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orc10q20220331p1i0.gif
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
March 31, 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 April 28, 2022:
177,117,186
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
25
ITEM 3. Quantitative
 
and Qualitative
 
Disclosures
 
about Market
 
Risk
47
ITEM 4. Controls
 
and Procedures
51
PART II. OTHER INFORMATION
ITEM 1. Legal
 
Proceedings
52
ITEM 1A.
 
Risk Factors
52
ITEM 2. Unregistered
 
Sales of Equity
 
Securities
 
and Use of
 
Proceeds
52
ITEM 3. Defaults
 
upon Senior
 
Securities
52
ITEM 4. Mine
 
Safety Disclosures
52
ITEM 5. Other
 
Information
52
ITEM 6. Exhibits
53
SIGNATURES
54
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
PART I. FINANCIAL
 
INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORCHID ISLAND CAPITAL, INC.
CONDENSED BALANCE SHEETS
($ in thousands, except per share data)
(Unaudited)
March 31,
December 31,
2022
2021
ASSETS:
Mortgage-backed securities, at fair value (includes pledged assets
 
of $
4,576,847
and $
6,506,372
, respectively)
$
4,580,594
$
6,511,095
U.S. Treasury Notes, at fair value (includes pledged assets of $
36,477
 
and $
29,740
, respectively)
36,477
37,175
Cash and cash equivalents
297,246
385,143
Restricted cash
130,199
65,299
Accrued interest receivable
14,853
18,859
Derivative assets
126,910
50,786
Other assets
1,153
320
Total Assets
$
5,187,432
$
7,068,677
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements
$
4,464,109
$
6,244,106
Dividends payable
7,996
11,530
Derivative liabilities
25,535
7,589
Accrued interest payable
1,018
788
Due to affiliates
1,066
1,062
Other liabilities
95,290
35,505
Total Liabilities
4,595,014
6,300,580
 
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $
0.01
 
par value;
100,000,000
 
shares authorized; no shares issued
and outstanding as of March 31, 2022 and December 31, 2021
-
-
Common Stock, $
0.01
 
par value;
500,000,000
 
shares authorized,
177,117,186
shares issued and outstanding as of March 31, 2022 and
176,993,049
 
shares issued
and outstanding as of December 31, 2021
1,771
1,770
Additional paid-in capital
822,128
849,081
Accumulated deficit
(231,481)
(82,754)
Total Stockholders' Equity
592,418
768,097
Total Liabilities
 
and Stockholders' Equity
$
5,187,432
$
7,068,677
See Notes to Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS
 
OF OPERATIONS
(Unaudited)
For the Three Months Ended March 31, 2022 and 2021
($ in thousands, except per share data)
Three Months Ended March 31,
2022
2021
Interest income
$
41,857
$
26,856
Interest expense
(2,655)
(1,941)
Net interest income
39,202
24,915
Realized losses on mortgage-backed securities
(51,086)
(7,397)
Unrealized losses on mortgage-backed securities and U.S. Treasury
 
Notes
(309,962)
(88,866)
Gains on derivative and other hedging instruments
177,816
45,472
Net portfolio loss
(144,030)
(25,876)
Expenses:
Management fees
2,634
1,621
Allocated overhead
441
404
Incentive compensation
237
364
Directors' fees and liability insurance
311
272
Audit, legal and other professional fees
304
318
Direct REIT operating expenses
643
421
Other administrative
127
93
Total expenses
4,697
3,493
Net loss
$
(148,727)
$
(29,369)
Basic and diluted net loss per share
$
(0.84)
$
(0.34)
Weighted Average Shares Outstanding
176,997,566
85,344,954
Dividends declared per common share
$
0.155
$
0.195
See Notes to Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS
 
OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Three Months Ended March 31, 2022 and 2021
(in thousands)
Additional
Retained
Common Stock
Paid-in
Earnings
Shares
Par Value
Capital
(Deficit)
Total
Balances, January 1, 2021
76,073
$
761
$
432,524
$
(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
18,248
182
96,726
-
96,908
Stock based awards and amortization
90
1
571
-
572
Balances, March 31, 2021
94,411
$
944
$
512,595
$
(47,363)
$
466,176
Balances, January 1, 2022
176,993
$
1,770
$
849,081
$
(82,754)
$
768,097
Net loss
-
-
-
(148,727)
(148,727)
Cash dividends declared
-
-
(27,492)
-
(27,492)
Stock based awards and amortization
124
1
539
-
540
Balances, March 31, 2022
177,117
$
1,771
$
822,128
$
(231,481)
$
592,418
See Notes to Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS
 
OF CASH FLOWS
(Unaudited)
For the Three Months Ended March 31, 2022 and 2021
($ in thousands)
2022
2021
CASH FLOWS FROM OPERATING
 
ACTIVITIES:
Net loss
$
(148,727)
$
(29,369)
Adjustments to reconcile net loss to net cash provided by operating activities:
Stock based compensation
162
259
Realized and unrealized losses on mortgage-backed securities
360,350
96,263
Unrealized losses on U.S. Treasury Notes
698
-
Realized and unrealized gains on derivative instruments
(101,921)
(45,914)
Changes in operating assets and liabilities:
Accrued interest receivable
4,006
(1,050)
Other assets
(833)
(588)
Accrued interest payable
230
(236)
Other liabilities
204
5,318
Due to affiliates
4
80
NET CASH PROVIDED BY OPERATING
 
ACTIVITIES
114,173
24,763
CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases
-
(1,764,082)
Sales
1,413,039
988,523
Principal repayments
157,112
123,880
Net proceeds from (payments on) derivative instruments
103,900
(10,674)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
1,674,051
(662,353)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements
12,861,900
7,517,156
Principal payments on repurchase agreements
(14,641,897)
(6,931,062)
Cash dividends
(31,010)
(16,030)
Proceeds from issuance of common stock, net of issuance costs
-
96,908
Shares withheld from employee stock awards for payment of taxes
(214)
(297)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
(1,811,221)
666,675
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS
 
AND RESTRICTED CASH
(22,997)
29,085
CASH, CASH EQUIVALENTS
 
AND RESTRICTED CASH, beginning of the period
450,442
299,506
CASH, CASH EQUIVALENTS
 
AND RESTRICTED CASH, end of the period
$
427,445
$
328,591
SUPPLEMENTAL DISCLOSURE OF
 
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest
$
2,425
$
2,176
SUPPLEMENTAL DISCLOSURE OF
 
NONCASH INVESTING ACTIVITIES:
Securities acquired settled in later period
$
-
$
217,758
Securities sold settled in later period
-
154,977
See Notes to Financial Statements
5
ORCHID ISLAND
 
CAPITAL, INC.
NOTES TO CONDENSED
 
FINANCIAL
 
STATEMENTS
(Unaudited)
MARCH 31,
 
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
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
27,493,650
 
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
7,600,000
 
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 January 2021 Underwriting
Agreement at $
5.20
 
per share. In addition, the Company granted J.P. Morgan a 30-day option to purchase up to an additional
1,140,000
 
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
8,740,000
 
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
8,000,000
 
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 $
5.45
 
per share. In addition, the
Company granted J.P. Morgan a 30-day option to purchase up to an additional
1,200,000
 
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
9,200,000
 
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
49,407,336
 
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 March 31, 2022, the Company issued a total of
15,835,700
 
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. Subsequent to March 31, 2022 through April 29, 2022,
 
the Company issued no shares under the October 2021
Equity Distribution Agreement.
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 three
 
month period
 
ended March
 
31, 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 March
 
31,
2022.
Variable Interest Entities (“VIEs”)
We obtain interests in VIEs through our investments in mortgage-backed securities.
 
Our interests in these VIEs are passive in
nature and are not expected to result in us obtaining a controlling financial interest
 
in these VIEs in the future.
 
As a result, we do not
consolidate these VIEs and we account for our interest in these VIEs as mortgage-backed
 
securities.
 
See Note 2 for additional
information regarding our investments in mortgage-backed securities.
 
Our maximum exposure to loss for these VIEs is the carrying
value of the mortgage-backed securities.
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.
 
 
 
 
 
 
 
 
 
 
 
 
7
(in thousands)
March 31, 2022
December 31, 2021
Cash and cash equivalents
$
297,246
$
385,143
Restricted cash
130,199
65,299
Total cash, cash equivalents
 
and restricted cash
$
427,445
$
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. We refer to RMBS
 
and CMOs as PT RMBS. We refer
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 our 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.
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.
8
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 March
 
31, 2022
 
and December
 
31, 2021 due
 
to the short-term
 
nature of
 
these
financial
 
instruments.
 
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.
9
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
 
or subscribed
 
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 our
 
common stock
 
on the date
 
of grant.
 
Compensation
 
expense is
 
recognized
 
over each
award’s respective
 
service period
 
using the
 
graded vesting
 
attribution
 
method. We
 
do not estimate
 
forfeiture
 
rates; rather,
 
we adjust 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.
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 consolidated financial
 
statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10
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 March
 
31, 2022
 
and December
 
31, 2021:
(in thousands)
March 31, 2022
December 31, 2021
Pass-Through RMBS Certificates:
Fixed-rate Mortgages
 
$
4,372,517
$
6,298,189
Total Pass-Through
 
Certificates
4,372,517
6,298,189
Structured RMBS Certificates:
Interest-Only Securities
206,617
210,382
Inverse Interest-Only Securities
1,460
2,524
Total Structured
 
RMBS Certificates
208,077
212,906
Total
$
4,580,594
$
6,511,095
As of March
 
31, 2022
 
and December
 
31, 2021,
 
the Company
 
held U.S.
 
Treasury Notes
 
with a fair
 
value of approximately
 
$
36.5
 
million
and $
37.2
 
million, respectively,
 
primarily
 
to satisfy
 
collateral
 
requirements
 
of one of
 
its derivative
 
counterparties.
The following
 
table is a
 
summary of
 
our net gain
 
(loss) from
 
the sale of
 
RMBS for
 
the three
 
months ended
 
March 31,
 
2022 and
 
2021.
Three Months Ended March 31,
2022
2021
Proceeds from sales of RMBS
$
1,413,039
$
988,523
Carrying value of RMBS sold
(1,464,125)
(995,920)
Net (loss) gain on sales of RMBS
$
(51,086)
$
(7,397)
Gross gain on sales of RMBS
$
709
$
2,813
Gross loss on sales of RMBS
(51,795)
(10,210)
Net (loss) gain on sales of RMBS
$
(51,086)
$
(7,397)
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
 
March 31,
 
2022, the
 
Company had
 
met all margin
 
call
requirements.
As of March
 
31, 2022
 
and December
 
31, 2021,
 
the Company’s
 
repurchase
 
agreements
 
had remaining
 
maturities
 
as summarized
below:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
11
($ in thousands)
OVERNIGHT
BETWEEN 2
BETWEEN 31
GREATER
 
(1 DAY OR
AND
AND
THAN
LESS)
30 DAYS
90 DAYS
90 DAYS
TOTAL
March 31, 2022
Fair market value of securities pledged, including
accrued interest receivable
$
-
$
3,966,753
$
576,875
$
48,035
$
4,591,663
Repurchase agreement liabilities associated with
these securities
$
-
$
3,848,289
$
564,223
$
51,597
$
4,464,109
Net weighted average borrowing rate
-
0.36%
0.42%
0.15%
0.37%
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%
In addition, cash pledged to counterparties for repurchase agreements was approximately
 
$113.6 million and $57.3 million as of
March 31, 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 March
 
31, 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
 
$
240.1
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 March
 
31, 2022
 
and December
 
31, 2021.
NOTE 4. DERIVATIVE AND OTHER HEDGING INSTRUMENTS
The table
 
below summarizes
 
fair value
 
information
 
about our
 
derivative
 
and other
 
hedging instruments
 
assets and
 
liabilities
 
as of
March 31,
 
2022 and
 
December
 
31, 2021.
(in thousands)
Derivative and Other Hedging Instruments
Balance Sheet Location
March 31, 2022
December 31, 2021
Assets
Interest rate swaps
Derivative assets, at fair value
$
65,194
$
29,293
Payer swaptions (long positions)
Derivative assets, at fair value
60,362
21,493
Interest rate caps
Derivative assets, at fair value
1,354
-
Total derivative
 
assets, at fair value
$
126,910
$
50,786
Liabilities
Interest rate swaps
Derivative liabilities, at fair value
$
-
$
2,862
Payer swaptions (short positions)
Derivative liabilities, at fair value
25,535
4,423
TBA securities
Derivative liabilities, at fair value
-
304
Total derivative
 
liabilities, at fair value
$
25,535
$
7,589
Margin Balances Posted to (from) Counterparties
Futures contracts
Restricted cash
$
16,610
$
8,035
TBA securities
Other liabilities
-
(856)
Interest rate swaption contracts
Other liabilities
(34,983)
(6,350)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12
Total margin
 
balances on derivative contracts
$
(18,373)
$
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 March
 
31, 2022
 
and December
31, 2021.
 
($ in thousands)
March 31, 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)
June 2022 5-year T-Note futures
(Jun 2022 - Jun 2027 Hedge Period)
$
1,194,000
2.25%
2.83%
$
32,928
June 2022 10-year Ultra futures
(Jun 2022 - Jun 2032 Hedge Period)
$
270,000
1.68%
2.06%
$
10,983
($ 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 $
114.69
 
at March 31, 2022 and $
120.98
 
at December 31, 2021.
 
The contract values
of the short positions were $
1,369.4
 
million and $
446.4
 
million at March 31, 2022 and December 31, 2021, respectively.
 
10-Year Ultra
 
futures
contracts were valued at a price of $
135.47
 
at March 31, 2022 and $
146.44
 
at December 31, 2021. The contract value of the short position was
$
365.8
 
million and $
322.2
 
million at March 31, 2022 and December 31, 2021, respectively
Under our
 
interest
 
rate swap
 
agreements,
 
we typically
 
pay a fixed
 
rate and
 
receive a
 
floating rate
 
based on an
 
index ("payer
 
swaps").
The floating
 
rate we receive
 
under our
 
swap agreements
 
has the effect
 
of offsetting
 
the repricing
 
characteristics
 
of our repurchase
agreements
 
and cash flows
 
on such liabilities.
 
We are typically
 
required
 
to post collateral
 
on our interest
 
rate swap
 
agreements.
 
The table
below presents
 
information
 
related to
 
the Company’s
 
interest
 
rate swap
 
positions
 
at March
 
31, 2022
 
and December
 
31, 2021.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
13
($ in thousands)
Average
Net
Fixed
Average
Estimated
Average
Notional
Pay
Receive
Fair
Maturity
Amount
Rate
Rate
Value
(Years)
March 31, 2022
Expiration > 3 to ≤ 5 years
$
300,000
0.95%
0.93%
$
18,138
4.0
Expiration > 5 years
1,100,000
1.51%
0.37%
47,056
7.0
$
1,400,000
1.39%
0.49%
$
65,194
6.3
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 March
 
31, 2022.
($ in thousands)
Net
Strike
Estimated
Notional
Swap
Curve
Fair
Expiration
Amount
Cost
Rate
Spread
Value
February 8, 2024
$
200,000
$
2,350
0.09%
10Y2Y
$
1,354
The table
 
below presents
 
information
 
related to
 
the Company’s
 
interest
 
rate swaption
 
positions
 
at March 31,
 
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)
March 31, 2022
Payer Swaptions - long
≤ 1 year
$
31,905
$
33,040
11.3
$
1,282,400
2.44%
3 Month
11.3
>1 year ≤ 2 years
15,300
27,322
18.8
728,400
2.52%
3 Month
10.0
$
47,205
$
60,362
14.0
$
2,010,800
2.47%
3 Month
10.8
Payer Swaptions - short
≤ 1 year
$
(19,540)
$
(25,535)
5.8
$
(1,433,000)
2.47%
3 Month
10.8
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
14
The
 
following
 
table
 
summarizes
 
our
 
contracts
 
to
 
purchase
 
and
 
sell
 
TBA
 
securities
 
as
 
of
 
December
 
31,
 
2021
.
 
There
 
were
 
no
outstanding TBA contracts as of March 31, 2022.
($ in thousands)
Notional
Net
Amount
Cost
Market
Carrying
Long (Short)
(1)
Basis
(2)
Value
(3)
Value
(4)
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 our balance sheets.
Gain (Loss) From Derivative and Other Hedging Instruments, Net
The table below presents the effect of the Company’s derivative and other hedging instruments on the statements of operations for
the three months ended March 31, 2022 and 2021.
(in thousands)
Three Months Ended March 31,
2022
2021
T-Note futures contracts (short position)
$
79,895
$
2,476
Eurodollar futures contracts (short positions)
-
12
Interest rate swaps
66,284
27,123
Payer swaptions (short positions)
(10,908)
(26,167)
Payer swaptions (long positions)
40,975
40,070
Interest rate caps
(996)
-
Interest rate floors
-
1,384
TBA securities (short positions)
2,539
9,133
TBA securities (long positions)
27
(8,559)
Total
$
177,816
$
45,472
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. We
 
attempt to
minimize this risk
 
by limiting
 
our 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,
 
we
 
may
 
be
 
required
 
to
pledge assets as collateral
 
for our 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, we may not receive payments provided for under the terms of
our derivative
 
agreements, and
 
may have
 
difficulty obtaining
 
our assets
 
pledged as
 
collateral for
 
our derivatives.
 
The cash
 
and cash
equivalents pledged as collateral for our derivative instruments are included
 
in restricted cash on our balance sheets.
It
 
is
 
the
 
Company's
 
policy
 
not
 
to
 
offset
 
assets
 
and
 
liabilities
 
associated
 
with
 
open
 
derivative
 
contracts.
 
However,
 
the
 
Chicago
Mercantile
 
Exchange
 
(“CME”)
 
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 serves
 
as the
 
central
clearing party are presented as if these derivatives had been settled as of the reporting
 
date.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
15
NOTE 5. PLEDGED ASSETS
Assets Pledged
 
to Counterparties
The table
 
below summarizes
 
our assets
 
pledged as
 
collateral
 
under our
 
repurchase
 
agreements
 
and derivative
 
agreements
 
by type,
including
 
securities
 
pledged related
 
to securities
 
sold but not
 
yet settled,
 
as of March
 
31, 2022
 
and December
 
31, 2021.
(in thousands)
March 31, 2022
December 31, 2021
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Counterparties
Agreements
Agreements
Total
Agreements
Agreements
Total
PT RMBS - fair value
$
4,369,564
$
-
$
4,369,564
$
6,294,102
$
-
$
6,294,102
Structured RMBS - fair value
207,283
-
207,283
212,270
-
212,270
U.S. Treasury Notes
-
36,477
36,477
-
29,740
29,740
Accrued interest on pledged securities
14,816
3
14,819
18,804
13
18,817
Restricted cash
113,589
16,610
130,199
57,264
8,035
65,299
Total
$
4,705,252
$
53,090
$
4,758,342
$
6,582,440
$
37,788
$
6,620,228
Assets Pledged
 
from Counterparties
The table
 
below summarizes
 
assets pledged
 
to us from
 
counterparties
 
under our
 
repurchase
 
agreements
 
and derivative
 
agreements
as of March
 
31, 2022
 
and December
 
31, 2021.
(in thousands)
March 31, 2022
December 31, 2021
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Orchid
Agreements
Agreements
Total
Agreements
Agreements
Total
Cash
$
4,172
$
34,983
$
39,155
$
4,339
$
7,206
$
11,545
Total
$
4,172
$
34,983
$
39,155
$
$
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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
16
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 March
 
31, 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
March 31, 2022
Interest rate swaps
$
65,194
$
-
$
65,194
$
-
$
-
$
65,194
Interest rate swaptions
60,362
-
60,362
-
(34,983)
25,379
Interest rate caps
1,354
-
1,354
-
-
1,354
$
126,910
$
-
$
126,910
$
-
$
(34,983)
$
91,927
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
March 31, 2022
Repurchase Agreements
$
4,464,109
$
-
$
4,464,109
$
(4,350,520)
$
(113,589)
$
-
Interest rate swaptions
25,535
-
25,535
-
-
25,535
$
4,489,644
$
-
$
4,489,644
$
(4,350,520)
$
(113,589)
$
25,535
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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
17
NOTE 7.
 
CAPITAL STOCK
Common Stock
 
Issuances
The Company
 
did not complete
 
any public
 
offerings of
 
its common
 
stock during
 
the three
 
months ended
 
March 31,
 
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
$
5.10
308,048
$
1,572
Follow-on Offerings
First Quarter
5.31
17,940,000
95,336
At the Market Offering Program
(3)
Second Quarter
5.40
23,087,089
124,746
At the Market Offering Program
(3)
Third Quarter
4.94
35,818,338
177,007
At the Market Offering Program
(3)
Fourth Quarter
4.87
23,674,698
115,398
100,828,173
$
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
2,000,000
 
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
4,522,822
 
shares of the Company's common stock. Coupled with the
783,757
 
shares remaining from the original
2,000,000
share authorization, the increased authorization brought the total authorization
 
to
5,306,579
 
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
16,861,994
 
shares, bringing the remaining authorization under the
stock repurchase program to
17,699,305
 
shares, representing approximately 10% of the Company’s then outstanding shares
 
of
common stock.
As part of the stock repurchase program, shares may be purchased in open market
 
transactions, block purchases, 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
18
From the inception of the stock repurchase program through March 31, 2022, the Company
 
repurchased a total of
5,685,511
shares at an aggregate cost of approximately $
40.4
 
million, including commissions and fees, for a weighted average price
 
of $
7.10
 
per
share. No shares were repurchased during the three months ended March
 
31, 2022 or during the year ended December 31, 2021. The
remaining authorization under the stock repurchase program as of March 31, 2022 was
17,699,305
 
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
$
1.395
$
4,662
2014
2.160
22,643
2015
1.920
38,748
2016
1.680
41,388
2017
1.680
70,717
2018
1.070
55,814
2019
0.960
54,421
2020
0.790
53,570
2021
0.780
97,601
2022 - YTD
(1)
0.200
35,484
Totals
$
12.635
$
475,048
(1)
On
April 13, 2022
, the Company declared a dividend of $
0.045
 
per share to be paid on
May 27, 2022
.
 
The effect of this dividend is included in
the table above but is not reflected in the Company’s financial statements
 
as of March 31, 2022.
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
 
our common
 
stock (on
 
a fully diluted
 
basis) at
 
the time
 
of the awards,
 
subject to
 
a maximum
 
aggregate
7,366,623
 
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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
19
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
 
three months
 
ended March
 
31, 2022 and
2021.
($ in thousands, except per share data)
Three Months Ended March 31,
2022
2021
Weighted
Weighted
Average
Average
Grant Date
Grant Date
 
Shares
Fair Value
Shares
Fair Value
Unvested, beginning of period
133,223
$
5.88
4,554
$
7.45
Granted
175,572
3.31
137,897
5.88
Vested and issued
(13,322)
5.88
(2,277)
7.45
Unvested, end of period
295,473
$
4.35
140,174
$
5.91
Compensation expense during period
$
106
$
3
Unrecognized compensation expense, end of period
$
942
$
812
Intrinsic value, end of period
$
960
$
842
Weighted-average remaining vesting term (in years)
1.8
2.1
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 three
 
months ended
 
March 31,
 
2022 and
 
2021. All
 
of the fully
 
vested shares
 
of common
 
stock issued
 
during the
 
three
months ended
 
March 31,
 
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)
Three Months Ended March 31,
2022
2021
Fully vested shares granted
175,572
137,897
Weighted average grant date price per share
$
3.31
$
5.88
Compensation expense related to fully vested shares of common stock awards
$
581
$
811
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
20
Deferred
 
Stock Units
Non-employee
 
directors
 
receive a
 
portion of
 
their compensation
 
in the form
 
of deferred
 
stock unit
 
awards (“DSUs”)
 
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
 
three months
 
ended March
 
31, 2022
 
and 2021.
($ in thousands, except per share data)
Three Months Ended March 31,
2022
2021
Weighted
Weighted
Average
Average
Grant Date
Grant Date
 
Shares
Fair Value
Shares
Fair Value
Outstanding, beginning of period
142,976
$
5.38
90,946
$
5.44
Granted and vested
15,273
4.39
10,422
5.31
Outstanding, end of period
158,249
$
5.29
101,368
$
5.43
Compensation expense during period
$
75
$
45
Intrinsic value, end of period
$
514
$
609
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 March 31, 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
21
NOTE 11.
 
EARNINGS PER SHARE (EPS)
The Company
 
had dividend
 
eligible
 
Performance
 
Units and
 
Deferred
 
Stock Units
 
that were
 
outstanding
 
during the
 
three months
ended March
 
31, 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 three
 
months ended
 
March 31,
 
2022 and
 
2021.
(in thousands, except per share information)
Three Months Ended March 31,
2022
2021
Basic and diluted EPS per common share:
Numerator for basic and diluted EPS per share of common stock:
Net loss - Basic and diluted
$
(148,727)
$
(29,369)
Weighted average shares of common stock:
Shares of common stock outstanding at the balance sheet date
177,117
94,411
Effect of weighting
 
(119)
(9,066)
Weighted average shares-basic and diluted
176,998
85,345
Net loss per common share:
Basic and diluted
$
(0.84)
$
(0.34)
Anti-dilutive incentive shares not included in calculation
454
242
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.
22
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, when
 
available.
 
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
three months
 
ended March
 
31, 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.
The following
 
table presents
 
financial
 
assets (liabilities)
 
measured
 
at fair value
 
on a recurring
 
basis as of
 
March 31,
 
2022 and
December
 
31, 2021.
 
Derivative
 
contracts
 
are reported
 
as a net
 
position by
 
contract
 
type, and
 
not based
 
on master
 
netting arrangements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
23
(in thousands)
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
 
Observable
Unobservable
Assets
Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
March 31, 2022
Mortgage-backed securities
$
-
$
4,580,594
$
-
U.S. Treasury Notes
36,477
-
-
Interest rate swaps
-
65,194
-
Interest rate swaptions
-
34,827
-
Interest rate caps
-
1,354
-
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 three months ended March 31, 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:
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 points 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.
24
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 $
3.1
 
million and $
2.0
million for the three months ended March 31, 2022 and 2021, respectively. At March 31, 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, our Chief Executive Officer and Chairman of our 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, our Chief Financial
Officer, Chief Investment Officer, Secretary and a member of our 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 March 31,
 
2022, Bimini
owned
2,595,357
 
shares, or
1.5
%, of the Company’s common stock.
25
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.
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”.
 
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 27,493,650 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.
26
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 7,600,000 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 $5.20 per share. In addition,
we granted J.P.
 
Morgan a 30-day option to purchase up to an additional 1,140,000 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 8,740,000 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 8,000,000 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 $5.45 per share.
 
In addition, we granted J.P. Morgan a 30-day
option to purchase up to an additional 1,200,000 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 9,200,000 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 49,407,336 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 March
31, 2022, we issued a total of 15,835,700 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 2,000,000
 
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 4,522,822 shares of the Company’s common stock. Coupled with the 783,757 shares
 
remaining from the original 2,000,000
share authorization, the increased authorization brought the total authorization
 
to 5,306,579 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 16,861,994 shares, bringing the
remaining authorization under the stock repurchase program to 17,699,305 shares, representing
 
approximately 10% 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 March 31, 2022, the Company
 
repurchased a total of 5,685,511
shares at an aggregate cost of approximately $40.4
 
million, including commissions and fees, for a weighted average price
 
of $7.10 per
share. The Company did not repurchase any shares of its common stock during the
 
three months ended March 31, 2022 or the year
ended December 31, 2021.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
27
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 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
 
three months
 
ended March
 
31, 2022,
 
as compared
 
to the
Company’s results
 
of operations
 
for the three
 
months ended
 
March 31,
 
2021.
Net (Loss)
 
Income Summary
Net loss
 
for the three
 
months ended
 
March 31,
 
2022 was
 
$148.7 million,
 
or $0.84
 
per share.
 
Net loss
 
for the three
 
months ended
March 31,
 
2021 was
 
$29.4 million,
 
or $0.34
 
per share.
 
The components
 
of net loss
 
for the three
 
months ended
 
March 31,
 
2022 and
 
2021,
along with
 
the changes
 
in those
 
components
 
are presented
 
in the table
 
below:
(in thousands)
2022
2021
Change
Interest income
$
41,857
$
26,856
$
15,001
Interest expense
(2,655)
(1,941)
(714)
Net interest income
39,202
24,915
14,287
Losses on RMBS and derivative contracts
(183,232)
(50,791)
(132,441)
Net portfolio deficiency
(144,030)
(25,876)
(118,154)
Expenses
(4,697)
(3,493)
(1,204)
Net loss
$
(148,727)
$
(29,369)
$
(119,358)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
28
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
 
three months
 
ended March
 
31, 2022,
 
as compared
 
to the
Company’s results
 
of operations
 
for each of
 
the three
 
months ended
 
December
 
31, 2021,
 
September
 
30, 2021,
 
June 30,
 
2021 and
 
March
31, 2021.
Net Earnings Excluding Realized and Unrealized Gains and Losses
(in thousands, except per share data)
Per Share
Net Earnings
Net Earnings
Excluding
Excluding
Realized and
Realized and
Realized and
Realized and
Net
Unrealized
Unrealized
Net
Unrealized
Unrealized
Income
Gains and
Gains and
Income
Gains and
Gains and
(GAAP)
Losses
(1)
Losses
(GAAP)
Losses
Losses
Three Months Ended
March 31, 2022
$
(148,727)
$
(183,232)
$
34,505
$
(0.84)
$
(1.04)
$
0.20
December 31, 2021
(44,564)
(82,597)
38,033
(0.27)
(0.49)
0.22
September 30, 2021
26,038
(2,887)
28,925
0.20
(0.02)
0.22
June 30, 2021
(16,865)
(40,844)
23,979
(0.17)
(0.41)
0.24
March 31, 2021
(29,369)
(50,791)
21,422
(0.34)
(0.60)
0.26
(1)
Includes realized
 
and unrealized
 
gains (losses)
 
on RMBS and derivative
 
financial instruments,
 
including net
 
interest income
 
or expense on
 
interest
rate swaps.
29
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.
The Company
 
may invest
 
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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30
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
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
Economic Interest Expense and Economic Net Interest Income
(in thousands)
Interest Expense on Borrowings
Gains
(Losses) on
Derivative
Instruments
Net Interest Income
GAAP
Attributed
Economic
GAAP
Economic
Interest
Interest
to Current
Interest
Net Interest
Net Interest
Income
Expense
Period
(1)
Expense
(2)
Income
Income
(3)
Three Months Ended
March 31, 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
(1)
Reflects the effect of derivative instrument hedges for only the period
 
presented.
(2)
Calculated by adding the effect of derivative instrument hedges attributed
 
to the period presented to GAAP interest expense.
(3)
Calculated by adding the effect of derivative instrument hedges attributed
 
to the period presented to GAAP net interest income.
Net Interest Income
During the
 
three months
 
ended March
 
31, 2022,
 
we generated
 
$39.2 million
 
of net interest
 
income, consisting
 
of $41.9
 
million
 
of
interest
 
income from
 
RMBS assets
 
offset by $2.7
 
million of
 
interest
 
expense on
 
borrowings.
 
For the comparable
 
period ended
 
March 31,
2021, we
 
generated
 
$24.9 million
 
of net interest
 
income, consisting
 
of $26.9
 
million of
 
interest
 
income from
 
RMBS assets
 
offset by $1.9
million of
 
interest
 
expense on
 
borrowings.
 
The $15.0
 
million increase
 
in interest
 
income was
 
due to a 36
 
basis point
 
("bps")
 
increase in
the yield
 
on average
 
RMBS,
 
partially
 
offset by the
 
$1,513.1
 
million increase
 
in average
 
RMBS. The
 
$0.7 million
 
increase in
 
interest
expense was
 
due to a
 
$1,465.5
 
million increase
 
in average
 
outstanding
 
borrowings.
 
We had more
 
average assets
 
and borrowings
 
during
the first
 
quarter of
 
2022 compared
 
to the first
 
quarter of
 
2021 as we
 
deployed the
 
proceeds
 
of our capital
 
raising activity
 
during the
 
year
ended December
 
31, 2021.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31
On an economic
 
basis, our
 
interest
 
expense on
 
borrowings
 
for the three
 
months ended
 
March 31,
 
2022 and
 
2021 was
 
$3.9 million
and $6.0
 
million, respectively,
 
resulting
 
in $37.9
 
million and
 
$20.9 million
 
of economic
 
net interest
 
income, respectively.
 
The lower
economic interest
 
expense during
 
the three
 
months ended
 
March 31,
 
2022 was
 
due to the
 
positive performance
 
of our hedging
 
activities
during the
 
period.
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
 
each quarter
 
in 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
March 31, 2022
$
5,545,844
$
41,857
3.02%
$
5,354,107
$
2,655
$