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orc10q20220930p1i0
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
QUARTERLY
 
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 2022
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number
:
 
001-35236
Orchid Island Capital, Inc.
(Exact name of registrant as specified in its charter)
Maryland
27-3269228
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
3305 Flamingo Drive
,
Vero Beach
,
Florida
32963
(Address of principal executive offices) (Zip Code)
 
(
772
)
231-1400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol:
Name of Each Exchange on Which
Registered
Common Stock, $0.01 par value
ORC
New York Stock Exchange
Indicate by
 
check mark
 
whether the
 
registrant (1) has
 
filed all
 
reports required
 
to be
 
filed by
 
Section 13 or
 
15(d) of
 
the Securities
 
Exchange Act
 
of
1934 during the preceding 12 months (or for such shorter
 
period that the registrant was required to file such
 
reports), and (2) has been subject to such
filing requirements for the past 90 days.
 
Yes
 
No
Indicate by check
 
mark whether the registrant
 
has submitted electronically every
 
Interactive Data File required
 
to be submitted pursuant
 
to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12
 
months (or for such shorter period that the registrant was
 
required to submit such
files).
 
Yes
 
No
Indicate by check mark whether the registrant is
 
a large accelerated filer,
 
an accelerated filer, a non-accelerated filer,
 
a smaller reporting company,
 
or
an emerging growth company. See the definitions of "large accelerated filer,"
 
"accelerated filer", "smaller reporting company", and "emerging growth
company" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company,
 
indicate by check mark if the registrant has
 
elected not to use the extended transition period
 
for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes
 
No
Number of shares outstanding at October 27, 2022:
33,422,207
ORCHID ISLAND
 
CAPITAL, INC.
TABLE OF CONTENTS
PART I. FINANCIAL
 
INFORMATION
ITEM 1. Financial
 
Statements
1
Condensed
 
Balance Sheets
 
(unaudited)
1
Condensed
 
Statements
 
of Operations
 
(unaudited)
2
Condensed
 
Statements
 
of Stockholders’
 
Equity (unaudited)
3
Condensed
 
Statements
 
of Cash Flows
 
(unaudited)
4
Notes to
 
Condensed
 
Financial
 
Statements
 
(unaudited)
5
ITEM 2. Management’s
 
Discussion
 
and Analysis
 
of Financial
 
Condition
 
and Results
 
of Operations
26
ITEM 3. Quantitative
 
and Qualitative
 
Disclosures
 
about Market
 
Risk
50
ITEM 4. Controls
 
and Procedures
54
PART II. OTHER INFORMATION
ITEM 1. Legal
 
Proceedings
55
ITEM 1A.
 
Risk Factors
55
ITEM 2. Unregistered
 
Sales of Equity
 
Securities
 
and Use of
 
Proceeds
55
ITEM 3. Defaults
 
upon Senior
 
Securities
55
ITEM 4. Mine
 
Safety Disclosures
55
ITEM 5. Other
 
Information
55
ITEM 6. Exhibits
56
SIGNATURES
57
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
PART I. FINANCIAL
 
INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORCHID ISLAND CAPITAL, INC.
CONDENSED BALANCE SHEETS
($ in thousands, except per share data)
(Unaudited)
September 30,
December 31,
2022
2021
ASSETS:
Mortgage-backed securities, at fair value (includes pledged assets
 
of $
3,195,846
and $
6,506,372
, respectively)
$
3,201,214
$
6,511,095
U.S. Treasury Notes, at fair value (includes pledged assets of $
36,118
 
and $
29,740
, respectively)
36,118
37,175
Cash and cash equivalents
214,183
385,143
Restricted cash
66,769
65,299
Accrued interest receivable
10,527
18,859
Derivative assets
262,318
50,786
Receivable for securities sold, pledged to counterparties
13,684
-
Other assets
1,027
320
Total Assets
$
3,805,840
$
7,068,677
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements
$
3,133,861
$
6,244,106
Dividends payable
5,636
11,530
Derivative liabilities
53,013
7,589
Accrued interest payable
4,424
788
Due to affiliates
1,075
1,062
Other liabilities
207,454
35,505
Total Liabilities
3,405,463
6,300,580
 
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $
0.01
 
par value;
20,000,000
 
shares authorized; no shares issued
and outstanding as of September 30, 2022 and December 31, 2021
-
-
Common Stock, $
0.01
 
par value;
100,000,000
 
shares authorized,
35,066,251
shares issued and outstanding as of September 30, 2022 and
35,398,610
 
shares issued
and outstanding as of December 31, 2021
351
354
Additional paid-in capital
776,159
850,497
Accumulated deficit
(376,133)
(82,754)
Total Stockholders' Equity
400,377
768,097
Total Liabilities
 
and Stockholders' Equity
$
3,805,840
$
7,068,677
See Notes to Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS
 
OF OPERATIONS
(Unaudited)
For the Three and Nine Months Ended September 30, 2022 and 2021
($ in thousands, except per share data)
Nine Months Ended September 30,
Three Months Ended September 30,
2022
2021
2022
2021
Interest income
$
112,735
$
90,279
$
35,610
$
34,169
Interest expense
(32,196)
(5,067)
(21,361)
(1,570)
Net interest income
80,539
85,212
14,249
32,599
Realized (losses) gains on mortgage-backed securities
(132,672)
(3,068)
(66,143)
2,977
Unrealized (losses) gains on mortgage-backed securities and
U.S. Treasury Notes
(692,781)
(107,386)
(212,221)
(11,239)
Gains on derivative and other hedging instruments
466,394
15,932
184,820
5,375
Net portfolio (loss) income
(278,520)
(9,310)
(79,295)
29,712
Expenses:
Management fees
7,881
5,569
2,616
2,156
Allocated overhead
1,482
1,189
522
390
Incentive compensation
763
884
212
259
Directors' fees and liability insurance
929
874
308
279
Audit, legal and other professional fees
899
832
293
212
Direct REIT operating expenses
2,281
1,024
1,064
309
Other administrative
624
514
203
69
Total expenses
14,859
10,886
5,218
3,674
Net (loss) income
$
(293,379)
$
(20,196)
$
(84,513)
$
26,038
Basic and diluted net (loss) income per share
$
(8.31)
$
(0.95)
$
(2.40)
$
1.00
Weighted Average Shares Outstanding
35,336,702
21,061,154
35,205,888
25,717,469
Dividends declared per common share
$
1.995
$
2.925
$
0.545
$
0.975
See Notes to Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS
 
OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Nine Months Ended September 30, 2022 and 2021
(in thousands)
Additional
Retained
Common Stock
Paid-in
Earnings
Shares
Par Value
Capital
(Deficit)
Total
Balances, January 1, 2021
15,215
$
152
$
433,133
$
(17,994)
$
415,291
Net loss
-
-
-
(29,369)
(29,369)
Cash dividends declared
-
-
(17,226)
-
(17,226)
Issuance of common stock pursuant to public offerings, net
3,650
37
96,871
-
96,908
Stock based awards and amortization
18
-
572
-
572
Balances, March 31, 2021
18,883
$
189
$
513,350
$
(47,363)
$
466,176
Net income
-
-
-
(16,865)
(16,865)
Cash dividends declared
-
-
(20,416)
-
(20,416)
Issuance of common stock pursuant to public offerings, net
4,617
46
124,700
-
124,746
Stock based awards and amortization
-
-
180
-
180
Balances, June 30, 2021
23,500
$
235
$
617,814
$
(64,228)
$
553,821
Net income
-
-
-
26,038
26,038
Cash dividends declared
-
-
(26,420)
-
(26,420)
Issuance of common stock pursuant to public offerings, net
7,164
71
176,936
-
177,007
Stock based awards and amortization
-
-
183
-
183
Balances, September 30, 2021
30,664
$
306
$
768,513
$
(38,190)
$
730,629
Balances, January 1, 2022
35,399
$
354
$
850,497
$
(82,754)
$
768,097
Net loss
-
-
-
(148,727)
(148,727)
Cash dividends declared
-
-
(27,492)
-
(27,492)
Stock based awards and amortization
25
-
540
-
540
Balances, March 31, 2022
35,424
$
354
$
823,545
$
(231,481)
$
592,418
Net loss
-
-
-
(60,139)
(60,139)
Cash dividends declared
-
-
(23,936)
-
(23,936)
Stock based awards and amortization
2
-
237
-
237
Shares repurchased and retired
(175)
(1)
(2,217)
-
(2,218)
Balances, June 30, 2022
35,251
$
353
$
797,629
$
(291,620)
$
506,362
Net income
-
-
-
(84,513)
(84,513)
Cash dividends declared
-
-
(19,231)
-
(19,231)
Stock based awards and amortization
1
-
143
-
143
Shares repurchased and retired
(186)
(2)
(2,382)
-
(2,384)
Balances, September 30, 2022
35,066
$
351
$
776,159
$
(376,133)
$
400,377
See Notes to Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS
 
OF CASH FLOWS
(Unaudited)
For the Nine Months Ended September 30, 2022 and 2021
($ in thousands)
2022
2021
CASH FLOWS FROM OPERATING
 
ACTIVITIES:
Net loss
$
(293,379)
$
(20,196)
Adjustments to reconcile net loss to net cash provided by operating activities:
Stock based compensation
552
612
Realized losses on mortgage-backed securities
132,672
3,068
Unrealized losses on mortgage-backed securities and U.S. Treasury
 
Notes
692,781
107,386
Realized and unrealized gains on derivative instruments
(261,364)
(22,180)
Changes in operating assets and liabilities:
Accrued interest receivable
8,332
(5,449)
Other assets
(353)
74
Accrued interest payable
3,636
(404)
Other liabilities
7,770
(2,031)
Due to affiliates
13
303
NET CASH PROVIDED BY OPERATING
 
ACTIVITIES
290,660
61,183
CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases
(622,535)
(4,816,301)
Sales
2,731,497
2,598,893
Principal repayments
376,169
413,005
Purchases of U.S. Treasury Notes
-
(37,440)
Net proceeds from (payments on) derivative instruments
246,321
(1,228)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
2,731,452
(1,843,071)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements
32,427,448
22,995,280
Principal payments on repurchase agreements
(35,537,693)
(21,376,997)
Cash dividends
(76,527)
(59,019)
Proceeds from issuance of common stock, net of issuance costs
-
398,661
Shares repurchased and retired
(4,602)
-
Shares withheld from employee stock awards for payment of taxes
(228)
(299)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
(3,191,602)
1,957,626
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS
 
AND RESTRICTED CASH
(169,490)
175,738
CASH, CASH EQUIVALENTS
 
AND RESTRICTED CASH, beginning of the period
450,442
299,506
CASH, CASH EQUIVALENTS
 
AND RESTRICTED CASH, end of the period
$
280,952
$
475,244
SUPPLEMENTAL DISCLOSURE OF
 
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest
$
28,560
$
5,471
SUPPLEMENTAL DISCLOSURE OF
 
NONCASH INVESTING ACTIVITIES:
Securities acquired settled in later period
$
-
$
180,619
See Notes to Financial Statements
5
ORCHID ISLAND
 
CAPITAL, INC.
NOTES TO CONDENSED
 
FINANCIAL
 
STATEMENTS
(Unaudited)
SEPTEMBER
 
30, 2022
NOTE 1.
 
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
 
and Business
 
Description
Orchid Island
 
Capital,
 
Inc. (“Orchid”
 
or the “Company”)
 
was incorporated
 
in Maryland
 
on August
 
17, 2010
 
for the purpose
 
of creating
and managing
 
a leveraged
 
investment
 
portfolio
 
consisting
 
of residential
 
mortgage-backed
 
securities
 
(“RMBS”).
 
From incorporation
 
to the
completion
 
of Orchid’s
 
initial public
 
offering of
 
its common
 
stock on
 
February
 
20, 2013,
 
Orchid was
 
a wholly
 
owned subsidiary
 
of Bimini
Capital Management,
 
Inc. (“Bimini”).
 
Orchid began
 
operations
 
on November
 
24, 2010
 
(the date
 
of commencement
 
of operations).
 
From
incorporation
 
through November
 
24, 2010,
 
Orchid’s only
 
activity
 
was the issuance
 
of common
 
stock to Bimini.
On August 4, 2020, Orchid entered into an equity distribution agreement (the “August
 
2020 Equity Distribution Agreement”) with
four sales agents pursuant to which the Company could offer and sell, from time to time,
 
up to an aggregate amount of $
150,000,000
 
of
shares of the Company’s common stock in transactions that were deemed to be “at the market” offerings and privately
 
negotiated
transactions.
 
The Company issued a total of
5,538,730
 
shares under the August 2020 Equity Distribution Agreement for aggregate
gross proceeds of
approximately $
150.0
 
million, and net proceeds of approximately $
147.4
 
million, after commissions and fees, prior to
its termination in June 2021.
On January 20, 2021, Orchid entered into an underwriting
 
agreement (the “January 2021 Underwriting Agreement”) with
 
J.P.
Morgan Securities LLC (“J.P. Morgan”), relating to the offer and sale of
1,520,000
 
shares of the Company’s common stock. J.P.
Morgan purchased the shares of the Company’s common stock from the Company pursuant
 
to the January 2021 Underwriting
Agreement at $
26.00
 
per share. In addition, the Company granted J.P. Morgan a 30-day option to purchase up to an additional
228,000
 
shares of the Company’s 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 the Company’s common stock occurred on January 25, 2021, with proceeds to
the Company of approximately $
45.2
 
million, net of offering expenses.
On March 2, 2021, Orchid entered into an underwriting agreement (the “March 2021
 
Underwriting Agreement”) with J.P. Morgan,
relating to the offer and sale of
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, net of
offering expenses.
On June 22, 2021, Orchid entered into an equity distribution agreement
 
(the “June 2021 Equity Distribution Agreement”) with four
sales agents pursuant to which the Company could offer and sell, from time to time, up to
 
an aggregate amount of $
250,000,000
 
of
shares of the Company’s common stock in transactions that were deemed to be “at the market” offerings and privately negotiated
transactions. The Company issued a total of
9,881,467
 
shares under the June 2021 Equity Distribution Agreement for aggregate gross
proceeds of approximately $
250.0
 
million, and net proceeds of approximately $
246.0
 
million, after commissions and fees, prior to its
termination in October 2021.
6
On October 29, 2021, Orchid entered into an equity distribution agreement (the
 
“October 2021 Equity Distribution Agreement”) with
four sales agents pursuant to which the Company may offer and sell, from time to time,
 
up to an aggregate amount of $
250,000,000
 
of
shares of the Company’s common stock in transactions that are deemed to be “at the market”
 
offerings and privately negotiated
transactions.
 
Through September 30, 2022, the Company issued a total of
3,167,140
 
shares under the October 2021 Equity
Distribution Agreement for aggregate gross proceeds of approximately $
78.3
 
million, and net proceeds of approximately $
77.0
 
million,
after commissions and fees. No shares were issued under the October 2021
 
Equity Distribution Agreement during the nine months
ended September 30, 2022.
Basis of
 
Presentation
 
and Use of
 
Estimates
The accompanying
 
unaudited
 
financial
 
statements
 
have been
 
prepared
 
in accordance
 
with accounting
 
principles
 
generally
 
accepted
in the United
 
States (“GAAP”)
 
for interim
 
financial
 
information
 
and with
 
the instructions
 
to Form 10-Q
 
and Article
 
8 of Regulation
 
S-X.
 
Accordingly, they
 
do not include
 
all of the
 
information
 
and footnotes
 
required
 
by GAAP for
 
complete financial
 
statements.
 
In the opinion
 
of
management,
 
all adjustments
 
(consisting
 
of normal
 
recurring
 
accruals)
 
considered
 
necessary
 
for a fair
 
presentation
 
have been
 
included.
 
Operating
 
results for
 
the nine and
 
three month
 
periods
 
ended September
 
30, 2022
 
are not necessarily
 
indicative
 
of the results
 
that may
 
be
expected for
 
the year
 
ending December
 
31, 2022.
The balance
 
sheet at December
 
31, 2021
 
has been
 
derived from
 
the audited
 
financial
 
statements
 
at that date
 
but does
 
not include
 
all
of the information
 
and footnotes
 
required
 
by GAAP for
 
complete financial
 
statements.
 
For further
 
information,
 
refer to
 
the financial
statements
 
and footnotes
 
thereto included
 
in the Company’s
 
Annual Report
 
on Form 10-K
 
for the year
 
ended December
 
31, 2021.
The preparation
 
of financial
 
statements
 
in conformity
 
with GAAP
 
requires
 
management
 
to make estimates
 
and assumptions
 
that affect
the reported
 
amounts of
 
assets and
 
liabilities
 
and disclosure
 
of contingent
 
assets and
 
liabilities
 
at the date
 
of the financial
 
statements
 
and
the reported
 
amounts of
 
revenues
 
and expenses
 
during the
 
reporting
 
period. Actual
 
results could
 
differ from
 
those estimates.
 
The
significant
 
estimates
 
affecting the
 
accompanying
 
financial
 
statements
 
are the fair
 
values of RMBS
 
and derivatives.
 
Management
 
believes
the estimates
 
and assumptions
 
underlying
 
the financial
 
statements
 
are reasonable
 
based on
 
the information
 
available as
 
of September
 
30,
2022.
Common Stock
 
Reverse
 
Split
On August 30, 2022, the Company effected a 1-for-5 reverse stock split of its common
 
stock and proportionately decreased the
number of authorized shares of common stock.
 
All share, per share, deferred stock unit (“DSU”) and performance unit (“PU”)
information has been retroactively adjusted to reflect the reverse split.
 
The shares of common stock retain a par value of $0.01 per
share.
Variable Interest Entities (“VIEs”)
The Company obtains interests in VIEs through its investments in mortgage-backed
 
securities.
 
The Company’s interests in these
VIEs are passive in nature and are not expected to result in the Company obtaining a
 
controlling financial interest in these VIEs in the
future.
 
As a result, the Company does not consolidate these VIEs and accounts
 
for these interests in these VIEs as mortgage-backed
securities.
 
See Note 2 for additional information regarding the Company’s investments in
 
mortgage-backed securities.
 
The maximum
exposure to loss for these VIEs is the carrying value of the mortgage-backed securities.
 
 
 
 
 
 
 
 
 
 
 
 
7
Cash and Cash Equivalents and Restricted Cash
Cash and
 
cash equivalents
 
include
 
cash on deposit
 
with financial
 
institutions
 
and highly
 
liquid investments
 
with original
 
maturities
 
of
three months
 
or less at
 
the time
 
of purchase.
 
Restricted
 
cash includes
 
cash pledged
 
as collateral
 
for repurchase
 
agreements
 
and other
borrowings,
 
and interest
 
rate swaps
 
and other
 
derivative
 
instruments.
The following
 
table provides
 
a reconciliation
 
of cash,
 
cash equivalents,
 
and restricted
 
cash reported
 
within the
 
statement
 
of financial
position that
 
sum to the
 
total of
 
the same such
 
amounts shown
 
in the statement
 
of cash flows.
(in thousands)
September 30, 2022
December 31, 2021
Cash and cash equivalents
$
214,183
$
385,143
Restricted cash
66,769
65,299
Total cash, cash equivalents
 
and restricted cash
$
280,952
$
450,442
The Company
 
maintains
 
cash balances
 
at three
 
banks and
 
excess margin
 
on account
 
with two
 
exchange clearing
 
members.
 
At times,
balances may
 
exceed federally
 
insured limits.
 
The Company
 
has not
 
experienced
 
any losses
 
related to
 
these balances.
 
The Federal
Deposit Insurance
 
Corporation
 
insures eligible
 
accounts
 
up to $250,000
 
per depositor
 
at each financial
 
institution.
 
Restricted
 
cash
balances are
 
uninsured,
 
but are held
 
in separate
 
customer accounts
 
that are
 
segregated
 
from the
 
general funds
 
of the counterparty.
 
The
Company limits
 
uninsured
 
balances
 
to only large,
 
well-known
 
banks and
 
exchange clearing
 
members and
 
believes that
 
it is not
 
exposed to
any significant
 
credit risk
 
on cash and
 
cash equivalents
 
or restricted
 
cash balances.
Mortgage-Backed
 
Securities
 
and U.S.
 
Treasury Notes
The Company
 
invests primarily
 
in mortgage
 
pass-through
 
(“PT”) residential
 
mortgage
 
backed securities
 
(“RMBS”)
 
and collateralized
mortgage
 
obligations
 
(“CMOs”)
 
issued by
 
Freddie Mac,
 
Fannie Mae
 
or Ginnie
 
Mae,
 
interest-only
 
(“IO”) securities
 
and inverse
 
interest-only
(“IIO”) securities
 
representing interest in or obligations backed by pools of RMBS. The Company
 
refers
 
to RMBS and CMOs as PT
RMBS. The Company refers to IO and IIO securities as structured RMBS. The Company
 
also invests in U.S. Treasury Notes, primarily
to satisfy collateral requirements of derivative counterparties. The Company has elected
 
to account for its investment in RMBS and
U.S. Treasury Notes
 
under the fair value option. Electing the fair value option requires the
 
Company to record changes in fair value in
the statement of operations, which, in management’s view, more appropriately reflects the results of the Company’s operations for a
particular reporting period and is consistent with the underlying economics and how the
 
portfolio is managed.
The Company
 
records securities
 
transactions
 
on the trade
 
date. Security
 
purchases
 
that have
 
not settled
 
as of the
 
balance sheet
 
date
are included
 
in the portfolio
 
balance with
 
an offsetting
 
liability
 
recorded,
 
whereas securities
 
sold that
 
have not
 
settled as
 
of the balance
sheet date
 
are removed
 
from the portfolio
 
balance with
 
an offsetting
 
receivable
 
recorded.
Fair value
 
is defined
 
as the price
 
that would
 
be received
 
to sell the
 
asset or
 
paid to transfer
 
the liability
 
in an orderly
 
transaction
between market
 
participants
 
at the measurement
 
date.
 
The fair
 
value measurement
 
assumes
 
that the
 
transaction
 
to sell the
 
asset or
transfer
 
the liability
 
either occurs
 
in the principal
 
market for
 
the asset
 
or liability, or
 
in the absence
 
of a principal
 
market, occurs
 
in the most
advantageous
 
market for
 
the asset
 
or liability. Estimated
 
fair values
 
for RMBS
 
are based
 
on independent
 
pricing sources
 
and/or third
 
party
broker quotes,
 
when available.
 
Estimated
 
fair values
 
for U.S.
 
Treasury Notes
 
are based
 
on quoted
 
prices for
 
identical
 
assets in
 
active
markets.
8
Income on
 
PT RMBS
 
and U.S. Treasury
 
Notes is based
 
on the stated
 
interest
 
rate of the
 
security. Premiums
 
or discounts
 
present
 
at
the date
 
of purchase
 
are not amortized.
 
Premium lost
 
and discount
 
accretion
 
resulting
 
from monthly
 
principal
 
repayments
 
are reflected
 
in
unrealized
 
gains (losses)
 
on RMBS
 
in the statements
 
of operations.
 
For IO securities,
 
the income
 
is accrued
 
based on
 
the carrying
 
value
and the effective
 
yield. The
 
difference
 
between income
 
accrued
 
and the interest
 
received on
 
the security
 
is characterized
 
as a return
 
of
investment
 
and serves
 
to reduce
 
the asset’s
 
carrying value.
 
At each
 
reporting
 
date, the
 
effective yield
 
is adjusted
 
prospectively
 
for future
reporting
 
periods
 
based on
 
the new estimate
 
of prepayments
 
and the contractual
 
terms of
 
the security. For
 
IIO securities,
 
effective
 
yield
and income
 
recognition
 
calculations
 
also take
 
into account
 
the index
 
value applicable
 
to the security.
 
Changes in
 
fair value
 
of RMBS during
each reporting
 
period are
 
recorded
 
in earnings
 
and reported
 
as unrealized
 
gains or
 
losses on
 
mortgage-backed
 
securities
 
in the
accompanying
 
statements
 
of operations.
Derivative and Other Hedging Instruments
 
The Company
 
uses derivative
 
and other
 
hedging instruments
 
to manage
 
interest
 
rate risk,
 
facilitate
 
asset/liability
 
strategies
 
and
manage other
 
exposures,
 
and it may
 
continue to
 
do so in the
 
future. The
 
principal
 
instruments
 
that the
 
Company has
 
used to date
 
are
Treasury Note
 
(“T-Note”),
 
federal funds
 
(“Fed Funds”)
 
and Eurodollar
 
futures contracts,
 
short positions
 
in U.S.
 
Treasury securities,
 
interest
rate swaps,
 
options to
 
enter in
 
interest
 
rate swaps
 
(“interest
 
rate swaptions”)
 
and “to-be-announced”
 
(“TBA”)
 
securities
 
transactions,
 
but the
Company may
 
enter into
 
other derivative
 
and other
 
hedging instruments
 
in the future.
 
The Company
 
accounts for
 
TBA securities
 
as derivative
 
instruments.
 
Gains and
 
losses associated
 
with TBA
 
securities
 
transactions
are reported
 
in gain (loss)
 
on derivative
 
instruments
 
in the accompanying
 
statements
 
of operations.
Derivative
 
and other
 
hedging instruments
 
are carried
 
at fair value,
 
and changes
 
in fair value
 
are recorded
 
in earnings
 
for each
 
period.
The Company’s
 
derivative
 
financial
 
instruments
 
are not designated
 
as hedge
 
accounting
 
relationships,
 
but rather
 
are used
 
as economic
hedges of
 
its portfolio
 
assets and
 
liabilities.
 
Gains and
 
losses on
 
derivatives,
 
except those
 
that result
 
in cash receipts
 
or payments,
 
are
included in
 
operating
 
activities
 
on the statement
 
of cash flows.
 
Cash payments
 
and cash receipts
 
from settlements
 
of derivatives,
 
including
current period
 
net cash settlements
 
on interest
 
rates swaps,
 
are classified
 
as an investing
 
activity
 
on the statements
 
of cash flows.
Holding derivatives
 
creates exposure
 
to credit
 
risk related
 
to the potential
 
for failure
 
on the part
 
of counterparties
 
and exchanges
 
to
honor their
 
commitments.
 
In the event
 
of default
 
by a counterparty,
 
the Company
 
may have
 
difficulty recovering
 
its collateral
 
and may not
receive
 
payments provided
 
for under
 
the terms
 
of the agreement.
 
The Company’s
 
derivative
 
agreements
 
require it
 
to post or
 
receive
collateral
 
to mitigate
 
such risk.
 
In addition,
 
the Company
 
uses only
 
registered
 
central clearing
 
exchanges
 
and well-established
 
commercial
banks as counterparties,
 
monitors
 
positions
 
with individual
 
counterparties
 
and adjusts
 
posted collateral
 
as required.
Financial
 
Instruments
The fair
 
value of financial
 
instruments
 
for which
 
it is practicable
 
to estimate
 
that value
 
is disclosed
 
either in
 
the body
 
of the financial
statements
 
or in the
 
accompanying
 
notes. RMBS,
 
Eurodollar,
 
Fed Funds
 
and T-Note futures
 
contracts,
 
interest
 
rate swaps,
 
interest
 
rate
swaptions
 
and TBA
 
securities
 
are accounted
 
for at fair
 
value in the
 
balance sheets.
 
The methods
 
and assumptions
 
used to
 
estimate fair
value for
 
these instruments
 
are presented
 
in Note 12
 
of the financial
 
statements.
The estimated
 
fair value
 
of cash and
 
cash equivalents,
 
restricted
 
cash, accrued
 
interest
 
receivable,
 
receivable
 
for securities
 
sold,
other assets,
 
due to affiliates,
 
repurchase
 
agreements,
 
payable for
 
unsettled
 
securities
 
purchased,
 
accrued interest
 
payable and
 
other
liabilities
 
generally
 
approximates
 
their carrying
 
values as
 
of September
 
30, 2022
 
and December
 
31, 2021 due
 
to the short-term
 
nature of
these financial
 
instruments.
 
9
Repurchase
 
Agreements
The Company
 
finances the
 
acquisition
 
of the majority
 
of its RMBS
 
through the
 
use of repurchase
 
agreements
 
under master
repurchase
 
agreements.
 
Repurchase
 
agreements
 
are accounted
 
for as collateralized
 
financing
 
transactions,
 
which are
 
carried at
 
their
contractual
 
amounts,
 
including
 
accrued interest,
 
as specified
 
in the respective
 
agreements.
Manager Compensation
The Company
 
is externally
 
managed
 
by Bimini
 
Advisors,
 
LLC (the
 
“Manager”
 
or “Bimini
 
Advisors”),
 
a Maryland
 
limited liability
company and
 
wholly-owned
 
subsidiary
 
of Bimini.
 
The Company’s
 
management
 
agreement
 
with the
 
Manager provides
 
for payment
 
to the
Manager of
 
a management
 
fee and reimbursement
 
of certain
 
operating
 
expenses,
 
which are
 
accrued and
 
expensed during
 
the period
 
for
which they
 
are earned
 
or incurred.
 
Refer to
 
Note 13 for
 
the terms
 
of the management
 
agreement.
Earnings
 
Per Share
Basic earnings
 
per share
 
(“EPS”)
 
is calculated
 
as net income
 
or loss attributable
 
to common
 
stockholders
 
divided by
 
the weighted
average number
 
of shares
 
of common
 
stock outstanding
 
during the
 
period. Diluted
 
EPS is calculated
 
using the
 
treasury
 
stock or
 
two-class
method, as
 
applicable,
 
for common
 
stock equivalents,
 
if any. However, the
 
common stock
 
equivalents
 
are not included
 
in computing
diluted EPS
 
if the result
 
is anti-dilutive.
 
Stock-Based
 
Compensation
The Company
 
may grant
 
equity-based
 
compensation
 
to non-employee
 
members of
 
its Board
 
of Directors
 
and to the
 
executive
 
officers
and employees
 
of the Manager.
 
Stock-based
 
awards issued
 
include performance
 
units, deferred
 
stock units
 
and immediately
 
vested
common stock
 
awards. Compensation
 
expense is
 
measured
 
and recognized
 
for all stock-based
 
payment awards
 
made to employees
 
and
non-employee
 
directors
 
based on
 
the fair
 
value of the
 
Company’s common
 
stock on
 
the date
 
of grant.
 
Compensation
 
expense is
recognized
 
over each
 
award’s respective
 
service period
 
using the
 
graded vesting
 
attribution
 
method. The
 
Company does
 
not estimate
forfeiture
 
rates; but
 
rather, adjusts
 
for forfeitures
 
in the periods
 
in which
 
they occur.
Income Taxes
Orchid has elected and is organized and operated so as to qualify to be taxed as a
 
real estate investment trust (“REIT”) under the
Internal Revenue Code of 1986, as amended (the “Code”).
 
REITs are generally not subject to federal income tax on their REIT taxable
income provided that they distribute to their stockholders all of their REIT taxable income
 
on an annual basis. A REIT must distribute at
least 90% of its REIT taxable income, determined without regard to the
 
deductions for dividends paid and excluding net capital gain,
and meet other requirements of the Code to retain its tax status.
Orchid assesses the likelihood, based on their technical merit, that uncertain tax
 
positions will be sustained upon examination
based on the facts, circumstances and information available at the end of each period.
 
All of Orchid’s tax positions are categorized as
highly certain.
 
There is no accrual for any tax, interest or penalties related to Orchid’s tax position
 
assessment.
 
The measurement of
uncertain tax positions is adjusted when new information is available,
 
or when an event occurs that requires a change.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10
Recent Accounting
 
Pronouncements
In March 2020, the FASB issued ASU 2020-04 “
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate
Reform on Financial Reporting.
 
ASU 2020-04 provides optional expedients and exceptions to GAAP requirements
 
for modifications
on debt instruments, leases, derivatives, and other contracts, related to the expected
 
market transition from the London Interbank
Offered Rate (“LIBOR”), and certain other floating rate benchmark indices, or collectively, IBORs, to alternative reference rates. ASU
2020-04 generally considers contract modifications related to reference rate reform to
 
be an event that does not require contract
remeasurement at the modification date nor a reassessment of a previous accounting
 
determination. The guidance in ASU 2020-04 is
optional and may be elected over time, through December 31, 2022, as reference
 
rate reform activities occur. The Company does not
believe the adoption of this ASU will have a material impact on its financial statements.
In January 2021, the FASB issued ASU 2021-01 “
Reference Rate Reform (Topic 848
).” ASU 2021-01 expands the scope of ASC
848 to include all affected derivatives and give market participants the ability to apply certain
 
aspects of the contract modification and
hedge accounting expedients to derivative contracts affected by the discounting transition. In addition,
 
ASU 2021-01 adds
implementation guidance to permit a company to apply certain optional expedients
 
to modifications of interest rate indexes used for
margining, discounting or contract price alignment of certain derivatives as a result
 
of reference rate reform initiatives and extends
optional expedients to account for a derivative contract modified as a continuation
 
of the existing contract and to continue hedge
accounting when certain critical terms of a hedging relationship change to
 
modifications made as part of the discounting transition. The
guidance in ASU 2021-01 is effective
 
immediately and available generally through December 31, 2022, as reference
 
rate reform
activities occur. The Company does not believe the adoption of this ASU will have a material impact on its financial statements.
NOTE 2.
 
MORTGAGE-BACKED SECURITIES AND U.S. TREASURY NOTES
The following
 
table presents
 
the Company’s
 
RMBS portfolio
 
as of September
 
30, 2022
 
and December
 
31, 2021:
(in thousands)
September 30, 2022
December 31, 2021
Pass-Through RMBS Certificates:
Fixed-rate Mortgages
 
$
3,150,403
$
6,298,189
Total Pass-Through
 
Certificates
3,150,403
6,298,189
Structured RMBS Certificates:
Interest-Only Securities
50,274
210,382
Inverse Interest-Only Securities
537
2,524
Total Structured
 
RMBS Certificates
50,811
212,906
Total
$
3,201,214
$
6,511,095
As of September
 
30, 2022
 
and December
 
31, 2021,
 
the Company
 
held U.S.
 
Treasury Notes
 
with a fair
 
value of approximately
 
$
36.1
million and
 
$
37.2
 
million,
 
respectively, primarily
 
to satisfy
 
collateral
 
requirements
 
of one of
 
its derivative
 
counterparties.
The following
 
table is a
 
summary of
 
the Company’s
 
net gain
 
(loss) from
 
the sale of
 
RMBS for
 
the nine
 
months ended
 
September
 
30,
2022 and
 
2021.
Nine Months Ended September 30,
2022
2021
Proceeds from sales of RMBS
$
2,731,497
$
2,598,893
Carrying value of RMBS sold
(2,864,169)
(2,601,961)
Net (loss) gain on sales of RMBS
$
(132,672)
$
(3,068)
Gross gain on sales of RMBS
$
2,705
$
7,866
Gross loss on sales of RMBS
(135,377)
(10,934)
Net (loss) gain on sales of RMBS
$
(132,672)
$
(3,068)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
11
NOTE 3.
 
REPURCHASE AGREEMENTS
The Company
 
pledges certain
 
of its RMBS
 
as collateral
 
under repurchase
 
agreements
 
with financial
 
institutions.
 
Interest
 
rates are
generally
 
fixed based
 
on prevailing
 
rates corresponding
 
to the terms
 
of the borrowings,
 
and interest
 
is generally
 
paid at the
 
termination
 
of a
borrowing.
 
If the fair
 
value of the
 
pledged securities
 
declines,
 
lenders
 
will typically
 
require the
 
Company to
 
post additional
 
collateral
 
or pay
down borrowings
 
to re-establish
 
agreed upon
 
collateral
 
requirements,
 
referred
 
to as "margin
 
calls." Similarly,
 
if the fair
 
value of
 
the pledged
securities
 
increases,
 
lenders
 
may release
 
collateral
 
back to the
 
Company. As of
 
September
 
30, 2022,
 
the Company
 
had met all
 
margin call
requirements.
As of September
 
30, 2022
 
and December
 
31, 2021,
 
the Company’s
 
repurchase
 
agreements
 
had remaining
 
maturities
 
as summarized
below:
($ in thousands)
OVERNIGHT
BETWEEN 2
BETWEEN 31
GREATER
 
(1 DAY OR
AND
AND
THAN
LESS)
30 DAYS
90 DAYS
90 DAYS
TOTAL
(1)
September 30, 2022
Fair market value of securities pledged, including
accrued interest receivable
$
-
$
1,731,976
$
1,413,061
$
61,316
$
3,206,353
Repurchase agreement liabilities associated with
these securities
$
-
$
1,707,215
$
1,372,870
$
53,776
$
3,133,861
Net weighted average borrowing rate
-
 
2.96%
3.07%
2.84%
3.00%
December 31, 2021
Fair market value of securities pledged, including
accrued interest receivable
$
-
$
4,624,396
$
1,848,080
$
52,699
$
6,525,175
Repurchase agreement liabilities associated with
these securities
$
-
$
4,403,182
$
1,789,327
$
51,597
$
6,244,106
Net weighted average borrowing rate
-
0.15%
0.13%
0.15%
0.15%
1)
Includes repurchase agreements with outstanding principal balances of approximately
 
$
103.7
 
million as of September 30, 2022, with interest
rates indexed to Secured Overnight Financing Rate (“SOFR”) that reprice daily.
In addition, cash pledged to counterparties for repurchase agreements was approximately
 
$
49.4
 
million and $
57.3
 
million as of
September 30, 2022 and December 31, 2021, respectively.
If, during
 
the term
 
of a repurchase
 
agreement,
 
a lender
 
files for
 
bankruptcy, the
 
Company might
 
experience
 
difficulty recovering
 
its
pledged assets,
 
which could
 
result in
 
an unsecured
 
claim against
 
the lender
 
for the difference
 
between the
 
amount loaned
 
to the Company
plus interest
 
due to the
 
counterparty
 
and the fair
 
value of the
 
collateral
 
pledged to
 
such lender,
 
including the accrued interest receivable
and cash posted by the Company as collateral. At September
 
30, 2022,
 
the Company
 
had an aggregate
 
amount at
 
risk (the
 
difference
between the
 
amount loaned
 
to the Company,
 
including
 
interest
 
payable and
 
securities
 
posted by
 
the counterparty
 
(if any),
 
and the fair
value of securities
 
and cash
 
pledged
 
(if any),
 
including
 
accrued
 
interest
 
on such securities)
 
with all
 
counterparties
 
of approximately
 
$
117.4
million.
 
The Company
 
did not
 
have an amount
 
at risk with
 
any individual
 
counterparty
 
that was
 
greater than
 
10% of the
 
Company’s equity
at September
 
30, 2022
 
and December
 
31, 2021.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12
NOTE 4. DERIVATIVE AND OTHER HEDGING INSTRUMENTS
The table
 
below summarizes
 
fair value
 
information
 
about the
 
Company’s derivative
 
and other
 
hedging instruments
 
assets and
liabilities
 
as of September
 
30, 2022
 
and December
 
31, 2021.
(in thousands)
Derivative and Other Hedging Instruments
Balance Sheet Location
September 30, 2022
December 31, 2021
Assets
Interest rate swaps
Derivative assets, at fair value
$
169,630
$
29,293
Payer swaptions (long positions)
Derivative assets, at fair value
91,195
21,493
Interest rate caps
Derivative assets, at fair value
1,188
-
TBA securities
Derivative assets, at fair value
305
-
Total derivative
 
assets, at fair value
$
262,318
$
50,786
Liabilities
Interest rate swaps
Derivative liabilities, at fair value
$
-
$
2,862
Payer swaptions (short positions)
Derivative liabilities, at fair value
52,315
4,423
TBA securities
Derivative liabilities, at fair value
698
304
Total derivative
 
liabilities, at fair value
$
53,013
$
7,589
Margin Balances Posted to (from) Counterparties
Futures contracts
Restricted cash
$
16,056
$
8,035
TBA securities
Restricted cash
1,336
-
TBA securities
Other liabilities
(11,422)
(856)
Interest rate swaption contracts
Other liabilities
(27,149)
(6,350)
Total margin
 
balances on derivative contracts
$
(21,179)
$
829
Eurodollar, Fed
 
Funds and
 
T-Note futures
 
are cash
 
settled futures
 
contracts
 
on an interest
 
rate, with
 
gains and
 
losses credited
 
or
charged to
 
the Company’s
 
cash accounts
 
on a daily
 
basis. A
 
minimum balance,
 
or “margin”,
 
is required
 
to be maintained
 
in the account
 
on
a daily basis.
The tables
 
below present
 
information
 
related to
 
the Company’s
 
T-Note futures
 
positions
 
at September
 
30, 2022
 
and
December
 
31, 2021.
 
($ in thousands)
September 30, 2022
Average
Weighted
Weighted
Contract
Average
Average
Notional
Entry
Effective
Open
Expiration Year
Amount
Rate
Rate
Equity
(1)
Treasury Note Futures Contracts (Short
 
Positions)
(2)
December 2022 5-year T-Note futures
(Dec 2022 - Dec 2027 Hedge Period)
$
750,500
3.54%
4.32%
$
29,141
December 2022 10-year Ultra futures
(Dec 2022 - Dec 2032 Hedge Period)
$
174,500
3.03%
3.77%
$
13,141
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
13
($ in thousands)
December 31, 2021
Average
Weighted
Weighted
Contract
Average
Average
Notional
Entry
Effective
Open
Expiration Year
Amount
Rate
Rate
Equity
(1)
Treasury Note Futures Contracts (Short
 
Position)
(2)
March 2022 5-year T-Note futures
(Mar 2022 - Mar 2027 Hedge Period)
$
369,000
1.56%
1.62%
$
1,013
March 2022 10-year Ultra futures
(Mar 2022 - Mar 2032 Hedge Period)
$
220,000
1.22%
1.09%
$
(3,861)
(1)
Open equity represents the cumulative gains (losses) recorded on open
 
futures positions from inception.
(2)
5-Year T-Note
 
futures contracts were valued at a price of $
107.51
 
at September 30, 2022 and $
120.98
 
at December 31, 2021.
 
The contract
values of the short positions were $
806.8
 
million and $
446.4
 
million at September 30, 2022 and December 31, 2021, respectively.
 
10-Year Ultra
futures contracts were valued at a price of $
118.48
 
at September 30, 2022 and $
146.44
 
at December 31, 2021. The contract value of the short
position was $
206.8
 
million and $
322.2
 
million at September 30, 2022 and December 31, 2021, respectively
Under its
 
interest
 
rate swap
 
agreements,
 
the Company
 
typically
 
pays
 
a fixed rate
 
and receive
 
a floating
 
rate based
 
on an index
("payer swaps").
 
The floating
 
rate the
 
Company receives
 
under its
 
swap agreements
 
has the effect
 
of offsetting
 
the repricing
characteristics
 
of our repurchase
 
agreements
 
and cash flows
 
on such liabilities.
 
The Company
 
is typically
 
required
 
to post collateral
 
on its
interest rate
 
swap agreements.
 
The table
 
below presents
 
information
 
related to
 
the Company’s
 
interest
 
rate swap
 
positions
 
at September
30, 2022
 
and December
 
31, 2021.
($ in thousands)
Average
Net
Fixed
Average
Estimated
Average
Notional
Pay
Receive
Fair
Maturity
Amount
Rate
Rate
Value
(Years)
September 30, 2022
Expiration > 3 to ≤ 5 years
$
500,000
0.84%
3.46%
$
60,776
4.0
Expiration > 5 years
900,000
1.70%
2.56%
108,854
6.8
$
1,400,000
1.39%
2.88%
$
169,630
5.8
December 31, 2021
Expiration > 3 to ≤ 5 years
$
955,000
0.64%
0.16%
$
21,788
4.0
Expiration > 5 years
400,000
1.16%
0.21%
4,643
7.3
$
1,355,000
0.79%
0.18%
$
26,431
5.0
The table
 
below presents
 
information
 
related to
 
the Company’s
 
interest
 
rate cap positions
 
at September
 
30, 2022.
($ 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
$
1,188
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
14
The table
 
below presents
 
information
 
related to
 
the Company’s
 
interest
 
rate swaption
 
positions
 
at September
 
30, 2022
 
and
 
December
31, 2021.
($ in thousands)
Option
Underlying Swap
Weighted
Average
Weighted
Average
Average
Adjustable
Average
Fair
Months to
Notional
Fixed
Rate
Term
Expiration
Cost
Value
Expiration
Amount
Rate
(LIBOR)
(Years)
September 30, 2022
Payer Swaptions - long
≤ 1 year
$
35,230
$
83,470
10.6
$
1,303,600
2.95%
3 Month
10.0
>10 years
7,267
7,725
238.9
80,000
2.07%
3 Month
10.0
$
42,497
$
91,195
23.8
$
1,383,600
2.90%
3 Month
10.0
Payer Swaptions - short
≤ 1 year
$
(17,500)
$
52,315
4.7
$
(958,300)
2.95%
3 Month
10.0
December 31, 2021
Payer Swaptions - long
≤ 1 year
$
4,000
$
1,575
3.2
$
400,000
1.66%
3 Month
5.0
>1 year ≤ 2 years
32,690
19,918
18.4
1,258,500
2.46%
3 Month
14.1
$
36,690
$
21,493
14.7
$
1,658,500
2.27%
3 Month
11.9
Payer Swaptions - short
≤ 1 year
$
(16,185)
$
(4,423)
5.3
$
(1,331,500)
2.29%
3 Month
11.4
The
 
following
 
table
 
summarizes
 
the
 
Company’s
 
contracts
 
to
 
purchase
 
and
 
sell
 
TBA
 
securities
 
as
 
of
 
September
 
30,
 
2022
 
and
December 31, 2021.
($ in thousands)
Notional
Net
Amount
Cost
Market
Carrying
Long (Short)
(1)
Basis
(2)
Value
(3)
Value
(4)
September 30, 2022
30-Year TBA securities:
2.0%
$
(175,000)
$
(141,329)
$
(141,723)
$
(394)
3.0%
(300,000)
(261,047)
(261,047)
-
Total
$
(475,000)
$
(402,376)
$
(402,770)
$
(394)
December 31, 2021
30-Year TBA securities:
3.0%
$
(575,000)
$
(595,630)
$
(595,934)
$
(304)
Total
$
(575,000)
$
(595,630)
$
(595,934)
$
(304)
(1)
Notional amount represents the par value (or principal balance) of the underlying
 
Agency RMBS.
(2)
Cost basis represents the forward price to be paid (received) for the underlying
 
Agency RMBS.
(3)
Market value represents the current market value of the TBA securities
 
(or of the underlying Agency RMBS) as of period-end.
(4)
Net carrying value represents the difference between the market
 
value 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
15
Gain (Loss) From Derivative and Other Hedging Instruments, Net
The table below presents the effect of the Company’s derivative and other hedging instruments on the statements of operations for
the nine and three months ended September 30, 2022 and 2021.
(in thousands)
Nine Months Ended September 30,
Three Months Ended September 30,
2022
2021
2022
2021
T-Note futures contracts (short position)
$
207,681
$
866
$
84,713
$
581
Eurodollar futures contracts (short positions)
-
(14)
-
(7)
Interest rate swaps
172,069
12,446
65,966
3,000
Payer swaptions (short positions)
(80,183)
3,507
(35,239)
2,295
Payer swaptions (long positions)
150,445
5,477
59,131
1,767
Interest rate caps
988
-
(499)
-
Interest rate floors
-
1,345
-
45
TBA securities (short positions)
14,194
864
10,642
(2,306)
TBA securities (long positions)
1,200
(8,559)
106
-
Total
$
466,394
$
15,932
$
184,820
$
5,375
Credit Risk-Related Contingent Features
The
 
use
 
of
 
derivatives
 
and
 
other
 
hedging
 
instruments
 
creates
 
exposure
 
to
 
credit
 
risk
 
relating
 
to
 
potential
 
losses
 
that
 
could
 
be
recognized in the event
 
that the counterparties to these
 
instruments fail to perform their
 
obligations under the contracts. The
 
Company
attempts to minimize
 
this risk by
 
limiting its counterparties
 
for instruments which
 
are not centrally
 
cleared on a
 
registered exchange to
major financial institutions
 
with acceptable credit
 
ratings and
 
monitoring positions with
 
individual counterparties. In
 
addition, the Company
may be
 
required to
 
pledge assets
 
as collateral
 
for its
 
derivatives, whose
 
amounts vary over
 
time based
 
on the
 
market value, notional
amount and remaining
 
term of
 
the derivative contract.
 
In the event
 
of a default
 
by a counterparty, the
 
Company may
 
not receive payments
provided
 
for
 
under
 
the
 
terms
 
of
 
its
 
derivative
 
agreements,
 
and
 
may
 
have
 
difficulty
 
obtaining
 
its
 
assets
 
pledged
 
as
 
collateral
 
for
 
its
derivatives. The cash and cash equivalents pledged as collateral for the Company derivative instruments
 
are included in restricted cash
on its balance sheets.
It is the Company's policy not
 
to offset assets and liabilities associated
 
with open derivative contracts. However, Chicago
 
Mercantile
Exchange
 
(“CME”)
 
and
 
Intercontinental
 
Exchange
 
(“ICE”)
 
rules
 
characterize
 
variation
 
margin
 
transfers
 
as
 
settlement
 
payments,
 
as
opposed to adjustments to collateral. As
 
a result, derivative assets and liabilities
 
associated with centrally cleared derivatives for
 
which
the CME or ICE serves as the central clearing party are presented as if these derivatives
 
had been settled as of the reporting date.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
16
NOTE 5. PLEDGED ASSETS
Assets Pledged
 
to Counterparties
The table
 
below summarizes
 
the Company’s
 
assets pledged
 
as collateral
 
under repurchase
 
agreements
 
and derivative
 
agreements
by type, including
 
securities
 
pledged
 
related to
 
securities
 
sold but
 
not yet settled,
 
as of September
 
30, 2022
 
and December
 
31, 2021.
(in thousands)
September 30, 2022
December 31, 2021
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Counterparties
Agreements
Agreements
Total
Agreements
Agreements
Total
PT RMBS - fair value
$
3,145,035
$
-
$
3,145,035
$
6,294,102
$
-
$
6,294,102
Structured RMBS - fair value
50,811
-
50,811
212,270
-
212,270
U.S. Treasury Notes
-
36,118
36,118
-
29,740
29,740
Accrued interest on pledged securities
10,507
4
10,511
18,804
13
18,817
Restricted cash
49,377
17,392
66,769
57,264
8,035
65,299
Total
$
3,255,730
$
53,514
$
3,309,244
$
6,582,440
$
37,788
$
6,620,228
Assets Pledged
 
from Counterparties
The table
 
below summarizes
 
assets pledged
 
to the Company
 
from counterparties
 
under repurchase
 
agreements
 
and derivative
agreements
 
as of September
 
30, 2022
 
and December
 
31, 2021.
(in thousands)
September 30, 2022
December 31, 2021
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Orchid
Agreements
Agreements
Total
Agreements
Agreements
Total
Cash
$
-
$
38,571
$
38,571
$
4,339
$
7,206
$
11,545
Total
$
-
$
38,571
$
38,571
$
$
4,339
$
7,206
$
11,545
Cash received
 
as margin
 
is recognized
 
as cash and
 
cash equivalents
 
with a corresponding
 
amount recognized
 
as an increase
 
in
repurchase
 
agreements
 
or other
 
liabilities
 
in the balance
 
sheets.
NOTE 6. OFFSETTING ASSETS AND LIABILITIES
The Company’s
 
derivative
 
agreements
 
and repurchase
 
agreements
 
and reverse
 
repurchase
 
agreements
 
are subject
 
to underlying
agreements
 
with master
 
netting or
 
similar arrangements,
 
which provide
 
for the right
 
of offset in
 
the event
 
of default
 
or in the
 
event of
bankruptcy
 
of either
 
party to
 
the transactions.
 
The Company
 
reports its
 
assets and
 
liabilities
 
subject to
 
these arrangements
 
on a gross
basis.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
17
The following
 
table presents
 
information
 
regarding
 
those assets
 
and liabilities
 
subject to
 
such arrangements
 
as if the
 
Company had
presented
 
them on a
 
net basis
 
as of September
 
30, 2022
 
and December
 
31, 2021.
(in thousands)
Offsetting of Assets
Gross Amount Not
Net Amount
Offset in the Balance Sheet
of Assets
Financial
Gross Amount
Gross Amount
Presented
Instruments
Cash
of Recognized
Offset in the
in the
Received as
Received as
Net
Assets
Balance Sheet
Balance Sheet
Collateral
Collateral
Amount
September 30, 2022
Interest rate swaps
$
169,630
$
-
$
169,630
$
-
$
-
$
169,630
Interest rate swaptions
91,195
-
91,195
-
(27,149)
64,046
Interest rate caps
1,188
-
1,188
-
-
1,188
TBA securities
305
-
305
-
(305)
-
$
262,318
$
-
$
262,318
$
-
$
(27,454)
$
234,864
December 31, 2021
Interest rate swaps
$
29,293
$
-
$
29,293
$
-
$
-
$
29,293
Interest rate swaptions
21,493
-
21,493
-
(6,350)
15,143
$
50,786
$
-
$
50,786
$
-
$
(6,350)
$
44,436
(in thousands)
Offsetting of Liabilities
Gross Amount Not
Net Amount
Offset in the Balance Sheet
of Liabilities
Financial
Gross Amount
Gross Amount
Presented
Instruments
of Recognized
Offset in the
in the
Posted as
Cash Posted
Net
Liabilities
Balance Sheet
Balance Sheet
Collateral
as Collateral
Amount
September 30, 2022
Repurchase Agreements
$
3,133,861
$
-
$
3,133,861
$
(3,084,484)
$
(49,377)
$
-
Interest rate swaptions
52,315
-
52,315
-
-
52,315
TBA securities
698
-
698
-
(698)
-
$
3,186,874
$
-
$
3,186,874
$
(3,084,484)
$
(50,075)
$
52,315
December 31, 2021
Repurchase Agreements
$
6,244,106
$
-
$
6,244,106
$
(6,186,842)
$
(57,264)
$
-
Interest rate swaps
2,862
-
2,862
(2,862)
-
-
Interest rate swaptions
4,423
-
4,423
-
-
4,423
TBA securities
304
-
304
-
-
304
$
6,251,695
$
-
$
6,251,695
$
(6,189,704)
$
(57,264)
$
4,727
The amounts
 
disclosed
 
for collateral
 
received by
 
or posted
 
to the same
 
counterparty
 
up to and
 
not exceeding
 
the net amount
 
of the
asset or
 
liability
 
presented
 
in the balance
 
sheets.
 
The fair
 
value of
 
the actual
 
collateral
 
received
 
by or posted
 
to the same
 
counterparty
typically
 
exceeds the
 
amounts
 
presented.
 
See Note
 
5 for a discussion
 
of collateral
 
posted or
 
received
 
against or
 
for repurchase
 
obligations
and derivative
 
and other
 
hedging
 
instruments.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
18
NOTE 7.
 
CAPITAL STOCK
Reverse
 
Stock Split
On August
 
30, 2022,
 
the Company
 
effected a
 
1-for-5 reverse
 
stock split
 
of its common
 
stock and
 
proportionately
 
decreased
 
the
number of
 
authorized
 
shares of
 
common stock.
 
All share,
 
per share,
 
deferred
 
stock unit
 
(“DSU”)
 
and performance
 
unit information
 
has
been retroactively
 
adjusted to
 
reflect
 
the reverse
 
split.
 
The shares
 
of common
 
stock retain
 
a par value
 
of $0.01
 
per share.
 
Common Stock
 
Issuances
The Company
 
did not complete
 
any public
 
offerings of
 
its common
 
stock during
 
the nine
 
months ended
 
September
 
30, 2022.
 
During
the year
 
ended December
 
31, 2021,
 
the Company
 
completed
 
the following
 
public offerings
 
of shares
 
of its common
 
stock.
 
($ in thousands, except per share amounts)
Weighted
Average
Price
Received
Net
Type of Offering
Period
Per Share
(1)
Shares
Proceeds
(2)
At the Market Offering Program
(3)
First Quarter
$
25.50
61,610
$
1,572
Follow-on Offerings
First Quarter
26.55
3,588,000
95,336
At the Market Offering Program
(3)
Second Quarter
27.00
4,617,418
124,746
At the Market Offering Program
(3)
Third Quarter
24.70
7,163,668
177,007
At the Market Offering Program
(3)
Fourth Quarter
24.35
4,734,940
115,398
20,165,636
$
514,059
(1)
Weighted average price received per share is after deducting the underwriters’
 
discount, if applicable, and other offering costs.
(2)
Net proceeds are net of the underwriters’ discount, if applicable, and other
 
offering costs.
(3)
The Company has entered into ten equity distribution agreements, nine of which have
 
either been terminated because all shares were sold or
were replaced with a subsequent agreement.
Stock Repurchase Program
On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to
400,000
 
shares of the Company’s
common stock. On February 8, 2018, the Board of Directors approved an increase
 
in the stock repurchase program for up to an
additional
904,564
 
shares of the Company's common stock. Coupled with the
156,751
 
shares remaining from the original
400,000
share authorization, the increased authorization brought the total authorization
 
to
1,061,316
 
shares, representing 10% of the
Company’s then outstanding share count.
 
On December 9, 2021, the Board of Directors approved an increase in the
 
number of shares of the Company’s common stock
available in the stock repurchase program for up to an additional
3,372,399
 
shares, bringing the remaining authorization under the
stock repurchase program to
3,539,861
 
shares, representing approximately 10% of the Company’s then outstanding shares of
common stock.
On October 12, 2022, the Board of Directors approved an increase
 
in the number of shares of the Company’s common stock
available in the stock repurchase program for up to an additional
4,300,000
 
shares, bringing the remaining authorization under the
stock repurchase program to
6,183,601
 
shares, representing approximately 18% of the Company’s then outstanding shares
 
of
common stock.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
19
As part of the stock repurchase program, shares may be purchased in open market
 
transactions, block purchases, through
privately negotiated transactions, or pursuant to any trading plan that may be adopted
 
in accordance with Rule 10b5-1 of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”).
 
Open market repurchases will be made in accordance with Exchange Act
Rule 10b-18, which sets certain restrictions on the method, timing, price
 
and volume of open market stock repurchases. The timing,
manner, price and amount of any repurchases will be determined by the Company in its discretion and will be subject
 
to economic and
market conditions, stock price, applicable legal requirements and other factors.
 
The authorization does not obligate the Company to
acquire any particular amount of common stock and the program may
 
be suspended or discontinued at the Company’s discretion
without prior notice. The stock repurchase program has no termination date.
From the inception of the stock repurchase program through September 30, 2022,
 
the Company repurchased a total of
1,487,362
shares at an aggregate cost of approximately $
44.8
 
million, including commissions and fees, for a weighted average price
 
of $30.12
per share. During the nine months ended September 30, 2022, the Company repurchased
 
a total of
350,260
 
shares at an aggregate
cost of approximately $
4.4
 
million, including commissions and fees, for a weighted average
 
price of $
12.68
 
per share. No shares were
repurchased during the year ended December 31, 2021. Subsequent to September
 
30, 2022, and through October 27, 2022, the
Company repurchased a total of
1,644,044
 
shares at an aggregate cost of approximately $
14.2
 
million, including commissions and
fees, for a weighted average price of $
8.64
 
per share. The remaining authorization under the stock repurchase
 
program as of October
27, 2022 was
5,845,557
 
shares.
 
Cash Dividends
The table below presents the cash dividends declared on the Company’s common
 
stock.
(in thousands, except per share amounts)
Year
Per Share
Amount
Total
2013
$
6.975
$
4,662
2014
10.800
22,643
2015
9.600
38,748
2016
8.400
41,388
2017
8.400
70,717
2018
5.350
55,814
2019
4.800
54,421
2020
3.950
53,570
2021
3.900
97,601
2022 - YTD
(1)
2.155
76,024
Totals
$
64.330
$
515,588
(1)
On
October 12, 2022
, the Company declared a dividend of $
0.16
 
per share to be paid on
November 28, 2022
.
 
The effect of this dividend is
included in the table above but is not reflected in the Company’s financial
 
statements as of September 30, 2022.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
20
NOTE 8.
 
STOCK INCENTIVE PLAN
In 2021,
 
the Company’s
 
Board of
 
Directors
 
adopted,
 
and the stockholders
 
approved,
 
the Orchid
 
Island Capital,
 
Inc. 2021
 
Equity
Incentive
 
Plan (the
 
“2021 Incentive
 
Plan”) to
 
replace the
 
Orchid Island
 
Capital,
 
Inc. 2012
 
Equity Incentive
 
Plan (the
 
“2012 Incentive
 
Plan”
and together
 
with the
 
2021 Incentive
 
Plan, the
 
“Incentive
 
Plans”).
 
The 2021
 
Incentive
 
Plan provides
 
for the award
 
of stock options,
 
stock
appreciation
 
rights, stock
 
award, performance
 
units, other
 
equity-based
 
awards (and
 
dividend equivalents
 
with respect
 
to awards
 
of
performance
 
units and
 
other equity-based
 
awards) and
 
incentive
 
awards.
 
The 2021
 
Incentive
 
Plan is administered
 
by the Compensation
Committee
 
of the Company’s
 
Board of
 
Directors
 
except that
 
the Company’s
 
full Board
 
of Directors
 
will administer
 
awards made
 
to directors
who are
 
not employees
 
of the Company
 
or its affiliates.
 
The 2021
 
Incentive
 
Plan provides
 
for awards
 
of up to
 
an aggregate
 
of
10
% of the
issued and
 
outstanding
 
shares of
 
the Company’s
 
common stock
 
(on a fully
 
diluted basis)
 
at the time
 
of the awards,
 
subject to
 
a maximum
aggregate
1,473,324
 
shares of
 
the Company’s
 
common stock
 
that may
 
be issued
 
under the
 
2021 Incentive
 
Plan. The
 
2021 Incentive
 
Plan
replaces the
 
2012 Incentive
 
Plan, and
 
no further
 
grants will
 
be made under
 
the 2012
 
Incentive
 
Plan.
 
However, any
 
outstanding
 
awards
under the
 
2012 Incentive
 
Plan will
 
continue in
 
accordance
 
with the
 
terms of
 
the 2012
 
Incentive
 
Plan and
 
any award
 
agreement
 
executed in
connection
 
with such
 
outstanding
 
awards.
 
Performance
 
Units
The Company
 
has issued,
 
and may
 
in the future
 
issue additional,
 
performance
 
units under
 
the Incentive
 
Plans to
 
certain executive
officers and
 
employees
 
of its Manager.
 
“Performance
 
Units” vest
 
after the
 
end of a
 
defined performance
 
period, based
 
on satisfaction
 
of
the performance
 
conditions
 
set forth
 
in the performance
 
unit agreement.
 
When earned,
 
each Performance
 
Unit will
 
be settled
 
by the
issuance of
 
one share
 
of the Company’s
 
common stock,
 
at which
 
time the
 
Performance
 
Unit will
 
be cancelled.
 
The Performance
 
Units
contain dividend
 
equivalent
 
rights, which
 
entitle the
 
Participants
 
to receive
 
distributions
 
declared
 
by the Company
 
on common
 
stock, but
 
do
not include
 
the right
 
to vote the
 
underlying
 
shares of
 
common stock.
 
Performance
 
Units are
 
subject to
 
forfeiture
 
should the
 
participant
 
no
longer serve
 
as an executive
 
officer or
 
employee of
 
the Company
 
or the Manager.
 
Compensation
 
expense for
 
the Performance
 
Units,
included in
 
incentive
 
compensation
 
on the statements
 
of operations,
 
is recognized
 
over the
 
remaining
 
vesting period
 
once it becomes
probable
 
that the
 
performance
 
conditions
 
will be achieved.
The following
 
table presents
 
information
 
related to
 
Performance
 
Units outstanding
 
during the
 
nine months
 
ended September
 
30, 2022
and 2021.
($ in thousands, except per share data)
Nine Months Ended September 30,
2022
2021
Weighted
Weighted
Average
Average
Grant Date
Grant Date
 
Shares
Fair Value
Shares
Fair Value
Unvested, beginning of period
26,645
$
29.40
911
$
37.25
Granted
35,114
16.55
27,579
29.40
Forfeited
(8,464)
21.40
-
-
Vested and issued
(7,594)
29.40
(911)
37.25
Unvested, end of period
45,701
$
21.01
27,579
$
29.40
Compensation expense during period
$
331
$
222
Unrecognized compensation expense, end of period
$
535
$
592
Intrinsic value, end of period
$
375
$
674
Weighted-average remaining vesting term (in years)
1.4
1.6
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
21
The number
 
of shares
 
of common
 
stock issuable
 
upon the
 
vesting of
 
the remaining
 
outstanding
 
Performance
 
Units was
 
reduced as a
result of
 
the book
 
value impairment
 
event that
 
occurred
 
pursuant
 
to the terms
 
of the long
 
term equity
 
incentive
 
compensation
 
plans (the
“Plans”)
 
established
 
under the
 
Company’s 2012
 
Equity Incentive
 
Plan and
 
2021 Equity
 
Incentive
 
Plan. The
 
book value
 
impairment
 
event
occurred
 
when the
 
Company's
 
book value
 
per share
 
declined
 
by more than
 
15% during
 
the quarter
 
ended March
 
31, 2022
 
and the
Company’s book
 
value per
 
share decline
 
from January
 
1, 2022 to
 
June 30,
 
2022 was
 
more than
 
10%. The
 
Plans provide
 
that if such
 
a
book value
 
impairment
 
event occurs,
 
then the
 
number of
 
outstanding
 
Performance
 
Units that
 
are outstanding
 
as of the
 
last day of
 
such two
quarter period
 
shall be reduced
 
by 15%.
Stock Awards
The Company
 
has issued,
 
and may
 
in the future
 
issue additional,
 
immediately
 
vested common
 
stock under
 
the Incentive
 
Plans to
certain executive
 
officers and
 
employees
 
of its Manager.
The following
 
table presents
 
information
 
related to
 
fully vested
 
common stock
issued during
 
the nine months
 
ended September
 
30, 2022
 
and 2021.
 
All of the
 
fully vested
 
shares of
 
common stock
 
issued during
 
the nine
months ended
 
September
 
30, 2022
 
and 2021,
 
and the related
 
compensation
 
expense, were
 
granted with
 
respect to
 
service performed
during the
 
fiscal years
 
ended December
 
31, 2021
 
and 2020,
 
respectively.
($ in thousands, except per share data)
Nine Months Ended September 30,
2022
2021
Fully vested shares granted
35,114
27,579
Weighted average grant date price per share
$
16.55
$
29.40
Compensation expense related to fully vested shares of common stock awards
$
581
$
811
Deferred
 
Stock Units
Non-employee
 
directors
 
receive a
 
portion of
 
their compensation
 
in the form
 
of DSU awards
 
pursuant
 
to the Incentive
 
Plans.
 
Each
DSU represents
 
a right to
 
receive one
 
share of
 
the Company’s
 
common stock.
 
Beginning
 
in 2022,
 
each non-employee
 
director
 
can elect
 
to
receive all
 
of his or
 
her compensation
 
in the form
 
of DSUs.
 
The DSUs
 
are immediately
 
vested and
 
are settled
 
at a future
 
date based
 
on the
election of
 
the individual
 
participant.
 
Compensation
 
expense for
 
the DSUs
 
is included
 
in directors’
 
fees and
 
liability insurance
 
in the
statements
 
of operations.
 
The DSUs
 
contain dividend
 
equivalent
 
rights, which
 
entitle the
 
participant
 
to receive
 
distributions
 
declared
 
by the
Company on
 
common stock.
 
These dividend
 
equivalent
 
rights
 
are settled
 
in cash or
 
additional
 
DSUs at
 
the participant’s
 
election.
 
The
DSUs do
 
not include
 
the right
 
to vote the
 
underlying
 
shares of
 
common stock.
 
The following
 
table presents
 
information
 
related to
 
the DSUs
 
outstanding
 
during the
 
nine months
 
ended September
 
30, 2022
 
and
2021.
($ in thousands, except per share data)
Nine Months Ended September 30,
2022
2021
Weighted
Weighted
Average
Average
Grant Date
Grant Date
 
Shares
Fair Value
Shares
Fair Value
Outstanding, beginning of period
28,595
$
26.92
18,189
$
27.20
Granted and vested
14,227
16.52
7,337
27.30
Outstanding, end of period
42,822
$
23.46
25,526
$
27.20
Compensation expense during period
$
239
$
180
Intrinsic value, end of period
$
351
$
624
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
22
NOTE 9.
 
COMMITMENTS AND CONTINGENCIES
From time to time, the Company may become involved in various claims and
 
legal actions arising in the ordinary course of
business. Management is not aware of any reported or unreported contingencies
 
at September 30, 2022.
NOTE 10. INCOME TAXES
The Company will generally not be subject to U.S. federal income tax on
 
its REIT taxable income to the extent that it distributes its
REIT taxable income to its stockholders and satisfies the ongoing REIT requirements,
 
including meeting certain asset, income and
stock ownership tests.
 
A REIT must generally distribute at least 90% of its REIT taxable income,
 
determined without regard to the
deductions for dividends paid and excluding net capital gain, to its stockholders,
 
annually to maintain REIT status.
 
An amount equal to
the sum of which 85% of its REIT ordinary income and 95% of its REIT
 
capital gain net income, plus certain undistributed income from
prior taxable years, must be distributed within the taxable year, in order to avoid the imposition of an excise tax.
 
The remaining
balance may be distributed up to the end of the following taxable year, provided the REIT elects to treat such amount
 
as a prior year
distribution and meets certain other requirements.
 
NOTE 11.
 
EARNINGS PER SHARE (EPS)
The Company
 
had dividend
 
eligible
 
Performance
 
Units and
 
Deferred
 
Stock Units
 
that were
 
outstanding
 
during the
 
nine and
 
three
months ended
 
September
 
30, 2022
 
and 2021.
 
The basic
 
and diluted
 
per share
 
computations
 
include these
 
unvested Performance
 
Units
and Deferred
 
Stock Units
 
if there is
 
income available
 
to common
 
stock, as
 
they have
 
dividend
 
participation
 
rights. The
 
unvested
Performance
 
Units and
 
Deferred
 
Stock Units
 
have no contractual
 
obligation
 
to share
 
in losses.
 
Because there
 
is no such
 
obligation,
 
the
unvested Performance
 
Units and
 
Deferred
 
Stock Units
 
are not included
 
in the basic
 
and diluted
 
EPS computations
 
when no income
 
is
available
 
to common
 
stock even
 
though they
 
are considered
 
participating
 
securities.
The table
 
below reconciles
 
the numerator
 
and denominator
 
of EPS for
 
the nine
 
and three
 
months ended
 
September
 
30, 2022
 
and
2021.
(in thousands, except per share information)
Nine Months Ended September 30,
Three Months Ended September 30,
2022
2021
2022
2021
Basic and diluted EPS per common share:
Numerator for basic and diluted EPS per share of common stock:
Net (loss) income - Basic and diluted
$
(293,380)
$
(20,196)
$
(84,514)
$
26,038
Weighted average shares of common stock:
Shares of common stock outstanding at the balance sheet date
35,066
30,664
35,066
30,664
Unvested dividend eligible share based compensation
outstanding at the balance sheet date
-
-
-
53
Effect of weighting
 
271
(9,603)
140
(5,000)
Weighted average shares-basic and diluted
35,337
21,061
35,206
25,717
Net (loss) income per common share:
Basic and diluted
$
(8.31)
$
(0.95)
$
(2.40)
$
1.00
Anti-dilutive incentive shares not included in calculation
89
53
89
-
23
NOTE 12.
 
FAIR VALUE
The framework
 
for using
 
fair value
 
to measure
 
assets and
 
liabilities
 
defines fair
 
value as the
 
price that
 
would be
 
received to
 
sell an
asset or
 
paid to transfer
 
a liability
 
(an exit
 
price). A
 
fair value
 
measure should
 
reflect the
 
assumptions
 
that market
 
participants
 
would use
 
in
pricing the
 
asset or
 
liability, including
 
the assumptions
 
about the
 
risk inherent
 
in a particular
 
valuation
 
technique,
 
the effect of
 
a restriction
on the sale
 
or use of
 
an asset and
 
the risk of
 
non-performance.
 
Required
 
disclosures
 
include stratification
 
of balance
 
sheet amounts
measured
 
at fair value
 
based on
 
inputs the
 
Company uses
 
to derive
 
fair value
 
measurements.
 
These stratifications
 
are:
 
Level 1 valuations,
 
where the
 
valuation
 
is based on
 
quoted market
 
prices for
 
identical
 
assets or
 
liabilities
 
traded in
 
active markets
(which include
 
exchanges
 
and over-the-counter
 
markets with
 
sufficient
 
volume),
 
Level 2 valuations,
 
where the
 
valuation
 
is based on
 
quoted market
 
prices for
 
similar instruments
 
traded in
 
active markets,
 
quoted
prices for
 
identical
 
or similar
 
instruments
 
in markets
 
that are
 
not 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
 
2 valuations,
 
and such valuations
 
currently
 
are determined
 
by the Company
based on
 
independent
 
pricing sources
 
and/or third
 
party broker
 
quotes. Because
 
the price
 
estimates
 
may vary, the Company
 
must make
certain judgments
 
and assumptions
 
about the
 
appropriate
 
price to
 
use to calculate
 
the fair
 
values. The
 
Company and
 
the independent
pricing sources
 
use various
 
valuation
 
techniques
 
to determine
 
the price
 
of the Company’s
 
securities.
 
These techniques
 
include observing
the most
 
recent market
 
for like
 
or identical
 
assets (including
 
security
 
coupon, maturity,
 
yield, and
 
prepayment
 
speeds), spread
 
pricing
techniques
 
to determine
 
market credit
 
spreads (option
 
adjusted spread,
 
zero volatility
 
spread,
 
spread to
 
the U.S.
 
Treasury curve
 
or spread
to a benchmark
 
such as a
 
TBA), and
 
model driven
 
approaches
 
(the discounted
 
cash flow
 
method,
 
Black Scholes
 
and SABR
 
models which
rely upon
 
observable
 
market rates
 
such as the
 
term structure
 
of interest
 
rates and
 
volatility).
 
The appropriate
 
spread pricing
 
method used
is based on
 
market convention.
 
The pricing
 
source determines
 
the spread
 
of recently
 
observed
 
trade activity
 
or observable
 
markets for
assets similar
 
to those
 
being priced.
 
The spread
 
is then adjusted
 
based on
 
variances
 
in certain
 
characteristics
 
between the
 
market
observation
 
and the asset
 
being priced.
 
Those characteristics
 
include: type
 
of asset,
 
the expected
 
life of the
 
asset, the
 
stability
 
and
predictability
 
of the expected
 
future cash
 
flows of
 
the asset,
 
whether
 
the coupon
 
of the asset
 
is fixed
 
or adjustable,
 
the guarantor
 
of the
security if
 
applicable,
 
the coupon,
 
the maturity, the
 
issuer, size of
 
the underlying
 
loans, year
 
in which
 
the underlying
 
loans
 
were originated,
loan to value
 
ratio, state
 
in which
 
the underlying
 
loans reside,
 
credit score
 
of the underlying
 
borrowers
 
and other
 
variables if
 
appropriate.
The fair
 
value of the
 
security is
 
determined
 
by using the
 
adjusted
 
spread.
 
The Company’s
 
U.S. Treasury
 
Notes are
 
based on
 
quoted prices
 
for identical
 
instruments
 
in active
 
markets and
 
are classified
 
as
Level 1 assets.
The Company’s
 
futures contracts
 
are Level
 
1 valuations,
 
as they are
 
exchange-traded
 
instruments
 
and quoted
 
market prices
 
are
readily available.
 
Futures contracts
 
are settled
 
daily. The Company’s
 
interest
 
rate swaps
 
and interest
 
rate swaptions
 
are Level
 
2
valuations.
 
The fair
 
value of interest
 
rate swaps
 
is determined
 
using a discounted
 
cash flow
 
approach
 
using forward
 
market interest
 
rates
and discount
 
rates, which
 
are observable
 
inputs. The
 
fair value
 
of interest
 
rate swaptions
 
is determined
 
using an option
 
pricing model.
 
RMBS (based
 
on the fair
 
value option),
 
derivatives
 
and TBA securities
 
were recorded
 
at fair value
 
on a recurring
 
basis during
 
the nine
and three
 
months ended
 
September
 
30, 2022
 
and 2021.
 
When determining
 
fair value
 
measurements,
 
the Company
 
considers
 
the principal
or most advantageous
 
market in
 
which it
 
would transact
 
and considers
 
assumptions
 
that market
 
participants
 
would use
 
when pricing
 
the
asset. When
 
possible,
 
the Company
 
looks to active
 
and observable
 
markets to
 
price identical
 
assets.
 
When identical
 
assets are
 
not traded
in active
 
markets, the
 
Company
 
looks to market
 
observable
 
data for
 
similar assets.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
24
The following
 
table presents
 
financial
 
assets (liabilities)
 
measured
 
at fair value
 
on a recurring
 
basis as of
 
September
 
30, 2022 and
December
 
31, 2021.
 
Derivative
 
contracts
 
are reported
 
as a net
 
position by
 
contract
 
type, and
 
not based
 
on master
 
netting arrangements.
 
(in thousands)
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
 
Observable
Unobservable
Assets
Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
September 30, 2022
Mortgage-backed securities
$
-
$
3,201,214
$
-
U.S. Treasury Notes
36,118
-
-
Interest rate swaps
-
169,630
-
Interest rate swaptions
-
38,880
-
Interest rate caps
-
1,188
-
TBA securities
-
(394)
-
December 31, 2021
Mortgage-backed securities
$
-
$
6,511,095
$
-
U.S. Treasury Notes
37,175
-
-
Interest rate swaps
-
26,431
-
Interest rate swaptions
-
17,070
-
TBA securities
-
(304)
-
During the nine and three months ended September 30, 2022 and 2021, there were
 
no transfers of financial assets or liabilities
between levels 1, 2 or 3.
NOTE 13. RELATED PARTY TRANSACTIONS
Management Agreement
The Company is externally managed and advised by Bimini Advisors, LLC (the
 
“Manager”) pursuant to the terms of a
management agreement. The management agreement has been renewed
 
through
February 20, 2023
 
and provides for automatic one-
year extension options thereafter and is subject to certain termination rights.
 
Under the terms of the management agreement, the
Manager is responsible for administering the business activities and day-to-day
 
operations of the Company.
 
The Manager receives a
monthly management fee in the amount of:
One-twelfth of 1.5% of the first $250 million of the Company’s month-end equity, as defined in the management agreement,
One-twelfth of 1.25% of the Company’s month-end equity that is greater than $250
 
million and less than or equal to $500
million, and
One-twelfth of 1.00% of the Company’s month-end equity that is greater than $500
 
million.
On April 1, 2022, pursuant to the third amendment to the management agreement
 
entered into on November 16, 2021, the
Manager began providing certain repurchase agreement trading, clearing and
 
administrative services to the Company that had been
previously provided by AVM, L.P.
 
under an agreement terminated on March 31, 2022.
 
In consideration for such services, the Company
will pay the following fees to the Manager:
25
A daily fee equal to the outstanding principal balance of repurchase agreement funding
 
in place as of the end of such day
multiplied by 1.5 basis points for the amount of aggregate outstanding principal balance
 
less than or equal to $5 billion, and
multiplied by 1.0 basis point for any amount of aggregate outstanding principal
 
balance in excess of $5 billion, and
A fee for the clearing and operational services provided by personnel
 
of the Manager equal to $10,000 per month.
The Company is obligated to reimburse the Manager for any direct expenses incurred
 
on its behalf and to pay the Manager the
Company’s pro rata portion of certain overhead costs set forth in the management
 
agreement.
 
Should the Company terminate the
management agreement without cause, it will pay the Manager a termination
 
fee equal to three times the average annual management
fee, as defined in the management agreement, before or on the last day of the
 
term of the agreement.
Total
 
expenses recorded for the management fee and allocated overhead incurred
 
were approximately $
9.4
 
million and $
3.1
million for the nine and three months ended September 30, 2022, respectively, and $
6.8
 
million and $
2.5
 
million for the nine and three
months ended September 30, 2021, respectively. At September 30, 2022 and December 31, 2021, the net amount due to
 
affiliates was
approximately $
1.1
 
million and $
1.1
 
million, respectively.
Other Relationships with Bimini
Robert Cauley, the Company’s Chief Executive Officer and Chairman of the Board of Directors, also serves as Chief Executive
Officer and Chairman of the Board of Directors of Bimini and owns shares of common
 
stock of Bimini. George H. Haas, IV, the
Company’s Chief Financial Officer, Chief Investment Officer, Secretary and a member of the Board of Directors, also serves as the
Chief Financial Officer, Chief Investment Officer and Treasurer of Bimini and owns shares of common stock of Bimini. In addition, as of
September 30, 2022, Bimini owned
519,871
 
shares, or
1.5
%, of the Company’s common stock.
26
ITEM 2. MANAGEMENT’S
 
DISCUSSION
 
AND ANALYSIS OF FINANCIAL
 
CONDITION
 
AND RESULTS OF
 
OPERATIONS
The following discussion of our financial condition and results of operations should
 
be read in conjunction with the financial
statements and notes to those statements included in Item 1 of this Form 10-Q.
 
The discussion may contain certain forward-looking
statements that involve risks and uncertainties. Forward-looking statements
 
are those that are not historical in nature. As a result of
many factors, such as those set forth under “Risk Factors” in our most recent
 
Annual Report on Form 10-K, our actual results may
differ materially from those anticipated in such forward-looking statements.
Common Stock
 
Reverse
 
Split
On August 30, 2022, the Company effected a 1-for-5 reverse stock split of its common
 
stock and proportionately decreased the
number of authorized shares of common stock.
 
All share and per share information has been retroactively adjusted to reflect
 
the
reverse split.
Overview
We are a specialty finance company that invests in residential mortgage-backed securities
 
(“RMBS”) which are issued and
guaranteed by a federally chartered corporation or agency (“Agency RMBS”).
 
Our investment strategy focuses on, and our portfolio
consists of, two categories of Agency RMBS: (i) traditional pass-through Agency RMBS,
 
such as mortgage pass-through certificates
issued by Fannie Mae, Freddie Mac or Ginnie Mae (the “GSEs”) and collateralized
 
mortgage obligations (“CMOs”) issued by the GSEs
(“PT RMBS”) and (ii) structured Agency RMBS, such as interest-only securities (“IOs”),
 
inverse interest-only securities (“IIOs”) and
principal only securities (“POs”), among other types of structured Agency RMBS.
 
We were formed by Bimini in August 2010,
commenced operations on November 24, 2010 and completed our initial public
 
offering (“IPO”) on February 20, 2013.
 
We are
externally managed by Bimini Advisors, an investment adviser registered with
 
the Securities and Exchange Commission (the “SEC”).
Our business objective is to provide attractive risk-adjusted total returns over the
 
long term through a combination of capital
appreciation and the payment of regular monthly distributions. We intend to achieve this objective
 
by investing in and strategically
allocating capital between the two categories of Agency RMBS described above.
 
We seek to generate income from (i) the net interest
margin on our leveraged PT RMBS portfolio and the leveraged portion
 
of our structured Agency RMBS portfolio, and (ii) the interest
income we generate from the unleveraged portion of our structured Agency RMBS
 
portfolio. We intend to fund our PT RMBS and
certain of our structured Agency RMBS through short-term borrowings
 
structured as repurchase agreements. PT RMBS and structured
Agency RMBS typically exhibit materially different sensitivities to movements in interest
 
rates. Declines in the value of one portfolio
may be offset by appreciation in the other. The percentage of capital that we allocate to our two Agency RMBS asset categories will
vary and will be actively managed in an effort to maintain the level of income generated by
 
the combined portfolios, the stability of that
income stream and the stability of the value of the combined portfolios. We believe that this
 
strategy will enhance our liquidity,
earnings, book value stability and asset selection opportunities in various interest
 
rate environments.
 
We operate so as to qualify to be taxed as a real estate investment trust
 
(“REIT”) under the Internal Revenue Code of 1986, as
amended (the “Code”).
 
We generally will not be subject to U.S. federal income tax to the extent that we
 
currently distribute all of our
REIT taxable income (as defined in the Code) to our stockholders and maintain
 
our REIT qualification.
The Company’s common stock trades on the New York Stock Exchange under the symbol “ORC”.
 
27
Capital Raising Activities
On August 4, 2020, we entered into an equity distribution agreement (the “August
 
2020 Equity Distribution Agreement”) with four
sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate
 
amount of $150,000,000 of shares of our
common stock in transactions that were deemed to be “at the market” offerings and privately
 
negotiated transactions. We issued a total
of 5,538,730 shares under the August 2020 Equity Distribution Agreement for aggregate
 
gross proceeds of approximately $150.0
million, and
 
net proceeds of approximately $147.4 million, after commissions and
 
fees,
 
prior to its termination in June 2021.
On January 20, 2021, we entered into 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 “June 2021
 
Equity Distribution Agreement”) with four
sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate
 
amount of $250,000,000 of shares of our
common stock in transactions that were deemed to be “at the market” offerings and privately
 
negotiated transactions. We issued a total
of 9,881,467 shares under the June 2021 Equity Distribution Agreement for aggregate
 
gross proceeds of approximately $250.0 million,
and net proceeds of approximately $246.2 million, after commissions and fees, prior to
 
its termination in October 2021.
On October 29, 2021,
 
we entered into an equity distribution agreement (the “October 2021
 
Equity Distribution Agreement”) with
four sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate
 
amount of $250,000,000 of shares of
our common stock in transactions that are deemed to be “at the market” offerings and privately negotiated
 
transactions. Through
September 30, 2022, we issued a total of 3,167,140 shares under the October 2021
 
Equity Distribution Agreement for aggregate gross
proceeds of approximately $78.3 million, and net proceeds of approximately
 
$77.0 million, after commissions and fees.
 
Stock Repurchase Agreement
On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to 400,000
 
shares of our common stock. The
timing, manner, price and amount of any repurchases is determined by the Company in its discretion and is subject
 
to economic and
market conditions, stock price, applicable legal requirements and other factors.
 
The authorization does not obligate the Company to
acquire any particular amount of common stock and the program may be
 
suspended or discontinued at the Company’s discretion
without prior notice. On February 8, 2018, the Board of Directors approved
 
an increase in the stock repurchase program for up to an
additional 904,564 shares of the Company’s common stock. Coupled with the 156,751
 
shares remaining from the original 400,000
share authorization, the increased authorization brought the total authorization
 
to 1,061,316 shares, representing 10% of the
Company’s then outstanding share count.
28
On December 9, 2021, the Board of Directors approved an increase in the
 
number of shares of the Company’s common stock
available in the stock repurchase program for up to an additional 3,372,399 shares, bringing
 
the remaining authorization under the
stock repurchase program to 3,539,861 shares, representing approximately 10% of the
 
Company’s then outstanding shares of
common stock.
 
On October 12, 2022, the Board of Directors approved an increase in the
 
number of shares of the Company’s common stock
available in the stock repurchase program for up to an additional 4,300,000 shares,
 
bringing the remaining authorization under the
stock repurchase program to 6,183,601 shares, representing approximately 18% of the
 
Company’s then outstanding shares of
common stock. This stock repurchase program has no termination date.
From the inception of the stock repurchase program through September 30, 2022, the
 
Company repurchased a total of 1,487,362
shares at an aggregate cost of approximately $44.8 million, including commissions
 
and fees, for a weighted average price of $30.12
per share. During the nine months ended September 30, 2022, the Company repurchased
 
a total of 350,260 shares of its common
stock at an aggregate cost of approximately $4.4 million, including commissions
 
and fees, for a weighted average price of $12.68 per
share. Subsequent to September 30, 2022, and through October 27, 2022, the Company
 
repurchased a total of 1,644,044 shares at an
aggregate cost of approximately $14.2 million, including commissions and fees, for a weighted
 
average price of $8.64 per share.
Factors that Affect our Results of Operations and Financial Condition
A variety of industry and economic factors may impact our results of operations and
 
financial condition. These factors include:
interest rate trends;
the difference between Agency RMBS yields and our funding and hedging costs;
competition for, and supply of, investments in Agency RMBS;
actions taken by the U.S. government, including the presidential administration,
 
the Federal Reserve (the “Fed”), the Federal
Housing Financing Agency (the “FHFA”), 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.
In addition, a variety of factors relating to our business may also impact our results
 
of operations and financial condition. These
factors include:
our degree of leverage;
our access to funding and borrowing capacity;
our borrowing costs;
our hedging activities;
the market value of our investments
increases in our cost of funds resulting from increases in the Fed Funds rate that
 
are controlled by the Fed which have
occurred, and are likely to continue to occur, in 2022; and
the requirements to qualify as a REIT and the requirements to qualify for
 
a registration exemption under the Investment
Company Act.
 
Results
 
of Operations
Described
 
below are
 
the Company’s
 
results of
 
operations
 
for the
 
nine and
 
three months
 
ended September
 
30, 2022,
 
as compared
 
to
the Company’s
 
results of
 
operations
 
for the nine
 
and three
 
months ended
 
September
 
30, 2021.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
29
Net (Loss)
 
Income Summary
Net loss
 
for the nine
 
months ended
 
September
 
30, 2022
 
was $293.4
 
million, or
 
$8.31 per
 
share. Net
 
loss for the
 
nine months
 
ended
September
 
30, 2021
 
was $20.2
 
million, or
 
$0.95 per
 
share.
 
Net loss
 
for the three
 
months ended
 
September
 
30, 2022
 
was $84.5
 
million, or
$2.40 per
 
share. Net
 
income for
 
the three
 
months ended
 
September
 
30, 2021
 
was $26.0
 
million, or
 
$1.00 per
 
share.
 
The components
 
of
net (loss)
 
income for
 
the nine and
 
three months
 
ended September
 
30, 2022
 
and 2021,
 
along with
 
the changes
 
in those components
 
are
presented
 
in the table
 
below:
(in thousands)
Nine Months Ended September 30,
Three Months Ended, September 30,
2022
2021
Change
2022
2021
Change
Interest income
$
112,735
$
90,279
$
22,456
$
35,610
$
34,169
$
1,441
Interest expense
(32,196)
(5,067)
(27,129)
(21,361)
(1,570)
(19,791)
Net interest income
80,539
85,212
(4,673)
14,249
32,599
(18,350)
Losses on RMBS and derivative contracts
(359,059)
(94,522)
(264,537)
(93,544)
(2,887)
(90,657)
Net portfolio (loss) income
(278,520)
(9,310)
(269,210)
(79,295)
29,712
(109,007)
Expenses
(14,859)
(10,886)
(3,973)
(5,218)
(3,674)
(1,544)
Net (loss) income
$
(293,379)
$
(20,196)
$
(273,183)
$
(84,513)
$
26,038
$
(110,551)
GAAP and
 
Non-GAAP
 
Reconciliations
In addition
 
to the results
 
presented
 
in accordance
 
with GAAP, our results
 
of operations
 
discussed
 
below include
 
certain non-GAAP
financial
 
information,
 
including
 
“Net Earnings
 
Excluding
 
Realized
 
and Unrealized
 
Gains and Losses”,
 
“Economic
 
Interest
 
Expense”
 
and
“Economic
 
Net Interest
 
Income.”
Net Earnings
 
Excluding
 
Realized
 
and Unrealized
 
Gains and
 
Losses
We have elected
 
to account
 
for our
 
Agency RMBS
 
under the
 
fair value
 
option. Securities
 
held under
 
the fair
 
value option
 
are
recorded
 
at estimated
 
fair value,
 
with changes
 
in the fair
 
value recorded
 
as unrealized
 
gains or
 
losses through
 
the statements
 
of
operations.
In addition,
 
we have not
 
designated
 
our derivative
 
financial
 
instruments
 
used for
 
hedging purposes
 
as hedges for
 
accounting
purposes,
 
but rather
 
hold them
 
for economic
 
hedging purposes.
 
Changes in
 
fair value
 
of these
 
instruments
 
are presented
 
in a separate
line item
 
in the Company’s
 
statements
 
of operations
 
and are not
 
included in
 
interest
 
expense.
 
As such, for
 
financial
 
reporting
 
purposes,
interest
 
expense and
 
cost of funds
 
are not impacted
 
by the fluctuation
 
in value of
 
the derivative
 
instruments.
 
Presenting
 
net earnings
 
excluding
 
realized and
 
unrealized
 
gains and
 
losses allows
 
management
 
to: (i) isolate
 
the net interest
 
income
and other
 
expenses of
 
the Company
 
over time,
 
free of all
 
fair value
 
adjustments
 
and (ii)
 
assess the
 
effectiveness
 
of our funding
 
and
hedging strategies
 
on our capital
 
allocation
 
decisions
 
and our
 
asset allocation
 
performance.
 
Our funding
 
and hedging
 
strategies,
 
capital
allocation
 
and asset
 
selection
 
are integral
 
to our risk
 
management
 
strategy, and therefore
 
critical to
 
the management
 
of our portfolio.
 
We
believe that
 
the presentation
 
of our net
 
earnings
 
excluding
 
realized
 
and unrealized
 
gains is useful
 
to investors
 
because it
 
provides
 
a means
of comparing
 
our results
 
of operations
 
to those
 
of our peers
 
who have not
 
elected the
 
same accounting
 
treatment.
 
Our presentation
 
of net
earnings
 
excluding
 
realized and
 
unrealized
 
gains and
 
losses may
 
not be comparable
 
to similarly-titled
 
measures of
 
other companies,
 
who
may use different
 
calculations.
 
As a result,
 
net earnings
 
excluding
 
realized and
 
unrealized
 
gains and
 
losses should
 
not be considered
 
as a
substitute
 
for our GAAP
 
net income
 
(loss) as
 
a measure
 
of our financial
 
performance
 
or any measure
 
of our liquidity
 
under GAAP.
 
The
table below
 
presents
 
a reconciliation
 
of our net
 
income (loss)
 
determined
 
in accordance
 
with GAAP
 
and net earnings
 
excluding realized
and unrealized
 
gains and
 
losses.
Described
 
below are
 
the Company’s
 
results of
 
operations
 
for the
 
nine months
 
ended September
 
30, 2022
 
and 2021,
 
and for each
quarter in
 
2022 to date
 
and 2021.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30
Net Earnings Excluding Realized and Unrealized Gains and Losses
(in thousands, except per share data)
Per Share
Net Earnings
Net Earnings
Excluding
Excluding
Realized and
Realized and
Realized and
Realized and
Net
Unrealized
Unrealized
Net
Unrealized
Unrealized
Income
Gains and
Gains and
Income
Gains and
Gains and
(GAAP)
Losses
(1)
Losses
(GAAP)
Losses
Losses
Three Months Ended
September 30, 2022
$
(84,513)
$
(93,544)
$
9,031
$
(2.40)
$
(2.66)
$
0.26
June 30, 2022
(60,139)
(82,283)
22,144
(1.70)
(2.32)
0.62
March 31, 2022
(148,727)
(183,232)
34,505
(4.20)
(5.18)
0.98
December 31, 2021
(44,564)
(82,597)
38,033
(1.33)
(2.46)
1.13
September 30, 2021
26,038
(2,887)
28,925
1.01
(0.11)
1.12
June 30, 2021
(16,865)
(40,844)
23,979
(0.85)
(2.05)
1.20
March 31, 2021
(29,369)
(50,791)
21,422
(1.72)
(2.98)
1.26
Nine Months Ended
September 30, 2022
$
(293,379)
$
(359,059)
$
65,680
$
(8.31)
$
(10.16)
$
1.85
September 30, 2021
(20,196)
(94,522)
74,326
(0.96)
(4.49)
3.53
(1)
Includes realized
 
and unrealized
 
gains (losses)
 
on RMBS and derivative
 
financial instruments,
 
including net
 
interest income
 
or expense on
 
interest
rate swaps.
Economic Interest
 
Expense and
 
Economic Net
 
Interest
 
Income
We use derivative
 
and other
 
hedging instruments,
 
specifically
 
Eurodollar, Fed
 
Funds and
 
T-Note futures
 
contracts,
 
short positions
 
in
U.S. Treasury
 
securities,
 
interest
 
rate swaps
 
and swaptions,
 
to hedge
 
a portion
 
of the interest
 
rate risk on
 
repurchase
 
agreements
 
in a
rising rate
 
environment.
 
We have not
 
elected to
 
designate
 
our derivative
 
holdings for
 
hedge accounting
 
treatment.
 
Changes in
 
fair value
 
of these
 
instruments
are presented
 
in a separate
 
line item
 
in our statements
 
of operations
 
and not included
 
in interest
 
expense. As
 
such, for
 
financial
 
reporting
purposes,
 
interest
 
expense and
 
cost of funds
 
are not impacted
 
by the fluctuation
 
in value of
 
the derivative
 
instruments.
 
For the purpose
 
of computing
 
economic net
 
interest
 
income and
 
ratios relating
 
to cost of
 
funds measures,
 
GAAP interest
 
expense
has been
 
adjusted to
 
reflect the
 
realized and
 
unrealized
 
gains or
 
losses on
 
certain derivative
 
instruments
 
the Company
 
uses, specifically
Eurodollar, Fed
 
Funds and
 
U.S. Treasury
 
futures,
 
and interest
 
rate swaps
 
and swaptions,
 
that pertain
 
to each period
 
presented.
 
We
believe that
 
adjusting
 
our interest
 
expense for
 
the periods
 
presented
 
by the gains
 
or losses
 
on these
 
derivative
 
instruments
 
would not
accurately
 
reflect our
 
economic
 
interest expense
 
for these
 
periods.
 
The reason
 
is that these
 
derivative
 
instruments
 
may cover
 
periods that
extend into
 
the future,
 
not just the
 
current period.
 
Any realized
 
or unrealized
 
gains or
 
losses on
 
the instruments
 
reflect the
 
change in
market value
 
of the instrument
 
caused by
 
changes in
 
underlying
 
interest
 
rates applicable
 
to the term
 
covered by
 
the instrument,
 
not just
the current
 
period. For
 
each period
 
presented,
 
we have combined
 
the effects
 
of the derivative
 
financial
 
instruments
 
in place for
 
the
respective
 
period with
 
the actual
 
interest
 
expense incurred
 
on borrowings
 
to reflect
 
total economic
 
interest
 
expense for
 
the applicable
period. Interest
 
expense, including
 
the effect
 
of derivative
 
instruments
 
for the period,
 
is referred
 
to as economic
 
interest expense.
 
Net
interest
 
income, when
 
calculated
 
to include
 
the effect
 
of derivative
 
instruments
 
for the period,
 
is referred
 
to as economic
 
net interest
income. This
 
presentation
 
includes
 
gains or
 
losses on
 
all contracts
 
in effect during
 
the reporting
 
period, covering
 
the current
 
period as
 
well
as periods
 
in the future.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31
The Company
 
from time
 
to time invests
 
in TBAs,
 
which are
 
forward
 
contracts
 
for the purchase
 
or sale of
 
Agency RMBS
 
at a
predetermined
 
price, face
 
amount,
 
issuer, coupon
 
and stated
 
maturity on
 
an agreed-upon
 
future date.
 
The specific
 
Agency RMBS
 
to be
delivered
 
into the
 
contract
 
are not known
 
until shortly
 
before the
 
settlement
 
date. We may
 
choose, prior
 
to settlement,
 
to move the
settlement
 
of these
 
securities
 
out to a
 
later date
 
by entering
 
into a dollar
 
roll transaction.
 
The Agency
 
RMBS purchased
 
or sold for
 
a
forward
 
settlement
 
date are
 
typically priced
 
at a discount
 
to equivalent
 
securities
 
settling
 
in the current
 
month. Consequently,
 
forward
purchases
 
of Agency
 
RMBS and
 
dollar roll
 
transactions
 
represent
 
a form of
 
off-balance
 
sheet financing.
 
These TBAs
 
are accounted
 
for as
derivatives
 
and marked
 
to market
 
through the
 
income statement.
 
Gains or losses
 
on TBAs are
 
included with
 
gains or
 
losses on
 
other
derivative
 
contracts
 
and are not
 
included
 
in interest
 
income for
 
purposes
 
of the discussions
 
below.
We believe
 
that economic
 
interest
 
expense and
 
economic
 
net interest
 
income provide
 
meaningful
 
information
 
to consider, in
 
addition
to the respective
 
amounts prepared
 
in accordance
 
with GAAP. The non-GAAP
 
measures help
 
management
 
to evaluate
 
its financial
position and
 
performance
 
without the
 
effects of
 
certain transactions
 
and GAAP
 
adjustments
 
that are
 
not necessarily
 
indicative
 
of our
current investment
 
portfolio
 
or operations.
 
The unrealized
 
gains or
 
losses on
 
derivative
 
instruments
 
presented
 
in our statements
 
of
operations
 
are not necessarily
 
representative
 
of the total
 
interest
 
rate expense
 
that we will
 
ultimately
 
realize. This
 
is because
 
as interest
rates move
 
up or down
 
in the future,
 
the gains
 
or losses
 
we ultimately
 
realize, and
 
which will
 
affect our
 
total interest
 
rate expense
 
in future
periods,
 
may differ
 
from the
 
unrealized
 
gains or
 
losses recognized
 
as of the
 
reporting
 
date.
 
Our presentation
 
of the economic
 
value of our
 
hedging strategy
 
has important
 
limitations.
 
First, other
 
market participants
 
may
calculate
 
economic
 
interest
 
expense and
 
economic net
 
interest
 
income differently
 
than the
 
way we calculate
 
them. Second,
 
while we
believe that
 
the calculation
 
of the economic
 
value of our
 
hedging
 
strategy
 
described
 
above helps
 
to present
 
our financial
 
position
 
and
performance,
 
it may be
 
of limited
 
usefulness
 
as an analytical
 
tool. Therefore,
 
the economic
 
value of
 
our investment
 
strategy should
 
not be
viewed in
 
isolation
 
and is not
 
a substitute
 
for interest
 
expense and
 
net interest
 
income computed
 
in accordance
 
with GAAP.
The tables
 
below present
 
a reconciliation
 
of the adjustments
 
to interest
 
expense shown
 
for each
 
period relative
 
to our derivative
instruments,
 
and the income
 
statement
 
line item,
 
gains (losses)
 
on derivative
 
instruments,
 
calculated
 
in accordance
 
with GAAP
 
for each
quarter of
 
2022 to date
 
and 2021.
Gains (Losses) on Derivative Instruments
(in thousands)
Funding Hedges
Recognized in
Attributed to
Attributed to
Income
U.S. Treasury and TBA
Current
Future
Statement
Securities Gain (Loss)
Period
Periods
(GAAP)
(Short Positions)
(Long Positions)
(Non-GAAP)
(Non-GAAP)
Three Months Ended
September 30, 2022
$
184,819
$
10,642
$
106
$
5,043
$
169,028
June 30, 2022
103,758
1,013
1,067
1,996
99,682
March 31, 2022
177,816
2,539
27
(1,287)
176,537
December 31, 2021
10,945
2,568
-
(7,949)
16,326
September 30, 2021
5,375
(2,306)
-
(1,248)
8,929
June 30, 2021
(34,915)
(5,963)
-
(5,104)
(23,848)
March 31, 2021
45,472
9,133
(8,559)
(4,044)
48,942
Nine Months Ended
September 30, 2022
$
466,393
$
14,194
$
1,200
$
5,752
$
445,247
September 30, 2021
15,932
864
(8,559)
(10,396)
34,023
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
32
Economic Interest Expense and Economic Net Interest Income
(in thousands)
Interest Expense on Borrowings
Gains
(Losses) on
Derivative
Instruments
Net Interest Income
GAAP
Attributed
Economic
GAAP
Economic
Interest
Interest
to Current
Interest
Net Interest
Net Interest
Income
Expense
Period
(1)
Expense
(2)
Income
Income
(3)
Three Months Ended
September 30, 2022
$
35,610
$
21,361
$
5,043
$
16,318
$
14,249
$
19,292
June 30, 2022
35,268
8,180
1,996
6,184
27,088
$
29,084
March 31, 2022
41,857
2,655
(1,287)
3,942
39,202
37,915
December 31, 2021
44,421
2,023
(7,949)
9,972
42,398
34,449
September 30, 2021
34,169
1,570
(1,248)
2,818
32,599
31,351
June 30, 2021
29,254
1,556
(5,104)
6,660
27,698
22,594
March 31, 2021
26,856
1,941
(4,044)
5,985
24,915
20,871
Nine Months Ended
September 30, 2022
$
112,735
$
32,196
$
5,752
$
26,444
$
80,539
$
86,291
September 30, 2021
90,279
5,067
(10,396)
15,463
85,212
74,816
(1)
Reflects the effect of derivative instrument hedges for only the period
 
presented.
(2)
Calculated by adding the effect of derivative instrument hedges attributed
 
to the period presented to GAAP interest expense.
(3)
Calculated by adding the effect of derivative instrument hedges attributed
 
to the period presented to GAAP net interest income.
Net Interest Income
During the
 
nine months
 
ended September
 
30, 2022,
 
we generated
 
$80.5 million
 
of net interest
 
income, consisting
 
of $112.7 million
 
of
interest
 
income from
 
RMBS assets
 
offset by $32.2
 
million of
 
interest
 
expense on
 
borrowings.
 
For the comparable
 
period ended
September
 
30, 2021,
 
we generated
 
$85.2 million
 
of net interest
 
income, consisting
 
of $90.3
 
million of
 
interest
 
income from
 
RMBS assets
offset by $5.1
 
million of
 
interest
 
expense on
 
borrowings.
 
The $22.5
 
million increase
 
in interest
 
income was
 
due to a
 
73 basis
 
point ("bps")
increase in
 
the yield
 
on average
 
RMBS,
 
which was
 
partially
 
offset by a
 
$98.8 million
 
decrease
 
in average
 
RMBS.
 
The $27.1
 
million
increase in
 
interest
 
expense was
 
due to a
 
85 bps increase
 
in the average
 
cost of funds,
 
partially
 
offset by a
 
$63.0 million
 
decrease
 
in
average outstanding
 
borrowings.
On an economic
 
basis, our
 
interest
 
expense on
 
borrowings
 
for the nine
 
months ended
 
September
 
30, 2022
 
and 2021
 
was $26.4
million and
 
$15.5 million,
 
respectively, resulting
 
in $86.3
 
million
 
and $74.8
 
million of
 
economic
 
net interest
 
income, respectively.
 
During the
 
three months
 
ended September
 
30, 2022,
 
we generated
 
$14.2 million
 
of net interest
 
income, consisting
 
of $35.6
 
million of
interest
 
income from
 
RMBS assets
 
offset by $21.4
 
million of
 
interest
 
expense on
 
borrowings.
 
For the three
 
months ended
 
September
 
30,
2021, we
 
generated
 
$32.6 million
 
of net interest
 
income, consisting
 
of $34.2
 
million of
 
interest
 
income from
 
RMBS assets
 
offset by $1.6
million of
 
interest
 
expense on
 
borrowings.
 
The $1.4
 
million increase
 
in interest
 
income was
 
due to a
 
133 bps increase
 
in the yield
 
on
average RMBS,
 
partially
 
offset by a
 
$1,565.3
 
million decrease
 
in average
 
RMBS.
 
The $19.8
 
million increase
 
in interest
 
expense
 
was due
to a 235
 
bps increase
 
in the average
 
cost of funds,
 
partially
 
offset by a
 
$1,417.9
 
million decrease
 
in average
 
outstanding
 
borrowings.
On an economic
 
basis, our
 
interest
 
expense on
 
borrowings
 
for the three
 
months ended
 
September
 
30, 2022
 
and 2021
 
was $16.3
million and
 
$2.8 million,
 
respectively, resulting
 
in $19.3 million
 
and $31.4
 
million of
 
economic
 
net interest
 
income, respectively.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
33
The tables
 
below provide
 
information
 
on our portfolio
 
average balances,
 
interest
 
income, yield
 
on assets,
 
average borrowings,
 
interest
expense, cost
 
of funds,
 
net interest
 
income and
 
net interest
 
spread for
 
the nine
 
months ended
 
September
 
30, 2022
 
and 2021 and
 
each
quarter of
 
2022 to date
 
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
September 30, 2022
$
3,571,037
$
35,610
3.99%
$
3,446,420
$
21,361
$
16,318
2.48%
1.89%
June 30, 2022
4,260,727
35,268
3.31%
4,111,544
8,180
6,184
0.80%
0.60%
March 31, 2022
5,545,844
41,857
3.02%
5,354,107
2,655
3,942
0.20%
0.29%
December 31, 2021
6,056,259
44,421
2.93%
5,728,988
2,023
9,972
0.14%
0.70%
September 30, 2021
5,136,331
34,169
2.66%
4,864,287
1,570
2,818
0.13%
0.23%
June 30, 2021
4,504,887
29,254
2.60%
4,348,192
1,556
6,660
0.14%
0.61%
March 31, 2021
4,032,716
26,856
2.66%
3,888,633
1,941
5,985
0.20%
0.62%
Nine Months Ended
September 30, 2022
$
4,459,203
$
112,735
3.37%
$
4,304,024
$
32,196
$
26,444
1.00%
0.82%
September 30, 2021
4,557,978
90,279
2.64%
4,367,037
5,067
15,463
0.15%
0.47%
($ in thousands)
Net Interest Income
Net Interest Spread
GAAP
Economic
GAAP
Economic
Basis
Basis
(2)
Basis
Basis
(4)
Three Months Ended
September 30, 2022
$
14,249
$
19,292
1.51%
2.10%
June 30, 2022
27,088
29,084
2.51%
2.71%
March 31, 2022
39,202
37,915
2.82%
2.73%
December 31, 2021
42,398
34,449
2.79%
2.23%
September 30, 2021
32,599
31,351
2.53%
2.43%
June 30, 2021
27,698
22,594
2.46%
1.99%
March 31, 2021
24,915
20,871
2.46%
2.04%
Nine Months Ended
September 30, 2022
$
80,539
$
86,291
2.37%
2.55%
September 30, 2021
85,212
74,816
2.49%
2.17%
(1)
Portfolio yields and costs of borrowings presented in the tables above and the
 
tables on pages 34 and 35 are calculated based on the
average balances of the underlying investment portfolio/borrowings balances
 
and are annualized for the periods presented. Average
balances for quarterly periods are calculated using two data points, the beginning
 
and ending balances.
(2)
Economic interest expense and economic net interest income
presented in the table above and the tables on page 35 includes the effect
of our derivative instrument hedges for only the periods presented.
(3)
 
Represents interest cost of our borrowings and the effect of derivative
 
instrument hedges attributed to the period divided by average
RMBS.
(4)
 
Economic net interest spread is calculated by subtracting average economic
 
cost of funds from realized yield on average RMBS.
Interest Income and Average Asset Yield
Our interest
 
income for
 
the nine
 
months ended
 
September
 
30, 2022
 
and 2021
 
was $112.7 million
 
and $90.3
 
million, respectively.
 
We
had average
 
RMBS holdings
 
of $4,459.2
 
million and
 
$4,558.0
 
million for
 
the nine
 
months ended
 
September
 
30, 2022
 
and 2021,
respectively.
 
The yield
 
on our portfolio
 
was 3.37%
 
and 2.64%
 
for the nine
 
months ended
 
September
 
30, 2022 and
 
2021, respectively.
 
For
the nine
 
months ended
 
September
 
30, 2022,
 
as compared
 
to the nine
 
months ended
 
September
 
30, 2021,
 
there was
 
a $22.5 million
increase in
 
interest
 
income due
 
to the 73
 
bps increase
 
in the yield
 
on average
 
RMBS,
 
partially
 
offset by the
 
$98.8 million
 
decrease
 
in
average RMBS.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
34
Our interest
 
income for
 
the three
 
months ended
 
September
 
30, 2022
 
and 2021
 
was $35.6
 
million and
 
$34.2 million,
 
respectively.
 
We
had average
 
RMBS holdings
 
of $3,571.0
 
million and
 
$5,136.3
 
million for
 
the three
 
months ended
 
September
 
30, 2022
 
and 2021,
respectively.
 
The yield
 
on our portfolio
 
was 3.99%
 
and 2.66%
 
for the three
 
months ended
 
September
 
30, 2022 and
 
2021, respectively.
 
For
the three
 
months ended
 
September
 
30, 2022,
 
as compared
 
to the three
 
months ended
 
September
 
30, 2021,
 
there was
 
a $1.4 million
increase in
 
interest
 
income due
 
to
the 133 bps
 
increase in
 
the yield
 
on average
 
RMBS,
 
partially
 
offset by the
 
$1,565.3
 
million decrease
 
in
average RMBS.
The table
 
below presents
 
the average
 
portfolio
 
size, income
 
and yields
 
of our respective
 
sub-portfolios,
 
consisting
 
of structured
 
RMBS
and PT RMBS,
 
for the nine
 
months ended
 
September
 
30, 2022
 
and 2021,
 
and for each
 
quarter of
 
2022 to date
 
and 2021.
 
($ in thousands)
Average RMBS Held
Interest Income
Realized Yield on Average RMBS
PT
Structured
PT
Structured
PT
Structured
RMBS
RMBS
Total
RMBS
RMBS
Total
RMBS
RMBS
Total
Three Months Ended
September 30, 2022
$
3,458,277
$
112,760
$
3,571,037
$
32,297
$
3,313
$
35,610
3.74%
11.75%
3.99%
June 30, 2022
4,069,334
191,393
4,260,727
31,894
3,374
35,268
3.14%
7.05%
3.31%
March 31, 2022
5,335,353
210,491
5,545,844
40,066
1,791
41,857
3.00%
3.40%
3.02%
December 31, 2021
5,878,376
177,883
6,056,259
42,673
1,748
44,421
2.90%
3.93%
2.93%
September 30, 2021
5,016,550
119,781
5,136,331
33,111
1,058
34,169
2.64%
3.53%
2.66%
June 30, 2021
4,436,135
68,752
4,504,887
29,286
(32)
29,254
2.64%
(0.18)%
2.60%
March 31, 2021
3,997,965
34,751
4,032,716
26,869
(13)
26,856
2.69%
(0.15)%
2.66%
Nine Months Ended
September 30, 2022
$
4,287,655
$
171,548
$
4,459,203
$
104,257
$
8,478
$
112,735
3.24%
6.59%
3.37%
September 30, 2021
4,483,550
74,428
4,557,978
89,266
1,013
90,279
2.65%
1.81%
2.64%
Interest Expense and the Cost of Funds
We had average
 
outstanding
 
borrowings
 
of $4,304.0
 
million and
 
$4,367.0
 
million and
 
total interest
 
expense of
 
$32.2 million
 
and $5.1
million for
 
the nine months
 
ended September
 
30, 2022
 
and 2021,
 
respectively. Our
 
average cost
 
of funds
 
was 1.00%
 
for the nine
 
months
ended September
 
30, 2022,
 
compared
 
to 0.15%
 
for the comparable
 
period in
 
2021.
 
The $27.1
 
million increase
 
in interest
 
expense
 
was
due to the
 
85 bps increase
 
in the average
 
cost of funds,
 
partially
 
offset by the
 
$63.0 million
 
decrease
 
in average
 
outstanding
 
borrowings
during the
 
nine months
 
ended September
 
30, 2022,
 
as compared
 
to the nine
 
months ended
 
September
 
30, 2021.
Our economic
 
interest
 
expense
 
was $26.4
 
million and
 
$15.5 million
 
for the nine
 
months ended
 
September
 
30, 2022
 
and 2021,
respectively. There
 
was a 35
 
bps increase
 
in the average
 
economic
 
cost of funds
 
to 0.82%
 
for the nine
 
months ended
 
September
 
30,
2022,
 
from 0.47%
 
for the nine
 
months ended
 
September
 
30, 2021.
We had average
 
outstanding
 
borrowings
 
of $3,446.4
 
million and
 
$4,864.3
 
million and
 
total interest
 
expense of
 
$21.4 million
 
and $1.6
million for
 
the three
 
months ended
 
September
 
30, 2022
 
and 2021,
 
respectively. Our
 
average
 
cost of funds
 
was 2.48%
 
and 0.13%
 
for three
months ended
 
September
 
30, 2022
 
and 2021,
 
respectively. There
 
was a 235
 
bps increase
 
in the average
 
cost of funds
 
and a $1,417.9
million decrease
 
in average
 
outstanding
 
borrowings
 
during the
 
three months
 
ended September
 
30, 2022,
 
compared
 
to the three
 
months
ended September
 
30, 2021.
 
Our economic
 
interest
 
expense
 
was $16.3
 
million and
 
$2.8 million
 
for the three
 
months ended
 
September
 
30, 2022
 
and 2021,
respectively. There
 
was a 166
 
bps increase
 
in the average
 
economic
 
cost of funds
 
to 1.89%
 
for the
 
three months
 
ended September
 
30,
2022 from
 
0.23% for
 
the three
 
months ended
 
September
 
30, 2021.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
35
Since all
 
of our repurchase
 
agreements
 
are short-term,
 
changes in
 
market rates
 
directly affect
 
our interest
 
expense. Our
 
average
 
cost
of funds
 
calculated
 
on a GAAP
 
basis was
 
29 bps above
 
the average
 
one-month
 
LIBOR and
 
81 bps below
 
the average
 
six-month
 
LIBOR
for the quarter
 
ended September
 
30, 2022.
 
Our average
 
economic cost
 
of funds
 
was 30 bps
 
below the
 
average one-month
 
LIBOR and
140 bps below
 
the average
 
six-month LIBOR
 
for the quarter
 
ended September
 
30, 2022.
 
The average
 
term to maturity
 
of the outstanding
repurchase
 
agreements
 
was 29 days
 
at September
 
30, 2022
 
and 27 days
 
at December
 
31, 2021.
The tables
 
below present
 
the average
 
balance of
 
borrowings
 
outstanding,
 
interest
 
expense and
 
average cost
 
of funds,
 
and average
one-month
 
and six-month
 
LIBOR rates
 
for the nine
 
months ended
 
September
 
30,
 
2022 and
 
2021, and
 
for each
 
quarter in
 
2022 to date
 
and
2021 on both
 
a GAAP and
 
economic basis.
 
($ in thousands)
Average
Interest Expense
Average Cost of Funds
Balance of
GAAP
Economic
GAAP
Economic
Borrowings
Basis
Basis
Basis
Basis
Three Months Ended
September 30, 2022
$
3,446,420
$
21,361
$
16,318
2.48%
1.89%
June 30, 2022
4,111,544
8,180
6,184
0.80%
0.60%
March 31, 2022
5,354,107
2,655
3,942
0.20%
0.29%
December 31, 2021
5,728,988
2,023
9,972
0.14%
0.70%
September 30, 2021
4,864,287
1,570
2,818
0.13%
0.23%
June 30, 2021
4,348,192
1,556
6,660
0.14%
0.61%
March 31, 2021
3,888,633
1,941
5,985
0.20%
0.62%
Nine Months Ended
September 30, 2022
$
4,304,024
$
32,196
$
26,444
1.00%
0.82%
September 30, 2021
4,367,037
5,067
15,463
0.15%
0.47%
Average GAAP Cost of Funds
Average Economic Cost of Funds
Relative to Average
Relative to Average
Average LIBOR
One-Month
Six-Month
One-Month
Six-Month
One-Month
Six-Month
LIBOR
LIBOR
LIBOR
LIBOR
Three Months Ended
September 30, 2022
2.19%
3.29%
0.29%
(0.81)%
(0.30)%
(1.40)%
June 30, 2022
0.93%
1.90%
(0.13)%
(1.10)%
(0.33)%
(1.30)%
March 31, 2022
0.25%
0.76%
(0.05)%
(0.56)%
0.04%
(0.47)%
December 31, 2021
0.09%
0.23%
0.05%
(0.09)%
0.61%
0.47%
September 30, 2021
0.09%
0.16%
0.04%
(0.03)%
0.14%
0.07%
June 30, 2021
0.10%
0.18%
0.04%
(0.04)%
0.51%
0.43%
March 31, 2021
0.13%
0.23%
0.07%
(0.03)%
0.49%
0.39%
Nine Months Ended
September 30, 2022
1.12%
1.98%
(0.12)%
(0.98)%
(0.30)%
(1.16)%
September 30, 2021
0.10%
0.19%
0.05%
(0.04)%
0.37%
0.28%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
36
Gains or Losses
The table
 
below presents
 
our gains
 
or losses
 
for the nine
 
and three
 
months ended
 
September
 
30, 2022
 
and 2021.
 
(in thousands)
Nine Months Ended September 30,
Three Months Ended September 30,
2022
2021
Change
2022
2021
Change
Realized (losses) gains on sales of RMBS
$
(132,672)
$
(3,068)
$
(129,604)
$
(66,143)
$
2,977
$
(69,120)
Unrealized losses on RMBS
(692,781)
(107,386)
(585,395)
(212,221)
(11,239)
(200,982)
Total losses on
 
RMBS
(825,453)
(110,454)
(714,999)
(278,364)
(8,262)
(270,102)
Gains on interest rate futures
207,681
852
206,829
84,713
574
84,139
Gains on interest rate swaps
172,069
12,446
159,623
65,966
3,000
62,966
(Losses) gains on payer swaptions (short positions)
(80,183)
3,507
(83,690)
(35,239)
2,295
(37,534)
Gains on payer swaptions (long positions)
150,445
5,477
144,968
59,131
1,767
57,364
Gains (losses) on interest rate caps
988
-
988
(499)
-
(499)
Gains (losses) on interest rate floors
-
1,345
(1,345)
-
45
(45)
Gains (losses) on TBA securities (short positions)
14,194
864
13,330
10,642
(2,306)
12,948
Gains (losses) on TBA securities (long positions)
1,200
(8,559)
9,759
106
-
106
Total gains
 
from derivative instruments
466,394
15,932
450,462
184,820
5,375
179,445
We invest in
 
RMBS with
 
the intent
 
to earn net
 
income from
 
the realized
 
yield on those
 
assets over
 
their related
 
funding and
 
hedging
costs, and
 
not for the
 
purpose of
 
making short
 
term gains
 
from sales.
 
However, we
 
have sold,
 
and may continue
 
to sell,
 
existing
 
assets to
acquire new
 
assets, which
 
our management
 
believes might
 
have higher
 
risk-adjusted
 
returns in
 
light of current
 
or anticipated
 
interest
 
rates,
federal government
 
programs
 
or general
 
economic conditions
 
or to manage
 
our balance
 
sheet as part
 
of our asset/liability
 
management
strategy. During
 
the nine
 
months ended
 
September
 
30, 2022 and
 
2021, we
 
received proceeds
 
of $2,731.5
 
million and
 
$2,598.9
 
million,
respectively, from
 
the sales
 
of RMBS.
 
During the
 
three months
 
ended September
 
30, 2022
 
and 2021,
 
we received
 
proceeds
 
of $796.9
million and
 
$918.0 million,
 
respectively, from
 
the sales
 
of RMBS.
Realized
 
and unrealized
 
gains and
 
losses on
 
RMBS are
 
driven in
 
part by changes
 
in yields and
 
interest
 
rates, the
 
spreads that
Agency RMBS
 
trade relative
 
to comparable
 
duration
 
U.S. Treasuries
 
or swaps,
 
as well as
 
varying levels
 
of demand
 
for RMBS,
 
which affect
the pricing
 
of the securities
 
in our portfolio.
 
The unrealized
 
gains and
 
losses on
 
RMBS may
 
also include
 
the premium
 
lost as a
 
result of
prepayments
 
on the underlying
 
mortgages,
 
decreasing
 
unrealized
 
gains or
 
increasing
 
unrealized
 
losses as
 
speeds or
 
premiums
 
increase.
To the extent RMBS
 
are carried
 
at a discount
 
to par, unrealized
 
gains or
 
losses on
 
RMBS would
 
also include
 
discount
 
accreted
 
as a result
of prepayments
 
on the underlying
 
mortgages,
 
increasing
 
unrealized
 
gains or
 
decreasing
 
unrealized
 
losses as
 
speeds on
 
discounts
increase.
 
Gains and
 
losses on
 
interest
 
rate futures
 
contracts
 
are affected
 
by changes
 
in implied
 
forward
 
rates during
 
the reporting
 
period.
The table
 
below presents
 
historical
 
interest
 
rate data
 
for each
 
quarter end
 
during 2022
 
to date and
 
2021.
5 Year
10 Year
15 Year
30 Year
Three
U.S. Treasury
U.S. Treasury
Fixed-Rate
Fixed-Rate
Month
Rate
(1)
Rate
(1)
Mortgage Rate
(2)
Mortgage Rate
(2)
LIBOR
(3)
September 30, 2022
4.04%
3.80%
5.35%
6.11%
3.45%
June 30, 2022
3.00%
2.97%
4.65%
5.52%
1.97%
March 31, 2022
2.42%
2.33%
3.39%
4.17%
0.84%
December 31, 2021
1.26%
1.51%
2.35%
3.10%
0.21%
September 30, 2021
1.00%
1.53%
2.18%
2.90%
0.12%
June 30, 2021
0.87%
1.44%
2.27%
2.98%
0.13%
March 31, 2021
0.94%
1.75%
2.39%
3.08%
0.19%
(1)
Historical 5 and 10 Year
 
U.S. Treasury Rates are obtained from quoted end
 
of day prices on the Chicago Board Options Exchange.
(2)
Historical 30 Year and
 
15 Year Fixed
 
Rate Mortgage Rates are obtained from Freddie Mac’s Primary
 
Mortgage Market Survey.
(3)
Historical LIBOR is obtained from the Intercontinental Exchange Benchmark
 
Administration Ltd.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
37
Expenses
For the nine
 
and three
 
months ended
 
September
 
30, 2022,
 
the Company’s
 
total operating
 
expenses
 
were approximately
 
$14.9 million
and $5.2
 
million, respectively,
 
compared
 
to approximately
 
$10.9 million
 
and $3.7
 
million, respectively,
 
for the nine
 
and three
 
months ended
September
 
30, 2021.
 
The table
 
below presents
 
a breakdown
 
of operating
 
expenses for
 
the nine
 
and three
 
months ended
 
September
 
30,
2022 and
 
2021.
(in thousands)
Nine Months Ended September 30,
Three Months Ended September 30,
2022
2021
Change
2022
2021
Change
Management fees
$
7,881
$
5,569
$
2,312
$
2,616
$
2,156
$
460
Overhead allocation
1,482
1,189
293
522
390
132
Accrued incentive compensation
763
884
(121)
212
259
(47)
Directors fees and liability insurance
929
874
55
308
279
29
Audit, legal and other professional fees
899
832
67
293
212
81
Direct REIT operating expenses
2,281
1,024
1,257
1,064
309
755
Other administrative
624
514
110
203
69
134
Total expenses
$
14,859
$
10,886
$
3,973
$
5,218
$
3,674
$
1,544
Direct REIT operating expenses were higher in both the nine and three
 
month periods ended September 30, 2022, as compared to
the same periods in 2021 primarily due to increased commissions and fees related
 
to the Company’s interest rate derivative positions.
We are externally managed and advised by Bimini Advisors, LLC (the “Manager”) pursuant
 
to the terms of a management
agreement. The management agreement has been renewed through February
 
20, 2023 and provides for automatic one-year extension
options thereafter and is subject to certain termination rights.
 
Under the terms of the management agreement, the Manager is
responsible for administering the business activities and day-to-day operations of
 
the Company.
 
The Manager receives a monthly
management fee in the amount of:
One-twelfth of 1.5% of the first $250 million of the Company’s month end equity, as defined in the management agreement,
One-twelfth of 1.25% of the Company’s month end equity that is greater than $250 million
 
and less than or equal to $500
million, and
One-twelfth of 1.00% of the Company’s month end equity that is greater than $500 million.
Should the Company terminate the management agreement without cause,
 
it will pay the Manager a termination fee equal to three
times the average annual management fee, as defined in the management
 
agreement, before or on the last day of the term of the
agreement.
The Company is obligated to reimburse the Manager for any direct expenses incurred
 
on its behalf and to pay the Manager the
Company’s pro rata portion of certain overhead costs set forth in the management
 
agreement.
 
On April 1, 2022, pursuant to the third amendment to the management agreement
 
entered into on November 16, 2021, the
Manager began providing certain repurchase agreement trading, clearing and
 
administrative services to the Company that had been
previously provided by AVM, L.P.
 
under an agreement terminated on March 31, 2022.
 
In consideration for such services, the Company
will pay the following fees to the Manager:
A daily fee equal to the outstanding principal balance of repurchase agreement funding
 
in place as of the end of such day
multiplied by 1.5 basis points for the amount of aggregate outstanding principal balance
 
less than or equal to $5 billion, and
multiplied by 1.0 basis point for any amount of aggregate outstanding principal
 
balance in excess of $5 billion, and
A fee for the clearing and operational services provided by personnel
 
of the Manager equal to $10,000 per month.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
38
The following table summarizes the management fee and overhead allocation
 
expenses for the nine months ended September 30,
2022 and 2021, and for each quarter in 2022 to date and 2021.
($ in thousands)
Average
Average
Advisory Services
Orchid
Orchid
Management
Overhead
Three Months Ended
MBS
Equity
Fee
Allocation
Total
September 30, 2022
$
3,571,037
$
839,935
$
2,616
$
522
$
3,138
June 30, 2022
4,260,727
866,539
2,631
519
3,150
March 31, 2022
5,545,844
853,576
2,634
441
3,075
December 31, 2021
6,056,259
806,382
2,587
443
3,030
September 30, 2021
5,136,331
672,384
2,156
390
2,546
June 30, 2021
4,504,887
542,679
1,792
395
2,187
March 31, 2021
4,032,716
456,687
1,621
404
2,025
Nine Months Ended
September 30, 2022
$
4,459,203
$
853,350
$
7,881
$
1,482
$
9,363
September 30, 2021
4,557,978
557,250
5,569
1,189
6,758
Financial
 
Condition:
Mortgage-Backed Securities
As of September
 
30, 2022,
 
our RMBS
 
portfolio
 
consisted
 
of $3,201.2
 
million of
 
Agency RMBS
 
at fair value
 
and had a
 
weighted
average coupon
 
on assets
 
of 3.31%.
 
During the
 
nine months
 
ended September
 
30, 2022,
 
we received
 
principal
 
repayments
 
of $376.2
million compared
 
to $413.0
 
million
 
for the nine
 
months ended
 
September
 
30, 2021.
 
The average
 
three month
 
prepayment
 
speeds for
 
the
quarters
 
ended September
 
30, 2022
 
and 2021
 
were 6.5%
 
and 12.4%,
 
respectively.
The following
 
table presents
 
the 3-month
 
constant prepayment
 
rate (“CPR”)
 
experienced
 
on our structured
 
and PT RMBS
 
sub-
portfolios,
 
on an annualized
 
basis, for
 
the quarterly
 
periods presented.
 
CPR is a
 
method of
 
expressing
 
the prepayment
 
rate for
 
a mortgage
pool that
 
assumes that
 
a constant
 
fraction
 
of the remaining
 
principal
 
is prepaid
 
each month
 
or year. Specifically,
 
the CPR
 
in the chart
below represents
 
the three
 
month prepayment
 
rate of the
 
securities
 
in the respective
 
asset category.
Structured
PT RMBS
RMBS
Total
Three Months Ended
Portfolio (%)
Portfolio (%)
Portfolio (%)
September 30, 2022
6.1
10.4
6.5
June 30, 2022
8.3
13.7
9.4
March 31, 2022
8.1
19.5
10.7
December 31, 2021
9.0
24.6
11.4
September 30, 2021
9.8
25.1
12.4
June 30, 2021
10.9
29.9
12.9
March 31, 2021
9.9
40.3
12.0
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
39
The following
 
tables summarize
 
certain characteristics
 
of the Company’s
 
PT RMBS
 
and structured
 
RMBS as of
 
September
 
30, 2022
and December
 
31, 2021:
($ in thousands)
Weighted
Percentage
Average
of
Weighted
Maturity
Fair
Entire
Average
in
Longest
Asset Category
Value
Portfolio
Coupon
Months
Maturity
September 30, 2022
Fixed Rate RMBS
$
3,150,403
98.4%
3.30%
341
1-Aug-52
Interest-Only Securities
50,274
1.6%
3.72%
278
25-Nov-51
Inverse Interest-Only Securities
537
0.0%
1.51%
289
15-Jun-42
Total Mortgage Assets
$
3,201,214
100.0%
3.31%
336
1-Aug-52
December 31, 2021
Fixed Rate RMBS
$
6,298,189
96.7%
2.93%
342
1-Dec-51
Interest-Only Securities
210,382
3.2%
3.40%
263
25-Jan-52
Inverse Interest-Only Securities
2,524
0.1%
3.75%
300
15-Jun-42
Total Mortgage Assets
$
6,511,095
100.0%
3.03%
325
25-Jan-52
($ in thousands)
September 30, 2022
December 31, 2021
Percentage of
Percentage of
Agency
Fair Value
Entire Portfolio
Fair Value
Entire Portfolio
Fannie Mae
$
2,231,699
69.7%
$
4,719,349
72.5%
Freddie Mac
969,515
30.3%
1,791,746
27.5%
Total Portfolio
$
3,201,214
100.0%
$
6,511,095
100.0%
September 30, 2022
December 31, 2021
Weighted Average Pass-through Purchase Price
$
107.06
$
107.19
Weighted Average Structured Purchase Price
$
18.08
$
15.21
Weighted Average Pass-through Current Price
$
89.44
$
105.31
Weighted Average Structured Current Price
$
17.32
$
14.08
Effective Duration
(1)
5.800
3.390
(1)
Effective duration is the approximate percentage change in price
 
for a 100 bps change in rates.
 
An effective duration of 5.800 indicates that an
interest rate increase of 1.0% would be expected to cause a 5.800% decrease in the value
 
of the RMBS in the Company’s investment portfolio
at September 30, 2022.
 
An effective duration of 3.390 indicates that an interest rate increase
 
of 1.0% would be expected to cause a 3.390%
decrease in the value of the RMBS in the Company’s investment portfolio
 
at December 31, 2021. These figures include the structured securities
in the portfolio, but do not include the effect of the Company’s funding
 
cost hedges.
 
Effective duration quotes for individual investments are
obtained from The Yield Book, Inc.
The following
 
table presents
 
a summary
 
of portfolio
 
assets acquired
 
during the
 
nine months
 
ended September
 
30, 2022
 
and 2021,
including
 
securities
 
purchased
 
during the
 
period that
 
settled after
 
the end of
 
the period,
 
if any.
($ in thousands)
2022
2021
Total Cost
Average
Price
Weighted
Average
Yield
Total Cost
Average
Price
Weighted
Average
Yield
Pass-through RMBS
$
622,535
$
100.66
4.24%
$
4,871,121
$
106.96
1.56%
Structured RMBS
-
-
-
125,728
13.04
3.80%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
40
Borrowings
As of September
 
30, 2022,
 
we had established
 
borrowing
 
facilities
 
in the repurchase
 
agreement
 
market with
 
a number
 
of commercial
banks and
 
other financial
 
institutions
 
and had borrowings
 
in place with
 
20 of these
 
counterparties.
 
None of these
 
lenders are
 
affiliated
 
with
the Company. These
 
borrowings
 
are secured
 
by the Company’s
 
RMBS and
 
cash, and
 
bear interest
 
at prevailing
 
market rates.
 
We believe
our established
 
repurchase
 
agreement
 
borrowing
 
facilities
 
provide borrowing
 
capacity in
 
excess of
 
our needs.
As of September
 
30, 2022,
 
we had obligations
 
outstanding
 
under the
 
repurchase
 
agreements
 
of approximately
 
$3,133.9
 
million with
 
a
net weighted
 
average borrowing
 
cost of 3.00%.
 
The remaining
 
maturity of
 
our outstanding
 
repurchase
 
agreement
 
obligations
 
ranged from
3 to 122
 
days, with
 
a weighted
 
average remaining
 
maturity of
 
29 days.
 
Securing
 
the repurchase
 
agreement
 
obligations
 
as of September
30, 2022
 
are RMBS
 
with an estimated
 
fair value,
 
including
 
accrued
 
interest,
 
of approximately
 
$3,206.4
 
million and
 
a weighted
 
average
maturity
 
of 345 months,
 
and cash
 
pledged to
 
counterparties
 
of approximately
 
$49.4 million.
 
Through
 
October 27,
 
2022, we
 
have been
 
able
to maintain
 
our repurchase
 
facilities
 
with comparable
 
terms to
 
those that
 
existed at
 
September
 
30, 2022,
 
with maturities
 
through January
30, 2023.
The table below presents information about our period end,
 
maximum and average balances of borrowings for each quarter in
2022 to date and 2021.
($ in thousands)
Difference Between Ending
Ending
Maximum
Average
Borrowings and
Balance of
Balance of
Balance of
Average Borrowings
Three Months Ended
Borrowings
Borrowings
Borrowings
Amount
Percent
September 30, 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)
December 31, 2021
6,244,106
6,419,689
5,728,988
515,118
8.99%
September 30, 2021
5,213,869
5,214,254
4,864,287
349,582
7.19%
June 30, 2021
4,514,704
4,517,953
4,348,192
166,512
3.83%
March 31, 2021
4,181,680
4,204,935
3,888,633
293,047
7.54%
(1)
The lower ending balance relative to the average balance during the quarter
 
ended March 31, 2022 reflects the disposal of RMBS pledged as
collateral. During the quarter ended March 31, 2022, the Company’s investment
 
in RMBS decreased $510.4 million.
Liquidity and Capital Resources
Liquidity
 
is our 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 sheet
 
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 extent
 
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.
41
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
 
sheet also
 
generates
 
liquidity
 
on an on-going
 
basis through
 
payments
 
of principal
 
and interest
 
we receive
 
on our
RMBS portfolio.
 
Because our
 
PT RMBS portfolio
 
consists entirely
 
of government
 
and agency
 
securities,
 
we do not
 
anticipate
 
having
difficulty 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 cash in
 
lieu of acquiring
additional
 
assets.
 
In this way
 
we can, at
 
a modest
 
cost, retain
 
higher levels
 
of cash on
 
hand and
 
decrease
 
the likelihood
 
we will have
 
to
sell assets
 
in a distressed
 
market in
 
order to
 
raise cash.
Our strategy
 
for hedging
 
our funding
 
costs typically
 
involves
 
taking short
 
positions
 
in interest
 
rate futures,
 
treasury
 
futures,
 
interest
 
rate
swaps, interest
 
rate swaptions
 
or other
 
instruments.
 
When the
 
market causes
 
these short
 
positions
 
to decline
 
in value we
 
are required
 
to
meet margin
 
calls with
 
cash.
 
This can
 
reduce our
 
liquidity
 
position
 
to the extent
 
other securities
 
in our portfolio
 
move in price
 
in such a
 
way
that we do
 
not receive
 
enough cash
 
via margin
 
calls to
 
offset the derivative
 
related margin
 
calls. If
 
this were
 
to occur
 
in sufficient
magnitude,
 
the loss of
 
liquidity
 
might force
 
us to reduce
 
the size
 
of the levered
 
portfolio,
 
pledge additional
 
structured
 
securities
 
to raise
funds or
 
risk operating
 
the portfolio
 
with less
 
liquidity.
External
 
Sources of
 
Liquidity
Our primary
 
external
 
sources of
 
liquidity
 
are our ability
 
to (i) borrow
 
under master
 
repurchase
 
agreements,
 
(ii) use
 
the TBA security
market and
 
(iii) sell
 
our equity
 
or debt
 
securities
 
in public
 
offerings
 
or private
 
placements.
 
Our borrowing
 
capacity will
 
vary over
 
time as the
market value
 
of our interest
 
earning assets
 
varies.
 
Our master
 
repurchase
 
agreements
 
have no
 
stated expiration,
 
but can be
 
terminated
 
at
any time at
 
our option
 
or at the
 
option of
 
the counterparty.
 
However, once
 
a definitive
 
repurchase
 
agreement
 
under a master
 
repurchase
agreement
 
has been
 
entered into,
 
it generally
 
may not be
 
terminated
 
by either
 
party.
 
A negotiated
 
termination
 
can occur, but
 
may involve
a fee to
 
be paid by
 
the party
 
seeking to
 
terminate
 
the repurchase
 
agreement
 
transaction.
Under our
 
repurchase
 
agreement
 
funding arrangements,
 
we are required
 
to post margin
 
at the initiation
 
of the borrowing.
 
The margin
posted represents
 
the haircut,
 
which is a
 
percentage
 
of the market
 
value of the
 
collateral
 
pledged.
 
To the extent the market
 
value of the
asset collateralizing
 
the financing
 
transaction
 
declines,
 
the market
 
value of our
 
posted margin
 
will be insufficient
 
and we will
 
be required
 
to
post additional
 
collateral.
 
Conversely, if
 
the market
 
value of the
 
asset pledged
 
increases
 
in value,
 
we would
 
be over collateralized
 
and we
would be
 
entitled to
 
have excess
 
margin returned
 
to us by the
 
counterparty.
 
Our lenders
 
typically
 
value our
 
pledged securities
 
daily to
ensure the
 
adequacy of
 
our margin
 
and make margin
 
calls as needed,
 
as do we.
 
Typically, but not
 
always, the
 
parties agree
 
to a minimum
threshold
 
amount for
 
margin calls
 
so as to avoid
 
the need
 
for nuisance
 
margin calls
 
on a daily
 
basis.
Our master
 
repurchase
 
agreements
do not specify
 
the haircut;
 
rather haircuts
 
are determined
 
on an individual
 
repurchase
 
transaction
 
basis. Throughout
 
the nine months
ended September
 
30, 2022,
 
haircuts on
 
our pledged
 
collateral
 
remained
 
stable and
 
as of September
 
30, 2022,
 
our weighted
 
average
haircut was
 
approximately
 
4.6% of
 
the value
 
of our collateral.
TBAs represent
 
a form of
 
off-balance
 
sheet financing
 
and are
 
accounted
 
for as derivative
 
instruments.
 
(See Note
 
4 to our
 
Financial
Statements
 
in this Form
 
10-Q for additional
 
details on
 
our TBAs).
 
Under certain
 
market conditions,
 
it may be
 
uneconomical
 
for us to
 
roll our
TBAs into
 
future months
 
and we may
 
need to take
 
or make physical
 
delivery
 
of the underlying
 
securities.
 
If we were
 
required to
 
take
physical delivery
 
to settle
 
a long TBA,
 
we would
 
have to fund
 
our total
 
purchase
 
commitment
 
with cash
 
or other
 
financing
 
sources and
 
our
liquidity
 
position could
 
be negatively
 
impacted.
 
42
Our TBAs
 
are also
 
subject to
 
margin requirements
 
governed
 
by the Mortgage-Backed
 
Securities
 
Division ("MBSD")
 
of the FICC
 
and
by our Master
 
Securities
 
Forward
 
Transaction
 
Agreements
 
(“MSFTAs”), which
 
may establish
 
margin levels
 
in excess
 
of the MBSD.
 
Such
provisions
 
require that
 
we establish
 
an initial
 
margin based
 
on the notional
 
value of the
 
TBA, which
 
is subject
 
to increase
 
if the estimated
fair value
 
of our TBAs
 
or the estimated
 
fair value
 
of our pledged
 
collateral
 
declines.
 
The MBSD
 
has the sole
 
discretion
 
to determine
 
the
value of our
 
TBAs and
 
of the pledged
 
collateral
 
securing such
 
contracts.
 
In the event
 
of a margin
 
call, we
 
must generally
 
provide
 
additional
collateral
 
on the same
 
business
 
day.
Settlement
 
of our TBA
 
obligations
 
by taking
 
delivery of
 
the underlying
 
securities
 
as well as
 
satisfying
 
margin requirements
 
could
negatively
 
impact our
 
liquidity
 
position.
 
However, since
 
we do not
 
use TBA dollar
 
roll transactions
 
as our primary
 
source of
 
financing,
 
we
believe that
 
we will have
 
adequate
 
sources of
 
liquidity
 
to meet
 
such obligations.
We invest a
 
portion of
 
our capital
 
in structured
 
Agency RMBS.
 
We generally
 
do not apply
 
leverage
 
to this portion
 
of our portfolio.
 
The
leverage
 
inherent
 
in structured
 
securities
 
replaces the
 
leverage
 
obtained
 
by acquiring
 
PT securities
 
and funding
 
them in the
 
repurchase
market.
 
This structured
 
RMBS strategy
 
has been
 
a core element
 
of the Company’s
 
overall investment
 
strategy
 
since inception.
 
However,
we have and
 
may continue
 
to pledge
 
a portion
 
of our structured
 
RMBS in
 
order to
 
raise our
 
cash levels,
 
but generally
 
will not
 
pledge these
securities
 
in order
 
to acquire
 
additional
 
assets.
In future
 
periods,
 
we expect
 
to continue
 
to finance
 
our activities
 
in a manner
 
that is consistent
 
with our
 
current operations
 
through
repurchase
 
agreements.
 
As of September
 
30, 2022,
 
we had cash
 
and cash equivalents
 
of $214.2
 
million.
 
We generated
 
cash flows
 
of
$496.2 million
 
from principal
 
and interest
 
payments on
 
our RMBS
 
and had average
 
repurchase
 
agreements
 
outstanding
 
of $4,304.0
 
million
during the
 
nine months
 
ended September
 
30, 2022.
As described
 
more fully
 
below, we may
 
also access
 
liquidity
 
by selling
 
our equity
 
or debt securities
 
in public
 
offerings or
 
private
placements.
Stockholders’
 
Equity
On August 4, 2020, we entered into the August 2020 Equity Distribution Agreement with
 
four sales agents pursuant to which we
could offer and sell, from time to time, up to an aggregate amount of $150,000,000 of
 
shares of our common stock in transactions that
were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total
 
of 5,538,730 shares under the
August 2020 Equity Distribution Agreement for aggregate gross proceeds of approximately
 
$150.0 million, and net proceeds of
approximately $147.4 million, after commissions and fees,
 
prior to its termination in June 2021.
On January 20, 2021, we entered into the January 2021 Underwriting Agreement
 
with J.P. Morgan Securities LLC (“J.P.
 
Morgan”),
relating to the offer and sale of 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 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 payable.
43
On June 22, 2021, we entered into the June 2021 Equity Distribution Agreement with four
 
sales agents pursuant to which we may
could offer and sell, from time to time, up to an aggregate amount of $250,000,000 of
 
shares of our common stock in transactions that
were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total
 
of 9,881,467 shares under the
June 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately
 
$250.0 million, and net proceeds of
approximately $246.2 million, after commissions and fees, prior to its termination in October
 
2021.
On October 29, 2021, we entered into the October 2021 Equity Distribution
 
Agreement with four sales agents pursuant to which
we may offer and sell, from time to time, up to an aggregate amount of $250,000,000 of shares
 
of our common stock in transactions
that are deemed to be “at the market” offerings and privately negotiated transactions. Through
 
September 30, 2022, we issued a total
of 3,167,140 shares under the October 2021 Equity Distribution Agreement for aggregate
 
gross proceeds of approximately $78.3
million, and net proceeds of approximately $77.0 million, after commissions and fees.
Outlook
Economic Summary
The evolution
 
of economic
 
and market
 
developments
 
pivoted in
 
the third
 
quarter of
 
2022.
 
Trends in place
 
since late
 
2021 have
changed in
 
the third
 
quarter.
 
The outlook
 
for the domestic
 
economy of
 
the United
 
States, particularly
 
with respect
 
to inflation,
 
the level
 
of
interest
 
rates and
 
expectations
 
for monetary
 
policy from
 
the Fed changed
 
during the
 
quarter.
 
As the second
 
quarter of
 
2022 ended,
 
the
market expected
 
that the
 
monetary
 
tightening
 
policies implemented
 
by the Fed
 
to control
 
inflation
 
would soon
 
succeed, and
 
that by
 
early in
2023 the
 
Fed would
 
likely start
 
to unwind
 
their rate
 
increases
 
in order
 
to avert
 
an economic
 
slowdown
 
resulting
 
from these
 
policies. The
catalyst for
 
the changes
 
that occurred
 
during the
 
third quarter
 
of 2022 was
 
clear evidence
 
that not
 
only was
 
inflation
 
persisting,
 
but that
 
it
was becoming
 
more broad
 
based and
 
entrenched.
 
As the Fed
 
and the various
 
members of
 
the FOMC
 
became aware
 
of this, their
 
public
comments consistently
 
sought to
 
dispel the
 
notion that
 
they would
 
be easing
 
monetary
 
policy in
 
early 2023
 
as the futures
 
markets were
pricing.
 
As the quarter
 
unfolded
 
and the inflation
 
data continued
 
to reflect
 
this trend,
 
the market
 
grew to
 
accept that
 
the Fed would
 
have to
raise the
 
Fed Funds
 
target further
 
into restrictive
 
territory.
 
The inflation
 
data for
 
September
 
of 2022,
 
released
 
in early October
 
of 2022,
 
was
again very
 
strong and
 
broad based.
 
The market
 
now expects
 
the terminal
 
rate to approach
 
5% and the
 
Fed to raise
 
the Fed Funds
 
rate by
at least 125
 
basis points
 
during the
 
fourth quarter
 
of 2022 alone.
 
The incoming
 
economic data
 
– other than
 
inflationary
 
data – has
generally
 
been very
 
strong as
 
well, implying
 
the Fed rate
 
increases
 
have yet to
 
have an impact
 
on the economy
 
other than
 
the most rate
sensitive
 
sectors.
Contributing
 
to the change
 
in economic
 
and interest
 
rate trends
 
were developments
 
abroad, particularly
 
in Europe
 
and the United
Kingdom.
 
While inflation
 
has proven
 
to be more
 
robust and
 
challenging
 
to control
 
in the U.S.,
 
it has been
 
even more
 
so in Europe
 
and
most of the
 
world outside
 
of China,
 
which is grappling
 
with persistent
 
COVID-19
 
cases that
 
have forced
 
the government
 
to intermittently
lock down
 
various population
 
centers.
 
The war
 
in Ukraine
 
has contributed
 
significantly
 
to food
 
and energy
 
price pressures
 
globally, more
so than in
 
the U.S.
 
The result
 
is essentially
 
all central
 
banks across
 
the globe
 
– outside
 
of China
 
and Japan
 
– are raising
 
rates.
 
Like the
Fed, the
 
central banks’
 
efforts have
 
yet to slow
 
inflation
 
and more
 
rate hikes
 
are very likely.
 
Food and
 
energy inflation
 
poses additional
pressure
 
on governments
 
who are
 
eager to
 
ease the
 
burden of
 
elevated prices
 
for essentials
 
like food
 
and energy, but
 
are constrained
because their
 
efforts themselves
 
might increase
 
inflationary
 
pressures
 
and run counter
 
to central
 
bank actions
 
that are
 
attempting
 
to
constrain
 
economic activity
 
and demand.
 
A further
 
complicating
 
factor has
 
been the
 
U.S. dollar.
 
As the Fed
 
is forced
 
to continue
 
to raise
 
rates in
 
the U.S.,
 
the dollar
 
has
appreciated
 
against all
 
other currencies.
 
This in turn
 
forces other
 
central banks
 
to raise
 
rates to
 
protect their
 
own currencies,
 
often above
and beyond
 
what their
 
domestic economic
 
circumstances
 
might warrant.
Risk sentiment
 
is at extremely
 
depressed
 
levels and
 
all asset
 
classes across
 
the financial
 
markets have
 
generated
 
negative
 
year-to-
date returns
 
for 2022,
 
outside of
 
energy and
 
certain food
 
commodities.
 
Economic growth
 
is expected
 
to continue
 
to slow over
 
the balance
of the year,
 
both in the
 
U.S. and
 
globally, and likely
 
contract
 
in 2023.
44
Interest
 
Rates
As the market
 
incorporated
 
inflation
 
data and
 
the Fed’s response
 
through the
 
second quarter
 
of 2022,
 
interest
 
rates began
 
to rise
materially.
 
On August
 
1, 2022,
 
the 10-year
 
U.S. Treasury
 
Note closed
 
with a yield
 
of 2.5759%,
 
shortly before
 
the FOMC
 
began to
 
temper
market expectations
 
that the
 
Fed would
 
pivot away
 
from their
 
tightening
 
and begin
 
to lower
 
the Fed Funds
 
rate in early
 
2023.
 
The yield
 
on
the 10-year
 
U.S. Treasury
 
Note closed
 
just above
 
3.83% on
 
September
 
30,
 
2022, and
 
surpassed
 
4% in October
 
of 2022.
 
This increase
was much
 
less than
 
the increase
 
in short-term
 
rates.
 
Interest
 
rates on
 
U.S. Treasury
 
Note maturities
 
inside one
 
year increased
 
by well
over 100
 
basis points
 
and by more
 
than 160
 
basis points
 
for maturities
 
of three
 
months or
 
less – in
 
each case
 
by the end
 
of the third
quarter of
 
2022.
 
In the case
 
of U.S.
 
Treasury Note
 
maturities
 
of three
 
or fewer
 
months, such
 
increases
 
are over
 
230 basis points
 
as of
October 26,
 
2022.
 
As of September
 
30, 2022,
 
market pricing
 
implied the
 
terminal rate
 
for the current
 
cycle would
 
be approximately
 
4.53%,
which would
 
be reached
 
late in the
 
first quarter
 
of 2023.
 
As of October
 
26, 2022,
 
pricing is
 
for a terminal
 
rate of approximately
 
4.85%
sometime late
 
in the second
 
quarter
 
of 2023 and
 
with the
 
Fed Funds
 
rate still
 
approximately
 
4.40%
 
in early 2024.
The Fed has
 
repeatedly
 
acknowledged
 
their efforts
 
to bring
 
inflation under
 
control and
 
taking the
 
Fed Funds
 
rate above
 
neutral may
cause the
 
economy to
 
enter a recession.
 
They deem
 
these steps
 
as necessary
 
to prevent
 
inflation
 
from remaining
 
higher than
 
the Fed’s
target rate
 
of inflation.
 
However, as it
 
appears the
 
Fed will
 
have to increase
 
the Fed Funds
 
rate considerably
 
higher than
 
was believed
 
to
be the case
 
even a few
 
months ago,
 
and central
 
banks across
 
the globe
 
are doing
 
likewise,
 
financial
 
conditions
 
have begun
 
to deteriorate
and liquidity
 
in many financial
 
markets has
 
declined.
 
If such trends
 
persist and
 
evidence appears
 
that certain
 
financial
 
markets are
 
not
operating
 
smoothly, or financial
 
conditions
 
are prohibiting
 
economic
 
activity from
 
operating
 
smoothly, central
 
banks may
 
face a dilemma
 
of
continuing
 
to increase
 
the Fed
 
Funds rate
 
or implementing
 
accommodations
 
to permit
 
the smooth
 
operation
 
of financial
 
markets and
 
the
economy –
 
assuming
 
this were
 
to occur
 
before inflation
 
could be
 
brought under
 
control.
 
The outcome
 
in such a
 
scenario
 
cannot be
predicted
 
with any
 
confidence.
The Agency
 
RMBS Market
Returns for
 
the Agency
 
RMBS market
 
for the third
 
quarter of
 
2022 were
 
(5.4)% and
 
these returns
 
were 1.7%
 
lower than
 
comparable
duration
 
LIBOR swaps.
 
The largest
 
RMBS investors
 
have generally
 
been selling
 
or decreasing
 
their exposure
 
to the sector.
 
Agency
RMBS spreads
 
relative to
 
benchmark
 
interest
 
rates increased
 
to levels
 
observed
 
in March of
 
2020 by the
 
end of the
 
third quarter
 
of 2022
and have
 
exceeded those
 
levels in
 
October of
 
2022.
 
The largest
 
investors
 
of Agency
 
RMBS, the
 
Fed via quantitative
 
easing (which
 
is now
quantitative
 
tightening
 
as the Fed
 
allows their
 
holdings of
 
Agency RMBS
 
to run-off),
 
large domestic
 
banks (which
 
due to quantitative
tightening
 
by the Fed
 
are experiencing
 
declines in
 
reserves/deposits)
 
and large
 
money managers
 
(which have
 
experienced
 
significant
outflows
 
as investors
 
leave fixed
 
income investments),
 
are collectively
 
causing demand
 
for Agency
 
RMBS to
 
decline materially
 
and driving
the spread
 
widening.
 
As the U.S.
 
dollar has
 
strengthened
 
against most
 
other currencies
 
across the
 
globe, there
 
is the chance
 
certain
central banks
 
– namely the
 
Bank of
 
Japan – may
 
be forced
 
to intervene
 
in the currency
 
markets to
 
support their
 
local currency,
 
in this case
the Yen.
 
They would
 
do so by selling
 
U.S. dollar-denominated
 
assets and
 
buying Yen.
 
The only U.S.
 
dollar-denominated
 
assets they
 
own
are U.S.
 
Treasuries and
 
Agency RMBS,
 
and selling
 
these would
 
represent
 
another source
 
of downward
 
pressure
 
on Agency RMBS.
 
The
relative performance
 
across the
 
Agency RMBS
 
universe was
 
skewed in
 
favor of
 
higher coupon,
 
30-year securities
 
that are
 
currently
 
in
production
 
by originators.
 
Lower coupon
 
securities,
 
especially
 
those held
 
in large
 
amounts by
 
the Fed,
 
and which
 
may eventually
 
be sold
by the Fed,
 
have performed
 
the worst.
 
These results
 
are consistent
 
with the
 
relative duration
 
of the securities,
 
as higher
 
coupons have
shorter durations,
 
or less sensitivity
 
to movements
 
in interest
 
rates.
 
As both the
 
domestic and
 
the global
 
economies
 
appear to
 
be slowing,
 
the more
 
credit sensitive
 
sectors of
 
the fixed
 
income markets
have come
 
under pressure
 
and are
 
likely to weaken
 
further if
 
the economies
 
do indeed
 
contract.
 
Actions by
 
the Fed as
 
described
 
above
may prevent
 
the sector
 
from performing
 
well in the
 
near term
 
but, if the
 
economy does
 
contract
 
and enter
 
a recession,
 
the sector
 
could do
well on a
 
relative performance
 
basis owing
 
to the lack
 
of credit
 
exposure
 
of Agency
 
RMBS.
 
This is consistent
 
with the
 
sector’s history
 
of
performance
 
in a counter-cyclical
 
manner –
 
doing well
 
when the
 
economy is
 
soft and
 
relatively
 
poorly when
 
the economy
 
is strong.
 
45
Recent Legislative
 
and Regulatory
 
Developments
In response
 
to the deterioration
 
in the markets
 
for U.S.
 
Treasuries, Agency
 
RMBS and
 
other mortgage
 
and fixed
 
income markets
resulting
 
from the
 
impacts of
 
the COVID-19
 
pandemic,
 
the Fed implemented
 
a program
 
of quantitative
 
easing.
 
Through November
 
of 2021,
the Fed was
 
committed
 
to purchasing
 
$80 billion
 
of U.S. Treasuries
 
and $40 billion
 
of Agency
 
RMBS each
 
month. In
 
November of
 
2021, it
began tapering
 
its net asset
 
purchases
 
each month
 
and ended
 
net asset
 
purchases
 
entirely
 
by early March
 
of 2022.
 
On May 4,
 
2022, the
FOMC announced
 
a plan for
 
reducing
 
the Fed’s balance
 
sheet. In
 
June of 2022,
 
in accordance
 
with this
 
plan, the
 
Fed began
 
reducing
 
its
balance sheet
 
by a maximum
 
of $30 billion
 
of U.S.
 
Treasuries and
 
$17.5 billion
 
of Agency
 
RMBS each
 
month. On
 
September
 
21, 2022,
the FOMC
 
announced
 
the Fed’s decision
 
to continue
 
reducing
 
the balance
 
sheet by a
 
maximum of
 
$60 billion
 
of U.S Treasuries
 
and $35
billion of
 
Agency RMBS
 
per month.
On January
 
29, 2021,
 
the CDC issued
 
guidance extending
 
eviction
 
moratoriums
 
for covered
 
persons put
 
in place by
 
the CARES
 
Act
through March
 
31, 2021.
 
The FHFA subsequently
 
extended
 
the foreclosure
 
moratorium
 
for loans
 
backed by
 
Fannie Mae
 
and Freddie
 
Mac
and the eviction
 
moratorium
 
for real
 
estate owned
 
by Fannie
 
Mae and Freddie
 
Mac until
 
July 31,
 
2021 and
 
September
 
30, 2021,
respectively. The
 
U.S. Housing
 
and Urban
 
Development
 
Department
 
subsequently
 
extended
 
the FHA
 
foreclosure
 
and eviction
 
moratoria
 
to
July 31, 2021,
 
and September
 
30, 2021,
 
respectively.
 
Despite
 
the expirations
 
of these
 
foreclosure
 
moratoria,
 
a final rule
 
adopted by
 
the
CFPB on
 
June 28,
 
2021, effectively
 
prohibited
 
servicers
 
from initiating
 
a foreclosure
 
before January
 
1, 2022,
 
in most instances.
Foreclosure
 
activity has
 
risen since
 
the end of
 
the moratorium,
 
with foreclosure
 
starts in
 
the third
 
quarter of
 
2022 up 167%
 
from the
comparable
 
period in
 
2021, but
 
still remaining
 
slightly
 
below pre-pandemic
 
levels.
 
In January
 
2019, the
 
Trump administration
 
made statements
 
of its plans
 
to work with
 
Congress to
 
overhaul
 
Fannie Mae
 
and Freddie
Mac and expectations
 
to announce
 
a framework
 
for the development
 
of a policy
 
for comprehensive
 
housing finance
 
reform soon.
 
On
September
 
30, 2019,
 
the FHFA announced
 
that Fannie
 
Mae and Freddie
 
Mac were
 
allowed to
 
increase their
 
capital buffers
 
to $25 billion
and $20 billion,
 
respectively, from
 
the prior
 
limit of $3
 
billion each.
 
This step
 
could ultimately
 
lead to
 
Fannie Mae
 
and Freddie
 
Mac being
privatized
 
and represents
 
the first
 
concrete
 
step on the
 
road to GSE
 
reform.
 
On June 30,
 
2020, the
 
FHFA released
 
a proposed
 
rule on a
new
 
regulatory
 
framework
 
for the GSEs
 
which seeks
 
to implement
 
both a risk-based
 
capital framework
 
and minimum
 
leverage
 
capital
requirements.
 
The final
 
rule on the
 
new capital
 
framework
 
for the GSEs
 
was published
 
in the federal
 
register
 
in December
 
2020.
 
On
January 14,
 
2021, the
 
U.S. Treasury
 
and the FHFA
 
executed letter
 
agreements
 
allowing
 
the GSEs
 
to continue
 
to retain
 
capital up
 
to their
regulatory
 
minimums,
 
including
 
buffers, as
 
prescribed
 
in the December
 
rule.
 
These letter
 
agreements
 
provide,
 
in part, (i)
 
there will
 
be no
exit from
 
conservatorship
 
until all
 
material litigation
 
is settled
 
and the GSE
 
has common
 
equity Tier
 
1 capital
 
of at least
 
3% of its
 
assets, (ii)
the GSEs
 
will comply
 
with the
 
FHFA’s regulatory capital
 
framework,
 
(iii) higher-risk
 
single-family
 
mortgage
 
acquisitions
 
will be
 
restricted
 
to
current levels,
 
and (iv)
 
the U.S.
 
Treasury and
 
the FHFA will
 
establish
 
a timeline
 
and process
 
for future
 
GSE reform.
 
However, no definitive
proposals
 
or legislation
 
have been
 
released
 
or enacted
 
with respect
 
to ending
 
the conservatorship,
 
unwinding
 
the GSEs,
 
or materially
reducing
 
the roles
 
of the GSEs
 
in the U.S.
 
mortgage
 
market. On
 
September
 
14, 2021,
 
the U.S.
 
Treasury and
 
the FHFA suspended
 
certain
policy provisions
 
in the January
 
agreement,
 
including
 
limits on
 
loans acquired
 
for cash
 
consideration,
 
multifamily
 
loans, loans
 
with higher
risk characteristics
 
and second
 
homes and
 
investment
 
properties.
 
On February
 
25, 2022,
 
the FHFA published
 
a final rule,
 
effective as
 
of
April 26,
 
2022, amending
 
the GSE capital
 
framework
 
established
 
in December
 
2020 by, among
 
other things,
 
replacing
 
the fixed
 
leverage
buffer equal
 
to 1.5% of
 
a GSE’s adjusted
 
total assets
 
with a dynamic
 
leverage
 
buffer equal
 
to 50% of
 
a GSE’s stability
 
capital buffer,
reducing
 
the risk weight
 
floor from
 
10% to 5%,
 
and removing
 
the requirement
 
that the
 
GSEs must
 
apply an overall
 
effectiveness
adjustment
 
to their
 
credit risk
 
transfer
 
exposures.
 
On June 14,
 
2022, the
 
GSEs announced
 
that they
 
will each
 
charge a
 
50 bps fee
 
for
commingled
 
securities
 
issued on
 
or after
 
July 1, 2022
 
to cover
 
the additional
 
capital required
 
for such
 
securities
 
under the
 
GSE capital
framework.
 
Industry
 
groups have
 
expressed
 
concern that
 
this poses
 
a risk to
 
the fungibility
 
of the Uniform
 
Mortgage-Backed
 
Security
(“UMBS”),
 
which could
 
negatively
 
impact liquidity
 
and pricing
 
in the market
 
for TBA
 
securities.
46
In 2017,
 
policymakers
 
announced
 
that LIBOR
 
will be replaced
 
by December
 
31, 2021.
 
The directive
 
was spurred
 
by the fact
 
that
banks are
 
uncomfortable
 
contributing
 
to the LIBOR
 
panel given
 
the shortage
 
of underlying
 
transactions
 
on which
 
to base levels
 
and the
liability
 
associated
 
with submitting
 
an unfounded
 
level. However,
 
the ICE Benchmark
 
Administration,
 
in its capacity
 
as administrator
 
of
USD LIBOR,
 
has announced
 
that it intends
 
to extend
 
publication
 
of USD LIBOR
 
(other than
 
one-week and
 
two-month
 
tenors) by
 
18
months to
 
June 2023.
 
Notwithstanding
 
this extension,
 
a joint statement
 
by key regulatory
 
authorities
 
calls on banks
 
to cease
 
entering
 
into
new contracts
 
that use
 
USD LIBOR
 
as a reference
 
rate by no
 
later than
 
December
 
31, 2021.
 
On December
 
7, 2021,
 
the CFPB
 
released
 
a final rule
 
that amends
 
Regulation
 
Z, which
 
implemented
 
the Truth in
 
Lending Act,
 
aimed
at addressing
 
cessation
 
of LIBOR
 
for both
 
closed-end
 
(e.g., home
 
mortgage)
 
and open-end
 
(e.g., home
 
equity line
 
of credit)
 
products.
 
The
rule, which
 
mostly became
 
effective
 
in April
 
of 2022,
 
establishes
 
requirements
 
for the selection
 
of replacement
 
indices for
 
existing LIBOR-
linked consumer
 
loans. Although
 
the rule
 
does not
 
mandate the
 
use of SOFR
 
as the alternative
 
rate, it
 
identifies
 
SOFR as a
 
comparable
rate for
 
closed-end
 
products
 
and states
 
that for
 
open-end products,
 
the CFPB
 
has determined
 
that ARRC’s
 
recommended
 
spread-adjusted
indices based
 
on SOFR for
 
consumer products
 
to replace
 
the one-month,
 
three-month,
 
or six-month
 
USD LIBOR
 
index “have
 
historical
fluctuations
 
that are
 
substantially
 
similar to
 
those of
 
the LIBOR
 
indices that
 
they are
 
intended
 
to replace.”
 
The CFPB
 
reserved judgment,
however, on a
 
SOFR-based
 
spread-adjusted
 
replacement
 
index to
 
replace the
 
one-year USD
 
LIBOR until
 
it obtained
 
additional
information.
 
On March 15,
 
2022, the
 
Adjustable
 
Interest
 
Rate (LIBOR)
 
Act (the “LIBOR
 
Act”) was
 
signed into
 
law as part
 
of the Consolidated
Appropriations
 
Act, 2022
 
(H.R. 2471).
 
The LIBOR
 
Act provides
 
for a statutory
 
replacement
 
benchmark
 
rate for
 
contracts
 
that use LIBOR
as a benchmark
 
and do not
 
contain any
 
fallback mechanism
 
independent
 
of LIBOR.
 
Pursuant to
 
the LIBOR
 
Act, SOFR
 
becomes the
 
new
benchmark
 
rate by operation
 
of law for
 
any such contract.
 
The LIBOR
 
Act establishes
 
a safe harbor
 
from litigation
 
for claims
 
arising out
 
of
or related
 
to the use
 
of SOFR
 
as the recommended
 
benchmark
 
replacement.
 
The LIBOR
 
Act makes
 
clear that
 
it should not
 
be construed
to disfavor
 
the use of
 
any benchmark
 
on a prospective
 
basis.
On July 28,
 
2022, the
 
Fed published
 
a proposed
 
rule to implement
 
the LIBOR
 
Act.
 
Since the
 
GSEs have
 
generally
 
been using
 
30-day
average SOFR
 
in their
 
newly issued
 
multifamily
 
loans and
 
other structured
 
products,
 
the Fed proposed
 
that the
 
benchmark
 
replacement
for Agency
 
RMBS be
 
the 30-day
 
average SOFR
 
plus the applicable
 
tenor spread
 
adjustment
 
specified
 
in the LIBOR
 
Act. Comments
 
for
the proposed
 
rule closed
 
August 29,
 
2022, and
 
any final
 
rule will
 
go into effect
 
30 days after
 
publication
 
in the Federal
 
Register.
The LIBOR
 
Act also
 
attempts
 
to forestall
 
challenges
 
that it is
 
impairing
 
contracts.
 
It provides
 
that the
 
discontinuance
 
of LIBOR
 
and the
automatic
 
statutory
 
transition
 
to a replacement
 
rate neither
 
impairs or
 
affects the
 
rights of
 
a party to
 
receive payment
 
under such
 
contracts,
nor allows
 
a party to
 
discharge
 
their performance
 
obligations
 
or to declare
 
a breach
 
of contract.
 
It amends
 
the Trust Indenture
 
Act of 1939
to state
 
that the
 
“the right
 
of any holder
 
of any indenture
 
security
 
to receive
 
payment of
 
the principal
 
of and interest
 
on such indenture
security shall
 
not be deemed
 
to be impaired
 
or affected”
 
by application
 
of the LIBOR
 
Act to any
 
indenture
 
security.
Effective January
 
1, 2021,
 
Fannie Mae,
 
in alignment
 
with Freddie
 
Mac, extended
 
the timeframe
 
for its delinquent
 
loan buyout
 
policy
for Single-Family
 
Uniform Mortgage-Backed
 
Securities
 
(UMBS) and
 
Mortgage-Backed
 
Securities
 
(MBS) from
 
four consecutively
 
missed
monthly payments
 
to twenty-four
 
consecutively
 
missed monthly
 
payments (i.e.,
 
24 months
 
past due).
 
This new
 
timeframe
 
applied to
outstanding
 
single-family
 
pools and
 
newly issued
 
single-family
 
pools and
 
was first
 
reflected
 
when January
 
2021 factors
 
were released
 
on
the fourth
 
business day
 
in February
 
2021.
 
For Agency
 
RMBS investors,
 
when a delinquent
 
loan is bought
 
out of a
 
pool of mortgage
 
loans, the
 
removal of
 
the loan
 
from the pool
is the same
 
as a total
 
prepayment
 
of the loan.
 
The respective
 
GSEs anticipated,
 
however, that
 
delinquent
 
loans will
 
be repurchased
 
in
most cases
 
before the
 
24-month
 
deadline under
 
one of the
 
following
 
exceptions
 
listed below.
 
a loan that
 
is paid in
 
full, or
 
where the
 
related lien
 
is released
 
and/or the
 
note debt
 
is satisfied
 
or forgiven;
 
a loan repurchased
 
by a seller/servicer
 
under applicable
 
selling
 
and servicing
 
requirements;
 
a loan entering
 
a permanent
 
modification,
 
which generally
 
requires
 
it to be
 
removed from
 
the MBS (during
 
any modification
 
trial
period, the
 
loan will
 
remain in
 
the MBS until
 
the trial
 
period ends);
47
 
a loan subject
 
to a short
 
sale or
 
deed-in-lieu
 
of foreclosure;
 
or
 
a loan referred
 
to foreclosure.
Because of
 
these exceptions,
 
the GSEs
 
believe based
 
on prevailing
 
assumptions
 
and market
 
conditions
 
this change
 
will have
 
only a
marginal impact
 
on prepayment
 
speeds, in
 
aggregate.
 
Cohort level
 
impacts may
 
vary. For example,
 
more than
 
half of loans
 
referred to
foreclosure
 
are historically
 
referred
 
within six
 
months of
 
delinquency. The
 
degree to
 
which speeds
 
are affected
 
depends on
 
delinquency
levels, borrower
 
response,
 
and referral
 
to foreclosure
 
timelines.
The scope
 
and nature
 
of the actions
 
the U.S.
 
government
 
or the Fed
 
will ultimately
 
undertake
 
are unknown
 
and will
 
continue to
 
evolve
Effect 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
 
fees
increase)
 
or require
 
us to change
 
our investment
 
strategy
 
altogether.
 
For example,
 
the elimination
 
of the guarantee
 
structure
 
of Agency
RMBS may
 
cause us to
 
change our
 
investment
 
strategy
 
to focus
 
on non-Agency
 
RMBS, which
 
in turn would
 
require us
 
to significantly
increase our
 
monitoring
 
of the credit
 
risks of our
 
investments
 
in addition
 
to interest
 
rate and
 
prepayment
 
risks.
Lower long-term
 
interest
 
rates can
 
affect the
 
value of our
 
Agency RMBS
 
in a number
 
of ways. If
 
prepayment
 
rates are
 
relatively
 
low
(due, in
 
part, to
 
the refinancing
 
problems described
 
above), lower
 
long-term
 
interest
 
rates can
 
increase the
 
value of higher-coupon
 
Agency
RMBS. This
 
is because
 
investors
 
typically place
 
a premium
 
on assets
 
with yields
 
that are
 
higher than
 
market yields.
 
Although
 
lower long-
term interest
 
rates may
 
increase
 
asset values
 
in our portfolio,
 
we may not
 
be able to
 
invest new
 
funds in similarly-yielding
 
assets.
If prepayment
 
levels increase,
 
the value
 
of our Agency
 
RMBS affected
 
by such prepayments
 
may decline.
 
This is because
 
a principal
prepayment
 
accelerates
 
the effective
 
term of an
 
Agency RMBS,
 
which would
 
shorten the
 
period during
 
which an
 
investor would
 
receive
above-market
 
returns (assuming
 
the yield
 
on the prepaid
 
asset is
 
higher than
 
market yields).
 
Also, prepayment
 
proceeds
 
may not
 
be able
to be reinvested
 
in similar-yielding
 
assets. Agency
 
RMBS backed
 
by mortgages
 
with high
 
interest
 
rates are
 
more susceptible
 
to
prepayment
 
risk because
 
holders
 
of those
 
mortgages
 
are most
 
likely to
 
refinance
 
to a lower
 
rate. IOs
 
and IIOs,
 
however, may
 
be the types
of Agency
 
RMBS most
 
sensitive
 
to increased
 
prepayment
 
rates. Because
 
the holder
 
of an IO
 
or IIO receives
 
no principal
 
payments,
 
the
values of
 
IOs and IIOs
 
are entirely
 
dependent
 
on the existence
 
of a principal
 
balance on
 
the underlying
 
mortgages.
 
If the principal
 
balance
is eliminated
 
due to prepayment,
 
IOs and IIOs
 
essentially
 
become worthless.
 
Although
 
increased
 
prepayment
 
rates can negatively
 
affect
the value
 
of our IOs
 
and IIOs,
 
they have
 
the opposite
 
effect on
 
POs. Because
 
POs act like
 
zero-coupon
 
bonds, meaning
 
they are
purchased
 
at a discount
 
to their
 
par value
 
and have
 
an effective
 
interest
 
rate based
 
on the discount
 
and the term
 
of the underlying
 
loan, an
increase in
 
prepayment
 
rates would
 
reduce the
 
effective term
 
of our POs
 
and accelerate
 
the yields
 
earned on
 
those assets,
 
which would
increase our
 
net income.
Higher long-term
 
rates can
 
also affect
 
the value
 
of our Agency
 
RMBS.
 
As long-term
 
rates rise,
 
rates available
 
to borrowers
 
also rise.
 
This tends
 
to cause prepayment
 
activity to
 
slow and
 
extend the
 
expected average
 
life of mortgage
 
cash flows.
 
As the expected
 
average
life of the
 
mortgage
 
cash flows
 
increases,
 
coupled with
 
higher discount
 
rates, the
 
value of Agency
 
RMBS declines.
 
Some of the
instruments
 
the Company
 
uses to hedge
 
our Agency
 
RMBS assets,
 
such as interest
 
rate futures,
 
swaps and
 
swaptions,
 
are stable
average life
 
instruments.
 
This means
 
that to the
 
extent we
 
use such instruments
 
to hedge
 
our Agency
 
RMBS assets,
 
our hedges
 
may not
adequately
 
protect us
 
from price
 
declines,
 
and therefore
 
may negatively
 
impact our
 
book value.
 
It is for
 
this reason
 
we use interest
 
only
securities
 
in our portfolio.
 
As interest
 
rates rise,
 
the expected
 
average life
 
of these
 
securities
 
increases,
 
causing generally
 
positive
 
price
movements
 
as the number
 
and size
 
of the cash
 
flows increase
 
the longer
 
the underlying
 
mortgages
 
remain outstanding.
 
This makes
interest
 
only securities
 
desirable
 
hedge instruments
 
for pass-through
 
Agency RMBS.
 
48
As described
 
above, the
 
Agency RMBS
 
market began
 
to experience
 
severe dislocations
 
in mid-March
 
2020 as a
 
result of
 
the
economic,
 
health and
 
market turmoil
 
brought about
 
by COVID-19.
 
On March 23,
 
2020, the
 
Fed announced
 
that it would
 
purchase
 
Agency
RMBS and
 
U.S. Treasuries
 
in the amounts
 
needed to
 
support smooth
 
market functioning,
 
which largely
 
stabilized
 
the Agency
 
RMBS
market, but
 
ended these
 
purchases
 
in March 2022
 
and announced
 
plans to reduce
 
its balance
 
sheet. The
 
Fed’s planned
 
reduction
 
of its
balance sheet
 
could negatively
 
impact our
 
investment
 
portfolio.
 
Further, the
 
moratoriums
 
on foreclosures
 
and evictions
 
described
 
above
will likely
 
delay potential
 
defaults
 
on loans that
 
would otherwise
 
be bought
 
out of Agency
 
RMBS pools
 
as described
 
above.
 
Depending
 
on
the ultimate
 
resolution
 
of the foreclosure
 
or evictions,
 
when and
 
if it occurs,
 
these loans
 
may be removed
 
from the
 
pool into which
 
they
were securitized.
 
If this were
 
to occur, it would
 
have the
 
effect of delaying
 
a prepayment
 
on the Company’s
 
securities
 
until such
 
time. To
the extent
 
the Company’s
 
Agency RMBS
 
assets were
 
acquired
 
at a premium
 
to par, this will
 
tend to increase
 
the realized
 
yield on
 
the
asset in question.
 
To the extent they
 
were acquired
 
at a discount,
 
this will
 
tend to decrease
 
the realized
 
yield on the
 
asset in question.
Because we
 
base our
 
investment
 
decisions
 
on risk management
 
principles
 
rather than
 
anticipated
 
movements
 
in interest
 
rates, in
 
a
volatile interest
 
rate environment
 
we may allocate
 
more capital
 
to structured
 
Agency RMBS
 
with shorter
 
durations.
 
We believe these
securities
 
have a lower
 
sensitivity
 
to changes
 
in long-term
 
interest
 
rates than
 
other asset
 
classes.
 
We may attempt
 
to mitigate
 
our
exposure
 
to changes
 
in long-term
 
interest
 
rates by
 
investing
 
in IOs and
 
IIOs, which
 
typically
 
have different
 
sensitivities
 
to changes
 
in long-
term interest
 
rates than
 
PT RMBS,
 
particularly
 
PT RMBS backed
 
by fixed-rate
 
mortgages.
Effects on
 
our borrowing
 
costs
We leverage
 
our PT RMBS
 
portfolio and
 
a portion
 
of our structured
 
Agency RMBS
 
with principal
 
balances through
 
the use of
 
short-
term repurchase
 
agreement
 
transactions.
 
The interest
 
rates on
 
our debt are
 
determined
 
by the short
 
term interest
 
rate markets.
 
Increases
in the Fed
 
Funds rate,
 
SOFR or LIBOR
 
typically
 
increase our
 
borrowing
 
costs, which
 
could affect
 
our interest
 
rate spread
 
if there is
 
no
corresponding
 
increase in
 
the interest
 
we earn
 
on our assets.
 
This would
 
be most prevalent
 
with respect
 
to our Agency
 
RMBS backed
 
by
fixed rate
 
mortgage
 
loans because
 
the interest
 
rate on a
 
fixed-rate
 
mortgage
 
loan does
 
not change
 
even though
 
market rates
 
may change.
In order
 
to protect
 
our net interest
 
margin against
 
increases
 
in short-term
 
interest
 
rates, we
 
may enter
 
into interest
 
rate swaps,
 
which
economically
 
convert our
 
floating-rate
 
repurchase
 
agreement
 
debt to fixed-rate
 
debt, or
 
utilize other
 
hedging instruments
 
such as
Eurodollar, Fed
 
Funds and
 
T-Note futures
 
contracts
 
or interest
 
rate swaptions.
Summary
In a continuation
 
of the extremely
 
turbulent
 
and volatile
 
market conditions
 
that have
 
existed since
 
the onset
 
of the COVID-19
pandemic,
 
during the
 
third quarter
 
of 2022 the
 
state of
 
the markets
 
and the outlook
 
changed
 
materially.
 
The perception
 
of inflation
 
on the
part of the
 
Fed has shaped
 
the rates
 
markets, currency
 
markets and
 
the outlook
 
for the economy
 
since the
 
spring of
 
2021.
 
This is when
inflation
 
first began
 
to accelerate
 
in the U.S.
 
During the
 
third quarter
 
the Fed’s outlook,
 
or more accurately,
 
the market’s
 
perception
 
of how
the Fed saw
 
inflation,
 
changed significantly.
 
Through early
 
August of
 
2022 the
 
markets perceived
 
that, while
 
inflation
 
was not transitory,
the Fed would
 
be able to
 
dampen demand
 
by raising
 
rates and
 
cause inflation
 
to decrease
 
back towards
 
the Fed’s long-term
 
target of
 
2%.
 
Further, the
 
market anticipated
 
this would
 
happen by
 
early in 2023
 
and that
 
the Fed would
 
then start
 
to loosen
 
monetary
 
policy shortly
thereafter.
 
The Fed,
 
through repeated
 
public comments
 
by various
 
Fed officials
 
and ultimately
 
by the Chairman
 
at the Fed’s
 
annual central
banker symposium
 
in Jackson
 
Hole, Wyoming
 
in late August,
 
stressed that
 
this was not
 
going to
 
be the case.
 
Incoming economic
 
data
over the
 
period was
 
persistently
 
strong, indicating
 
the rate
 
increases
 
to date had
 
yet to slow
 
demand.
 
More importantly,
 
incoming inflation
data showed
 
no evidence
 
of slowing
 
at all and
 
was in fact
 
becoming more
 
widespread,
 
possibly
 
even well
 
entrenched.
 
This reinforced
 
the
notion the
 
Fed will
 
have to take
 
rates higher
 
and for longer.
 
49
The result
 
of these
 
developments
 
were significant
 
and widespread.
 
Germane to
 
Orchid Island
 
and levered
 
Agency RMBS
 
investors
were increases
 
in market
 
interest
 
rates and
 
a widening
 
in the spreads
 
that Agency
 
RMBS securities
 
trade relative
 
to comparable
 
duration
U.S. Treasuries
 
or swaps.
 
The yield on
 
the 10-year
 
U.S. Treasury
 
closed just
 
above 3.83%
 
on September
 
30,
 
2022, and
 
surpassed
 
4% in
October of
 
2022.
 
This increase
 
was much
 
less than
 
short-term
 
rates increased.
 
Interest
 
rates on
 
maturities
 
inside one
 
year increased
 
by
well over
 
100 basis
 
points and
 
by more than
 
160 basis
 
points for
 
maturities
 
of three
 
months
 
or less –
 
in each case
 
by the end
 
of the
quarter.
 
Yields of maturities
 
of three
 
or fewer
 
months have
 
increased
 
by over 230
 
basis points
 
since the
 
end of the
 
second quarter
 
of 2022
through October
 
26, 2022.
 
As of September
 
30, 2022,
 
market pricing
 
implied the
 
terminal rate
 
for the current
 
cycle would
 
be approximately
4.53% - achieved
 
late in the
 
first quarter
 
of 2023.
 
As of October
 
26, 2022,
 
the market
 
is pricing
 
in a terminal
 
rate of approximately
 
4.85%
sometime late
 
in the second
 
quarter
 
of 2023 and
 
with the Fed
 
Funds rate
 
still approximately
 
4.40% in
 
early 2024.
 
Agency RMBS
 
spreads relative
 
to benchmark
 
interest
 
rates increased
 
to levels
 
observed
 
in March
 
of 2020 by
 
the end of
 
the third
quarter of
 
2022 and
 
have exceeded
 
those levels
 
in October
 
of 2022.
 
Returns for
 
the Agency
 
RMBS market
 
for the third
 
quarter of
 
2022
were (5.40)%
 
and these
 
returns were
 
1.7% lower
 
than comparable
 
duration LIBOR
 
swaps.
 
The relative
 
performance
 
across the
 
Agency
RMBS universe
 
is skewed
 
in favor
 
of higher
 
coupon, 30-year
 
securities
 
that are
 
currently
 
in production
 
by originators.
 
Lower coupon
securities,
 
especially
 
those held
 
in large
 
amounts by
 
the Fed,
 
and which
 
may eventually
 
be sold by
 
the Fed,
 
have performed
 
the worst.
 
These results
 
are consistent
 
with the
 
relative duration
 
of the securities,
 
as higher
 
coupons have
 
shorter durations,
 
or less sensitivity
 
to
movements
 
in interest
 
rates. Actions
 
by the Fed
 
may prevent
 
the sector
 
from performing
 
well in the
 
near term
 
but, if the
 
economy does
contract
 
and enter
 
a recession,
 
the sector
 
could do well
 
on a relative
 
performance
 
basis owing
 
to the lack
 
of credit
 
exposure of
 
Agency
RMBS.
 
This is consistent
 
with the
 
sector’s
 
history of
 
performance
 
in a counter-cyclical
 
manner –
 
doing well
 
when the
 
economy is
 
soft and
relatively
 
poorly when
 
the economy
 
is strong.
Critical
 
Accounting
 
Estimates
 
Our condensed
 
financial
 
statements
 
are prepared
 
in accordance
 
with GAAP. GAAP requires
 
our management
 
to make some
 
complex
and subjective
 
decisions
 
and assessments.
 
Our most critical
 
accounting
 
estimates
 
involve decisions
 
and assessments
 
which could
significantly
 
affect reported
 
assets, liabilities,
 
revenues
 
and expenses.
 
There have
 
been no changes
 
to our critical
 
accounting
 
estimates
 
as
discussed
 
in our annual
 
report on
 
Form 10-K
 
for the year
 
ended December
 
31, 2021.
Capital
 
Expenditures
At September
 
30, 2022,
 
we had no
 
material commitments
 
for capital
 
expenditures.
Dividends
In addition
 
to other
 
requirements
 
that must
 
be satisfied
 
to continue
 
to qualify
 
as a REIT, we must
 
pay annual
 
dividends
 
to our
stockholders
 
of at least
 
90% of our
 
REIT taxable
 
income, determined
 
without regard
 
to the deduction
 
for dividends
 
paid and
 
excluding any
net capital
 
gains. REIT
 
taxable income
 
(loss) is
 
computed
 
in accordance
 
with the
 
Code, and
 
can be greater
 
than or less
 
than our financial
statement
 
net income
 
(loss) computed
 
in accordance
 
with GAAP. These
 
book to tax
 
differences
 
primarily
 
relate to
 
the recognition
 
of
interest
 
income on
 
RMBS, unrealized
 
gains and
 
losses on
 
RMBS, and
 
the amortization
 
of losses
 
on derivative
 
instruments
 
that are treated
as funding
 
hedges for
 
tax purposes.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
50
We intend
 
to pay regular
 
monthly dividends
 
to our stockholders
 
and have
 
declared
 
the following
 
dividends
 
since the
 
completion
 
of our
IPO.
(in thousands, except per share amounts)
Year
Per Share
Amount
Total
2013
$
6.975
$
4,662
2014
10.800
22,643
2015
9.600
38,748
2016
8.400
41,388
2017
8.400
70,717
2018
5.350
55,814
2019
4.800
54,421
2020
3.950
53,570
2021
3.900
97,601
2022 - YTD
(1)
2.155
76,024
Totals
$
64.330
$
515,588
(1)
On October 12, 2022, the Company declared a dividend of $0.16 per
 
share to be paid on November 28, 2022.
 
The effect of this dividend is
included in the table above, but is not reflected in the Company’s financial
 
statements as of September 30, 2022.
ITEM 3.
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES
 
ABOUT MARKET
 
RISK
Market risk
 
is the exposure
 
to loss resulting
 
from changes
 
in market
 
factors such
 
as interest
 
rates, foreign
 
currency exchange
 
rates,
commodity
 
prices and
 
equity prices.
 
The primary
 
market risks
 
that we
 
are exposed
 
to are interest
 
rate risk,
 
prepayment
 
risk, spread
 
risk,
liquidity
 
risk, extension
 
risk and
 
counterparty
 
credit risk.
Interest
 
Rate Risk
Interest
 
rate risk
 
is highly
 
sensitive
 
to many factors,
 
including
 
governmental
 
monetary
 
and tax
 
policies,
 
domestic
 
and international
economic and
 
political
 
considerations
 
and other
 
factors beyond
 
our control.
Changes in
 
the general
 
level of interest
 
rates can
 
affect our
 
net interest
 
income, which
 
is the difference
 
between the
 
interest income
earned on
 
interest-earning
 
assets and
 
the interest
 
expense incurred
 
in connection
 
with our
 
interest-bearing
 
liabilities,
 
by affecting
 
the
spread between
 
our interest-earning
 
assets and
 
interest-bearing
 
liabilities.
 
Changes in
 
the level
 
of interest
 
rates can
 
also affect
 
the rate
 
of
prepayments
 
of our securities
 
and the
 
value of the
 
RMBS that
 
constitute
 
our investment
 
portfolio,
 
which affects
 
our net income,
 
ability to
realize gains
 
from the
 
sale of these
 
assets and
 
ability to
 
borrow, and
 
the amount
 
that we can
 
borrow against
 
these securities.
We may utilize
 
a variety
 
of financial
 
instruments
 
in order
 
to limit
 
the effects
 
of changes
 
in interest
 
rates on
 
our operations.
 
The principal
instruments
 
that we use
 
are futures
 
contracts,
 
interest
 
rate swaps
 
and swaptions.
 
These instruments
 
are intended
 
to serve as
 
an economic
hedge against
 
future interest
 
rate increases
 
on our repurchase
 
agreement
 
borrowings.
 
Hedging techniques
 
are partly
 
based on
 
assumed
levels of
 
prepayments
 
of our Agency
 
RMBS.
 
If prepayments
 
are slower
 
or faster
 
than assumed,
 
the life of
 
the Agency
 
RMBS will
 
be
longer or
 
shorter, which
 
would reduce
 
the effectiveness
 
of any hedging
 
strategies
 
we may use
 
and may cause
 
losses on
 
such
transactions.
 
Hedging strategies
 
involving
 
the use of
 
derivative
 
securities
 
are highly
 
complex
 
and may produce
 
volatile returns.
 
Hedging
techniques
 
are also
 
limited by
 
the rules
 
relating
 
to REIT
 
qualification.
 
In order
 
to preserve
 
our REIT
 
status, we
 
may be forced
 
to terminate
a hedging
 
transaction
 
at a time
 
when the
 
transaction
 
is most needed.
51
Our profitability
 
and the value
 
of our investment
 
portfolio
 
(including
 
derivatives
 
used for
 
hedging
 
purposes)
 
may be adversely
 
affected
during any
 
period as
 
a result
 
of changing
 
interest
 
rates, including
 
changes in
 
the forward
 
yield curve.
 
Our portfolio
 
of PT RMBS
 
is typically
 
comprised
 
of adjustable-rate
 
RMBS (“ARMs”),
 
fixed-rate
 
RMBS and
 
hybrid adjustable-rate
RMBS. We
 
generally
 
seek to acquire
 
low duration
 
assets that
 
offer high
 
levels of
 
protection
 
from mortgage
 
prepayments
 
provided
 
that they
are reasonably
 
priced by
 
the market.
 
Although
 
the duration
 
of an individual
 
asset can
 
change as
 
a result
 
of changes
 
in interest
 
rates, we
strive to
 
maintain a
 
hedged PT
 
RMBS portfolio
 
with an effective
 
duration
 
of less than
 
2.0. The
 
stated contractual
 
final maturity
 
of the
mortgage
 
loans underlying
 
our portfolio
 
of PT RMBS
 
generally ranges
 
up to 30
 
years. However,
 
the effect
 
of prepayments
 
of the
underlying
 
mortgage
 
loans tends
 
to shorten
 
the resulting
 
cash flows
 
from our
 
investments
 
substantially.
 
Prepayments
 
occur for
 
various
reasons,
 
including
 
refinancing
 
of underlying
 
mortgages
 
and loan
 
payoffs in
 
connection
 
with home
 
sales, and
 
borrowers
 
paying more
 
than
their scheduled
 
loan payments,
 
which accelerates
 
the amortization
 
of the loans.
The duration
 
of our IO
 
and IIO portfolios
 
will vary
 
greatly depending
 
on the structural
 
features
 
of the securities.
 
While prepayment
activity will
 
always affect
 
the cash
 
flows associated
 
with the
 
securities,
 
the interest
 
only nature
 
of IOs may
 
cause their
 
durations
 
to become
extremely
 
negative when
 
prepayments
 
are high,
 
and less negative
 
when prepayments
 
are low.
 
Prepayments
 
affect the
 
durations
 
of IIOs
similarly, but the
 
floating rate
 
nature of
 
the coupon
 
of IIOs (which
 
is inversely
 
related to
 
the level
 
of one month
 
LIBOR) causes
 
their price
movements,
 
and model
 
duration,
 
to be affected
 
by changes
 
in both
 
prepayments
 
and one month
 
LIBOR, both
 
current and
 
anticipated
levels.
 
As a result,
 
the duration
 
of IIO securities
 
will also
 
vary greatly.
Prepayments
 
on the loans
 
underlying
 
our RMBS
 
can alter
 
the timing
 
of the cash
 
flows from
 
the underlying
 
loans to us.
 
As a result,
 
we
gauge the
 
interest
 
rate sensitivity
 
of our assets
 
by measuring
 
their effective
 
duration.
 
While modified
 
duration
 
measures the
 
price sensitivity
of a bond
 
to movements
 
in interest
 
rates, effective
 
duration
 
captures
 
both the
 
movement in
 
interest
 
rates and
 
the fact
 
that cash
 
flows to
 
a
mortgage
 
related security
 
are altered
 
when interest
 
rates move.
 
Accordingly, when
 
the contract
 
interest
 
rate on a
 
mortgage
 
loan is
substantially
 
above prevailing
 
interest
 
rates in
 
the market,
 
the effective
 
duration
 
of securities
 
collateralized
 
by such loans
 
can be quite
 
low
because of
 
expected prepayments.
We face the
 
risk that
 
the market
 
value of our
 
PT RMBS
 
assets will
 
increase or
 
decrease
 
at different
 
rates than
 
that of our
 
structured
RMBS or
 
liabilities,
 
including
 
our hedging
 
instruments.
 
Accordingly, we
 
assess our
 
interest
 
rate risk
 
by estimating
 
the duration
 
of our assets
and the duration
 
of our liabilities.
 
We generally
 
calculate
 
duration
 
using various
 
third party
 
models.
 
However, empirical
 
results and
 
various
third party
 
models may
 
produce
 
different duration
 
numbers for
 
the same
 
securities.
The following
 
sensitivity
 
analysis
 
shows the
 
estimated
 
impact on
 
the fair
 
value of our
 
interest
 
rate-sensitive
 
investments
 
and hedge
positions
 
as of September
 
30, 2022
 
and December
 
31, 2021,
 
assuming rates
 
instantaneously
 
fall 200 bps,
 
fall 100 bps,
 
fall 50 bps,
 
rise 50
bps, rise
 
100 bps and
 
rise 200
 
bps, adjusted
 
to reflect
 
the impact
 
of convexity, which
 
is the measure
 
of the sensitivity
 
of our hedge
positions
 
and Agency
 
RMBS’ effective
 
duration
 
to movements
 
in interest
 
rates. We
 
have a negatively
 
convex asset
 
profile and
 
a linear
 
to
slightly positively
 
convex hedge
 
portfolio
 
(short positions).
 
It is not
 
uncommon for
 
us to have
 
losses in
 
both directions.
All changes
 
in value in
 
the table
 
below are
 
measured
 
as percentage
 
changes from
 
the investment
 
portfolio
 
value and
 
net asset
 
value
at the base
 
interest
 
rate scenario.
 
The base
 
interest
 
rate scenario
 
assumes interest
 
rates and
 
prepayment
 
projections
 
as of September
 
30,
2022 and
 
December
 
31, 2021.
 
Actual results
 
could differ
 
materially
 
from estimates,
 
especially
 
in the current
 
market environment.
 
To the extent that
 
these estimates
or other
 
assumptions
 
do not hold
 
true, which
 
is likely in
 
a period
 
of high price
 
volatility, actual
 
results will
 
likely differ
 
materially
 
from
projections
 
and could
 
be larger
 
or smaller
 
than the
 
estimates
 
in the table
 
below. Moreover,
 
if different
 
models were
 
employed in
 
the
analysis,
 
materially
 
different projections
 
could result.
 
Lastly, while
 
the table
 
below reflects
 
the estimated
 
impact of
 
interest rate
 
increases
and decreases
 
on a static
 
portfolio,
 
we may from
 
time to time
 
sell any of
 
our agency
 
securities
 
as a part
 
of the overall
 
management
 
of our
investment
 
portfolio.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
52
Interest Rate Sensitivity
(1)
Portfolio
Market
Book
Change in Interest Rate
Value
(2)(3)
Value
(2)(4)
As of September 30, 2022
-200 Basis Points
0.23%
1.87%
-100 Basis Points
0.54%
4.32%
-50 Basis Points
0.38%
3.04%
+50 Basis Points
(0.47)%
(3.73)%
+100 Basis Points
(1.00)%
(8.01)%
+200 Basis Points
(2.18)%
(17.46)%
As of December 31, 2021
-200 Basis Points
(2.01)%
(17.00)%
-100 Basis Points
(0.33)%
(2.76)%
-50 Basis Points
0.19%
1.59%
+50 Basis Points
(0.48)%
(4.04)%
+100 Basis Points
(1.64)%
(13.91)%
+200 Basis Points
(4.79)%
(40.64)%
(1)
 
Interest rate
 
sensitivity is
 
derived from models
 
that are dependent
 
on inputs and
 
assumptions provided
 
by third parties
 
as well as by
 
our Manager,
and assumes
 
there are no
 
changes in
 
mortgage spreads
 
and assumes a
 
static portfolio.
 
Actual results
 
could differ
 
materially from
 
these estimates.
 
(2)
 
Includes the
 
effect of derivatives
 
and other securities
 
used for hedging
 
purposes.
 
(3)
 
Estimated dollar
 
change in investment
 
portfolio value
 
expressed
 
as a percent
 
of the total
 
fair value of
 
our investment
 
portfolio as
 
of such date.
 
(4)
 
Estimated dollar
 
change in portfolio
 
value expressed
 
as a percent
 
of stockholders'
 
equity as of
 
such date.
 
In addition
 
to changes
 
in interest
 
rates, other
 
factors impact
 
the fair
 
value of our
 
interest
 
rate-sensitive
 
investments,
 
such as the
 
shape
of the yield
 
curve, market
 
expectations
 
as to future
 
interest
 
rate changes
 
and other
 
market conditions.
 
Accordingly, in
 
the event
 
of changes
in actual
 
interest
 
rates, the
 
change in
 
the fair
 
value of our
 
assets would
 
likely differ
 
from that
 
shown above
 
and such difference
 
might be
material and
 
adverse to
 
our stockholders.
 
Prepayment
 
Risk
Because residential
 
borrowers
 
have the
 
option to
 
prepay their
 
mortgage
 
loans at par
 
at any time,
 
we face the
 
risk that
 
we will
experience
 
a return
 
of principal
 
on our investments
 
faster than
 
anticipated.
 
Various factors
 
affect the
 
rate at which
 
mortgage
 
prepayments
occur, including
 
changes in
 
the level
 
of and directional
 
trends in
 
housing prices,
 
interest
 
rates, general
 
economic conditions,
 
loan age
 
and
size, loan-to-value
 
ratio, the
 
location
 
of the property
 
and social
 
and demographic
 
conditions.
 
Additionally, changes
 
to government
sponsored
 
entity underwriting
 
practices
 
or other
 
governmental
 
programs
 
could also
 
significantly
 
impact prepayment
 
rates or
 
expectations.
Generally, prepayments
 
on Agency
 
RMBS increase
 
during periods
 
of falling
 
mortgage
 
interest
 
rates and
 
decrease
 
during periods
 
of rising
mortgage
 
interest
 
rates. However,
 
this may not
 
always be
 
the case.
 
We may reinvest
 
principal
 
repayments
 
at a yield
 
that is lower
 
or
higher than
 
the yield
 
on the repaid
 
investment,
 
thus affecting
 
our net
 
interest
 
income by altering
 
the average
 
yield on our
 
assets.
 
Spread Risk
When the
 
market spread
 
widens between
 
the yield
 
on our Agency
 
RMBS and
 
benchmark
 
interest
 
rates, our
 
net book
 
value could
decline if
 
the value
 
of our Agency
 
RMBS falls
 
by more than
 
the offsetting
 
fair value
 
increases
 
on our hedging
 
instruments
 
tied to
 
the
underlying
 
benchmark
 
interest
 
rates. We
 
refer to
 
this as "spread
 
risk" or "basis
 
risk." The
 
spread risk
 
associated
 
with our
 
mortgage
 
assets
and the resulting
 
fluctuations
 
in fair
 
value of these
 
securities
 
can occur
 
independent
 
of changes
 
in benchmark
 
interest
 
rates and
 
may relate
to other
 
factors impacting
 
the mortgage
 
and fixed
 
income markets,
 
such as actual
 
or anticipated
 
monetary
 
policy actions
 
by the Fed,
market liquidity,
 
or changes
 
in required
 
rates of
 
return on
 
different assets.
 
Consequently, while
 
we use futures
 
contracts
 
and interest
 
rate
swaps and
 
swaptions
 
to attempt
 
to protect
 
against moves
 
in interest
 
rates, such
 
instruments
 
typically
 
will not
 
protect our
 
net book value
against spread
 
risk.
53
Liquidity
 
Risk
The primary
 
liquidity
 
risk for
 
us arises
 
from financing
 
long-term
 
assets with
 
shorter-term
 
borrowings
 
through repurchase
 
agreements.
Our assets
 
that are
 
pledged to
 
secure repurchase
 
agreements
 
are Agency
 
RMBS and
 
cash. As of
 
September
 
30, 2022,
 
we had
unrestricted
 
cash and cash
 
equivalents
 
of $214.2
 
million and
 
unpledged
 
securities
 
of approximately
 
$5.4 million
 
(not including
 
unsettled
securities
 
purchases
 
or securities
 
pledged to
 
us) available
 
to meet
 
margin calls
 
on our repurchase
 
agreements
 
and derivative
 
contracts,
and for other
 
corporate
 
purposes. However,
 
should the
 
value of our
 
Agency RMBS
 
pledged as
 
collateral
 
or the value
 
of our derivative
instruments
 
suddenly decrease,
 
margin calls
 
relating
 
to our repurchase
 
and derivative
 
agreements
 
could increase,
 
causing
 
an adverse
change in
 
our liquidity
 
position.
 
Further, there
 
is no assurance
 
that we will
 
always be
 
able to renew
 
(or roll)
 
our repurchase
 
agreements.
 
In
addition,
 
our counterparties
 
have the
 
option to
 
increase our
 
haircuts (margin
 
requirements)
 
on the assets
 
we pledge
 
against repurchase
agreements,
 
thereby reducing
 
the amount
 
that can
 
be borrowed
 
against an
 
asset even
 
if they agree
 
to renew
 
or roll the
 
repurchase
agreement.
 
Significantly
 
higher haircuts
 
can reduce
 
our ability
 
to leverage
 
our portfolio
 
or even force
 
us to sell
 
assets, especially
 
if
correlated
 
with asset
 
price declines
 
or faster
 
prepayment
 
rates on
 
our assets.
Extension
 
Risk
The projected
 
weighted
 
average life
 
and the duration
 
(or interest
 
rate sensitivity)
 
of our investments
 
is based on
 
our Manager's
assumptions
 
regarding
 
the rate
 
at which
 
the borrowers
 
will prepay
 
the underlying
 
mortgage
 
loans. In
 
general,
 
we use futures
 
contracts and
interest
 
rate swaps
 
and swaptions
 
to help manage
 
our funding
 
cost on our
 
investments
 
in the event
 
that interest
 
rates rise.
 
These hedging
instruments
 
allow us
 
to reduce
 
our funding
 
exposure
 
on the notional
 
amount of
 
the instrument
 
for a specified
 
period of
 
time.
However, if prepayment
 
rates decrease
 
in a rising
 
interest
 
rate environment,
 
the average
 
life or
 
duration
 
of our fixed-rate
 
assets or
 
the
fixed-rate
 
portion of
 
the ARMs or
 
other assets
 
generally
 
extends.
 
This could
 
have a negative
 
impact on
 
our results
 
from operations,
 
as our
hedging instrument
 
expirations
 
are fixed
 
and will,
 
therefore,
 
cover a smaller
 
percentage
 
of our funding
 
exposure
 
on our mortgage
 
assets to
the extent
 
that their
 
average lives
 
increase due
 
to slower
 
prepayments.
 
This situation
 
may also
 
cause the
 
market value
 
of our Agency
RMBS and
 
CMOs collateralized
 
by fixed rate
 
mortgages
 
or hybrid
 
ARMs to decline
 
by more than
 
otherwise
 
would be
 
the case while
 
most
of our hedging
 
instruments
 
would not
 
receive any
 
incremental
 
offsetting
 
gains. In
 
extreme situations,
 
we may be
 
forced to
 
sell assets
 
to
maintain adequate
 
liquidity, which
 
could cause
 
us to incur
 
realized losses.
Counterparty
 
Credit Risk
We are exposed
 
to counterparty
 
credit risk
 
relating
 
to potential
 
losses that
 
could be recognized
 
in the event
 
that the
 
counterparties
 
to
our repurchase
 
agreements
 
and derivative
 
contracts
 
fail to perform
 
their obligations
 
under such
 
agreements.
 
The amount
 
of assets
 
we
pledge as
 
collateral
 
in accordance
 
with our
 
agreements
 
varies over
 
time based
 
on the market
 
value and
 
notional amount
 
of such assets
 
as
well as the
 
value of our
 
derivative
 
contracts.
 
In the event
 
of a default
 
by a counterparty,
 
we may not
 
receive payments
 
provided
 
for under
the terms
 
of our agreements
 
and may have
 
difficulty obtaining
 
our assets
 
pledged as
 
collateral
 
under such
 
agreements.
 
Our credit
 
risk
related to
 
certain derivative
 
transactions
 
is largely
 
mitigated
 
through
 
daily adjustments
 
to collateral
 
pledged based
 
on changes
 
in market
value and
 
we limit
 
our counterparties
 
to registered
 
central clearing
 
exchanges
 
and major
 
financial
 
institutions
 
with acceptable
 
credit ratings,
monitoring
 
positions
 
with individual
 
counterparties
 
and adjusting
 
collateral
 
posted as
 
required.
 
However, there
 
is no guarantee
 
our efforts
to manage
 
counterparty
 
credit risk
 
will be successful
 
and we could
 
suffer significant
 
losses if
 
unsuccessful.
54
ITEM 4. CONTROLS
 
AND PROCEDURES
Evaluation
 
of Disclosure
 
Controls
 
and Procedures
 
As of the
 
end of the
 
period covered
 
by this report
 
(the “evaluation
 
date”), we
 
carried out
 
an evaluation,
 
under the
 
supervision
 
and with
the participation
 
of our management,
 
including
 
our Chief
 
Executive
 
Officer (the
 
“CEO”) and
 
Chief Financial
 
Officer (the
 
“CFO”),
 
of the
effectiveness
 
of the design
 
and operation
 
of our disclosure
 
controls
 
and procedures,
 
as defined
 
in Rule 13a-15(e)
 
under the
 
Exchange
 
Act.
Based on
 
this evaluation,
 
the CEO and
 
CFO concluded
 
our disclosure
 
controls and
 
procedures,
 
as designed
 
and implemented,
 
were
effective as
 
of the evaluation
 
date (1)
 
in ensuring
 
that information
 
regarding
 
the Company
 
is accumulated
 
and communicated
 
to our
management,
 
including
 
our CEO
 
and CFO,
 
by our employees,
 
as appropriate
 
to allow
 
timely decisions
 
regarding
 
required
 
disclosure
 
and
(2) in providing
 
reasonable
 
assurance
 
that information
 
we must disclose
 
in our periodic
 
reports
 
under the
 
Exchange
 
Act is recorded,
processed,
 
summarized
 
and reported
 
within the
 
time periods
 
prescribed
 
by the SEC’s
 
rules and
 
forms.
Changes
 
in Internal
 
Control over
 
Financial
 
Reporting
There were
 
no significant
 
changes in
 
the Company’s
 
internal
 
control
 
over financial
 
reporting
 
that occurred
 
during the
 
Company’s most
recent fiscal
 
quarter that
 
have materially
 
affected, or
 
are reasonably
 
likely to
 
materially
 
affect, the
 
Company’s internal
 
control over
 
financial
reporting.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
55
PART II. OTHER
 
INFORMATION
ITEM 1.
 
LEGAL PROCEEDINGS
We are not party to any material pending legal proceedings as described in Item 103
 
of Regulation S-K.
ITEM 1A.
 
RISK FACTORS
 
A description of certain factors that may affect our future results and risk factors
 
is set forth in our Annual Report on Form 10-K for
the year ended December 31, 2021. As of September 30, 2022,
 
there have been no material changes in our risk factors from those set
forth in our Annual Report on Form 10-K for the year ended December 31, 2021.
ITEM 2. UNREGISTERED
 
SALES OF
 
EQUITY SECURITIES
 
AND USE
 
OF PROCEEDS
The Company did not have any unregistered sales of its equity securities during the
 
three months ended September 30, 2022.
 
The table below presents the Company’s share repurchase activity for the three months
 
ended September 30, 2022.
Shares Purchased
Maximum Number
Total Number
Weighted-Average
as Part of Publicly
of Shares That May Yet
of Shares
Price Paid
Announced
Be Repurchased Under
Repurchased
(1)
Per Share
Programs
the Authorization
(2)
July 1, 2022 - July 31, 2022
-
$
-
-
3,364,601
August 1, 2022 - August 31, 2022
-
-
-
3,364,601
September 1, 2022 - September 30, 2022
186,249
12.73
175,000
3,189,601
Totals / Weighted Average
186,249
$
12.73
175,000
3,189,601
(1)
Includes 452
 
shares of the
 
Company’s common
 
stock acquired
 
by the Company
 
in connection
 
with the satisfaction
 
of tax withholding
 
obligations on
vested employment
 
related awards
 
under equity
 
incentive plans
 
and cash paid
 
for 10,796.6
 
fractional shares
 
as a result
 
of the Company’s
 
1-for-5
reverse stock
 
split effected
 
on August 30,
 
2022. These repurchases
 
do not reduce
 
the number of
 
shares available
 
under the stock
 
repurchase
program authorization.
(2)
On October
 
12, 2022, the
 
Board of Directors
 
approved an increase
 
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.
 
The effect of this
 
increase in
 
not reflected
 
in the table.
ITEM 3.
 
DEFAULTS UPON SENIOR
 
SECURITIES
None.
ITEM 4.
 
MINE SAFETY
 
DISCLOSURES
Not Applicable.
ITEM 5.
 
OTHER INFORMATION
None.
56
ITEM 6. EXHIBITS
Exhibit No.
3.1
3.2
3.3
3.4
4.1
31.1
31.2
32.1
32.2
Exhibit 101.INS XBRL
Inline XBRL Instance Document – the instance document does not appear
 
in the
Interactive Data File because its XBRL tags are embedded within the Inline XBRL
document.***
Exhibit 101.SCH XBRL
Taxonomy Extension Schema Document ***
Exhibit 101.CAL XBRL
Taxonomy Extension Calculation Linkbase Document***
Exhibit 101.DEF XBRL
Additional Taxonomy Extension Definition Linkbase Document Created***
Exhibit 101.LAB XBRL
Taxonomy Extension Label Linkbase Document ***
Exhibit 101.PRE XBRL
Taxonomy Extension Presentation Linkbase Document ***
Exhibit 104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
*
 
Filed herewith.
**
 
Furnished
 
herewith.
***
 
Submitted
 
electronically
 
herewith.
 
Management
 
contract
 
or compensatory
 
plan.
 
 
57
Signatures
Pursuant
 
to the requirements
 
of Section
 
13 or 15(d)
 
of the Securities
 
Exchange
 
Act of 1934,
 
as amended,
 
the registrant
 
has duly caused
this report
 
to be signed
 
on its behalf
 
by the undersigned,
 
thereunto
 
duly authorized.
Orchid Island Capital, Inc
.
Registrant
Date:
 
October 28, 2022
By:
/s/ Robert E. Cauley
Robert E. Cauley
Chief Executive Officer, President and Chairman of the Board
(Principal Executive Officer)
Date:
 
October 28, 2022
By:
/s/ George H. Haas, IV
George H. Haas, IV
Secretary, Chief Financial Officer, Chief Investment Officer and
Director (Principal Financial and Accounting Officer)