10-Q 1 orc20240331_10q.htm FORM 10-Q orc20240331_10q.htm
0001518621 Orchid Island Capital, Inc. false --12-31 Q1 2024 3,875,705 3,885,554 79,590 79,680 0.01 0.01 20,000,000 20,000,000 0 0 0 0 0.01 0.01 100,000,000 100,000,000 52,826,169 52,826,169 51,636,074 51,636,074 0.36 0.48 1 false false false false On April 10, 2024, the Company declared a dividend of $0.12 per share to be paid on May 30, 2024. 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, 2024. Cost basis represents the forward price to be paid (received) for the underlying Agency RMBS. The notional balance for the inverse interest-only securities portfolio was $25.8 million and $26.8 million as of March 31, 2024 and December 31, 2023, respectively. If, on September, 20, 2024, the S&P 500 Index (SPX) is lower than 4,725.166, and the SOFR 10 Year Swap Rate is above 3.883%, the Company will receive the notional amount. If either condition is not met, the Company will receive $0. Weighted average price received per share is after deducting the underwriters’ discount, if applicable, and other offering costs. The number of shares of common stock issuable upon the vesting of the remaining outstanding PUs as of December 31, 2023 was reduced by 14,365 shares as a result of a book value impairment event that occurred pursuant to the terms of the long term equity incentive compensation plans (the "Plans") established under the Company’s Incentive Plans. The book value impairment event occurred when the Company's book value per share declined by more than 15% during the quarter ended September 30, 2023 and the Company's book value per share decline from July 1, 2023 to December 31, 2023 was more than 10%. The Plans provide that if such a book value impairment event occurs, then the number of outstanding PUs that are outstanding as of the last day of such two quarter period shall be reduced by 15%. The notional balance for the interest-only securities portfolio was $94.9 million and $98.6 million as of March 31, 2024 and December 31, 2023, respectively. 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 As of December 31, 2023, the Company had entered into eleven equity distribution agreements, ten of which have either been terminated because all shares were sold or were replaced with a subsequent agreement. Net proceeds are net of the underwriters' discount, if applicable, and other offering costs. The Company has entered into eleven equity distribution agreements, ten of which have either been terminated because all shares were sold or were replaced with a subsequent agreement. Notional amount represents the par value (or principal balance) of the underlying Agency RMBS. The cost information in the table above represents the aggregate current par value, multiplied by the purchase price of each security in the portfolio. 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Table of Contents

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, 2024

 

         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

 

orclogo.jpg

 

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 25, 2024: 52,973,989

 

 

 

ORCHID ISLAND CAPITAL, INC.

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

1

 

Condensed Balance Sheets (unaudited)

1

 

Condensed Statements of Comprehensive Income (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

23

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

41

ITEM 4. Controls and Procedures

44

 

PART II. OTHER INFORMATION

 

ITEM 1. Legal Proceedings

46

ITEM 1A. Risk Factors

46

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

46

ITEM 3. Defaults upon Senior Securities

46

ITEM 4. Mine Safety Disclosures

46

ITEM 5. Other Information

46

ITEM 6. Exhibits

47

SIGNATURES

48

 

 

 

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,

 
  

2024

  

2023

 

ASSETS:

        

Mortgage-backed securities, at fair value (includes pledged assets of $3,875,705 and $3,885,554, respectively)

 $3,881,078  $3,894,012 

U.S. Treasury securities, available-for-sale (includes pledged assets of $79,590 and $79,680, respectively)

  99,496   148,820 

Cash and cash equivalents

  190,373   171,893 

Restricted cash

  13,247   28,396 

Accrued interest receivable

  15,614   14,951 

Derivative assets

  12,511   6,420 

Other assets

  2,343   455 

Total Assets

 $4,214,662  $4,264,947 
         

LIABILITIES AND STOCKHOLDERS' EQUITY

        
         

LIABILITIES:

        

Repurchase agreements

 $3,711,498  $3,705,649 

Payable for investment securities and TBA transactions

  395   60,454 

Dividends payable

  6,365   6,222 

Derivative liabilities

  80   12,694 

Accrued interest payable

  12,769   7,939 

Due to affiliates

  1,007   1,013 

Other liabilities

  917   1,031 

Total Liabilities

  3,733,031   3,795,002 
         

COMMITMENTS AND CONTINGENCIES

          
         

STOCKHOLDERS' EQUITY:

        

Preferred stock, $0.01 par value; 20,000,000 shares authorized; no shares issued and outstanding as of March 31, 2024 and December 31, 2023

  -   - 

Common Stock, $0.01 par value; 100,000,000 shares authorized, 52,826,169 shares issued and outstanding as of March 31, 2024 and 51,636,074 shares issued and outstanding as of December 31, 2023

  528   516 

Additional paid-in capital

  841,790   849,845 

Accumulated deficit

  (360,657)  (380,433)

Accumulated other comprehensive (loss) income

  (30)  17 

Total Stockholders' Equity

  481,631   469,945 

Total Liabilities and Stockholders' Equity

 $4,214,662  $4,264,947 

 

See Notes to Financial Statements

 

 

 

 

 ORCHID ISLAND CAPITAL, INC.

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 For the Three Months Ended March 31, 2024 and 2023

($ in thousands, except per share data)

 

   

Three Months Ended March 31,

 
   

2024

   

2023

 

Interest income

  $ 48,871     $ 38,012  

Interest expense

    (51,361 )     (42,217 )

Net interest expense

    (2,490 )     (4,205 )

Unrealized (losses) gains on mortgage-backed securities and U.S. Treasury securities

    (61,895 )     53,895  

Gains (losses) on derivative and other hedging instruments

    87,899       (41,156 )

Net portfolio income

    23,514       8,534  
                 

Expenses:

               

Management fees

    2,161       2,642  

Allocated overhead

    598       576  

Incentive compensation

    (89 )     470  

Directors' fees and liability insurance

    329       323  

Audit, legal and other professional fees

    476       451  

Direct REIT operating expenses

    170       165  

Other administrative

    93       377  

Total expenses

    3,738       5,004  
                 

Net income

  $ 19,776     $ 3,530  

Unrealized losses on U.S. Treasury securities measured at fair value through other comprehensive net income

    (47 )     -  

Comprehensive net income

  $ 19,729     $ 3,530  
                 

Basic and diluted net income per share

  $ 0.38     $ 0.09  
                 

Weighted Average Shares Outstanding

    51,604,135       38,491,767  

   

See Notes to Financial Statements

 

 

 

ORCHID ISLAND CAPITAL, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

For the Three Months Ended March 31, 2024 and 2023

(in thousands)

 

                  

Accumulated

     
                  Other     
          

Additional

  

Retained

  

Comprehensive

     
  

Common Stock

  

Paid-in

  

Earnings

  

Income

     
  

Shares

  

Par Value

  

Capital

  

(Deficit)

  

(Loss)

  

Total

 
                         

Balances, January 1, 2024

  51,636  $516  $849,845  $(380,433) $17  $469,945 

Net income

  -   -   -   19,776   -   19,776 

Unrealized loss on available-for-sale securities

  -   -   -   -   (47)  (47)

Cash dividends declared ($0.36 per share)

  -   -   (18,724)  -   -   (18,724)

Stock based awards and amortization

  33   -   350   -   -   350 

Issuance of common stock pursuant to public offerings, net

  1,490   15   13,094   -   -   13,109 

Shares repurchased and retired

  (333)  (3)  (2,775)  -   -   (2,778)

Balances, March 31, 2024

  52,826  $528  $841,790  $(360,657) $(30) $481,631 
                         

Balances, January 1, 2023

  36,765  $368  $779,602  $(341,207) $-  $438,763 

Net income

  -   -   -   3,530   -   3,530 

Cash dividends declared ($0.48 per share)

  -   -   (18,807)  -   -   (18,807)

Stock based awards and amortization

  4   -   181   -   -   181 

Issuance of common stock pursuant to public offerings, net

  2,690   26   31,631   -   -   31,657 

Shares repurchased and retired

  (373)  (3)  (3,960)  -   -   (3,963)

Balances, March 31, 2023

  39,086  $391  $788,647  $(337,677) $-  $451,361 

 

See Notes to Financial Statements

 

 

 

ORCHID ISLAND CAPITAL, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

For the Three Months Ended March 31, 2024 and 2023

($ in thousands)

 

   

2024

   

2023

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net income

  $ 19,776     $ 3,530  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

               

Stock based compensation

    (140 )     409  

Discount accretion on U.S. Treasury Bills

    (1,221 )     -  

Unrealized losses (gains) on mortgage-backed securities and U.S. Treasury securities

    61,895       (53,895 )

Realized and unrealized (gains) losses on derivative instruments

    (39,176 )     43,563  

Changes in operating assets and liabilities:

               

Accrued interest receivable

    (663 )     (1,601 )

Other assets

    (530 )     (459 )

Accrued interest payable

    4,830       5,544  

Other liabilities

    244       182  

Due to affiliates

    (6 )     98  

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

    45,009       (2,629 )
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

From mortgage-backed securities investments:

               

Purchases

    (345,032 )     (467,460 )

Sales and maturities

    221,733       -  

Principal repayments

    74,338       61,021  

Purchases of U.S. Treasury securities, available-for-sale

    (98,643 )     -  

Proceeds from maturity of U.S. Treasury securities, available-for-sale

    100,000       -  

Net proceeds from (payments on) derivative instruments

    8,435       (42,450 )

NET CASH USED IN INVESTING ACTIVITIES

    (39,169 )     (448,889 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Proceeds from repurchase agreements

    8,529,398       7,849,145  

Principal payments on repurchase agreements

    (8,523,549 )     (7,458,153 )

Cash dividends

    (18,564 )     (18,422 )

Proceeds from issuance of common stock, net of issuance costs

    13,109       31,657  

Common stock repurchases, including shares withheld from employee stock awards for payment of taxes

    (2,903 )     (3,970 )

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

    (2,509 )     400,257  
                 

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

    3,331       (51,261 )

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the period

    200,289       237,219  

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the period

  $ 203,620     $ 185,958  
                 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

               

Cash paid during the period for:

               

Interest

  $ 46,531     $ 36,673  

 

See Notes to Financial Statements

 

 

ORCHID ISLAND CAPITAL, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2024

 

 

NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Business Description

 

Orchid Island Capital, Inc. (“Orchid” or the “Company”) was incorporated in Maryland on August 17, 2010 for the purpose of creating and managing a leveraged investment portfolio consisting of residential mortgage-backed securities (“RMBS”).  From incorporation to the completion of Orchid’s initial public offering of its common stock on February 20, 2013, Orchid was a wholly owned subsidiary of Bimini Capital Management, Inc. (“Bimini”).  Orchid began operations on November 24, 2010 (the date of commencement of operations).  From incorporation through November 24, 2010, Orchid’s only activity was the issuance of common stock to Bimini.

 

On 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 could offer and sell, from time to time, up to an aggregate amount of $250,000,000 of shares of the Company’s common stock in transactions that were deemed to be “at the market” offerings and privately negotiated transactions. The Company issued a total of 9,742,188 shares under the October 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately $151.8 million, and net proceeds of approximately $149.3 million, after commissions and fees, prior to its termination in March 2023. 

 

On March 7, 2023, Orchid entered into an equity distribution agreement (the “March 2023 Equity Distribution Agreement”) with three 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, 2024, the Company issued a total of 14,680,114 shares under the March 2023 Equity Distribution Agreement for aggregate gross proceeds of approximately $143.2 million, and net proceeds of approximately $140.9 million, after commissions and fees.

 

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 statement of results for the interim period have been included. Operating results for the three month period ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.

 

The balance sheet at  December 31, 2023 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, 2023.

 

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 significantly 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, 2024.

 

5

 

Variable Interest Entities (VIEs)

 

The Company obtains interests in VIEs through its investments in mortgage-backed securities. The Company’s interests in these VIEs are passive in nature and are not expected to result in the Company obtaining a controlling financial interest in these VIEs in the future. As a result, the Company does not consolidate these VIEs and accounts for these interests in these VIEs as mortgage-backed securities. See Note 2 for additional information regarding the Company’s investments in mortgage-backed securities. The maximum exposure to loss for these VIEs is the carrying value of the mortgage-backed securities.

 

Cash and Cash Equivalents and Restricted Cash

 

Cash and cash equivalents include cash on deposit with financial institutions and highly liquid investments with original maturities of three months or less at the time of purchase. Restricted cash includes cash pledged as collateral for repurchase agreements and other borrowings, and interest rate swaps and other derivative instruments.

 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial position that sum to the total of the same such amounts shown in the statement of cash flows.

 

(in thousands)

        
  

March 31, 2024

  

December 31, 2023

 

Cash and cash equivalents

 $190,373  $171,893 

Restricted cash

  13,247   28,396 

Total cash, cash equivalents and restricted cash

 $203,620  $200,289 

 

The Company maintains cash balances at three banks, a government securities backed overnight sweep fund, and excess margin on account with three 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 Securities

 

The Company invests primarily in mortgage pass-through (“PT”) residential mortgage backed securities (“RMBS”) and collateralized mortgage obligations (“CMOs”) issued by Freddie Mac, Fannie Mae or Ginnie Mae, interest-only (“IO”) securities and inverse interest-only (“IIO”) securities representing interest in or obligations backed by pools of RMBS. The Company refers to RMBS and CMOs as PT RMBS. The Company refers to IO and IIO securities as structured RMBS. The Company also invests in U.S. Treasury Notes and U.S. Treasury Bills (collectively, "U.S. Treasury securities"), primarily to satisfy collateral requirements of derivative counterparties. The Company has elected to account for its investment in RMBS and U.S. Treasury securities under the fair value option. Electing the fair value option requires the Company to record changes in fair value in net income, which, in management’s view, more appropriately reflects the results of the Company’s operations for a particular reporting period and is consistent with the underlying economics and how the portfolio is managed. The Company has designated its U.S. Treasury securities purchased after August 2023 as available-for-sale, and changes in fair value for reasons other than expected credit losses are recognized in other comprehensive income. 

 

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 securities are based on quoted prices for identical assets in active markets.

 

6

 

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 comprehensive income. 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 investments for which the fair value option is elected are recorded in earnings and reported as unrealized gains or losses on mortgage-backed securities and U.S. Treasury securities in the accompanying statements of comprehensive income. Realized gains and losses on sales of investments for which the fair value option has been elected, using the specific identification method, are reported as a separate component of net portfolio income on the statements of comprehensive income.

 

U.S. Treasury Bills are zero-coupon bonds that are purchased at a discount to the par amount. This discount is accreted into income over the life of the investment and reported in the statements of comprehensive income as interest income. Changes in fair value of U.S. Treasury securities that are classified as available-for-sale are reported in accumulated other comprehensive income ("OCI"). Upon the sale of a security designated as available-for-sale, we determine the cost of the security and the amount of unrealized gain or loss to reclassify out of accumulated OCI into earnings based on the specific identification method. The Company evaluated securities for allowance for credit losses and since all of the Company's available-for-sale securities designated investments consist of U.S. Treasury securities, which are backed by the full faith and credit of the U.S. government, the Company does not record an allowance for credit losses.

 

Derivative 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”), Secured Overnight Financing Rate ("SOFR"), 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”), dual digital options, interest rate caps and floors, 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 comprehensive income.

 

Derivative and other hedging instruments are carried at fair value, and changes in fair value are recorded in income as gains or losses on derivative and other hedging instruments 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 statements of cash flows. Cash payments and cash receipts from settlements of derivatives, including current period net cash settlements on interest rate 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, Fed Funds, SOFR and T-Note futures contracts, interest rate swaps, interest rate swaptions, dual digital options, interest rate floors and caps, 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 13 of the financial statements.

 

7

 

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 14 for the terms of the management agreement.

 

Earnings Per Share

 

Basic earnings per share (“EPS”) is calculated as net income or loss attributable to common stockholders divided by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is calculated using the treasury stock or two-class method, as applicable, for common stock equivalents, if any. However, the common stock equivalents are not included in computing diluted EPS if the result is anti-dilutive.

 

Stock-Based Compensation

 

The Company may grant equity-based compensation to non-employee members of its Board of Directors and to the executive officers and employees of the Manager. Stock-based awards issued include performance units ("PUs"), deferred stock units ("DSUs") and immediately vested common stock awards. Compensation expense is measured and recognized for all stock-based payment awards made to employees and non-employee directors based on the fair value of the Company’s common stock on the date of grant. Compensation expense is recognized over each award’s respective service period using the graded vesting attribution method. The Company does not estimate forfeiture rates; but rather, adjusts for forfeitures in the periods in which they occur.

 

Income Taxes

 

Orchid has elected and is organized and operated so as to qualify to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). REITs are generally not subject to U.S. 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 November 2023, the FASB issued Accounting Standards Update ("ASU:) 2023-07 "Segment Reporting (Topic 820): Improvements to Reportable Segment Disclosures. ASU 2023-07 requires additional disclosures about reportable segments’ significant expenses on an interim and annual basis. The guidance in ASU 2023-07 is effective in annual periods beginning after December 15, 2023 and subsequent interim periods, with early adoption permitted. The Company is currently evaluating the provisions of the amendments and the impact on its future financial statements.

8

 

 

NOTE 2. MORTGAGE-BACKED SECURITIES, AT FAIR VALUE

 

The following table presents the Company’s RMBS portfolio that are remeasured at fair value through earnings as of March 31, 2024 and December 31, 2023:

 

(in thousands)

                        
  

March 31, 2024

  

December 31, 2023

 
  

Par Value

  

Cost(1)

  

Fair Value

  

Par Value

  

Cost(1)

  

Fair Value

 

Pass-Through RMBS Certificates:

                        

Fixed-rate Mortgages

 $4,351,259  $4,466,595  $3,864,505  $4,051,145  $4,198,424  $3,877,082 

Total Pass-Through Certificates

  4,351,259   4,466,595   3,864,505   4,051,145   4,198,424   3,877,082 

Structured RMBS Certificates:

                        

Interest-Only Securities(2)

  n/a   19,142   16,326   n/a   19,839   16,572 

Inverse Interest-Only Securities(3)

  n/a   1,756   247   n/a   1,825   358 

Total Structured RMBS Certificates

     20,898   16,573      21,664   16,930 

Total

 $4,351,259  $4,487,493  $3,881,078  $4,051,145  $4,220,088  $3,894,012 

 

(1)

The cost information in the table above represents the aggregate current par value, multiplied by the purchase price of each security in the portfolio.

(2)

The notional balance for the interest-only securities portfolio was $94.9 million and $98.6 million as of March 31, 2024 and December 31, 2023, respectively.

(3)

The notional balance for the inverse interest-only securities portfolio was $25.8 million and $26.8 million as of March 31, 2024 and December 31, 2023, respectively.

 

During the three months ended  March 31, 2024, the Company resecuritized RMBS with a fair value of $221.7 million, by transferring the RMBS into a larger RMBS that is backed by the transferred RMBS. The Company retained the entire larger RMBS. No gain or loss was recorded on this resecuritization. There were no sales of RMBS during the three months ended March 31, 2023.

 

NOTE 3. U.S. TREASURY SECURITIES, AVAILABLE-FOR-SALE

 

As of March 31, 2024 and December 31, 2023, the Company held U.S. Treasury securities with a fair value of approximately $99.5 million and $148.8 million, respectively, that were classified as available-for-sale. U.S. Treasury securities are held primarily to satisfy collateral requirements of the Company's repurchase and derivative counterparties.

 

The amortized cost, gross unrealized holding gains and losses, and fair value of available-for-sale investments as of March 31, 2024 and December 31, 2023 are as follows:

 

(in thousands)

                
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

March 31, 2024

                

U.S. Treasury Bill maturing 4/30/2024

 $49,791  $-  $(24) $49,767 

U.S. Treasury Note maturing 5/31/2024

  49,735   -   (6)  49,729 
  $99,526  $-  $(30) $99,496 

December 31, 2023

                

U.S. Treasury Bill maturing 1/2/2024

 $49,671  $9  $-  $49,680 

U.S. Treasury Bill maturing 2/15/2024

  49,992   8   -   50,000 

U.S. Treasury Bill maturing 4/30/2024

  49,140   -   -   49,140 
  $148,803  $17  $-  $148,820 

 

Since all of the Company's available-for-sale securities are backed by the full faith and credit of the U.S. government, the Company has not recorded an allowance for credit losses. 

 

9

 
 

NOTE 4. 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, 2024, the Company had met all margin call requirements.

 

As of March 31, 2024 and December 31, 2023, the Company’s repurchase agreements had remaining maturities as summarized below:

 

($ in thousands)

                    
  

OVERNIGHT

  

BETWEEN 2

  

BETWEEN 31

  

GREATER

     
  

(1 DAY OR

  

AND

  

AND

  

THAN

     
  

LESS)

  

30 DAYS

  

90 DAYS

  

90 DAYS

  

TOTAL

 

March 31, 2024

                    

Fair market value of securities pledged, including accrued interest receivable

 $94,362  $3,406,836  $361,390  $28,379  $3,890,967 

Repurchase agreement liabilities associated with these securities

 $88,946  $3,251,797  $343,299  $27,456  $3,711,498 

Net weighted average borrowing rate

  5.47%  5.46%  5.45%  5.37%  5.46%

December 31, 2023

                    

Fair market value of securities pledged, including accrued interest receivable

 $-  $3,125,315  $710,055  $65,106  $3,900,476 

Repurchase agreement liabilities associated with these securities

 $-  $2,966,650  $674,696  $64,303  $3,705,649 

Net weighted average borrowing rate

  -   5.55%  5.54%  5.46%  5.55%

 

In addition, cash pledged to counterparties for repurchase agreements was approximately $7.4 million as of March 31, 2024.

 

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, 2024, 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 $174.1 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, 2024 or  December 31, 2023.

 

10

 
 

NOTE 5. DERIVATIVE AND OTHER HEDGING INSTRUMENTS

 

The table below summarizes fair value information about the Company’s derivative and other hedging instruments assets and liabilities as of March 31, 2024 and December 31, 2023.

 

(in thousands)

         

Derivative and Other Hedging Instruments

Balance Sheet Location

 

March 31, 2024

  

December 31, 2023

 

Assets

         

Interest rate swaps

Derivative assets, at fair value

 $11,252  $6,348 

Payer swaption (long position)

Derivative assets, at fair value

  14   72 

Dual digital option

Derivative assets, at fair value

  261   - 

TBA securities

Derivative assets, at fair value

  984   - 

Total derivative assets, at fair value

 $12,511  $6,420 
          

Liabilities

         

TBA securities

Derivative liabilities, at fair value

 $80  $12,694 

Total derivative liabilities, at fair value

 $80  $12,694 
          

Margin Balances Posted to (from) Counterparties

         

Futures contracts

Restricted cash

 $5,009  $4,096 

TBA securities

Restricted cash

  65   23,720 

TBA securities

Other liabilities

  (240)  - 

Interest rate swaption contracts

Restricted cash

  755   580 

Total margin balances on derivative contracts

 $5,589  $28,396 

 

Fed Funds, T-Note and SOFR 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 and SOFR futures positions at March 31, 2024 and December 31, 2023.

 

($ in thousands)

                
  

March 31, 2024

 
  

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 2024 5-year T-Note futures (Jun 2024 - Jun 2029 Hedge Period)

 $421,500   4.26%  4.42% $(1,099)

March 2024 10-year T-Note futures (Mar 2024 - Mar 2034 Hedge Period)

  320,000   4.29%  4.64%  (2,475)

SOFR Futures Contracts (Short Positions)

                

December 2024 3-Month SOFR futures (Sep 2024 - Dec 2024 Hedge Period)

 $25,000   4.27%  4.87% $149 

March 2025 3-Month SOFR futures (Dec 2024 - Mar 2025 Hedge Period)

  25,000   3.90%  4.57%  168 

June 2025 3-Month SOFR futures (Mar 2025 - Jun 2025 Hedge Period)

  25,000   3.58%  4.30%  179 

September 2025 3-Month SOFR futures (Jun 2025 - Sep 2025 Hedge Period)

  25,000   3.37%  4.07%  175 

December 2025 3-Month SOFR futures (Sep 2025 - Dec 2025 Hedge Period)

  25,000   3.25%  3.88%  158 

March 2026 3-Month SOFR futures (Dec 2025 - Mar 2026 Hedge Period)

  25,000   3.21%  3.76%  138 

 

11

 

($ in thousands)

                
  

December 31, 2023

 
  

Average

  

Weighted

  

Weighted

     
  

Contract

  

Average

  

Average

     
  

Notional

  

Entry

  

Effective

  

Open

 

Expiration Year

 

Amount

  

Rate

  

Rate

  

Equity(1)

 

Treasury Note Futures Contracts (Short Positions)(2)

                

March 2024 5-year T-Note futures (Mar 2024 - Mar 2029 Hedge Period)

 $421,500   4.36%  4.04% $(9,936)

March 2024 10-year T-Note futures (Mar 2024 - Mar 2034 Hedge Period)

  320,000   4.38%  4.39%  (11,393)

SOFR Futures Contracts (Short Positions)

                

June 2024 3-Month SOFR futures (Mar 2024 - Jun 2024 Hedge Period)

 $25,000   5.08%  4.99% $(24)

September 2024 3-Month SOFR futures (Jun 2024 - Sep 2024 Hedge Period)

  25,000   4.67%  4.52%  (39)

December 2024 3-Month SOFR futures (Sep 2024 - Dec 2024 Hedge Period)

  25,000   4.27%  4.10%  (44)

March 2025 3-Month SOFR futures (Dec 2024 - Mar 2025 Hedge Period)

  25,000   3.90%  3.73%  (43)

June 2025 3-Month SOFR futures (Mar 2025 - Jun 2025 Hedge Period)

  25,000   3.58%  3.42%  (41)

September 2025 3-Month SOFR futures (Jun 2025 - Sep 2025 Hedge Period)

  25,000   3.37%  3.21%  (39)

December 2025 3-Month SOFR futures (Sep 2025 - Dec 2025 Hedge Period)

  25,000   3.25%  3.10%  (37)

March 2026 3-Month SOFR futures (Dec 2025 - Mar 2026 Hedge Period)

  25,000   3.21%  3.07%  (35)

 

(1)

Open equity represents the cumulative gains (losses) recorded on open futures positions from inception.

(2)

5-Year T-Note futures contracts were valued at a price of $107.02 at March 31, 2024 and $108.77 at December 31, 2023. The contract values of the short positions were $451.1 million and $458.5 million at March 31, 2024 and December 31, 2023, respectively. 10-Year T-Note futures contracts were valued at a price of $110.80 at March 31, 2024 and $112.89 at December 31, 2023.The contract values of the short positions were $354.6 million and $361.2 million at March 31, 2024 and December 31, 2023, respectively.

 

Under its interest rate swap agreements, the Company typically pays a fixed rate and receives a floating rate ("payer swaps") based on an index, such as SOFR. The floating rate the Company receives under its swap agreements has the effect of offsetting the repricing characteristics of its repurchase agreements and cash flows on such liabilities. The Company is typically required to post margin on its interest rate swap agreements. The table below presents information related to the Company’s interest rate swap positions at March 31, 2024 and December 31, 2023.

 

($ in thousands)

                
      

Average

         
      

Fixed

  

Average

  

Average

 
  

Notional

  

Pay

  

Receive

  

Maturity

 
  

Amount

  

Rate

  

Rate

  

(Years)

 

March 31, 2024

                

Expiration > 1 to ≤ 5 years

 $1,200,000   1.34%  5.45%  3.9 

Expiration > 5 years

  1,331,800   3.28%  5.38%  7.4 
  $2,531,800   2.36%  5.41%  5.7 

December 31, 2023

                

Expiration > 1 to ≤ 5 years

 $500,000   0.84%  5.64%  2.7 

Expiration > 5 years

  1,826,500   2.62%  5.40%  6.8 
  $2,326,500   2.24%  5.45%  5.9 

 

Our interest rate swaps are centrally cleared through two registered commodities exchanges, the Chicago Mercantile Exchange ("CME") and the London Clearing House (“LCH”). The clearing exchanges require that we post an "initial margin" amount determined by the exchanges. The initial margin amount is intended to be set at a level sufficient to protect the exchange from the interest rate swap's maximum estimated single-day price movement and is subject to adjustment based on changes in market volatility and other factors. We also exchange daily settlements of "variation margin" based upon changes in fair value, as measured by the exchanges.

 

12

 

The table below presents information related to the Company’s option positions at March 31, 2024 and December 31, 2023.

 

($ in thousands)

                         
  

Option

  

Underlying Swap

 
          

Weighted

           

Weighted

 
          

Average

      

Average

 

Adjustable

 

Average

 
      

Fair

  

Months to

  

Notional

  

Fixed

 

Rate

 

Term

 
  

Cost

  

Value

  

Expiration

  

Amount

  

Rate

 

Index

 

(Years)

 

March 31, 2024

                         

Payer Swaption (long position)

 $1,619  $14   2.0  $800,000   5.40%

SOFR

  1.0 

Dual Digital Option (1)

 $500  $261   5.7  $9,412   n/a 

n/a

  n/a 

December 31, 2023

                         

Payer Swaption (long position)

 $1,619  $72   5.0  $800,000   5.40%

SOFR

  1.0 

 

(1)

If, on September, 20, 2024, the S&P 500 Index (SPX) is lower than 4,725.166, and the SOFR 10 Year Swap Rate is above 3.883%, the Company will receive the notional amount. If either condition is not met, the Company will receive $0.

 

We purchase interest rate swaptions to help mitigate the potential impact of larger, more rapid changes in interest rates on the performance of our investment portfolio. Interest rate swaptions provide us the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future. Our interest rate swaption agreements are not subject to central clearing. The difference between the premium paid and the fair value of the swaption is reported in gain (loss) on derivative and other hedging instruments in our statements of comprehensive income. If a swaption expires unexercised, the realized loss on the swaption would be equal to the premium paid. If we sell or exercise a swaption, the realized gain or loss on the swaption would be equal to the difference between the cash or the fair value of the underlying interest rate swap and the premium paid.

 

A dual digital option is a type of binary, or digital option, that involves both upper and lower conditions. A dual digital option will only activate if both conditions are met at expiration.  If both conditions are met, we will receive the notional amount. If either condition is not met, we will lose our premium.

 

The following table summarizes the Company’s contracts to purchase and sell TBA securities as of March 31, 2024 and December 31, 2023.

 

($ in thousands)

                 
   

Notional

             
   

Amount

      

 

  

Net

 
   

Long

  

Cost

  

Market

  

Carrying

 
   

(Short)(1)

  

Basis(2)

  

Value(3)

  

Value(4)

 

March 31, 2024

                 

30-Year TBA securities:

                 
3.0%  $(170,700) $(147,202) $(147,282) $(80)
3.5%   (200,000)  (180,219)  (179,235)  984 

Total

  $(370,700) $(327,421) $(326,517) $904 

December 31, 2023

                 

30-Year TBA securities:

                 
3.0%  $(70,700) $(59,278) $(62,647) $(3,369)
5.0%   (250,000)  (242,725)  (247,657)  (4,932)
5.5%   (325,000)  (322,410)  (326,803)  (4,393)

Total

  $(645,700) $(624,413) $(637,107) $(12,694)

 

(1)

Notional amount represents the par value (or principal balance) of the underlying Agency RMBS.

(2)

Cost basis represents the forward price to be paid (received) for the underlying Agency RMBS.

(3)

Market value represents the current market value of the TBA securities (or of the underlying Agency RMBS) as of period-end.

(4)

Net carrying value represents the difference between the market value and the cost basis of the TBA securities as of period-end and is reported in derivative assets (liabilities) at fair value in the balance sheets.

 

13

 

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 comprehensive income for the three months ended March 31, 2024 and 2023.

 

(in thousands)

        
  

Three Months Ended March 31,

 
  

2024

  

2023

 

Interest rate futures contracts (short position)

 $19,090  $(4,038)

Interest rate swaps

  59,098   (26,144)

Payer swaptions (short positions)

  -   6,585 

Payer swaptions (long positions)

  (58)  (12,109)

Interest rate caps

  -   (645)

Dual digital option

  (239)  - 

Interest rate floors (long positions)

  -   1,185 

TBA securities (short positions)

  9,903   (5,990)

TBA securities (long positions)

  105   - 

Total

 $87,899  $(41,156)

 

Credit Risk-Related Contingent Features

 

The use of derivatives and other hedging instruments creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. The Company attempts to minimize this risk by limiting its counterparties for instruments which are not centrally cleared on a registered exchange to major financial institutions with acceptable credit ratings and monitoring positions with individual counterparties. In addition, the Company may be required to pledge assets as collateral for its derivatives, whose amounts vary over time based on the market value, notional amount and remaining term of the derivative contract. In the event of a default by a counterparty, the Company may not receive payments provided for under the terms of its derivative agreements, and may have difficulty obtaining its assets pledged as collateral for its derivatives. The cash and cash equivalents pledged as collateral for the Company derivative instruments are included in restricted cash on its balance sheets.

 

It is the Company's policy not to offset assets and liabilities associated with open derivative contracts. However, CME and LCH rules characterize variation margin transfers as settlement payments, as opposed to adjustments to collateral. As a result, derivative assets and liabilities associated with centrally cleared derivatives for which the CME or LCH serves as the central clearing party are presented as if these derivatives had been settled as of the reporting date.

 

NOTE 6. PLEDGED ASSETS

 

Assets Pledged to Counterparties

 

The table below summarizes the Company’s assets pledged as collateral under repurchase agreements and derivative agreements by type, including securities pledged related to securities sold but not yet settled, as of March 31, 2024 and December 31, 2023.

 

(in thousands)

                        
  

March 31, 2024

  

December 31, 2023

 
  

Repurchase

  

Derivative

      

Repurchase

  

Derivative

     

Assets Pledged to Counterparties

 

Agreements

  

Agreements

  

Total

  

Agreements

  

Agreements

  

Total

 

PT RMBS - fair value

 $3,859,132  $-  $3,859,132  $3,868,624  $-  $3,868,624 

Structured RMBS - fair value

  16,573   -   16,573   16,930   -   16,930 

U.S. Treasury securities

  -   79,590   79,590   -   79,680   79,680 

Accrued interest on pledged securities

  15,262   336   15,598   14,922   -   14,922 

Restricted cash

  7,418   5,829   13,247   -   28,396   28,396 

Total

 $3,898,385  $85,755  $3,984,140  $3,900,476  $108,076  $4,008,552 

 

14

 

Assets Pledged from Counterparties

 

The table below summarizes assets pledged to the Company from counterparties under repurchase agreements and derivative agreements as of March 31, 2024 and December 31, 2023.

 

(in thousands)

                        
  

March 31, 2024

  

December 31, 2023

 
  

Repurchase

  

Derivative

      

Repurchase

  

Derivative

     

Assets Pledged to Orchid

 

Agreements

  

Agreements

  

Total

  

Agreements

  

Agreements

  

Total

 

Cash

 $6,475  $240  $6,715  $42,179  $-  $42,179 

U.S. Treasury securities - fair value

  1,418   -   1,418   10,429   -   10,429 

Total

 $7,893  $240  $8,133  $52,608  $-  $52,608