | |||||||||||||||||||
Three Months Ended | ||||||||||||||||||||||||
December 31, 2023 | $ | 27,127 | $ | 33,977 | $ | (6,850 | ) | $ | 0.52 | $ | 0.65 | $ | (0.13 | ) | ||||||||||
September 30, 2023 | (80,132 | ) | (66,890 | ) | (13,242 | ) | (1.68 | ) | (1.40 | ) | (0.28 | ) | ||||||||||||
June 30, 2023 | 10,249 | 23,828 | (13,579 | ) | 0.25 | 0.59 | (0.34 | ) | ||||||||||||||||
March 31, 2023 | 3,530 | 12,739 | (9,209 | ) | 0.09 | 0.33 | (0.24 | ) | ||||||||||||||||
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 | ||||||||||||||
December 31, 2021 | (44,564 | ) | (82,709 | ) | 38,145 | (1.33 | ) | (2.46 | ) | 1.13 | ||||||||||||||
September 30, 2021 | 26,038 | (2,957 | ) | 28,995 | 1.01 | (0.11 | ) | 1.12 | ||||||||||||||||
June 30, 2021 | (16,865 | ) | (40,926 | ) | 24,061 | (0.85 | ) | (2.06 | ) | 1.21 | ||||||||||||||
March 31, 2021 | (29,369 | ) | (50,912 | ) | 21,543 | (1.72 | ) | (2.98 | ) | 1.26 | ||||||||||||||
Years Ended | ||||||||||||||||||||||||
December 31, 2023 | $ | (39,226 | ) | $ | 3,654 | $ | (42,880 | ) | $ | (0.89 | ) | $ | 0.08 | $ | (0.97 | ) | ||||||||
December 31, 2022 | (258,453 | ) | (323,929 | ) | 65,476 | (6.90 | ) | (8.65 | ) | 1.75 | ||||||||||||||
December 31, 2021 | (64,760 | ) | (177,504 | ) | 112,744 | (2.67 | ) | (7.33 | ) | 4.66 |
(1) | Includes realized and unrealized gains (losses) on RMBS and derivative financial instruments, including net interest income or expense on interest rate swaps. |
Prior to be delivered
Realized and Unrealized Gains and Losses - Reclassification of Derivative Transaction Expenses | ||||||||||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||||||
Net Earnings (Loss) 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 | ||||||||||||||
December 31, 2021 | (82,597 | ) | (112 | ) | (82,709 | ) | 38,033 | (112 | ) | 38,145 | ||||||||||||||
September 30, 2021 | (2,887 | ) | (70 | ) | (2,957 | ) | 28,925 | (70 | ) | 28,995 | ||||||||||||||
June 30, 2021 | (40,844 | ) | (82 | ) | (40,926 | ) | 23,979 | (82 | ) | 24,061 | ||||||||||||||
March 31, 2021 | (50,791 | ) | (121 | ) | (50,912 | ) | 21,422 | (121 | ) | 21,543 | ||||||||||||||
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 | ||||||||||||||
December 31, 2021 | (2.46 | ) | - | (2.46 | ) | 1.13 | - | 1.13 | ||||||||||||||||
September 30, 2021 | (0.11 | ) | - | (0.11 | ) | 1.12 | - | 1.12 | ||||||||||||||||
June 30, 2021 | (2.05 | ) | (0.01 | ) | (2.06 | ) | 1.20 | (0.01 | ) | 1.21 | ||||||||||||||
March 31, 2021 | (2.98 | ) | - | (2.98 | ) | 1.26 | - | 1.26 |
Economic Interest Expense and Economic Net Interest Income
We use derivative and other hedging instruments, specifically Fed Funds, SOFR and T-Note futures contracts, short positions in thousands)
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 (loss) 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 Fed Funds, SOFR and T-Note 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 average
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 61 includesderivative instruments, calculated in accordance with GAAP for the effectyears ended December 31, 2023, 2022 and 2021 and each quarter during 2023, 2022 and 2021.
Gains (Losses) on Derivative Instruments | ||||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Economic Hedges | ||||||||||||||||||||
Recognized in | Attributed to | Attributed to | ||||||||||||||||||
Income | TBA Securities Gain (Loss) | Current | Future | |||||||||||||||||
Statement | Short | Long | Period | Periods | ||||||||||||||||
(GAAP) | Positions | Positions | (Non-GAAP) | (Non-GAAP) | ||||||||||||||||
Three Months Ended | ||||||||||||||||||||
December 31, 2023 | $ | (149,016 | ) | $ | (29,750 | ) | $ | (2,262 | ) | $ | 25,161 | $ | (142,165 | ) | ||||||
September 30, 2023 | 142,042 | 21,511 | (2,024 | ) | 24,440 | 98,115 | ||||||||||||||
June 30, 2023 | 93,367 | 15,599 | (574 | ) | 23,482 | 54,860 | ||||||||||||||
March 31, 2023 | (41,156 | ) | (5,990 | ) | - | 19,211 | (54,377 | ) | ||||||||||||
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 | ||||||||||||||
December 31, 2021 | 10,833 | 2,568 | - | (8,061 | ) | 16,326 | ||||||||||||||
September 30, 2021 | 5,305 | (2,306 | ) | - | (1,318 | ) | 8,929 | |||||||||||||
June 30, 2021 | (34,997 | ) | (5,963 | ) | - | (5,186 | ) | (23,848 | ) | |||||||||||
March 31, 2021 | 45,351 | 9,133 | (8,559 | ) | (4,165 | ) | 48,942 | |||||||||||||
Years Ended | ||||||||||||||||||||
December 31, 2023 | $ | 45,237 | $ | 1,370 | $ | (4,860 | ) | $ | 92,294 | $ | (43,567 | ) | ||||||||
December 31, 2022 | 452,476 | 4,494 | 1,200 | 13,568 | 433,214 | |||||||||||||||
December 31, 2021 | 26,492 | 3,432 | (8,559 | ) | (18,730 | ) | 50,349 |
The table below presents the effect of the reclassification of derivative
expenses discussed above for each quarter in 2022 and 2021.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 | ) | ||||||||||||||||
December 31, 2021 | 10,945 | 112 | 10,833 | (7,949 | ) | 112 | (8,061 | ) | ||||||||||||||||
September 30, 2021 | 5,375 | 70 | 5,305 | (1,248 | ) | 70 | (1,318 | ) | ||||||||||||||||
June 30, 2021 | (34,915 | ) | 82 | (34,997 | ) | (5,104 | ) | 82 | (5,186 | ) | ||||||||||||||
March 31, 2021 | 45,472 | 121 | 45,351 | (4,044 | ) | 121 | (4,165 | ) |
Economic Interest Expense and Economic Net Interest Income | ||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Interest Expense on Borrowings | ||||||||||||||||||||||||
Gains | ||||||||||||||||||||||||
(Losses) on | ||||||||||||||||||||||||
Derivative | ||||||||||||||||||||||||
Instruments | Net Interest Income | |||||||||||||||||||||||
GAAP | Attributed | Economic | GAAP | Economic | ||||||||||||||||||||
Interest | Interest | to Current | Interest | Net Interest | Net Interest | |||||||||||||||||||
Income | Expense | Period(1) | Expense(2) | Income | Income(3) | |||||||||||||||||||
Three Months Ended | ||||||||||||||||||||||||
December 31, 2023 | $ | 49,539 | $ | 52,325 | $ | 25,161 | $ | 27,164 | $ | (2,786 | ) | $ | 22,375 | |||||||||||
September 30, 2023 | 50,107 | 58,705 | 24,440 | 34,265 | (8,598 | ) | 15,842 | |||||||||||||||||
June 30, 2023 | 39,911 | 48,671 | 23,482 | 25,189 | (8,760 | ) | 14,722 | |||||||||||||||||
March 31, 2023 | 38,012 | 42,217 | 19,211 | 23,006 | (4,205 | ) | 15,006 | |||||||||||||||||
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 | |||||||||||||||||
December 31, 2021 | 44,421 | 2,023 | (8,061 | ) | 10,084 | 42,398 | 34,337 | |||||||||||||||||
September 30, 2021 | 34,169 | 1,570 | (1,318 | ) | 2,888 | 32,599 | 31,281 | |||||||||||||||||
June 30, 2021 | 29,254 | 1,556 | (5,186 | ) | 6,742 | 27,698 | 22,512 | |||||||||||||||||
March 31, 2021 | 26,856 | 1,941 | (4,165 | ) | 6,106 | 24,915 | 20,750 | |||||||||||||||||
Years Ended | ||||||||||||||||||||||||
December 31, 2023 | $ | 177,569 | $ | 201,918 | $ | 92,294 | $ | 109,624 | $ | (24,349 | ) | $ | 67,945 | |||||||||||
December 31, 2022 | 144,633 | 61,708 | 13,568 | 48,140 | 82,925 | 96,493 | ||||||||||||||||||
December 31, 2021 | 134,700 | 7,090 | (18,730 | ) | 25,820 | 127,610 | 108,880 |
(1) | Reflects the effect of derivative instrument hedges for only the period presented. |
(2) | Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP interest expense. |
(3) | Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP net interest income. |
Net Interest Income
During the year ended December 31, 2023, we generated $24.4 million of net interest expense, consisting of $177.6 million of interest income from RMBS assets offset by $201.9 million of interest expense on borrowings. For the comparable period ended December 31, 2022, we generated $82.9 million of net interest income, consisting of $144.6 million of interest income from RMBS assets offset by $61.7 million of interest expense on borrowings. The $32.9 million increase in interest income was driven by an 83 basis points ("bps") increase in yield on average RMBS that was partially offset by a $34.3 million decrease in average RMBS. The $140.2 million increase in interest expense for the year ended December 31, 2023 was driven by a 354 bps increase in the average cost of funds, offset by a $57.0 million decrease in average borrowings.
For the year ended December 31, 2021, we generated $127.6 million of net interest income, consisting of $134.7 million of interest income from RMBS assets offset by $7.1 million of interest expense on borrowings. The $9.9 million increase in interest income for the year ended December 31, 2022, compared to the period dividedyear ended December 31, 2021, was due to a 72 bps increase in yield on average RMBS, that was partially offset by a $745.5 million decrease in average
On an economic basis, our interest expense on borrowings for the years ended December 31, 2023, 2022 and 2021 was $109.6 million, $48.1 million and $25.8 million, respectively, resulting in $68.0 million, $96.5 million and $108.9 million of economic net interest income, respectively.
The tables below provide information on our portfolio average balances, interest income, yield on assets, average borrowings, interest expense, cost of funds, net interest income and net interest spread is calculated by subtracting averagefor each quarter in 2023, 2022 and 2021 and for the years ended December 31, 2023, 2022 and 2021 on both a GAAP and economic basis.
($ 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 | ||||||||||||||||||||||||||||||||
December 31, 2023 | $ | 4,207,118 | $ | 49,539 | 4.71 | % | $ | 4,066,298 | $ | 52,325 | $ | 27,164 | 5.15 | % | 2.67 | % | ||||||||||||||||
September 30, 2023 | 4,447,098 | 50,107 | 4.51 | % | 4,314,332 | 58,705 | 34,265 | 5.44 | % | 3.18 | % | |||||||||||||||||||||
June 30, 2023 | 4,186,939 | 39,911 | 3.81 | % | 3,985,577 | 48,671 | 25,189 | 4.88 | % | 2.53 | % | |||||||||||||||||||||
March 31, 2023 | 3,769,954 | 38,012 | 4.03 | % | 3,573,941 | 42,217 | 23,006 | 4.72 | % | 2.57 | % | |||||||||||||||||||||
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 | % | |||||||||||||||||||||
December 31, 2021 | 6,056,259 | 44,421 | 2.93 | % | 5,728,988 | 2,023 | 10,084 | 0.14 | % | 0.70 | % | |||||||||||||||||||||
September 30, 2021 | 5,136,331 | 34,169 | 2.66 | % | 4,864,287 | 1,570 | 2,888 | 0.13 | % | 0.24 | % | |||||||||||||||||||||
June 30, 2021 | 4,504,887 | 29,254 | 2.60 | % | 4,348,192 | 1,556 | 6,742 | 0.14 | % | 0.62 | % | |||||||||||||||||||||
March 31, 2021 | 4,032,716 | 26,856 | 2.66 | % | 3,888,633 | 1,941 | 6,106 | 0.20 | % | 0.63 | % | |||||||||||||||||||||
Years Ended | ||||||||||||||||||||||||||||||||
December 31, 2023 | $ | 4,152,777 | $ | 177,569 | 4.28 | % | $ | 3,985,037 | $ | 201,918 | $ | 109,624 | 5.07 | % | 2.75 | % | ||||||||||||||||
December 31, 2022 | 4,187,054 | 144,633 | 3.45 | % | 4,042,056 | 61,708 | 48,140 | 1.53 | % | 1.19 | % | |||||||||||||||||||||
December 31, 2021 | 4,932,548 | 134,700 | 2.73 | % | 4,707,525 | 7,090 | 25,820 | 0.15 | % | 0.55 | % |
($ in thousands) | ||||||||||||||||
Net Interest Income | Net Interest Spread | |||||||||||||||
GAAP | Economic | GAAP | Economic | |||||||||||||
Basis | Basis(2) | Basis | Basis(4) | |||||||||||||
Three Months Ended | ||||||||||||||||
December 31, 2023 | $ | (2,786 | ) | $ | 22,375 | (0.44 | )% | 2.04 | % | |||||||
September 30, 2023 | (8,598 | ) | 15,842 | (0.93 | )% | 1.33 | % | |||||||||
June 30, 2023 | (8,760 | ) | 14,722 | (1.07 | )% | 1.28 | % | |||||||||
March 31, 2023 | (4,205 | ) | 15,006 | (0.69 | )% | 1.46 | % | |||||||||
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 | % | ||||||||||
December 31, 2021 | 42,398 | 34,337 | 2.79 | % | 2.23 | % | ||||||||||
September 30, 2021 | 32,599 | 31,281 | 2.53 | % | 2.42 | % | ||||||||||
June 30, 2021 | 27,698 | 22,512 | 2.46 | % | 1.98 | % | ||||||||||
March 31, 2021 | 24,915 | 20,750 | 2.46 | % | 2.03 | % | ||||||||||
Years Ended | ||||||||||||||||
December 31, 2023 | $ | (24,349 | ) | $ | 67,945 | (0.79 | )% | 1.53 | % | |||||||
December 31, 2022 | 82,925 | 96,493 | 1.92 | % | 2.26 | % | ||||||||||
December 31, 2021 | 127,610 | 108,880 | 2.58 | % | 2.18 | % |
(1) | Portfolio yields and costs of borrowings presented in the tables above and the tables on pages 51 and 52 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 52 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 | ||||||||||||||||||||||||||||||||||||
December 31, 2023 | $ | 4,189,599 | $ | 17,519 | $ | 4,207,118 | $ | 49,135 | $ | 404 | $ | 49,539 | 4.69 | % | 9.21 | % | 4.71 | % | ||||||||||||||||||
September 30, 2023 | 4,429,159 | 17,939 | 4,447,098 | 49,661 | 446 | 50,107 | 4.48 | % | 9.96 | % | 4.51 | % | ||||||||||||||||||||||||
June 30, 2023 | 4,168,333 | 18,606 | 4,186,939 | 39,495 | 416 | 39,911 | 3.79 | % | 8.95 | % | 3.81 | % | ||||||||||||||||||||||||
March 31, 2023 | 3,750,184 | 19,770 | 3,769,954 | 37,594 | 418 | 38,012 | 4.01 | % | 8.44 | % | 4.03 | % | ||||||||||||||||||||||||
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 | 32,298 | 3,313 | 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 | % | ||||||||||||||||||||||||
December 31, 2021 | 5,878,376 | 177,883 | 6,056,259 | 42,673 | 1,748 | 44,421 | 2.90 | % | 3.93 | % | 2.93 | % | ||||||||||||||||||||||||
September 30, 2021 | 5,016,550 | 119,781 | 5,136,331 | 33,111 | 1,058 | 34,169 | 2.64 | % | 3.53 | % | 2.66 | % | ||||||||||||||||||||||||
June 30, 2021 | 4,436,135 | 68,752 | 4,504,887 | 29,286 | (32 | ) | 29,254 | 2.64 | % | (0.18 | )% | 2.60 | % | |||||||||||||||||||||||
March 31, 2021 | 3,997,965 | 34,751 | 4,032,716 | 26,869 | (13 | ) | 26,856 | 2.69 | % | (0.15 | )% | 2.66 | % | |||||||||||||||||||||||
Years Ended | ||||||||||||||||||||||||||||||||||||
December 31, 2023 | $ | 4,134,319 | $ | 18,459 | $ | 4,152,778 | $ | 175,885 | $ | 1,684 | $ | 177,569 | 4.25 | % | 9.12 | % | 4.28 | % | ||||||||||||||||||
December 31, 2022 | 4,049,530 | 137,524 | 4,187,054 | 135,462 | 9,171 | 144,633 | 3.35 | % | 6.67 | % | 3.45 | % | ||||||||||||||||||||||||
December 31, 2021 | 4,832,257 | 100,291 | 4,932,548 | 131,939 | 2,761 | 134,700 | 2.73 | % | 2.75 | % | 2.73 | % |
Interest Expense and the Cost of Funds
We had average
outstandingborrowingsofFor the year
ended December31,Our economic
interestexpensewasSince all
of our repurchaseagreementsare short-term,changes inmarket ratesdirectly affectour interestexpense. OuraveragecostThe tables
below presentthe averagebalance ofborrowingsoutstanding,interestexpense andaverage costof funds,and one-month average($ in thousands) | ||||||||||||||||||||
Average | Interest Expense | Average Cost of Funds | ||||||||||||||||||
Balance of | GAAP | Economic | GAAP | Economic | ||||||||||||||||
Borrowings | Basis | Basis | Basis | Basis | ||||||||||||||||
Three Months Ended | ||||||||||||||||||||
December 31, 2023 | $ | 4,066,298 | $ | 52,325 | $ | 27,164 | 5.15 | % | 2.67 | % | ||||||||||
September 30, 2023 | 4,314,332 | 58,705 | 34,265 | 5.44 | % | 3.18 | % | |||||||||||||
June 30, 2023 | 3,985,577 | 48,671 | 25,189 | 4.88 | % | 2.53 | % | |||||||||||||
March 31, 2023 | 3,573,941 | 42,217 | 23,006 | 4.72 | % | 2.57 | % | |||||||||||||
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 | % | |||||||||||||
December 31, 2021 | 5,728,988 | 2,023 | 10,084 | 0.14 | % | 0.70 | % | |||||||||||||
September 30, 2021 | 4,864,287 | 1,570 | 2,888 | 0.13 | % | 0.24 | % | |||||||||||||
June 30, 2021 | 4,348,192 | 1,556 | 6,742 | 0.14 | % | 0.62 | % | |||||||||||||
March 31, 2021 | 3,888,633 | 1,941 | 6,106 | 0.20 | % | 0.63 | % | |||||||||||||
Years Ended | ||||||||||||||||||||
December 31, 2023 | $ | 3,985,037 | $ | 201,918 | $ | 109,624 | 5.07 | % | 2.75 | % | ||||||||||
December 31, 2022 | 4,042,056 | 61,708 | 48,140 | 1.53 | % | 1.19 | % | |||||||||||||
December 31, 2021 | 4,707,525 | 7,090 | 25,820 | 0.15 | % | 0.55 | % |
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 | ||||||||||||||||||||||||
December 31, 2023 | 5.34 | % | 5.35 | % | (0.19 | )% | (0.20 | )% | (2.67 | )% | (2.68 | )% | ||||||||||||
September 30, 2023 | 5.32 | % | 5.17 | % | 0.12 | % | 0.27 | % | (2.14 | )% | (1.99 | )% | ||||||||||||
June 30, 2023 | 5.07 | % | 4.78 | % | (0.19 | )% | 0.10 | % | (2.54 | )% | (2.25 | )% | ||||||||||||
March 31, 2023 | 4.63 | % | 4.09 | % | 0.09 | % | 0.63 | % | (2.06 | )% | (1.52 | )% | ||||||||||||
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 | % | ||||||||||||
December 31, 2021 | 0.05 | % | 0.05 | % | 0.09 | % | 0.09 | % | 0.65 | % | 0.65 | % | ||||||||||||
September 30, 2021 | 0.05 | % | 0.03 | % | 0.08 | % | 0.10 | % | 0.19 | % | 0.21 | % | ||||||||||||
June 30, 2021 | 0.03 | % | 0.03 | % | 0.11 | % | 0.11 | % | 0.59 | % | 0.59 | % | ||||||||||||
March 31, 2021 | 0.01 | % | 0.06 | % | 0.19 | % | 0.14 | % | 0.62 | % | 0.57 | % | ||||||||||||
Years Ended | ||||||||||||||||||||||||
December 31, 2023 | 5.09 | % | 4.85 | % | (0.02 | )% | 0.22 | % | (2.34 | )% | (2.10 | )% | ||||||||||||
December 31, 2022 | 1.94 | % | 1.20 | % | (0.41 | )% | 0.33 | % | (0.75 | )% | (0.01 | )% | ||||||||||||
December 31, 2021 | 0.04 | % | 0.04 | % | 0.11 | % | 0.11 | % | 0.51 | % | 0.51 | % |
Gains or Losses
The table
below presentsour gainsor lossesfor the yearsended December31, 2023, 2022 and 2021.(in thousands) | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
Realized losses on sales of RMBS | $ | (22,642 | ) | $ | (133,695 | ) | $ | (5,542 | ) | |||
Unrealized losses on RMBS and U.S. Treasury Notes | (18,941 | ) | (642,710 | ) | (198,454 | ) | ||||||
Total losses on RMBS and U.S. Treasury Notes | (41,583 | ) | (776,405 | ) | (203,996 | ) | ||||||
Gains (losses) on interest rate futures | 32,650 | 206,907 | (1,026 | ) | ||||||||
Gains on interest rate swaps | 19,657 | 167,641 | 23,398 | |||||||||
Gains (losses) on payer swaptions (short positions) | 4,113 | (81,050 | ) | 9,062 | ||||||||
(Losses) gains on payer swaptions (long positions) | (8,734 | ) | 152,365 | (2,580 | ) | |||||||
(Losses) gains on interest rate caps | (219 | ) | 919 | - | ||||||||
Gains on interest rate floors (long positions) | 1,785 | - | 2,765 | |||||||||
Losses on interest rate floors (short positions) | (525 | ) | - | - | ||||||||
Gains on TBA securities (short positions) | 1,370 | 4,494 | 3,432 | |||||||||
(Losses) gains on TBA securities (long positions) | (4,860 | ) | 1,200 | (8,559 | ) | |||||||
Total | $ | 3,654 | $ | (323,929 | ) | $ | (177,504 | ) |
We invest in RMBS with the intent to earn net income from the realized yield on those assets over their related funding and hedging costs, and not for the purpose of making short term gains from sales. However, we have sold, and may continue to sell, existing assets to acquire new assets, which our management believes might have higher risk-adjusted returns in light of current or anticipated interest rates, federal government programs or general economic conditions or to manage our balance sheet as part of our asset/liability management strategy. During the years ended December 31, 2023, 2022 and 2021, the Company received proceeds of $835.1 million, $2,759.9 million, and $2,851.7 million, respectively, from the sales and maturities of RMBS and U.S. Treasury securities.
Realized and unrealized gains and losses on salesRMBS are driven in part by changes in yields and interest rates, the spreads that Agency RMBS trade relative to comparable duration U.S. Treasuries or swaps, as well as varying levels of demand for RMBS,
5 Year | 10 Year | 15 Year | 30 Year | |||||||||||||||||
U.S. | U.S | Fixed-Rate | Fixed-Rate | 90 Day | ||||||||||||||||
Treasury | Treasury | Mortgage | Mortgage | Average | ||||||||||||||||
Rate(1) | Rate(1) | Rate(2) | Rate(2) | SOFR(3) | ||||||||||||||||
December 31, 2023 | 3.84 | % | 3.87 | % | 5.93 | % | 6.61 | % | 5.36 | % | ||||||||||
September 30, 2023 | 4.61 | % | 4.57 | % | 6.72 | % | 7.31 | % | 5.27 | % | ||||||||||
June 30, 2023 | 4.13 | % | 3.82 | % | 6.06 | % | 6.71 | % | 5.00 | % | ||||||||||
March 31, 2023 | 3.61 | % | 3.49 | % | 5.56 | % | 6.32 | % | 4.51 | % | ||||||||||
December 31, 2022 | 4.00 | % | 3.88 | % | 5.68 | % | 6.42 | % | 3.62 | % | ||||||||||
September 30, 2022 | 4.04 | % | 3.80 | % | 5.96 | % | 6.70 | % | 2.13 | % | ||||||||||
June 30, 2022 | 3.00 | % | 2.97 | % | 4.83 | % | 5.70 | % | 0.70 | % | ||||||||||
March 31, 2022 | 2.42 | % | 2.33 | % | 3.83 | % | 4.67 | % | 0.09 | % | ||||||||||
December 31, 2021 | 1.26 | % | 1.51 | % | 2.33 | % | 3.11 | % | 0.05 | % | ||||||||||
September 30, 2021 | 1.00 | % | 1.53 | % | 2.28 | % | 3.01 | % | 0.05 | % | ||||||||||
June 30, 2021 | 0.87 | % | 1.44 | % | 2.34 | % | 3.02 | % | 0.02 | % | ||||||||||
March 31, 2021 | 0.94 | % | 1.75 | % | 2.45 | % | 3.17 | % | 0.04 | % |
(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. |
Unrealized Gains and Losses on PT RMBS
For the purpose of recording income on the Company’s investments in PT RMBS, interest income is based on the stated interest rate of the security. Using the fair value accounting method, premiums or discounts to the face value of the PT RMBS present at the date of purchase are not amortized. Premium lost and discount accretion resulting from monthly principal repayments are reflected in unrealized gains (losses) on RMBS in the statements of comprehensive income (loss). The following table adjusts the Company’s interest rate swaps
($ in thousands) | ||||||||||||||||||||||||||||||||
Unrealized Gains (Losses) on PT RMBS | Inclusive of | |||||||||||||||||||||||||||||||
Price | Premium Amortization/ | |||||||||||||||||||||||||||||||
Premium | Only | Discount Accretion | ||||||||||||||||||||||||||||||
Average | Yield on | Amortization/ | Unrealized | Yield on | ||||||||||||||||||||||||||||
RMBS | Interest | Average | As | Discount | Gains | Interest | Average | |||||||||||||||||||||||||
Held | Income | RMBS | Reported(1) | Accretion(2) | (Losses) | Income(3) | RMBS(3) | |||||||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||||||||||||||
December 31, 2023 | $ | 4,207,118 | $ | 49,539 | 4.71 | % | $ | 206,222 | $ | 8,067 | $ | 198,155 | $ | 57,606 | 5.48 | % | ||||||||||||||||
September 30, 2023 | 4,447,098 | 50,107 | 4.51 | % | (210,159 | ) | 7,252 | (217,411 | ) | 57,359 | 5.16 | % | ||||||||||||||||||||
June 30, 2023 | 4,186,939 | 39,911 | 3.81 | % | (68,898 | ) | 4,886 | (73,784 | ) | 44,797 | 4.28 | % | ||||||||||||||||||||
March 31, 2023 | 3,769,954 | 38,012 | 4.03 | % | 53,444 | 4,774 | 48,670 | 42,786 | 4.54 | % | ||||||||||||||||||||||
December 31, 2022 | 3,370,608 | 31,897 | 3.79 | % | 50,182 | 6,748 | 43,434 | 38,645 | 4.59 | % | ||||||||||||||||||||||
September 30, 2022 | 3,571,037 | 35,611 | 3.99 | % | (211,727 | ) | 4,647 | (216,374 | ) | 40,258 | 4.51 | % | ||||||||||||||||||||
June 30, 2022 | 4,260,727 | 35,268 | 3.31 | % | (176,042 | ) | 726 | (176,768 | ) | 35,994 | 3.38 | % | ||||||||||||||||||||
March 31, 2022 | 5,545,844 | 41,857 | 3.02 | % | (326,212 | ) | (8,431 | ) | (317,781 | ) | 33,426 | 2.41 | % | |||||||||||||||||||
December 31, 2021 | 6,056,259 | 44,421 | 2.93 | % | (90,357 | ) | (11,492 | ) | (78,865 | ) | 32,929 | 2.17 | % | |||||||||||||||||||
September 30, 2021 | 5,136,331 | 34,169 | 2.66 | % | (15,219 | ) | (9,769 | ) | (5,450 | ) | 24,400 | 1.90 | % | |||||||||||||||||||
June 30, 2021 | 4,504,887 | 29,254 | 2.60 | % | 2,973 | (9,184 | ) | 12,157 | 20,070 | 1.78 | % | |||||||||||||||||||||
March 31, 2021 | 4,032,716 | 26,856 | 2.66 | % | (98,885 | ) | (11,099 | ) | (87,786 | ) | 15,757 | 1.56 | % | |||||||||||||||||||
Years Ended | ||||||||||||||||||||||||||||||||
December 31, 2023 | $ | 4,152,777 | $ | 177,569 | 4.28 | % | $ | (19,391 | ) | $ | 24,979 | $ | (44,370 | ) | $ | 202,548 | 4.88 | % | ||||||||||||||
December 31, 2022 | 4,187,054 | 144,633 | 3.45 | % | (663,799 | ) | 3,690 | (667,489 | ) | 148,323 | 3.54 | % | ||||||||||||||||||||
December 31, 2021 | 4,932,548 | 134,700 | 2.73 | % | (201,488 | ) | (41,544 | ) | (159,944 | ) | 93,156 | 1.89 | % |
(1) | As reported in the Company’s statements of comprehensive income (loss) using the fair value accounting method. |
(2) | Premium amortization/discount accretion for each period is calculated using the beginning of period market value of all securities. Amounts presented are intended to approximate amortization/accretion using the yield method over the life of the security based on premium/discount present at purchase date. |
(3) | Interest Income – Inclusive of Premium Amortization/Discount Accretion and Yield on Average RMBS – Inclusive of Premium Amortization/Discount Accretion are non-GAAP measures. See “—GAAP and Non-GAAP Reconciliations,” for a description of our non-GAAP measures. |
Expenses
Total operating expenses
were(in thousands) | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
Management fees | $ | 10,491 | $ | 10,447 | $ | 8,156 | ||||||
Overhead allocation | 2,389 | 2,042 | 1,632 | |||||||||
Incentive compensation | 1,419 | 957 | 1,132 | |||||||||
Directors fees and liability insurance | 1,322 | 1,251 | 1,169 | |||||||||
Audit, legal and other professional fees | 1,495 | 1,143 | 1,112 | |||||||||
Direct REIT operating expenses | 715 | 831 | 1,090 | |||||||||
Other administrative | 700 | 778 | 575 | |||||||||
Total expenses | $ | 18,531 | $ | 17,449 | $ | 14,866 |
We are externally managed and advised by Bimini Advisors LLC (the “Manager”) pursuant
● | 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 providethe third amendment to the management agreement entered into on November 16, 2021, the Manager began providing certain repurchase agreement trading, clearing and administrative
● | 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 $10,000 per month. |
Should the Company terminate the management agreement without cause,
it will pay the Manager a termination fee equal to threeThe following table summarizes the management fee and overhead allocation
expenses for each quarter in 2023, 2022 and 2021($ in thousands) | ||||||||||||||||||||
Average | Average | Advisory Services | ||||||||||||||||||
Orchid | Orchid | Management | Overhead | |||||||||||||||||
Three Months Ended | MBS | Equity | Fee | Allocation | Total | |||||||||||||||
December 31, 2023 | $ | 4,207,118 | $ | 851,532 | $ | 2,275 | $ | 617 | $ | 2,892 | ||||||||||
September 30, 2023 | 4,447,098 | 964,230 | 2,870 | 557 | 3,427 | |||||||||||||||
June 30, 2023 | 4,186,939 | 899,109 | 2,704 | 639 | 3,343 | |||||||||||||||
March 31, 2023 | 3,769,954 | 865,722 | 2,642 | 576 | 3,218 | |||||||||||||||
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 | 853,577 | 2,634 | 441 | 3,075 | |||||||||||||||
December 31, 2021 | 6,056,259 | 806,382 | 2,587 | 443 | 3,030 | |||||||||||||||
September 30, 2021 | 5,136,331 | 672,384 | 2,156 | 390 | 2,546 | |||||||||||||||
June 30, 2021 | 4,504,887 | 542,679 | 1,792 | 395 | 2,187 | |||||||||||||||
March 31, 2021 | 4,032,716 | 456,687 | 1,621 | 404 | 2,025 | |||||||||||||||
Years Ended | ||||||||||||||||||||
December 31, 2023 | $ | 4,152,777 | $ | 895,148 | $ | 10,491 | $ | 2,389 | $ | 12,880 | ||||||||||
December 31, 2022 | 4,187,054 | 845,892 | 10,447 | 2,042 | 12,489 | |||||||||||||||
December 31, 2021 | 4,932,548 | 619,533 | 8,156 | 1,632 | 9,788 |
Financial
Condition:Mortgage-Backed Securities
As of December
31,The following
table presentsthe 3-monthconstant prepaymentrate (“CPR”)experiencedon our structuredand PT RMBSStructured | ||||||||||||
PT RMBS | RMBS | Total | ||||||||||
Three Months Ended | Portfolio (%) | Portfolio (%) | Portfolio (%) | |||||||||
December 31, 2023 | 5.4 | 7.9 | 5.5 | |||||||||
September 30, 2023 | 6.1 | 5.7 | 6.0 | |||||||||
June 30, 2023 | 5.6 | 7.0 | 5.6 | |||||||||
March 31, 2023 | 3.9 | 5.7 | 4.0 | |||||||||
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 | ||||||||||||
December 31, 2023 | |||||||||||||||||
Fixed Rate RMBS | $ | 3,877,082 | 99.6 | % | 4.33 | % | 334 | 1-Nov-53 | |||||||||
Interest-Only Securities | 16,572 | 0.4 | % | 4.01 | % | 223 | 25-Jul-48 | ||||||||||
Inverse Interest-Only Securities | 358 | 0.0 | % | 0.00 | % | 274 | 15-Jun-42 | ||||||||||
Total Mortgage Assets | $ | 3,894,012 | 100.0 | % | 4.30 | % | 331 | 1-Nov-53 | |||||||||
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) | ||||||||||||||||
December 31, 2023 | December 31, 2022 | |||||||||||||||
Percentage of | Percentage of | |||||||||||||||
Agency | Fair Value | Entire Portfolio | Fair Value | Entire Portfolio | ||||||||||||
Fannie Mae | $ | 2,714,192 | 69.7 | % | $ | 2,320,960 | 65.6 | % | ||||||||
Freddie Mac | 1,179,820 | 30.3 | % | 1,219,042 | 34.4 | % | ||||||||||
Total Portfolio | $ | 3,894,012 | 100.0 | % | $ | 3,540,002 | 100.0 | % |
December 31, 2023 | December 31, 2022 | |||||||
Weighted Average Pass-through Purchase Price | $ | 104.10 | $ | 106.41 | ||||
Weighted Average Structured Purchase Price | $ | 18.74 | $ | 18.74 | ||||
Weighted Average Pass-through Current Price | $ | 95.70 | $ | 91.46 | ||||
Weighted Average Structured Current Price | $ | 13.51 | $ | 14.05 | ||||
Effective Duration (1) | 4.40 | 5.58 |
(1) | Effective duration is the approximate percentage change in price for a 100 bps change in rates. An effective duration of 4.40 indicates that an interest rate increase of 1.0% would be expected to cause a 4.40% decrease in the value of the RMBS in the Company’s investment portfolio at December 31, 2023. An effective duration of 5.58 indicates that an interest rate increase of 1.0% would be expected to cause a 5.58% 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 years ended December 31, 2020
($ in thousands) | ||||||||||||||||||||||||
2023 | 2022 | |||||||||||||||||||||||
Total Cost | Average Price | Weighted Average Yield | Total Cost | Average Price | Weighted Average Yield | |||||||||||||||||||
Pass-through RMBS | $ | 1,521,070 | $ | 100.27 | 5.40 | % | $ | 1,004,526 | $ | 100.03 | 4.59 | % |
Borrowings
As of December 31, 2021
As of December 31, 2020
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 | ||||||||||||||||
December 31, 2023 | $ | 3,705,649 | $ | 4,426,947 | $ | 4,066,298 | $ | (360,649 | ) | (8.87 | )% | ||||||||||
September 30, 2023 | 4,426,947 | 4,494,858 | 4,314,332 | 112,615 | 2.61 | % | |||||||||||||||
June 30, 2023 | 4,201,717 | 4,201,717 | 3,985,577 | 216,140 | 5.42 | % | |||||||||||||||
March 31, 2023 | 3,769,437 | 3,849,137 | 3,573,941 | 195,496 | 5.47 | % | |||||||||||||||
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 | |||||||||||||
December 31, 2023 | $ | 3,705,649 | $ | 3,795,002 | $ | (645,700 | ) | $ | 469,944 | 7.9:1 | 6.7:1 | |||||||
September 30, 2023 | 4,426,947 | 4,470,052 | (502,500 | ) | 466,841 | 9.5:1 | 8.5:1 | |||||||||||
June 30, 2023 | 4,201,717 | 4,240,845 | (250,000 | ) | 490,086 | 8.6:1 | 8.1:1 | |||||||||||
March 31, 2023 | 3,769,437 | 3,814,651 | (875,000 | ) | 451,361 | 8.4:1 | 6.5:1 | |||||||||||
December 31, 2022 | 3,378,445 | 3,426,973 | (675,000 | ) | 438,762 | 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 ability to turn non-cash assets into cash, purchase additional investments, repay principal and interest on borrowings, fund overhead, fulfill margin calls and pay dividends. We have both internal and external sources of liquidity. However, our material unused sources of liquidity include cash balances, unencumbered assets and our ability to sell encumbered assets to raise cash. Our balance relativesheet also generates liquidity on an on-going basis through payments of principal and interest we receive on our RMBS portfolio. Management believes that we currently have sufficient liquidity and capital resources available for (a) the acquisition of additional investments consistent with the size and nature of our existing RMBS portfolio, (b) the repayments on borrowings and (c) the payment of dividends to the averageextent required for our continued qualification as a REIT. We may also generate liquidity from time to time by selling our equity or debt securities in public offerings or private placements.
Internal Sources of Liquidity
Our internal sources of liquidity include our cash balances, unencumbered assets and our ability to liquidate our encumbered security holdings. Our balance duringsheet also generates liquidity on an on-going basis through payments of principal and interest we receive on our RMBS portfolio. Because our PT RMBS portfolio consists entirely of government and agency securities, we do not anticipate having difficulty converting our assets to cash should our liquidity needs ever exceed our immediately available sources of cash. Our structured RMBS portfolio also consists entirely of governmental agency securities, although they typically do not trade with comparable bid / ask spreads as PT RMBS. However, we anticipate that we would be able to liquidate such securities readily, even in distressed markets, although we would likely do so at prices below where such securities could be sold in a more stable market. To enhance our liquidity even further, we may pledge a portion of our structured RMBS as part of a repurchase agreement funding, but retain the quarter
Our strategy for hedging our funding costs typically involves taking short positions in interest rate futures, treasury futures, interest rate swaps, interest rate swaptions or other instruments. When the market causes these short positions to decline in value we are required to meet margin calls with cash. This can reduce our liquidity in responseposition to the dislocationsextent other securities in the financial
ExternalSources ofLiquidity
Our primary
externalsources ofliquidityare our abilityto (i) borrowunder masterrepurchaseagreements,(ii) usethe TBAsecurityUnder our
repurchaseagreementfunding arrangements,we are requiredto post marginat the initiationof the borrowing.The marginTBAs
representa form ofoff-balancesheet financingand areaccountedfor as derivativeinstruments.Our TBAs
are alsosubject tomargin requirementsgovernedby the Mortgage-BackedSecuritiesDivision ("MBSD")of the FICCandSettlement
of our TBAobligationsby takingdelivery ofthe underlyingsecuritiesas well assatisfyingmargin requirementscouldWe invest
a portionof our capitalin structuredAgency RMBS.We generallydo not applyleverageto this portionIn future
periods,we expectto continueto financeour activitiesin a mannerthat is consistentwith ourcurrent operationsthroughAs described more fully below, we may also access liquidity by selling our equity or debt securities in public offerings or private placements.
On August 2, 2017,4, 2020, we entered into the August 20172020 Equity Distribution Agreement
On January 20, 2021, we entered into the January 2021 Underwriting Agreement
with J.P. Morgan Securities LLC (“J.P.Morgan”),On March 2, 2021, we entered into the March 2021 Underwriting Agreement with J.P. Morgan, relating to the offer and sale of 1,600,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from the Company pursuant to the March 2021 Underwriting Agreement at $27.25 per share. In addition, we granted J.P. Morgan a 30-day option to purchase up to an additional 240,000 shares of our common stock on the same terms and conditions, which J.P. Morgan exercised in full on March 3,
On June 22, 2021, we entered into the June 2021 Equity Distribution Agreement with four
sales agents pursuant to which we couldOn October 29, 2021, we entered into the Octoberan equity distribution agreement (the “October 2021 Equity Distribution
On March 7, 2023, we entered into an equity distribution agreement (the “March 2023 Equity Distribution Agreement”) with three sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate amount of $250,000,000 of
shares of our common stock in transactionsOutlook
Economic Summary
The fourth
quarter ofThe market pivoted sharply in the fourth quarter of 2021,2023, followed shortly thereafter by the Fed. The primary impetus for the change in the market’s outlook was the trend in inflation data. While incoming data often exceeded expectations on a relative basis – the trend in inflation was nonetheless downward. While service inflation remained elevated, goods inflation was trending negative, and even more so
Interest Rates
Starting at the end of the second quarter of 2023 interest rates began to move steadily higher, driven by the factors discussed above. In late October, rates across the curve is typical as the economy
The market’s apparent anxiousness for the
The Agency RMBS
As with interest rates across the fourth quarter
Based on an absolute and relative to comparable duration U.S.
The Agency RMBS sector outperformed investment grade corporates on an absolute basis but trailed sub-investment grade corporates, again on an absolute basis. Relative to comparable duration swaps for the fourth quarter, Agency RMBS trailed investment grade corporates by 120 basis points but outperformed sub-investment grades corporates by 20 basis points. Note prior to the sharp reversal in the markets at the end of October total returns for all three sectors were negative year to date, and all three sectors – Agency RMBS, investment grade and sub-investment grade corporates – generated positive absolute and excess returns for the year.
In response to the significant increase in interest rates and volatility, with the corresponding weakness in Agency RMBS assets early in the fourth quarter, we reduced our leverage and increased hedges. Specifically, we reduced our holding of 30-year fixed rate 3.0% coupons by approximately 40% - given their long duration - and modestly added a 30-year 7.0% coupon position.
Recent Legislative and Regulatory Developments
In response to the deterioration in the markets for U.S. Treasuries, Agency MBSRMBS and other mortgage
On September 30, 2019, the FHFA announced that Fannie Mae and Freddie Macwere allowed
to increase their capital buffersThe scope and nature of the actions the U.S. government or the Fed will
ultimately undertake are unknown and will continue toEffect on Us
Regulatory developments, movements in interest rates and prepayment rates
affect us in many ways, including the following:Effects on our Assets
A change in or elimination of the guarantee structure of Agency RMBS may increase
our costs (if, for example, guarantee feesIf prepayment rates are relatively
If prepayment levels increase, the value of any of our Agency RMBS that are carried at a premium to par that are affected by such prepayments may decline.
This is because aHigher long-term rates can also affect the value of our Agency RMBS.
As long-term rates rise, rates available to borrowers alsoThe Agency RMBS market began to experience severe dislocations
in mid-March 2020 as a result of theBecause we base our investment decisions on risk management principles
rather than anticipated movements in interest rates, inEffects on our borrowing costs
We leverage our PT RMBS portfolio and a portion of our structured Agency RMBS
with principal balances through the use ofIn order to protect our net interest margin against increases in short-term interest rates, we
may enter into interest rate swaps,Summary
The country andsecond half of 2023 was a very challenging period for the financial markets, especially the fixed income markets in the U.S. The U.S. economy currently appearproved incredibly resilient in the face of continued rate increases by the Fed since March of 2022 of 500 basis points. Growth for the third quarter was a surprising 4.9%, as measured by GDP. The preliminary growth rate for the fourth quarter was 3.3%, still above what is deemed to be ona sustainable rate. Fiscal deficits in the verge of recovering from
A series of events in November and December triggered a violent reversal in the year – as they begin the process of “normalizing”
In response to the significant increase in interest rates and possibly into 2023.
Critical Accounting Estimates
Our financial statements are prepared in accordance with GAAP. GAAP requires our management to make some complex and
Mortgage-Backed Securities
Our investments in Agency RMBS are accounted for at fair value. We acquire our Agency
RMBS for the purpose of generatingAs discussed in Note 1213 to the financial statements, our Agency RMBS are valued using
In managing our portfolio, Bimini Advisors employs the following four-step process at
each valuation date to determine the fair•
First, our Manager obtains fair values from subscription-based independent pricingsources. These prices are used by both•
Second, our Manager requests non-binding quotes from one to four broker-dealersfor certain Agency RMBS in order to•
Third, our Manager reviews the values obtained by the pricing source and the broker-dealersfor consistency across similar•
Finally, if the data from the pricing services and broker-dealers is not homogenous or if the data obtained is inconsistent withManagement believes its pricing methodology to be consistent with the
definition of fair value described in Financial AccountingDerivative Financial Instruments
We use derivative instruments to manage interest rate risk, facilitate asset/liability strategies
and manage other exposures, and weWe account for TBA securities as derivative instruments. Gains and losses associated
with TBA securities transactions areWe have elected not to treat any of our derivative financial instruments as hedges in
order to align the accounting treatment of itsIncome Recognition
Since we commenced operations, we have elected to account for all of our Agency
RMBS under the fair value option.All of our Agency RMBS are either pass-through securities or structured Agency
RMBS, including CMOs, IOs, IIOs or POs. IncomeCapital Expenditures
At December 31, 2021,
Dividends
In addition to other requirements that must be satisfied to continue to qualify as a REIT, we must pay annual dividends to our
We intend to pay regular monthly dividends to our stockholders and have declared the
following dividends since the completion of(in thousands, except per share amounts) | ||||||||
Year | Per Share Amount | Total | ||||||
2013 | $ | 6.975 | $ | 4,662 | ||||
2014 | 10.800 | 22,643 | ||||||
2015 | 9.600 | 38,748 | ||||||
2016 | 8.400 | 41,388 | ||||||
2017 | 8.400 | 70,717 | ||||||
2018 | 5.350 | 55,814 | ||||||
2019 | 4.800 | 54,421 | ||||||
2020 | 3.950 | 53,570 | ||||||
2021 | 3.900 | 97,601 | ||||||
2022 | 2.475 | 87,906 | ||||||
2023 | 1.800 | 81,127 | ||||||
2024 YTD(1) | 0.240 | 12,362 | ||||||
Totals | $ | 66.690 | $ | 620,959 |
(1) | On January 10, 2024, the Company declared a dividend of $0.12 per share to be paid on February 27, 2024. On February 14, 2024, the Company declared a dividend of $0.12 per share to be paid on March 26, 2024. The effects of these dividends are included in the table above but are not reflected in the Company’s financial statements as of December 31, 2023. |
Market risk is the exposure to loss resulting from changes in market factors such as
interest rates, foreign currency exchangeInterest Rate Risk
Interest rate risk is highly sensitive to many factors, including governmental
monetary and tax policies, domestic and internationalChanges in the general level of interest rates can affect our net interest income, which is the
difference between the interestWe may utilize a variety of financial instruments in order to limit the effects of changes in interest rates on
our operations. TheOur profitability and the value of our investment portfolio (including derivatives used
for hedging purposes) may be adverselyOur portfolio of PT RMBS is typically comprised of adjustable-rate RMBS (“ARMs”),
fixed-rate RMBS and hybrid adjustable-rateThe duration of our IO and IIO portfolios will vary greatly depending on the
structural features of the securities.While prepaymentPrepayments on the loans underlying our RMBS can alter the timing of the cash flows
from the underlying loans to us. As a result,We face the risk that the market value of our PT RMBS assets will increase or decrease
at different rates than that of ourThe following sensitivity analysis shows the estimated impact on the fair value of
our interest rate-sensitive investments and hedgeAll changes in value in the table below are measured as percentage changes from
the investment portfolio value and net assetActual results could differ materially from
Interest Rate Sensitivity(1) | ||||||||
Portfolio | ||||||||
Market | Book | |||||||
Change in Interest Rate | Value(2)(3) | Value(2)(4) | ||||||
As of December 31, 2023 | ||||||||
-200 Basis Points | (2.03 | )% | (16.78 | )% | ||||
-100 Basis Points | (0.54 | )% | (4.48 | )% | ||||
-50 Basis Points | (0.17 | )% | (1.40 | )% | ||||
+50 Basis Points | 0.00 | % | 0.02 | % | ||||
+100 Basis Points | (0.15 | )% | (1.23 | )% | ||||
+200 Basis Points | (0.81 | )% | (6.70 | )% | ||||
As of December 31, 2022 | ||||||||
-200 Basis Points | 0.52 | % | 4.18 | % | ||||
-100 Basis Points | 0.61 | % | 4.92 | % | ||||
-50 Basis Points | 0.40 | % | 3.25 | % | ||||
+50 Basis Points | (0.43 | )% | (3.47 | )% | ||||
+100 Basis Points | (1.04 | )% | (8.38 | )% | ||||
+200 Basis Points | (2.51 | )% | (20.27 | )% |
(1) | Interest rate sensitivity is derived from models that are dependent on inputs and assumptions provided by third parties as well as by our Manager, and assumes there are no changes in mortgage spreads and assumes a static portfolio. Actual results could differ materially from these estimates. |
(2) | Includes the effect of derivatives and other securities used for hedging purposes. |
(3) | Estimated dollar change in investment portfolio value expressed as a percent of the total fair value of our investment portfolio as of such date. |
(4) | Estimated dollar change in portfolio value expressed as a percent of stockholders' equity as of such date. |
In addition to changes in interest rates, other factors impact the fair value of our
interest rate-sensitive investments, such as thePrepayment Risk
Because residential borrowers have the option to prepay their mortgage loans at
par at any time, we face the risk that we willSpread Risk
When the market spread widens between the yield on our Agency RMBS and benchmark
interest rates, our net book value couldLiquidity Risk
The primary liquidity risk for us arises from financing long-term assets with
shorter-term borrowings through repurchaseExtension Risk
The projected weighted average life and the duration (or interest rate
sensitivity) of our investments is based on our Manager'sHowever, if prepayment rates decrease in a rising interest rate environment, the average life or duration of
our fixed-rate assets orCounterparty Credit Risk
We are exposed to counterparty credit risk relating to potential losses that could be recognized
in the event that the counterpartiesIndex to Financial Statements
Page | |
Report of Independent Registered Public Accounting Firm (BDO USA, P.C.; West Palm Beach, FL; PCAOB ID#243) | |
Balance Sheets | |
Statements of Comprehensive Income (Loss) | |
Statements of Stockholders’ Equity | |
Statements of Cash Flows | |
Notes to Financial Statements |
Stockholders and Board of Directors
Orchid Island Capital, Inc.
Vero Beach, Florida
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Orchid Island Capital, Inc. (the “Company”)
as of December 31,We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States)Basis for Opinion
These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on theWe conducted our audits in accordance with the standards of the PCAOB. Those standards
require that we plan and perform the auditOur audits included performing procedures to assess the risks of material misstatement
of the financial statements, whether due toCritical Audit Matter
The critical audit matter communicated below is a matter arising from the current
period audit of the financial statements that wasAs described in Notes
We identified the valuation of mortgage-backed securities
The primary procedures we performed to address this critical audit matter included:
● | Testing the design, implementation, and operating effectiveness of controls relating to the valuation of mortgaged-backed securities in the Company’s process to select the price from multiple pricing sources to determine the fair value. |
● | Assessing the range of values used for each investment position, and evaluating the price selected for potential bias by comparing the selected price to the high, low and average of the range of pricing sources. |
● | Utilizing personnel with specialized knowledge and skill in valuation to develop an independent estimate of the fair value of each investment position by: (i) assessing the stated security coupon rate, maturity, yield, and prepayment speed, and comparing to the fair value used by the Company; (ii) comparing the Company’s fair value estimate of mortgage-backed securities to recent available market transactions, if available. |
/s/ BDO USA, LLP
Certified Public Accountants
We have served as the Company's auditor since 2011.
BALANCE SHEETS | ||||||
($ in thousands, except per share data) |
December 31, 2023 | December 31, 2022 | |||||||
ASSETS: | ||||||||
Mortgage-backed securities, at fair value (includes pledged assets of $3,885,554 and $3,512,640, respectively) | $ | 3,894,012 | $ | 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 $79,680 at December 31, 2023) | 148,820 | - | ||||||
Cash and cash equivalents | 171,893 | 205,651 | ||||||
Restricted cash | 28,396 | 31,568 | ||||||
Accrued interest receivable | 14,951 | 11,519 | ||||||
Derivative assets | 6,420 | 40,172 | ||||||
Other assets | 455 | 442 | ||||||
Total Assets | $ | 4,264,947 | $ | 3,865,736 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
LIABILITIES: | ||||||||
Repurchase agreements | $ | 3,705,649 | $ | 3,378,445 | ||||
Payable for investment securities and TBA transactions | 60,454 | - | ||||||
Dividends payable | 6,222 | 5,908 | ||||||
Derivative liabilities | 12,694 | 7,161 | ||||||
Accrued interest payable | 7,939 | 9,209 | ||||||
Due to affiliates | 1,013 | 1,131 | ||||||
Other liabilities | 1,031 | 25,119 | ||||||
Total Liabilities | 3,795,002 | 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 December 31, 2023 and December 31, 2022 | - | - | ||||||
Common Stock, $0.01 par value; 100,000,000 shares authorized, 51,636,074 shares issued and outstanding as of December 31, 2023 and 36,764,983 shares issued and outstanding as of December 31, 2022 | 516 | 368 | ||||||
Additional paid-in capital | 849,845 | 779,602 | ||||||
Accumulated deficit | (380,433 | ) | (341,207 | ) | ||||
Accumulated other comprehensive income | 17 | - | ||||||
Total Stockholders' Equity | 469,945 | 438,763 | ||||||
Total Liabilities and Stockholders' Equity | $ | 4,264,947 | $ | 3,865,736 |
See Notes to Financial Statements |
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | |||||||
For the Years Ended December 31, 2023, 2022 and 2021 | |||||||
($ in thousands, except per share data) |
2023 | 2022 | 2021 | ||||||||||
Interest income | $ | 177,569 | $ | 144,633 | $ | 134,700 | ||||||
Interest expense | (201,918 | ) | (61,708 | ) | (7,090 | ) | ||||||
Net interest (expense) income | (24,349 | ) | 82,925 | 127,610 | ||||||||
Realized losses on mortgage-backed securities | (22,642 | ) | (133,695 | ) | (5,542 | ) | ||||||
Unrealized losses on mortgage-backed securities and U.S. Treasury securities | (18,941 | ) | (642,710 | ) | (198,454 | ) | ||||||
Gains on derivative instruments | 45,237 | 452,476 | 26,492 | |||||||||
Net portfolio loss | (20,695 | ) | (241,004 | ) | (49,894 | ) | ||||||
Expenses: | ||||||||||||
Management fees | 10,491 | 10,447 | 8,156 | |||||||||
Allocated overhead | 2,389 | 2,042 | 1,632 | |||||||||
Incentive compensation | 1,419 | 957 | 1,132 | |||||||||
Directors' fees and liability insurance | 1,322 | 1,251 | 1,169 | |||||||||
Audit, legal and other professional fees | 1,495 | 1,143 | 1,112 | |||||||||
Direct REIT operating expenses | 715 | 831 | 1,090 | |||||||||
Other administrative | 700 | 778 | 575 | |||||||||
Total expenses | 18,531 | 17,449 | 14,866 | |||||||||
Net loss | $ | (39,226 | ) | $ | (258,453 | ) | $ | (64,760 | ) | |||
Unrealized gains on U.S. Treasury securities measured at fair value through other comprehensive net loss | $ | 17 | $ | - | $ | - | ||||||
Comprehensive net loss | $ | (39,209 | ) | $ | (258,453 | ) | $ | (64,760 | ) | |||
Basic and diluted net loss per share | $ | (0.89 | ) | $ | (6.90 | ) | $ | (2.67 | ) | |||
Weighted Average Shares Outstanding | 44,649,039 | 37,464,671 | 24,228,865 |
See Notes to Financial Statements |
STATEMENTS OF STOCKHOLDERS' EQUITY | |||||||||||
For the Years Ended December 31, 2023, 2022 and 2021 | |||||||||||
(in thousands) |
Additional | Retained | Other | ||||||||||||||||||||||
Common Stock | Paid-in | Earnings | Comprehensive | |||||||||||||||||||||
Shares | Par Value | Capital | (Deficit) | Income | Total | |||||||||||||||||||
Balances, January 1, 2021 | 15,215 | $ | 152 | $ | 433,133 | $ | (17,994 | ) | $ | - | $ | 415,291 | ||||||||||||
Net loss | - | - | - | (64,760 | ) | - | (64,760 | ) | ||||||||||||||||
Cash dividends declared | - | - | (97,601 | ) | - | - | (97,601 | ) | ||||||||||||||||
Issuance of common stock pursuant to public offerings, net | 20,166 | 202 | 513,857 | - | - | 514,059 | ||||||||||||||||||
Stock based awards and amortization | 18 | - | 1,108 | - | - | 1,108 | ||||||||||||||||||
Shares repurchased and retired | - | - | - | - | - | - | ||||||||||||||||||
Balances, December 31, 2021 | 35,399 | 354 | 850,497 | (82,754 | ) | - | 768,097 | |||||||||||||||||
Net loss | - | - | - | (258,453 | ) | - | (258,453 | ) | ||||||||||||||||
Cash dividends declared | - | - | (87,906 | ) | - | - | (87,906 | ) | ||||||||||||||||
Issuance of common stock pursuant to public offerings, net | 3,885 | 38 | 40,542 | - | - | 40,580 | ||||||||||||||||||
Stock based awards and amortization | 30 | - | 1,055 | - | - | 1,055 | ||||||||||||||||||
Shares repurchased and retired | (2,549 | ) | (24 | ) | (24,586 | ) | - | - | (24,610 | ) | ||||||||||||||
Balances, December 31, 2022 | 36,765 | 368 | 779,602 | (341,207 | ) | - | 438,763 | |||||||||||||||||
Net loss | - | - | - | (39,226 | ) | - | (39,226 | ) | ||||||||||||||||
Unrealized gain on available-for-sale securities | - | - | - | - | 17 | 17 | ||||||||||||||||||
Cash dividends declared | - | - | (81,127 | ) | - | - | (81,127 | ) | ||||||||||||||||
Issuance of common stock pursuant to public offerings, net | 15,880 | 157 | 159,281 | - | - | 159,438 | ||||||||||||||||||
Stock based awards and amortization | 64 | 1 | 1,503 | - | - | 1,504 | ||||||||||||||||||
Shares repurchased and retired | (1,073 | ) | (10 | ) | (9,414 | ) | - | - | (9,424 | ) | ||||||||||||||
Balances, December 31, 2023 | 51,636 | $ | 516 | $ | 849,845 | $ | (380,433 | ) | $ | 17 | $ | 469,945 |
See Notes to Financial Statements |
STATEMENTS OF CASH FLOWS | |||||||
For the Years Ended December 31, 2023, 2022 and 2021 | |||||||
($ in thousands) |
2023 | 2022 | 2021 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Net loss | $ | (39,226 | ) | $ | (258,453 | ) | $ | (64,760 | ) | |||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||
Stock based compensation | 1,198 | 685 | 772 | |||||||||
Discount accretion on U.S. Treasury Bills | (1,875 | ) | - | - | ||||||||
Realized losses on mortgage-backed securities | 22,642 | 133,695 | 5,542 | |||||||||
Unrealized losses on mortgage-backed securities and U.S. Treasury securities | 18,941 | 642,710 | 198,454 | |||||||||
Realized and unrealized losses (gains) on derivative instruments | 10,616 | (245,421 | ) | (35,350 | ) | |||||||
Changes in operating assets and liabilities: | ||||||||||||
Accrued interest receivable | (3,432 | ) | 7,340 | (9,138 | ) | |||||||
Other assets | (7 | ) | (128 | ) | 196 | |||||||
Accrued interest payable | (1,270 | ) | 8,421 | (369 | ) | |||||||
Other liabilities | 534 | 454 | 663 | |||||||||
Due to affiliates | (118 | ) | 69 | 430 | ||||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES | 8,003 | 289,372 | 96,440 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
From mortgage-backed securities investments: | ||||||||||||
Purchases | (1,521,070 | ) | (1,004,526 | ) | (6,430,725 | ) | ||||||
Sales and maturities | 797,633 | 2,759,919 | 2,851,708 | |||||||||
Principal repayments | 326,720 | 440,094 | 591,086 | |||||||||
Purchases of U.S. Treasury securities | (97,787 | ) | - | (37,440 | ) | |||||||
Maturity of U.S. Treasury securities | 37,500 | - | - | |||||||||
Net proceeds from derivative instruments | 15,940 | 245,335 | 8,571 | |||||||||
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES | (441,064 | ) | 2,440,822 | (3,016,800 | ) | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Proceeds from repurchase agreements | 37,761,388 | 40,040,024 | 35,950,241 | |||||||||
Principal payments on repurchase agreements | (37,434,184 | ) | (42,905,685 | ) | (33,301,721 | ) | ||||||
Cash dividends paid | (80,754 | ) | (93,494 | ) | (90,984 | ) | ||||||
Proceeds from issuance of common stock, net of issuance costs | 159,438 | 40,580 | 514,059 | |||||||||
Common stock repurchases, including shares withheld from employee stock awards for payment of taxes | (9,757 | ) | (24,842 | ) | (299 | ) | ||||||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | 396,131 | (2,943,417 | ) | 3,071,296 | ||||||||
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | (36,930 | ) | (213,223 | ) | 150,936 | |||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the period | 237,219 | 450,442 | 299,506 | |||||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the period | $ | 200,289 | $ | 237,219 | $ | 450,442 | ||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||||
Cash paid during the period for: | ||||||||||||
Interest | $ | 203,188 | $ | 53,288 | $ | 7,458 |
See Notes to Financial Statements |
NOTES TO FINANCIAL STATEMENTS
December 31, 2021
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Description
Orchid Island Capital, Inc. (“Orchid” or the “Company”), was incorporated in Maryland on August 17, 2010 for the purpose of $
On August 2, 2017, 4, 2020, Orchid entered into an equity distribution agreement (the “August
On July 30, 2019, January 20, 2021, Orchid entered into an underwriting agreement (the “2019 “January 2021 Underwriting
On January 23, 2020, March 2, 2021, Orchid entered into an underwriting agreement (the “March 2021 Underwriting Agreement”) with J.P. Morgan, relating to the offer and sale of 1,600,000 shares of the Company’s common stock. J.P. Morgan purchased the shares of the Company’s common stock from the Company pursuant to the March 2021 Underwriting Agreement at $27.25 per share. In addition, the Company granted J.P. Morgan a 30-day option to purchase up to an additional 240,000 shares of the Company’s common stock on the same terms and conditions, which J.P. Morgan exercised in full on March 3, 2021. The closing of the offering of 1,840,000 shares of the Company’s common stock occurred on March 5, 2021, with proceeds to the Company of approximately $50.0 million, after deduction of underwriting discounts and commissions and other estimated offering expenses.
On June 22, 2021, Orchid entered into an equity distribution agreement (the
“On August 4, 2020, October 29, 2021, Orchid entered into an equity distribution agreement (the “August
On March 2, 2021, Orchid entered into an underwriting agreement (the “March 2021 UnderwritingAgreement”) with J.P. Morgan,
Basis of
Presentationand Use ofEstimatesThe accompanying
financialstatementshave beenpreparedin accordancewith accountingprinciplesgenerallyacceptedin theReclassification of Comparative Period Information
The Company previously reported $3.3 million and $0.4 million of commissions, fees and other expenses associated with its derivative holdings for the years ended December 31, 2022 and 2021, respectively, in "Direct REIT operating expenses" in the statements of comprehensive income (loss). These expenses have been reclassified as part of "Gains (losses) on derivative and other hedging instruments" to conform with the presentation in the current period.
Common Stock Reverse Split
On August 30, 2022, the Company effected a 1-for-5 reverse stock split of its common stock and proportionately decreased the number of authorized shares of common stock. All share, per share, deferred stock unit ("DSU") and performance unit ("PU") information has been retroactively adjusted to reflect the reverse split. The shares of common stock retain a par value of $0.01 per share.
Variable Interest Entities (VIEs)
The Company obtains interests in VIEs through ourits investments in mortgage-backed securities.
Cash 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) | ||||||||
December 31, 2023 | December 31, 2022 | |||||||
Cash and cash equivalents | $ | 171,893 | $ | 205,651 | ||||
Restricted cash | 28,396 | 31,568 | ||||||
Total cash, cash equivalents and restricted cash | $ | 200,289 | $ | 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 collateralizedmortgageThe 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 RMBS and U.S. Treasury Notes
U.S. Treasury Bills are zero-coupon bonds that are purchased at a discount to the par amount. This discount is accreted into income over the life of the investment and reported in the statements of comprehensive income (loss) 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. The Company evaluated securities for allowance for credit losses and since all of the Company's available-for-sale securities designated investments consist of U.S. Treasury securities, which are backed by the full faith and credit of the U.S. government, the Company does not record an allowance for credit losses.
Derivative Financial 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 disclosed,either inthe bodyof the financialRepurchase
AgreementsThe Company
finances theacquisitionof the majorityof its RMBSthrough theuse of repurchaseagreementsunder masterManager Compensation
The Company
Earnings
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 elected and is organized and operated so as to qualify to be taxed as a REIT
under the Code.REITs are generally notOrchid 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 2020-04 “Reference2020-04 “Reference Rate Reform (Topic 848)848): Facilitation of the Effects of Reference Rate
In January 2021, the FASB issued ASU 2021-01 “Reference2021-01 “Reference Rate Reform (Topic 848)848).
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) | ||||||||||||||||||||||||
December 31, 2023 | December 31, 2022 | |||||||||||||||||||||||
Par Value | Cost (1) | Fair Value | Par Value | Cost (1) | Fair Value | |||||||||||||||||||
Pass-Through RMBS Certificates: | ||||||||||||||||||||||||
Fixed-rate Mortgages | $ | 4,051,145 | $ | 4,198,424 | $ | 3,877,082 | $ | 3,848,367 | $ | 4,088,165 | $ | 3,519,906 | ||||||||||||
Total Pass-Through Certificates | 4,051,145 | 4,198,424 | 3,877,082 | 3,848,367 | 4,088,165 | 3,519,906 | ||||||||||||||||||
Structured RMBS Certificates: | ||||||||||||||||||||||||
Interest-Only Securities (2) | n/a | 19,839 | 16,572 | n/a | 22,395 | 19,669 | ||||||||||||||||||
Inverse Interest-Only Securities (3) | n/a | 1,825 | 358 | n/a | 2,147 | 427 | ||||||||||||||||||
Total Structured RMBS Certificates | - | 21,664 | 16,930 | - | 24,542 | 20,096 | ||||||||||||||||||
Total | $ | 4,051,145 | $ | 4,220,088 | $ | 3,894,012 | $ | 3,848,367 | $ | 4,112,707 | $ | 3,540,002 |
(1) | The cost information in the table above represents the aggregate current par value, multiplied by the purchase price of each security in the portfolio. |
(2) | The notional balance for the interest-only securities portfolio was $98.6 million and $111.5 million as of December 31, 2023 and 2022, respectively. |
(3) | The notional balance for the inverse interest-only securities portfolio was $26.8 million and $31.5 million as of December 31, 2023 and 2022, respectively. |
As of December31, 2021,2022, the Company
The following
table is asummary of(in thousands) | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
Proceeds from sales of RMBS | $ | 797,633 | $ | 2,759,919 | $ | 2,851,708 | ||||||
Carrying value of RMBS sold | (820,275 | ) | (2,893,614 | ) | (2,857,250 | ) | ||||||
Net loss on sales of RMBS | $ | (22,642 | ) | $ | (133,695 | ) | $ | (5,542 | ) | |||
Gross gain on sales of RMBS | $ | - | $ | 2,705 | $ | 7,930 | ||||||
Gross loss on sales of RMBS | (22,642 | ) | (136,400 | ) | (13,472 | ) | ||||||
Net loss on sales of RMBS | $ | (22,642 | ) | $ | (133,695 | ) | $ | (5,542 | ) |
NOTE 3. U.S. TREASURY SECURITIES, AVAILABLE-FOR-SALE
As of December31,
The amortized cost, gross unrealized holding gains and losses, and fair value of RMBS
(in thousands) | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
U.S. Treasury Bill, 1/2/2024 Maturity | $ | 49,671 | $ | 9 | $ | - | $ | 49,680 | ||||||||
U.S. Treasury Bill, 2/15/2024 Maturity | 49,992 | 8 | - | 50,000 | ||||||||||||
U.S. Treasury Bill, 4/30/2024 Maturity | 49,140 | - | - | 49,140 | ||||||||||||
$ | 148,803 | $ | 17 | $ | - | $ | 148,820 |
The Company had no securities classified as available-for-sale that were in an unrealized loss on salesposition as of RMBS
NOTE 4.REPURCHASE AGREEMENTS
The Company
pledges certainof its RMBSas collateralunder repurchaseagreementswith financialinstitutions.Interestrates areAs of December
($ in thousands) | ||||||||||||||||||||
OVERNIGHT | BETWEEN 2 | BETWEEN 31 | GREATER | |||||||||||||||||
(1 DAY OR | AND | AND | THAN | |||||||||||||||||
LESS) | 30 DAYS | 90 DAYS | 90 DAYS | TOTAL | ||||||||||||||||
December 31, 2023 | ||||||||||||||||||||
Fair market value of securities pledged, including accrued interest receivable | $ | - | $ | 3,125,315 | $ | 710,055 | $ | 65,106 | $ | 3,900,476 | ||||||||||
Repurchase agreement liabilities associated with these securities | $ | - | $ | 2,966,650 | $ | 674,696 | $ | 64,303 | $ | 3,705,649 | ||||||||||
Net weighted average borrowing rate | - | 5.55 | % | 5.54 | % | 5.46 | % | 5.55 | % | |||||||||||
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 | % |
In addition, cash pledged to counterparties as collateral for repurchase agreements was approximately $13.3 million as of securities pledged, including
If, during
the termof a repurchaseagreement,a lenderfiles forbankruptcy, theCompany mightexperiencedifficulty recoveringitsNOTE 4.5. DERIVATIVE AND OTHER HEDGING INSTRUMENTS
The table
below summarizesfair valueinformationabout(in thousands) | |||||||||
Derivative and Other Hedging Instruments | Balance Sheet Location | December 31, 2023 | December 31, 2022 | ||||||
Assets | |||||||||
Interest rate swaps | Derivative assets, at fair value | $ | 6,348 | $ | 4,983 | ||||
Payer swaptions (long positions) | Derivative assets, at fair value | 72 | 33,398 | ||||||
Interest rate caps | Derivative assets, at fair value | - | 1,119 | ||||||
TBA securities | Derivative assets, at fair value | - | 672 | ||||||
Total derivative assets, at fair value | $ | 6,420 | $ | 40,172 | |||||
Liabilities | |||||||||
Interest rate swaps | Derivative liabilities, at fair value | $ | - | $ | - | ||||
Payer swaptions (short positions) | Derivative liabilities, at fair value | - | 5,982 | ||||||
TBA securities | Derivative liabilities, at fair value | 12,694 | 1,179 | ||||||
Total derivative liabilities, at fair value | $ | 12,694 | $ | 7,161 | |||||
Margin Balances Posted to (from) Counterparties | |||||||||
Futures contracts | Restricted cash | $ | 4,096 | $ | 16,493 | ||||
TBA securities | Restricted cash | 23,720 | 1,734 | ||||||
Interest rate swaption contracts | Restricted cash | 580 | - | ||||||
TBA securities | Other liabilities | - | (532 | ) | |||||
Interest rate swaption contracts | Other liabilities | - | (12,489 | ) | |||||
Total margin balances on derivative contracts | $ | 28,396 | $ | 5,206 |
T-Note and SOFR futures
are cashsettled futurescontractson an interestrate, withgains andlosses creditedor($ in thousands) | ||||||||||||||||
December 31, 2023 | ||||||||||||||||
Average | Weighted | Weighted | ||||||||||||||
Contract | Average | Average | ||||||||||||||
Notional | Entry | Effective | Open | |||||||||||||
Expiration Year | Amount | Rate | Rate | Equity(1) | ||||||||||||
U.S. Treasury Note Futures Contracts (Short Positions)(2) | ||||||||||||||||
March 2024 5-year T-Note futures (Mar 2024 - Mar 2029 Hedge Period) | $ | 421,500 | 4.36 | % | 4.04 | % | $ | (9,936 | ) | |||||||
March 2024 10-year Ultra futures (Mar 2024 - Mar 2034 Hedge Period) | 320,000 | 4.38 | % | 4.39 | % | $ | (11,393 | ) | ||||||||
SOFR Futures Contracts (Short Positions) | ||||||||||||||||
June 2024 3-Month SOFR futures (Mar 2024 - Jun 2024 Hedge Period) | $ | 25,000 | 5.08 | % | 4.99 | % | $ | (24 | ) | |||||||
September 2024 3-Month SOFR futures (Jun 2024 - Sep 2024 Hedge Period) | 25,000 | 4.67 | % | 4.52 | % | $ | (39 | ) | ||||||||
December 2024 3-Month SOFR futures (Sep 2024 - Dec 2024 Hedge Period) | 25,000 | 4.27 | % | 4.10 | % | $ | (44 | ) | ||||||||
March 2025 3-Month SOFR futures (Dec 2024 - Mar 2025 Hedge Period) | 25,000 | 3.90 | % | 3.73 | % | $ | (43 | ) | ||||||||
June 2025 3-Month SOFR futures (Mar 2025 - Jun 2025 Hedge Period) | 25,000 | 3.58 | % | 3.42 | % | $ | (41 | ) | ||||||||
September 2025 3-Month SOFR futures (Jun 2025 - Sep 2025 Hedge Period) | 25,000 | 3.37 | % | 3.21 | % | $ | (39 | ) | ||||||||
December 2025 3-Month SOFR futures (Sep 2025 - Dec 2025 Hedge Period) | 25,000 | 3.25 | % | 3.10 | % | $ | (37 | ) | ||||||||
March 2026 3-Month SOFR futures (Dec 2025 - Mar 2026 Hedge Period) | 25,000 | 3.21 | % | 3.07 | % | $ | (35 | ) |
($ in thousands) | ||||||||||||||||
December 31, 2022 | ||||||||||||||||
Average | Weighted | Weighted | ||||||||||||||
Contract | Average | Average | ||||||||||||||
Notional | Entry | Effective | Open | |||||||||||||
Expiration Year | Amount | Rate | Rate | Equity(1) | ||||||||||||
U.S. 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 $108.77 at December 31, 2023 and $107.93 at December 31, 2022. The contract values of the short positions were $458.5 million and $810.0 million at December 31, 2023 and 2022, respectively. 10-Year Ultra futures contracts were valued at price of $112.89 at December 31, 2023 and $118.28 at December 31, 2022. The contract value of the short positions was $361.3 million and $206.4 million at December 31, 2023 and 2022, respectively. |
Under its interest rate swap agreements, the cumulative gains (losses) recorded on open
($ in thousands) | ||||||||||||||||
Average | ||||||||||||||||
Fixed | Average | Average | ||||||||||||||
Notional | Pay | Receive | Maturity | |||||||||||||
Amount | Rate | Rate | (Years) | |||||||||||||
December 31, 2023 | ||||||||||||||||
Expiration > 1 to ≤ 5 years | $ | 500,000 | 0.84 | % | 5.64 | % | 2.7 | |||||||||
Expiration > 5 years | 1,826,500 | 2.62 | % | 5.40 | % | 6.8 | ||||||||||
$ | 2,326,500 | 2.24 | % | 5.45 | % | 5.9 | ||||||||||
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 December 31, 2020
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 ≤ 5 years
The table
below presentsinformationrelated tothe($ in thousands) | |||||||||||||||||
Net | |||||||||||||||||
Strike | Estimated | ||||||||||||||||
Notional | Swap | Curve | Fair | ||||||||||||||
Expiration | Amount | Cost | Rate | Spread | Value | ||||||||||||
February 8, 2024 | $ | 200,000 | $ | 1,450 | 0.09 | % | 2Y10Y | $ | 1,119 |
The table below presents information related to the Company’s interest rate swaption positions at December 31, 2023 and 2022.
($ in thousands) | |||||||||||||||||||||||||
Option | Underlying Swap | ||||||||||||||||||||||||
Weighted | Weighted | ||||||||||||||||||||||||
Average | Average | Average | Average | ||||||||||||||||||||||
Fair | Months to | Notional | Fixed | Adjustable | Term | ||||||||||||||||||||
Expiration | Cost | Value | Expiration | Amount | Rate | Rate | (Years) | ||||||||||||||||||
December 31, 2023 | |||||||||||||||||||||||||
Payer Swaptions (long positions) | |||||||||||||||||||||||||
≤ 1 year | $ | 1,619 | $ | 72 | 5.0 | 800,000 | 5.40 | % | SOFR | 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 | |||||||||||||||
> 1 year ≤ 2 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 | % | SOFR | 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 ourthe Company's contracts to purchase and sell TBA
($ in thousands) | ||||||||||||||||
Notional | Net | |||||||||||||||
Amount | Cost | Market | Carrying | |||||||||||||
Long (Short)(1) | Basis(2) | Value(3) | Value(4) | |||||||||||||
December 31, 2023 | ||||||||||||||||
30-Year TBA securities: | ||||||||||||||||
3.0% | $ | (70,700 | ) | $ | (59,278 | ) | $ | (62,647 | ) | $ | (3,369 | ) | ||||
5.0% | (250,000 | ) | (242,725 | ) | (247,657 | ) | (4,932 | ) | ||||||||
5.5% | (325,000 | ) | (322,410 | ) | (326,803 | ) | (4,393 | ) | ||||||||
Total | $ | (645,700 | ) | $ | (624,413 | ) | $ | (637,107 | ) | $ | (12,694 | ) | ||||
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 (loss) for
(in thousands) | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
Futures contracts (short positions) | $ | 32,650 | 206,907 | (1,026 | ) | |||||||
Interest rate swaps | 19,657 | 167,641 | 23,398 | |||||||||
Payer swaptions (long positions) | (8,734 | ) | 152,365 | (2,580 | ) | |||||||
Payer swaptions (short positions) | 4,113 | (81,050 | ) | 9,062 | ||||||||
Interest rate caps | (219 | ) | 919 | - | ||||||||
Interest rate floors (long positions) | 1,785 | - | 2,765 | |||||||||
Interest rate floors (short positions) | (525 | ) | - | - | ||||||||
TBA securities (short positions) | 1,370 | 4,494 | 3,432 | |||||||||
TBA securities (long positions) | (4,860 | ) | 1,200 | (8,559 | ) | |||||||
Total | $ | 45,237 | $ | 452,476 | $ | 26,492 |
Credit Risk-Related Contingent Features
The
useofderivativesandotherhedginginstrumentscreatesexposuretocreditriskrelatingtopotentiallossesthatcouldbeIt
istheCompany'spolicynottooffsetassetsandliabilitiesassociatedwithopenderivativecontracts.However,NOTE 5.6. PLEDGED ASSETS
Assets Pledged to Counterparties
The table below summarizes the Company's assets pledged securities
(in thousands) | ||||||||||||||||||||||||
December 31, 2023 | December 31, 2022 | |||||||||||||||||||||||
Repurchase | Derivative | Repurchase | Derivative | |||||||||||||||||||||
Assets Pledged to Counterparties | Agreements | Agreements | Total | Agreements | Agreements | Total | ||||||||||||||||||
PT RMBS - fair value | $ | 3,868,624 | $ | - | $ | 3,868,624 | $ | 3,492,544 | $ | - | $ | 3,492,544 | ||||||||||||
Structured RMBS - fair value | 16,930 | - | 16,930 | 20,096 | - | 20,096 | ||||||||||||||||||
U.S. Treasury securities - fair value | - | 79,680 | 79,680 | - | 36,382 | 36,382 | ||||||||||||||||||
Accrued interest on pledged securities | 14,922 | - | 14,922 | 11,419 | 16 | 11,435 | ||||||||||||||||||
Restricted cash | - | 28,396 | 28,396 | 13,341 | 18,227 | 31,568 | ||||||||||||||||||
Total | $ | 3,900,476 | $ | 108,076 | $ | 4,008,552 | $ | 3,537,400 | $ | 54,625 | $ | 3,592,025 |
Assets Pledged from Counterparties
The table below summarizes assets pledged to the Company from counterparties under repurchase agreements and derivative agreements as of December 31, 2020
(in thousands) | ||||||||||||||||||||||||
December 31, 2023 | December 31, 2022 | |||||||||||||||||||||||
Repurchase | Derivative | Repurchase | Derivative | |||||||||||||||||||||
Assets Pledged to Orchid | Agreements | Agreements | Total | Agreements | Agreements | Total | ||||||||||||||||||
Cash | $ | 42,179 | $ | - | $ | 42,179 | $ | 3,075 | $ | 13,021 | $ | 16,096 | ||||||||||||
U.S. Treasury securities - fair value | 10,429 | - | 10,429 | 197 | - | 197 | ||||||||||||||||||
Total | $ | 52,608 | $ | - | $ | 52,608 | $ | 3,272 | $ | 13,021 | $ | 16,293 |
U.S. Treasury securities - fair value
NOTE 6.7. OFFSETTING ASSETS AND LIABILITIES
The Company’s
derivativeagreementsand repurchaseagreementsare subjectto underlyingagreementswith masternetting orThe following table presents information regarding those assets and liabilities subject to such arrangements as
(in thousands) | ||||||||||||||||||||||||
Offsetting of Assets | ||||||||||||||||||||||||
Net Amount | Gross Amount Not | |||||||||||||||||||||||
Gross | Gross | of Assets | Offset in the Balance Sheet | |||||||||||||||||||||
Amount | Amount | Presented | Financial | |||||||||||||||||||||
of | Offset in the | in the | Instruments | Cash | ||||||||||||||||||||
Recognized | Balance | Balance | Received as | Received as | Net | |||||||||||||||||||
Assets | Sheet | Sheet | Collateral | Collateral | Amount | |||||||||||||||||||
December 31, 2023 | ||||||||||||||||||||||||
Interest rate swaps | $ | 6,348 | $ | - | $ | 6,348 | $ | - | $ | - | $ | 6,348 | ||||||||||||
Interest rate swaptions | 72 | - | 72 | - | - | 72 | ||||||||||||||||||
$ | 6,420 | $ | - | $ | 6,420 | $ | - | $ | - | $ | 6,420 | |||||||||||||
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 | ||||||||||||||||||||||||
Net Amount | Gross Amount Not | |||||||||||||||||||||||
Gross | Gross | of Liabilities | Offset in the Balance Sheet | |||||||||||||||||||||
Amount | Amount | Presented | Financial | |||||||||||||||||||||
of | Offset in the | in the | Instruments | |||||||||||||||||||||
Recognized | Balance | Balance | Posted as | Cash Posted | Net | |||||||||||||||||||
Liabilities | Sheet | Sheet | Collateral | Collateral | Amount | |||||||||||||||||||
December 31, 2023 | ||||||||||||||||||||||||
Repurchase Agreements | $ | 3,705,649 | $ | - | $ | 3,705,649 | $ | (3,705,649 | ) | $ | - | $ | - | |||||||||||
TBA securities | 12,694 | - | 12,694 | - | (12,694 | ) | - | |||||||||||||||||
$ | 3,718,343 | $ | - | $ | 3,718,343 | $ | (3,705,649 | ) | $ | (12,694 | ) | $ | - | |||||||||||
December 31, 2022 | ||||||||||||||||||||||||
Repurchase Agreements | $ | 3,378,445 | $ | - | $ | 3,378,445 | $ | (3,365,104 | ) | $ | (13,341 | ) | $ | - | ||||||||||
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 disclosed for collateral received by or posted to the same counterparty up to and not exceeding the net amount of the asset or liability presented in the balance sheets. The fair value of the actual collateral received by or posted to the same counterparty typically exceeds the amounts presented. See Note 6 for a discussion of collateral posted or received against or for repurchase obligations and derivative and other hedging instruments.
NOTE 8. CAPITAL STOCK
Reverse Stock Split
On August 30, 2022, the Company effected a 1-for-5 reverse stock split of which have eitherits common stock and proportionately decreased the number of authorized shares of common stock. All share, per share, DSU and PU information has been terminated
Common Stock Issuances
During 2023 and 2022, the Company completed the following public offerings of shares of its common stock.
($ in thousands, except per share amounts) | |||||||||||||
Weighted | |||||||||||||
Average | |||||||||||||
Price | |||||||||||||
Received | Net | ||||||||||||
Type of Offering | Period | Per Share(1) | Shares | Proceeds(2) | |||||||||
2023 | |||||||||||||
At the Market Offering Program(3) | First Quarter | $ | 11.77 | 2,690,000 | $ | 31,657 | |||||||
At the Market Offering Program(3) | Second Quarter | 9.95 | 4,757,953 | 47,355 | |||||||||
At the Market Offering Program(3) | Third Quarter | 9.54 | 8,432,086 | 80,426 | |||||||||
At the Market Offering Program(3) | Fourth Quarter | - | - | - | |||||||||
15,880,039 | $ | 159,438 | |||||||||||
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) | As of December 31, 2023, the Company had 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 theOn October 12, 2022, the Board of Directors approved an increase in the number of shares of the Company’s common stock available in the stock repurchase program for up to an additional 4,300,000 shares, bringing the remaining authorization under the stock repurchase program to 6,183,601 shares, representing approximately 18% of the Company’s then outstanding shares of common stock.
As part of the stock repurchase program,
shares may be purchased in open market transactions,From the inception of the stock repurchase program through December 31, 2021,2023, the
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 | 1.800 | 81,127 | ||||||
2024 YTD(1) | 0.240 | 12,362 | ||||||
Totals | $ | 66.690 | $ | 620,959 |
(1) | On January 10, 2024, the Company declared a dividend of $0.12 per share to be paid on February 27, 2024. On February 14, 2024, the Company declared a dividend of $0.12 per share to be paid on March 26, 2024. The effect of these dividends are included in the table above, but are not reflected in the Company’s financial statements as of December 31, 2023. |
NOTE 8.9.STOCK INCENTIVE PLAN
In 2021, the Company’s Board of Directors adopted, and the stockholders approved, the
Orchid Island Capital, Inc. 2021 EquityPerformance Units
The Company has issued, and may in the future issue additional performance units
The following table presents information related to Performance UnitsPUs outstanding during
($ in thousands, except per share data) | ||||||||||||||||
2023 | 2022 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Grant Date | Grant Date | |||||||||||||||
Shares | Fair Value | Shares | Fair Value | |||||||||||||
Unvested, beginning of period | 36,920 | $ | 20.57 | 26,645 | $ | 29.40 | ||||||||||
Granted | 76,696 | 10.82 | 35,114 | 16.55 | ||||||||||||
Forfeited | - | - | (14,980 | ) | 21.04 | |||||||||||
Vested and issued | (17,848 | ) | 22.09 | (9,859 | ) | 29.40 | ||||||||||
Unvested, end of period | 95,768 | $ | 12.48 | 36,920 | $ | 20.57 | ||||||||||
Compensation expense during period | $ | 590 | $ | 376 | ||||||||||||
Unrecognized compensation expense, end of period | $ | 597 | $ | 357 | ||||||||||||
Intrinsic value, end of period | $ | 807 | $ | 388 | ||||||||||||
Weighted-average remaining vesting term (in years) | 1.2 | 1.2 |
The number of shares of common stock issuable upon the vesting of the remaining
outstandingStock Awards
The Company has issued, and may in the future issue additional, immediately vested
common stock under the Incentive Plans to($ in thousands, except per share data) | ||||||||
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(1) | $ | 830 | $ | 581 |
(1) | The awards issued during the year ended December 31, 2023 were granted with respect to service performed in 2022. Approximately $600,000 of compensation expense related to the 2023 awards was accrued and recognized in 2022. The awards issued during the year ended December 31, 2022 were granted with respect to service performed in 2021. Approximately $600,000 of compensation expense related to the 2022 awards was accrued and recognized in 2021. |
Deferred Stock Units
Non-employee directors receive a portion of their compensation in the
form ofThe following table presents information related to the DSUs outstanding during
the years ended December 31,($ in thousands, except per share data) | ||||||||||||||||
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 | 42,507 | 9.81 | 25,602 | 12.89 | ||||||||||||
Outstanding, end of period | 96,704 | $ | 15.69 | 54,197 | $ | 20.29 | ||||||||||
Compensation expense during period | $ | 378 | $ | 328 | ||||||||||||
Intrinsic value, end of period | $ | 815 | $ | 569 |
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 11.INCOME TAXES
The Company
will generallynot be subjectto U.S. federalincome taxon its REITtaxable incometo the extentthat it distributesitsREIT taxable
income (loss)is computedin accordancewith theCode, whichis differentthan the Company’sfinancialstatementnetAs of December31, 2021,2023, we had distributed
NOTE 11.12.EARNINGS PER SHARE (EPS)
The Company
had dividendeligibleThe table below reconciles the numerator and denominator of EPS for the years ended December 31, 2023, 2022 and 2021.
(in thousands, except per-share information) | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
Numerator for basic and diluted EPS per share of common stock: | ||||||||||||
Net loss - Basic and diluted | $ | (39,226 | ) | $ | (258,453 | ) | $ | (64,760 | ) | |||
Weighted average shares of common stock: | ||||||||||||
Shares of common stock outstanding at the balance sheet date | 51,636 | 36,765 | 35,399 | |||||||||
Effect of weighting | (6,987 | ) | 700 | (11,170 | ) | |||||||
Weighted average shares-basic and diluted | 44,649 | 37,465 | 24,229 | |||||||||
Net loss per common share: | ||||||||||||
Basic and diluted | $ | (0.89 | ) | $ | (6.90 | ) | $ | (2.67 | ) | |||
Anti-dilutive incentive shares not included in calculation. | 192 | 91 | 55 |
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 TBAsecuritieswere recordedat fair valueon a recurringbasis duringtheThe estimated fair value of cash and cash equivalents, restricted cash, accrued interest receivable, receivable for securities sold, other assets, due to affiliates, repurchase agreements, payable for unsettled securities purchased, accrued interest payable and other liabilities generally approximates their carrying values due to the short-term nature of these financial instruments as of December 31, 2023 and 2022. The Company estimates the fair value of the cash and cash equivalents using Level 1 inputs, and the accrued interest receivable, receivable for securities sold, other assets, due to affiliates, repurchase agreements, payable for unsettled securities purchased, accrued interest payable and other liabilities using Level 2 inputs.
The following
table presentsfinancialassets (liabilities)measuredat fair valueon a recurringbasis as ofDecember31,(in thousands) | ||||||||||||
Quoted Prices | ||||||||||||
in Active | Significant | |||||||||||
Markets for | Other | Significant | ||||||||||
Identical | Observable | Unobservable | ||||||||||
Assets | Inputs | Inputs | ||||||||||
(Level 1) | (Level 2) | (Level 3) | ||||||||||
December 31, 2023 | ||||||||||||
Mortgage-backed securities | $ | - | $ | 3,894,012 | $ | - | ||||||
U.S. Treasury securities | 148,820 | - | - | |||||||||
Interest rate swaps | - | 6,348 | - | |||||||||
Interest rate swaptions | - | 72 | - | |||||||||
TBA securities | - | (12,694 | ) | - | ||||||||
December 31, 2022 | ||||||||||||
Mortgage-backed securities | $ | - | $ | 3,540,002 | $ | - | ||||||
U.S. Treasury securities | 36,382 | - | - | |||||||||
Interest rate swaps | - | 4,983 | - | |||||||||
Interest rate swaptions | - | 27,416 | - | |||||||||
Interest rate caps | - | 1,119 | - | |||||||||
TBA securities | - | (507 | ) | - |
During the years ended December 31, 2021 2023 and 2020,2022, there were no transfers of financial
Management Agreement
The Company is externally managed and advised by the “Manager”Manager pursuant to
● | 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
● | 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 theTotal
expenses recorded for the management fee,Other Relationships with Bimini
Robert Cauley, ourthe Company's Chief Executive Officer and Chairman of ourthe Board of Directors, also serves as Chief Executive Officer and
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
We had no disagreements with our Independent Registered Public Accounting Firm on any matter of accounting
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report (the “evaluation date”), we
carried out an evaluation, under the supervision andChanges in Internal ControlsControl over Financial Reporting
There were no significant changes in the Company’s internal control over financial
reporting that occurred during the Company’sManagement’s Report of Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting.● | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
● | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and |
● | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements.As a result,The Company’s management assessed the effectiveness of the Company’s internal control over financial
reporting as ofBased on management’s assessment, the Company’s management believes that, as of December 31, 2021,2023, the
Report of Independent Registered Public
Accounting FirmStockholders and Board of Directors
Orchid Island Capital, Inc.
Vero Beach, Florida
Opinion on Internal Control over Financial
ReportingWe
haveaudited OrchidIslandCapital, Inc.’sWe also have audited,
in accordancewith the standardsof the PublicCompany AccountingOversight Board (UnitedBasis for Opinion
The Company’s
management is responsible for maintaining effectiveinternal control over financial reporting andWe conducted our
audit ofDefinition and Limitations of Internal
Control over Financial ReportingA
company’sinternalcontroloverfinancialreportingisaprocessdesignedtoprovidereasonableassuranceBecause
ofitsinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetect/s/ BDO USA, LLP
Certified Public Accountants
West Palm Beach, Florida
February 25, 202223, 2024
During the quarter ended December 31, 2023, no director or officer of the Company adopted, modified or terminated any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement, each as defined in Item 408 of Regulation S-K.
The information required by this Item 10 and not otherwise set forth below is incorporated herein by reference to the
The information required by this Item 11 is incorporated herein by reference to the Proxy Statement.
The information required by this Item 12 is incorporated herein by reference to the Proxy Statement and to Part II, Item
The information required by this Item 13 is incorporated herein by reference to the Proxy Statement.
The information required by this Item 14 is incorporated herein by reference to the Proxy Statement.
a. | Financial Statements. The financial statements of the Company, together with the report of Independent Registered Public Accounting Firm thereon, are set forth in Part II-Item 8 of this Form 10-K and are incorporated herein by reference. |
The following information is filed as part of this Form 10-K
Page | |
Report of Independent Registered Public Accounting Firm | |
Balance Sheets | |
Statements of Comprehensive Income (Loss) | |
Statements of Stockholders’ Equity | |
Statements of Cash Flows | |
Notes to Financial Statements |
b. | Financial Statement Schedules. |
Not applicable.
c. | Exhibits. |
Exhibit 97 | Incentive Compensation Recoupment Policy†* | |
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. |
ITEM 16. FORM 10-K SUMMARY
The Company has elected not to provide summary information.
Signatures
Pursuant to the requirements
of Section 13 or 15(d)of the Securities ExchangeAct of 1934, as amended,the registrant has dulycausedOrchid Island Capital, Inc. | ||||
Registrant | ||||
Date: February 23, 2024 | By: | /s/ Robert E. Cauley | ||
Robert E. Cauley Chief Executive Officer, President and Chairman of the Board | ||||
Date: February 23, 2024 | By: | /s/ George H. Haas, IV | ||
George H. Haas, IV Secretary, Chief Financial Officer, Chief Investment Officer and Director (Principal Financial and Accounting Officer) |
Pursuant to the requirements of the Board
/s/ Robert E. Cauley | Chairman of the Board, Director, Chief | February 23, 2024 | ||
Robert E. Cauley | Executive Officer, and President | |||
(Principal Executive Officer) | ||||
/s/ George H. Haas, IV | Chief Financial Officer, Chief | February 23, 2024 | ||
George H. Haas, IV | Investment Officer, and Director | |||
(Principal Financial and Accounting Officer) | ||||
/s/ W Coleman Bitting | Independent Director | February 23, 2024 | ||
W Coleman Bitting | ||||
/s/ Frank P. Filipps | Independent Director | February 23, 2024 | ||
Frank P. Filipps | ||||
/s/ Paula Morabito | Independent Director | February 23, 2024 | ||
Paula Morabito | ||||
/s/ Ava L. Parker | Independent Director | February 23, 2024 | ||
Ava L. Parker |