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orc10q20220930p1i0
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
QUARTERLY
 
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 2022
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number
:
 
001-35236
Orchid Island Capital, Inc.
(Exact name of registrant as specified in its charter)
Maryland
27-3269228
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
3305 Flamingo Drive
,
Vero Beach
,
Florida
32963
(Address of principal executive offices) (Zip Code)
 
(
772
)
231-1400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol:
Name of Each Exchange on Which
Registered
Common Stock, $0.01 par value
ORC
New York Stock Exchange
Indicate by
 
check mark
 
whether the
 
registrant (1) has
 
filed all
 
reports required
 
to be
 
filed by
 
Section 13 or
 
15(d) of
 
the Securities
 
Exchange Act
 
of
1934 during the preceding 12 months (or for such shorter
 
period that the registrant was required to file such
 
reports), and (2) has been subject to such
filing requirements for the past 90 days.
 
Yes
 
No
Indicate by check
 
mark whether the registrant
 
has submitted electronically every
 
Interactive Data File required
 
to be submitted pursuant
 
to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12
 
months (or for such shorter period that the registrant was
 
required to submit such
files).
 
Yes
 
No
Indicate by check mark whether the registrant is
 
a large accelerated filer,
 
an accelerated filer, a non-accelerated filer,
 
a smaller reporting company,
 
or
an emerging growth company. See the definitions of "large accelerated filer,"
 
"accelerated filer", "smaller reporting company", and "emerging growth
company" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company,
 
indicate by check mark if the registrant has
 
elected not to use the extended transition period
 
for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes
 
No
Number of shares outstanding at October 27, 2022:
33,422,207
ORCHID ISLAND
 
CAPITAL, INC.
TABLE OF CONTENTS
PART I. FINANCIAL
 
INFORMATION
ITEM 1. Financial
 
Statements
1
Condensed
 
Balance Sheets
 
(unaudited)
1
Condensed
 
Statements
 
of Operations
 
(unaudited)
2
Condensed
 
Statements
 
of Stockholders’
 
Equity (unaudited)
3
Condensed
 
Statements
 
of Cash Flows
 
(unaudited)
4
Notes to
 
Condensed
 
Financial
 
Statements
 
(unaudited)
5
ITEM 2. Management’s
 
Discussion
 
and Analysis
 
of Financial
 
Condition
 
and Results
 
of Operations
26
ITEM 3. Quantitative
 
and Qualitative
 
Disclosures
 
about Market
 
Risk
50
ITEM 4. Controls
 
and Procedures
54
PART II. OTHER INFORMATION
ITEM 1. Legal
 
Proceedings
55
ITEM 1A.
 
Risk Factors
55
ITEM 2. Unregistered
 
Sales of Equity
 
Securities
 
and Use of
 
Proceeds
55
ITEM 3. Defaults
 
upon Senior
 
Securities
55
ITEM 4. Mine
 
Safety Disclosures
55
ITEM 5. Other
 
Information
55
ITEM 6. Exhibits
56
SIGNATURES
57
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
PART I. FINANCIAL
 
INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORCHID ISLAND CAPITAL, INC.
CONDENSED BALANCE SHEETS
($ in thousands, except per share data)
(Unaudited)
September 30,
December 31,
2022
2021
ASSETS:
Mortgage-backed securities, at fair value (includes pledged assets
 
of $
3,195,846
and $
6,506,372
, respectively)
$
3,201,214
$
6,511,095
U.S. Treasury Notes, at fair value (includes pledged assets of $
36,118
 
and $
29,740
, respectively)
36,118
37,175
Cash and cash equivalents
214,183
385,143
Restricted cash
66,769
65,299
Accrued interest receivable
10,527
18,859
Derivative assets
262,318
50,786
Receivable for securities sold, pledged to counterparties
13,684
-
Other assets
1,027
320
Total Assets
$
3,805,840
$
7,068,677
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements
$
3,133,861
$
6,244,106
Dividends payable
5,636
11,530
Derivative liabilities
53,013
7,589
Accrued interest payable
4,424
788
Due to affiliates
1,075
1,062
Other liabilities
207,454
35,505
Total Liabilities
3,405,463
6,300,580
 
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $
0.01
 
par value;
20,000,000
 
shares authorized; no shares issued
and outstanding as of September 30, 2022 and December 31, 2021
-
-
Common Stock, $
0.01
 
par value;
100,000,000
 
shares authorized,
35,066,251
shares issued and outstanding as of September 30, 2022 and
35,398,610
 
shares issued
and outstanding as of December 31, 2021
351
354
Additional paid-in capital
776,159
850,497
Accumulated deficit
(376,133)
(82,754)
Total Stockholders' Equity
400,377
768,097
Total Liabilities
 
and Stockholders' Equity
$
3,805,840
$
7,068,677
See Notes to Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS
 
OF OPERATIONS
(Unaudited)
For the Three and Nine Months Ended September 30, 2022 and 2021
($ in thousands, except per share data)
Nine Months Ended September 30,
Three Months Ended September 30,
2022
2021
2022
2021
Interest income
$
112,735
$
90,279
$
35,610
$
34,169
Interest expense
(32,196)
(5,067)
(21,361)
(1,570)
Net interest income
80,539
85,212
14,249
32,599
Realized (losses) gains on mortgage-backed securities
(132,672)
(3,068)
(66,143)
2,977
Unrealized (losses) gains on mortgage-backed securities and
U.S. Treasury Notes
(692,781)
(107,386)
(212,221)
(11,239)
Gains on derivative and other hedging instruments
466,394
15,932
184,820
5,375
Net portfolio (loss) income
(278,520)
(9,310)
(79,295)
29,712
Expenses:
Management fees
7,881
5,569
2,616
2,156
Allocated overhead
1,482
1,189
522
390
Incentive compensation
763
884
212
259
Directors' fees and liability insurance
929
874
308
279
Audit, legal and other professional fees
899
832
293
212
Direct REIT operating expenses
2,281
1,024
1,064
309
Other administrative
624
514
203
69
Total expenses
14,859
10,886
5,218
3,674
Net (loss) income
$
(293,379)
$
(20,196)
$
(84,513)
$
26,038
Basic and diluted net (loss) income per share
$
(8.31)
$
(0.95)
$
(2.40)
$
1.00
Weighted Average Shares Outstanding
35,336,702
21,061,154
35,205,888
25,717,469
Dividends declared per common share
$
1.995
$
2.925
$
0.545
$
0.975
See Notes to Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS
 
OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Nine Months Ended September 30, 2022 and 2021
(in thousands)
Additional
Retained
Common Stock
Paid-in
Earnings
Shares
Par Value
Capital
(Deficit)
Total
Balances, January 1, 2021
15,215
$
152
$
433,133
$
(17,994)
$
415,291
Net loss
-
-
-
(29,369)
(29,369)
Cash dividends declared
-
-
(17,226)
-
(17,226)
Issuance of common stock pursuant to public offerings, net
3,650
37
96,871
-
96,908
Stock based awards and amortization
18
-
572
-
572
Balances, March 31, 2021
18,883
$
189
$
513,350
$
(47,363)
$
466,176
Net income
-
-
-
(16,865)
(16,865)
Cash dividends declared
-
-
(20,416)
-
(20,416)
Issuance of common stock pursuant to public offerings, net
4,617
46
124,700
-
124,746
Stock based awards and amortization
-
-
180
-
180
Balances, June 30, 2021
23,500
$
235
$
617,814
$
(64,228)
$
553,821
Net income
-
-
-
26,038
26,038
Cash dividends declared
-
-
(26,420)
-
(26,420)
Issuance of common stock pursuant to public offerings, net
7,164
71
176,936
-
177,007
Stock based awards and amortization
-
-
183
-
183
Balances, September 30, 2021
30,664
$
306
$
768,513
$
(38,190)
$
730,629
Balances, January 1, 2022
35,399
$
354
$
850,497
$
(82,754)
$
768,097
Net loss
-
-
-
(148,727)
(148,727)
Cash dividends declared
-
-
(27,492)
-
(27,492)
Stock based awards and amortization
25
-
540
-
540
Balances, March 31, 2022
35,424
$
354
$
823,545
$
(231,481)
$
592,418
Net loss
-
-
-
(60,139)
(60,139)
Cash dividends declared
-
-
(23,936)
-
(23,936)
Stock based awards and amortization
2
-
237
-
237
Shares repurchased and retired
(175)
(1)
(2,217)
-
(2,218)
Balances, June 30, 2022
35,251
$
353
$
797,629
$
(291,620)
$
506,362
Net income
-
-
-
(84,513)
(84,513)
Cash dividends declared
-
-
(19,231)
-
(19,231)
Stock based awards and amortization
1
-
143
-
143
Shares repurchased and retired
(186)
(2)
(2,382)
-
(2,384)
Balances, September 30, 2022
35,066
$
351
$
776,159
$
(376,133)
$
400,377
See Notes to Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS
 
OF CASH FLOWS
(Unaudited)
For the Nine Months Ended September 30, 2022 and 2021
($ in thousands)
2022
2021
CASH FLOWS FROM OPERATING
 
ACTIVITIES:
Net loss
$
(293,379)
$
(20,196)
Adjustments to reconcile net loss to net cash provided by operating activities:
Stock based compensation
552
612
Realized losses on mortgage-backed securities
132,672
3,068
Unrealized losses on mortgage-backed securities and U.S. Treasury
 
Notes
692,781
107,386
Realized and unrealized gains on derivative instruments
(261,364)
(22,180)
Changes in operating assets and liabilities:
Accrued interest receivable
8,332
(5,449)
Other assets
(353)
74
Accrued interest payable
3,636
(404)
Other liabilities
7,770
(2,031)
Due to affiliates
13
303
NET CASH PROVIDED BY OPERATING
 
ACTIVITIES
290,660
61,183
CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases
(622,535)
(4,816,301)
Sales
2,731,497
2,598,893
Principal repayments
376,169
413,005
Purchases of U.S. Treasury Notes
-
(37,440)
Net proceeds from (payments on) derivative instruments
246,321
(1,228)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
2,731,452
(1,843,071)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements
32,427,448
22,995,280
Principal payments on repurchase agreements
(35,537,693)
(21,376,997)
Cash dividends
(76,527)
(59,019)
Proceeds from issuance of common stock, net of issuance costs
-
398,661
Shares repurchased and retired
(4,602)
-
Shares withheld from employee stock awards for payment of taxes
(228)
(299)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
(3,191,602)
1,957,626
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS
 
AND RESTRICTED CASH
(169,490)
175,738
CASH, CASH EQUIVALENTS
 
AND RESTRICTED CASH, beginning of the period
450,442
299,506
CASH, CASH EQUIVALENTS
 
AND RESTRICTED CASH, end of the period
$
280,952
$
475,244
SUPPLEMENTAL DISCLOSURE OF
 
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest
$
28,560
$
5,471
SUPPLEMENTAL DISCLOSURE OF
 
NONCASH INVESTING ACTIVITIES:
Securities acquired settled in later period
$
-
$
180,619
See Notes to Financial Statements
5
ORCHID ISLAND
 
CAPITAL, INC.
NOTES TO CONDENSED
 
FINANCIAL
 
STATEMENTS
(Unaudited)
SEPTEMBER
 
30, 2022
NOTE 1.
 
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
 
and Business
 
Description
Orchid Island
 
Capital,
 
Inc. (“Orchid”
 
or the “Company”)
 
was incorporated
 
in Maryland
 
on August
 
17, 2010
 
for the purpose
 
of creating
and managing
 
a leveraged
 
investment
 
portfolio
 
consisting
 
of residential
 
mortgage-backed
 
securities
 
(“RMBS”).
 
From incorporation
 
to the
completion
 
of Orchid’s
 
initial public
 
offering of
 
its common
 
stock on
 
February
 
20, 2013,
 
Orchid was
 
a wholly
 
owned subsidiary
 
of Bimini
Capital Management,
 
Inc. (“Bimini”).
 
Orchid began
 
operations
 
on November
 
24, 2010
 
(the date
 
of commencement
 
of operations).
 
From
incorporation
 
through November
 
24, 2010,
 
Orchid’s only
 
activity
 
was the issuance
 
of common
 
stock to Bimini.
On August 4, 2020, Orchid entered into an equity distribution agreement (the “August
 
2020 Equity Distribution Agreement”) with
four sales agents pursuant to which the Company could offer and sell, from time to time,
 
up to an aggregate amount of $
150,000,000
 
of
shares of the Company’s common stock in transactions that were deemed to be “at the market” offerings and privately
 
negotiated
transactions.
 
The Company issued a total of
5,538,730
 
shares under the August 2020 Equity Distribution Agreement for aggregate
gross proceeds of
approximately $
150.0
 
million, and net proceeds of approximately $
147.4
 
million, after commissions and fees, prior to
its termination in June 2021.
On January 20, 2021, Orchid entered into an underwriting
 
agreement (the “January 2021 Underwriting Agreement”) with
 
J.P.
Morgan Securities LLC (“J.P. Morgan”), relating to the offer and sale of
1,520,000
 
shares of the Company’s common stock. J.P.
Morgan purchased the shares of the Company’s common stock from the Company pursuant
 
to the January 2021 Underwriting
Agreement at $
26.00
 
per share. In addition, the Company granted J.P. Morgan a 30-day option to purchase up to an additional
228,000
 
shares of the Company’s common stock on the same terms and conditions, which J.P. Morgan exercised in full on January 21,
2021. The closing of the offering of
1,748,000
 
shares of the Company’s common stock occurred on January 25, 2021, with proceeds to
the Company of approximately $
45.2
 
million, net of offering expenses.
On March 2, 2021, Orchid entered into an underwriting agreement (the “March 2021
 
Underwriting Agreement”) with J.P. Morgan,
relating to the offer and sale of
1,600,000
 
shares of the Company’s common stock. J.P. Morgan purchased the shares of the
Company’s common stock from the Company pursuant to the March 2021 Underwriting
 
Agreement at $
27.25
 
per share. In addition,
the Company granted J.P. Morgan a 30-day option to purchase up to an additional
240,000
 
shares of the Company’s common stock on
the same terms and conditions, which J.P. Morgan exercised in full on March 3, 2021. The closing of the offering of
1,840,000
 
shares
of the Company’s common stock occurred on March 5, 2021, with proceeds to the Company
 
of approximately $
50.0
 
million, net of
offering expenses.
On June 22, 2021, Orchid entered into an equity distribution agreement
 
(the “June 2021 Equity Distribution Agreement”) with four
sales agents pursuant to which the Company could offer and sell, from time to time, up to
 
an aggregate amount of $
250,000,000
 
of
shares of the Company’s common stock in transactions that were deemed to be “at the market” offerings and privately negotiated
transactions. The Company issued a total of
9,881,467
 
shares under the June 2021 Equity Distribution Agreement for aggregate gross
proceeds of approximately $
250.0
 
million, and net proceeds of approximately $
246.0
 
million, after commissions and fees, prior to its
termination in October 2021.
6
On October 29, 2021, Orchid entered into an equity distribution agreement (the
 
“October 2021 Equity Distribution Agreement”) with
four sales agents pursuant to which the Company may offer and sell, from time to time,
 
up to an aggregate amount of $
250,000,000
 
of
shares of the Company’s common stock in transactions that are deemed to be “at the market”
 
offerings and privately negotiated
transactions.
 
Through September 30, 2022, the Company issued a total of
3,167,140
 
shares under the October 2021 Equity
Distribution Agreement for aggregate gross proceeds of approximately $
78.3
 
million, and net proceeds of approximately $
77.0
 
million,
after commissions and fees. No shares were issued under the October 2021
 
Equity Distribution Agreement during the nine months
ended September 30, 2022.
Basis of
 
Presentation
 
and Use of
 
Estimates
The accompanying
 
unaudited
 
financial
 
statements
 
have been
 
prepared
 
in accordance
 
with accounting
 
principles
 
generally
 
accepted
in the United
 
States (“GAAP”)
 
for interim
 
financial
 
information
 
and with
 
the instructions
 
to Form 10-Q
 
and Article
 
8 of Regulation
 
S-X.
 
Accordingly, they
 
do not include
 
all of the
 
information
 
and footnotes
 
required
 
by GAAP for
 
complete financial
 
statements.
 
In the opinion
 
of
management,
 
all adjustments
 
(consisting
 
of normal
 
recurring
 
accruals)
 
considered
 
necessary
 
for a fair
 
presentation
 
have been
 
included.
 
Operating
 
results for
 
the nine and
 
three month
 
periods
 
ended September
 
30, 2022
 
are not necessarily
 
indicative
 
of the results
 
that may
 
be
expected for
 
the year
 
ending December
 
31, 2022.
The balance
 
sheet at December
 
31, 2021
 
has been
 
derived from
 
the audited
 
financial
 
statements
 
at that date
 
but does
 
not include
 
all
of the information
 
and footnotes
 
required
 
by GAAP for
 
complete financial
 
statements.
 
For further
 
information,
 
refer to
 
the financial
statements
 
and footnotes
 
thereto included
 
in the Company’s
 
Annual Report
 
on Form 10-K
 
for the year
 
ended December
 
31, 2021.
The preparation
 
of financial
 
statements
 
in conformity
 
with GAAP
 
requires
 
management
 
to make estimates
 
and assumptions
 
that affect
the reported
 
amounts of
 
assets and
 
liabilities
 
and disclosure
 
of contingent
 
assets and
 
liabilities
 
at the date
 
of the financial
 
statements
 
and
the reported
 
amounts of
 
revenues
 
and expenses
 
during the
 
reporting
 
period. Actual
 
results could
 
differ from
 
those estimates.
 
The
significant
 
estimates
 
affecting the
 
accompanying
 
financial
 
statements
 
are the fair
 
values of RMBS
 
and derivatives.
 
Management
 
believes
the estimates
 
and assumptions
 
underlying
 
the financial
 
statements
 
are reasonable
 
based on
 
the information
 
available as
 
of September
 
30,
2022.
Common Stock
 
Reverse
 
Split
On August 30, 2022, the Company effected a 1-for-5 reverse stock split of its common
 
stock and proportionately decreased the
number of authorized shares of common stock.
 
All share, per share, deferred stock unit (“DSU”) and performance unit (“PU”)
information has been retroactively adjusted to reflect the reverse split.
 
The shares of common stock retain a par value of $0.01 per
share.
Variable Interest Entities (“VIEs”)
The Company obtains interests in VIEs through its investments in mortgage-backed
 
securities.
 
The Company’s interests in these
VIEs are passive in nature and are not expected to result in the Company obtaining a
 
controlling financial interest in these VIEs in the
future.
 
As a result, the Company does not consolidate these VIEs and accounts
 
for these interests in these VIEs as mortgage-backed
securities.
 
See Note 2 for additional information regarding the Company’s investments in
 
mortgage-backed securities.
 
The maximum
exposure to loss for these VIEs is the carrying value of the mortgage-backed securities.
 
 
 
 
 
 
 
 
 
 
 
 
7
Cash and Cash Equivalents and Restricted Cash
Cash and
 
cash equivalents
 
include
 
cash on deposit
 
with financial
 
institutions
 
and highly
 
liquid investments
 
with original
 
maturities
 
of
three months
 
or less at
 
the time
 
of purchase.
 
Restricted
 
cash includes
 
cash pledged
 
as collateral
 
for repurchase
 
agreements
 
and other
borrowings,
 
and interest
 
rate swaps
 
and other
 
derivative
 
instruments.
The following
 
table provides
 
a reconciliation
 
of cash,
 
cash equivalents,
 
and restricted
 
cash reported
 
within the
 
statement
 
of financial
position that
 
sum to the
 
total of
 
the same such
 
amounts shown
 
in the statement
 
of cash flows.
(in thousands)
September 30, 2022
December 31, 2021
Cash and cash equivalents
$
214,183
$
385,143
Restricted cash
66,769
65,299
Total cash, cash equivalents
 
and restricted cash
$
280,952
$
450,442
The Company
 
maintains
 
cash balances
 
at three
 
banks and
 
excess margin
 
on account
 
with two
 
exchange clearing
 
members.
 
At times,
balances may
 
exceed federally
 
insured limits.
 
The Company
 
has not
 
experienced
 
any losses
 
related to
 
these balances.
 
The Federal
Deposit Insurance
 
Corporation
 
insures eligible
 
accounts
 
up to $250,000
 
per depositor
 
at each financial
 
institution.
 
Restricted
 
cash
balances are
 
uninsured,
 
but are held
 
in separate
 
customer accounts
 
that are
 
segregated
 
from the
 
general funds
 
of the counterparty.
 
The
Company limits
 
uninsured
 
balances
 
to only large,
 
well-known
 
banks and
 
exchange clearing
 
members and
 
believes that
 
it is not
 
exposed to
any significant
 
credit risk
 
on cash and
 
cash equivalents
 
or restricted
 
cash balances.
Mortgage-Backed
 
Securities
 
and U.S.
 
Treasury Notes
The Company
 
invests primarily
 
in mortgage
 
pass-through
 
(“PT”) residential
 
mortgage
 
backed securities
 
(“RMBS”)
 
and collateralized
mortgage
 
obligations
 
(“CMOs”)
 
issued by
 
Freddie Mac,
 
Fannie Mae
 
or Ginnie
 
Mae,
 
interest-only
 
(“IO”) securities
 
and inverse
 
interest-only
(“IIO”) securities
 
representing interest in or obligations backed by pools of RMBS. The Company
 
refers
 
to RMBS and CMOs as PT
RMBS. The Company refers to IO and IIO securities as structured RMBS. The Company
 
also invests in U.S. Treasury Notes, primarily
to satisfy collateral requirements of derivative counterparties. The Company has elected
 
to account for its investment in RMBS and
U.S. Treasury Notes
 
under the fair value option. Electing the fair value option requires the
 
Company to record changes in fair value in
the statement of operations, which, in management’s view, more appropriately reflects the results of the Company’s operations for a
particular reporting period and is consistent with the underlying economics and how the
 
portfolio is managed.
The Company
 
records securities
 
transactions
 
on the trade
 
date. Security
 
purchases
 
that have
 
not settled
 
as of the
 
balance sheet
 
date
are included
 
in the portfolio
 
balance with
 
an offsetting
 
liability
 
recorded,
 
whereas securities
 
sold that
 
have not
 
settled as
 
of the balance
sheet date
 
are removed
 
from the portfolio
 
balance with
 
an offsetting
 
receivable
 
recorded.
Fair value
 
is defined
 
as the price
 
that would
 
be received
 
to sell the
 
asset or
 
paid to transfer
 
the liability
 
in an orderly
 
transaction
between market
 
participants
 
at the measurement
 
date.
 
The fair
 
value measurement
 
assumes
 
that the
 
transaction
 
to sell the
 
asset or
transfer
 
the liability
 
either occurs
 
in the principal
 
market for
 
the asset
 
or liability, or
 
in the absence
 
of a principal
 
market, occurs
 
in the most
advantageous
 
market for
 
the asset
 
or liability. Estimated
 
fair values
 
for RMBS
 
are based
 
on independent
 
pricing sources
 
and/or third
 
party
broker quotes,
 
when available.
 
Estimated
 
fair values
 
for U.S.
 
Treasury Notes
 
are based
 
on quoted
 
prices for
 
identical
 
assets in
 
active
markets.
8
Income on
 
PT RMBS
 
and U.S. Treasury
 
Notes is based
 
on the stated
 
interest
 
rate of the
 
security. Premiums
 
or discounts
 
present
 
at
the date
 
of purchase
 
are not amortized.
 
Premium lost
 
and discount
 
accretion
 
resulting
 
from monthly
 
principal
 
repayments
 
are reflected
 
in
unrealized
 
gains (losses)
 
on RMBS
 
in the statements
 
of operations.
 
For IO securities,
 
the income
 
is accrued
 
based on
 
the carrying
 
value
and the effective
 
yield. The
 
difference
 
between income
 
accrued
 
and the interest
 
received on
 
the security
 
is characterized
 
as a return
 
of
investment
 
and serves
 
to reduce
 
the asset’s
 
carrying value.
 
At each
 
reporting
 
date, the
 
effective yield
 
is adjusted
 
prospectively
 
for future
reporting
 
periods
 
based on
 
the new estimate
 
of prepayments
 
and the contractual
 
terms of
 
the security. For
 
IIO securities,
 
effective
 
yield
and income
 
recognition
 
calculations
 
also take
 
into account
 
the index
 
value applicable
 
to the security.
 
Changes in
 
fair value
 
of RMBS during
each reporting
 
period are
 
recorded
 
in earnings
 
and reported
 
as unrealized
 
gains or
 
losses on
 
mortgage-backed
 
securities
 
in the
accompanying
 
statements
 
of operations.
Derivative and Other Hedging Instruments
 
The Company
 
uses derivative
 
and other
 
hedging instruments
 
to manage
 
interest
 
rate risk,
 
facilitate
 
asset/liability
 
strategies
 
and
manage other
 
exposures,
 
and it may
 
continue to
 
do so in the
 
future. The
 
principal
 
instruments
 
that the
 
Company has
 
used to date
 
are
Treasury Note
 
(“T-Note”),
 
federal funds
 
(“Fed Funds”)
 
and Eurodollar
 
futures contracts,
 
short positions
 
in U.S.
 
Treasury securities,
 
interest
rate swaps,
 
options to
 
enter in
 
interest
 
rate swaps
 
(“interest
 
rate swaptions”)
 
and “to-be-announced”
 
(“TBA”)
 
securities
 
transactions,
 
but the
Company may
 
enter into
 
other derivative
 
and other
 
hedging instruments
 
in the future.
 
The Company
 
accounts for
 
TBA securities
 
as derivative
 
instruments.
 
Gains and
 
losses associated
 
with TBA
 
securities
 
transactions
are reported
 
in gain (loss)
 
on derivative
 
instruments
 
in the accompanying
 
statements
 
of operations.
Derivative
 
and other
 
hedging instruments
 
are carried
 
at fair value,
 
and changes
 
in fair value
 
are recorded
 
in earnings
 
for each
 
period.
The Company’s
 
derivative
 
financial
 
instruments
 
are not designated
 
as hedge
 
accounting
 
relationships,
 
but rather
 
are used
 
as economic
hedges of
 
its portfolio
 
assets and
 
liabilities.
 
Gains and
 
losses on
 
derivatives,
 
except those
 
that result
 
in cash receipts
 
or payments,
 
are
included in
 
operating
 
activities
 
on the statement
 
of cash flows.
 
Cash payments
 
and cash receipts
 
from settlements
 
of derivatives,
 
including
current period
 
net cash settlements
 
on interest
 
rates swaps,
 
are classified
 
as an investing
 
activity
 
on the statements
 
of cash flows.
Holding derivatives
 
creates exposure
 
to credit
 
risk related
 
to the potential
 
for failure
 
on the part
 
of counterparties
 
and exchanges
 
to
honor their
 
commitments.
 
In the event
 
of default
 
by a counterparty,
 
the Company
 
may have
 
difficulty recovering
 
its collateral
 
and may not
receive
 
payments provided
 
for under
 
the terms
 
of the agreement.
 
The Company’s
 
derivative
 
agreements
 
require it
 
to post or
 
receive
collateral
 
to mitigate
 
such risk.
 
In addition,
 
the Company
 
uses only
 
registered
 
central clearing
 
exchanges
 
and well-established
 
commercial
banks as counterparties,
 
monitors
 
positions
 
with individual
 
counterparties
 
and adjusts
 
posted collateral
 
as required.
Financial
 
Instruments
The fair
 
value of financial
 
instruments
 
for which
 
it is practicable
 
to estimate
 
that value
 
is disclosed
 
either in
 
the body
 
of the financial
statements
 
or in the
 
accompanying
 
notes. RMBS,
 
Eurodollar,
 
Fed Funds
 
and T-Note futures
 
contracts,
 
interest
 
rate swaps,
 
interest
 
rate
swaptions
 
and TBA
 
securities
 
are accounted
 
for at fair
 
value in the
 
balance sheets.
 
The methods
 
and assumptions
 
used to
 
estimate fair
value for
 
these instruments
 
are presented
 
in Note 12
 
of the financial
 
statements.
The estimated
 
fair value
 
of cash and
 
cash equivalents,
 
restricted
 
cash, accrued
 
interest
 
receivable,
 
receivable
 
for securities
 
sold,
other assets,
 
due to affiliates,
 
repurchase
 
agreements,
 
payable for
 
unsettled
 
securities
 
purchased,
 
accrued interest
 
payable and
 
other
liabilities
 
generally
 
approximates
 
their carrying
 
values as
 
of September
 
30, 2022
 
and December
 
31, 2021 due
 
to the short-term
 
nature of
these financial
 
instruments.
 
9
Repurchase
 
Agreements
The Company
 
finances the
 
acquisition
 
of the majority
 
of its RMBS
 
through the
 
use of repurchase
 
agreements
 
under master
repurchase
 
agreements.
 
Repurchase
 
agreements
 
are accounted
 
for as collateralized
 
financing
 
transactions,
 
which are
 
carried at
 
their
contractual
 
amounts,
 
including
 
accrued interest,
 
as specified
 
in the respective
 
agreements.
Manager Compensation
The Company
 
is externally
 
managed
 
by Bimini
 
Advisors,
 
LLC (the
 
“Manager”
 
or “Bimini
 
Advisors”),
 
a Maryland
 
limited liability
company and
 
wholly-owned
 
subsidiary
 
of Bimini.
 
The Company’s
 
management
 
agreement
 
with the
 
Manager provides
 
for payment
 
to the
Manager of
 
a management
 
fee and reimbursement
 
of certain
 
operating
 
expenses,
 
which are
 
accrued and
 
expensed during
 
the period
 
for
which they
 
are earned
 
or incurred.
 
Refer to
 
Note 13 for
 
the terms
 
of the management
 
agreement.
Earnings
 
Per Share
Basic earnings
 
per share
 
(“EPS”)
 
is calculated
 
as net income
 
or loss attributable
 
to common
 
stockholders
 
divided by
 
the weighted
average number
 
of shares
 
of common
 
stock outstanding
 
during the
 
period. Diluted
 
EPS is calculated
 
using the
 
treasury
 
stock or
 
two-class
method, as
 
applicable,
 
for common
 
stock equivalents,
 
if any. However, the
 
common stock
 
equivalents
 
are not included
 
in computing
diluted EPS
 
if the result
 
is anti-dilutive.
 
Stock-Based
 
Compensation
The Company
 
may grant
 
equity-based
 
compensation
 
to non-employee
 
members of
 
its Board
 
of Directors
 
and to the
 
executive
 
officers
and employees
 
of the Manager.
 
Stock-based
 
awards issued
 
include performance
 
units, deferred
 
stock units
 
and immediately
 
vested
common stock
 
awards. Compensation
 
expense is
 
measured
 
and recognized
 
for all stock-based
 
payment awards
 
made to employees
 
and
non-employee
 
directors
 
based on
 
the fair
 
value of the
 
Company’s common
 
stock on
 
the date
 
of grant.
 
Compensation
 
expense is
recognized
 
over each
 
award’s respective
 
service period
 
using the
 
graded vesting
 
attribution
 
method. The
 
Company does
 
not estimate
forfeiture
 
rates; but
 
rather, adjusts
 
for forfeitures
 
in the periods
 
in which
 
they occur.
Income Taxes
Orchid has elected and is organized and operated so as to qualify to be taxed as a
 
real estate investment trust (“REIT”) under the
Internal Revenue Code of 1986, as amended (the “Code”).
 
REITs are generally not subject to federal income tax on their REIT taxable
income provided that they distribute to their stockholders all of their REIT taxable income
 
on an annual basis. A REIT must distribute at
least 90% of its REIT taxable income, determined without regard to the
 
deductions for dividends paid and excluding net capital gain,
and meet other requirements of the Code to retain its tax status.
Orchid assesses the likelihood, based on their technical merit, that uncertain tax
 
positions will be sustained upon examination
based on the facts, circumstances and information available at the end of each period.
 
All of Orchid’s tax positions are categorized as
highly certain.
 
There is no accrual for any tax, interest or penalties related to Orchid’s tax position
 
assessment.
 
The measurement of
uncertain tax positions is adjusted when new information is available,
 
or when an event occurs that requires a change.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10
Recent Accounting
 
Pronouncements
In March 2020, the FASB issued ASU 2020-04 “
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate
Reform on Financial Reporting.
 
ASU 2020-04 provides optional expedients and exceptions to GAAP requirements
 
for modifications
on debt instruments, leases, derivatives, and other contracts, related to the expected
 
market transition from the London Interbank
Offered Rate (“LIBOR”), and certain other floating rate benchmark indices, or collectively, IBORs, to alternative reference rates. ASU
2020-04 generally considers contract modifications related to reference rate reform to
 
be an event that does not require contract
remeasurement at the modification date nor a reassessment of a previous accounting
 
determination. The guidance in ASU 2020-04 is
optional and may be elected over time, through December 31, 2022, as reference
 
rate reform activities occur. The Company does not
believe the adoption of this ASU will have a material impact on its financial statements.
In January 2021, the FASB issued ASU 2021-01 “
Reference Rate Reform (Topic 848
).” ASU 2021-01 expands the scope of ASC
848 to include all affected derivatives and give market participants the ability to apply certain
 
aspects of the contract modification and
hedge accounting expedients to derivative contracts affected by the discounting transition. In addition,
 
ASU 2021-01 adds
implementation guidance to permit a company to apply certain optional expedients
 
to modifications of interest rate indexes used for
margining, discounting or contract price alignment of certain derivatives as a result
 
of reference rate reform initiatives and extends
optional expedients to account for a derivative contract modified as a continuation
 
of the existing contract and to continue hedge
accounting when certain critical terms of a hedging relationship change to
 
modifications made as part of the discounting transition. The
guidance in ASU 2021-01 is effective
 
immediately and available generally through December 31, 2022, as reference
 
rate reform
activities occur. The Company does not believe the adoption of this ASU will have a material impact on its financial statements.
NOTE 2.
 
MORTGAGE-BACKED SECURITIES AND U.S. TREASURY NOTES
The following
 
table presents
 
the Company’s
 
RMBS portfolio
 
as of September
 
30, 2022
 
and December
 
31, 2021:
(in thousands)
September 30, 2022
December 31, 2021
Pass-Through RMBS Certificates:
Fixed-rate Mortgages
 
$
3,150,403
$
6,298,189
Total Pass-Through
 
Certificates
3,150,403
6,298,189
Structured RMBS Certificates:
Interest-Only Securities
50,274
210,382
Inverse Interest-Only Securities
537
2,524
Total Structured
 
RMBS Certificates
50,811
212,906
Total
$
3,201,214
$
6,511,095
As of September
 
30, 2022
 
and December
 
31, 2021,
 
the Company
 
held U.S.
 
Treasury Notes
 
with a fair
 
value of approximately
 
$
36.1
million and
 
$
37.2
 
million,
 
respectively, primarily
 
to satisfy
 
collateral
 
requirements
 
of one of
 
its derivative
 
counterparties.
The following
 
table is a
 
summary of
 
the Company’s
 
net gain
 
(loss) from
 
the sale of
 
RMBS for
 
the nine
 
months ended
 
September
 
30,
2022 and
 
2021.
Nine Months Ended September 30,
2022
2021
Proceeds from sales of RMBS
$
2,731,497
$
2,598,893
Carrying value of RMBS sold
(2,864,169)
(2,601,961)
Net (loss) gain on sales of RMBS
$
(132,672)
$
(3,068)
Gross gain on sales of RMBS
$
2,705
$
7,866
Gross loss on sales of RMBS
(135,377)
(10,934)
Net (loss) gain on sales of RMBS
$
(132,672)
$
(3,068)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
11
NOTE 3.
 
REPURCHASE AGREEMENTS
The Company
 
pledges certain
 
of its RMBS
 
as collateral
 
under repurchase
 
agreements
 
with financial
 
institutions.
 
Interest
 
rates are
generally
 
fixed based
 
on prevailing
 
rates corresponding
 
to the terms
 
of the borrowings,
 
and interest
 
is generally
 
paid at the
 
termination
 
of a
borrowing.
 
If the fair
 
value of the
 
pledged securities
 
declines,
 
lenders
 
will typically
 
require the
 
Company to
 
post additional
 
collateral
 
or pay
down borrowings
 
to re-establish
 
agreed upon
 
collateral
 
requirements,
 
referred
 
to as "margin
 
calls." Similarly,
 
if the fair
 
value of
 
the pledged
securities
 
increases,
 
lenders
 
may release
 
collateral
 
back to the
 
Company. As of
 
September
 
30, 2022,
 
the Company
 
had met all
 
margin call
requirements.
As of September
 
30, 2022
 
and December
 
31, 2021,
 
the Company’s
 
repurchase
 
agreements
 
had remaining
 
maturities
 
as summarized
below:
($ in thousands)
OVERNIGHT
BETWEEN 2
BETWEEN 31
GREATER
 
(1 DAY OR
AND
AND
THAN
LESS)
30 DAYS
90 DAYS
90 DAYS
TOTAL
(1)
September 30, 2022
Fair market value of securities pledged, including
accrued interest receivable
$
-
$
1,731,976
$
1,413,061
$
61,316
$
3,206,353
Repurchase agreement liabilities associated with
these securities
$
-
$
1,707,215
$
1,372,870
$
53,776
$
3,133,861
Net weighted average borrowing rate
-
 
2.96%
3.07%
2.84%
3.00%
December 31, 2021
Fair market value of securities pledged, including
accrued interest receivable
$
-
$
4,624,396
$
1,848,080
$
52,699
$
6,525,175
Repurchase agreement liabilities associated with
these securities
$
-
$
4,403,182
$
1,789,327
$
51,597
$
6,244,106
Net weighted average borrowing rate
-
0.15%
0.13%
0.15%
0.15%
1)
Includes repurchase agreements with outstanding principal balances of approximately
 
$
103.7
 
million as of September 30, 2022, with interest
rates indexed to Secured Overnight Financing Rate (“SOFR”) that reprice daily.
In addition, cash pledged to counterparties for repurchase agreements was approximately
 
$
49.4
 
million and $
57.3
 
million as of
September 30, 2022 and December 31, 2021, respectively.
If, during
 
the term
 
of a repurchase
 
agreement,
 
a lender
 
files for
 
bankruptcy, the
 
Company might
 
experience
 
difficulty recovering
 
its
pledged assets,
 
which could
 
result in
 
an unsecured
 
claim against
 
the lender
 
for the difference
 
between the
 
amount loaned
 
to the Company
plus interest
 
due to the
 
counterparty
 
and the fair
 
value of the
 
collateral
 
pledged to
 
such lender,
 
including the accrued interest receivable
and cash posted by the Company as collateral. At September
 
30, 2022,
 
the Company
 
had an aggregate
 
amount at
 
risk (the
 
difference
between the
 
amount loaned
 
to the Company,
 
including
 
interest
 
payable and
 
securities
 
posted by
 
the counterparty
 
(if any),
 
and the fair
value of securities
 
and cash
 
pledged
 
(if any),
 
including
 
accrued
 
interest
 
on such securities)
 
with all
 
counterparties
 
of approximately
 
$
117.4
million.
 
The Company
 
did not
 
have an amount
 
at risk with
 
any individual
 
counterparty
 
that was
 
greater than
 
10% of the
 
Company’s equity
at September
 
30, 2022
 
and December
 
31, 2021.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12
NOTE 4. DERIVATIVE AND OTHER HEDGING INSTRUMENTS
The table
 
below summarizes
 
fair value
 
information
 
about the
 
Company’s derivative
 
and other
 
hedging instruments
 
assets and
liabilities
 
as of September
 
30, 2022
 
and December
 
31, 2021.
(in thousands)
Derivative and Other Hedging Instruments
Balance Sheet Location
September 30, 2022
December 31, 2021
Assets
Interest rate swaps
Derivative assets, at fair value
$
169,630
$
29,293
Payer swaptions (long positions)
Derivative assets, at fair value
91,195
21,493
Interest rate caps
Derivative assets, at fair value
1,188
-
TBA securities
Derivative assets, at fair value
305
-
Total derivative
 
assets, at fair value
$
262,318
$
50,786
Liabilities
Interest rate swaps
Derivative liabilities, at fair value
$
-
$
2,862
Payer swaptions (short positions)
Derivative liabilities, at fair value
52,315
4,423
TBA securities
Derivative liabilities, at fair value
698
304
Total derivative
 
liabilities, at fair value
$
53,013
$
7,589
Margin Balances Posted to (from) Counterparties
Futures contracts
Restricted cash
$
16,056
$
8,035
TBA securities
Restricted cash
1,336
-
TBA securities
Other liabilities
(11,422)
(856)
Interest rate swaption contracts
Other liabilities
(27,149)
(6,350)
Total margin
 
balances on derivative contracts
$
(21,179)
$
829
Eurodollar, Fed
 
Funds and
 
T-Note futures
 
are cash
 
settled futures
 
contracts
 
on an interest
 
rate, with
 
gains and
 
losses credited
 
or
charged to
 
the Company’s
 
cash accounts
 
on a daily
 
basis. A
 
minimum balance,
 
or “margin”,
 
is required
 
to be maintained
 
in the account
 
on
a daily basis.
The tables
 
below present
 
information
 
related to
 
the Company’s
 
T-Note futures
 
positions
 
at September
 
30, 2022
 
and
December
 
31, 2021.
 
($ in thousands)
September 30, 2022
Average
Weighted
Weighted
Contract
Average
Average
Notional
Entry
Effective
Open
Expiration Year
Amount
Rate
Rate
Equity
(1)
Treasury Note Futures Contracts (Short
 
Positions)
(2)
December 2022 5-year T-Note futures
(Dec 2022 - Dec 2027 Hedge Period)
$
750,500
3.54%
4.32%
$
29,141
December 2022 10-year Ultra futures
(Dec 2022 - Dec 2032 Hedge Period)
$
174,500
3.03%
3.77%
$
13,141
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
13
($ in thousands)
December 31, 2021
Average
Weighted
Weighted
Contract
Average
Average
Notional
Entry
Effective
Open
Expiration Year
Amount
Rate
Rate
Equity
(1)
Treasury Note Futures Contracts (Short
 
Position)
(2)
March 2022 5-year T-Note futures
(Mar 2022 - Mar 2027 Hedge Period)
$
369,000
1.56%
1.62%
$
1,013
March 2022 10-year Ultra futures
(Mar 2022 - Mar 2032 Hedge Period)
$
220,000
1.22%
1.09%
$
(3,861)
(1)
Open equity represents the cumulative gains (losses) recorded on open
 
futures positions from inception.
(2)
5-Year T-Note
 
futures contracts were valued at a price of $
107.51
 
at September 30, 2022 and $
120.98
 
at December 31, 2021.
 
The contract
values of the short positions were $
806.8
 
million and $
446.4
 
million at September 30, 2022 and December 31, 2021, respectively.
 
10-Year Ultra
futures contracts were valued at a price of $
118.48
 
at September 30, 2022 and $
146.44
 
at December 31, 2021. The contract value of the short
position was $
206.8
 
million and $
322.2
 
million at September 30, 2022 and December 31, 2021, respectively
Under its
 
interest
 
rate swap
 
agreements,
 
the Company
 
typically
 
pays
 
a fixed rate
 
and receive
 
a floating
 
rate based
 
on an index
("payer swaps").
 
The floating
 
rate the
 
Company receives
 
under its
 
swap agreements
 
has the effect
 
of offsetting
 
the repricing
characteristics
 
of our repurchase
 
agreements
 
and cash flows
 
on such liabilities.
 
The Company
 
is typically
 
required
 
to post collateral
 
on its
interest rate
 
swap agreements.
 
The table
 
below presents
 
information
 
related to
 
the Company’s
 
interest
 
rate swap
 
positions
 
at September
30, 2022
 
and December
 
31, 2021.
($ in thousands)
Average
Net
Fixed
Average
Estimated
Average
Notional
Pay
Receive
Fair
Maturity
Amount
Rate
Rate
Value
(Years)
September 30, 2022
Expiration > 3 to ≤ 5 years
$
500,000
0.84%
3.46%
$
60,776
4.0
Expiration > 5 years
900,000
1.70%
2.56%
108,854
6.8
$
1,400,000
1.39%
2.88%
$
169,630
5.8
December 31, 2021
Expiration > 3 to ≤ 5 years
$
955,000
0.64%
0.16%
$
21,788
4.0
Expiration > 5 years
400,000
1.16%
0.21%
4,643
7.3
$
1,355,000
0.79%
0.18%
$
26,431
5.0
The table
 
below presents
 
information
 
related to
 
the Company’s
 
interest
 
rate cap positions
 
at September
 
30, 2022.
($ in thousands)
Net
Strike
Estimated
Notional
Swap
Curve
Fair
Expiration
Amount
Cost
Rate
Spread
Value
February 8, 2024
$
200,000
$
1,450
0.09%
2Y10Y
$
1,188
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
14
The table
 
below presents
 
information
 
related to
 
the Company’s
 
interest
 
rate swaption
 
positions
 
at September
 
30, 2022
 
and
 
December
31, 2021.
($ in thousands)
Option
Underlying Swap
Weighted
Average
Weighted
Average
Average
Adjustable
Average
Fair
Months to
Notional
Fixed
Rate
Term
Expiration
Cost
Value
Expiration
Amount
Rate
(LIBOR)
(Years)
September 30, 2022
Payer Swaptions - long
≤ 1 year
$
35,230
$
83,470
10.6
$
1,303,600
2.95%
3 Month
10.0
>10 years
7,267
7,725
238.9
80,000
2.07%
3 Month
10.0
$
42,497
$
91,195
23.8
$
1,383,600
2.90%
3 Month
10.0
Payer Swaptions - short
≤ 1 year
$
(17,500)
$
52,315
4.7
$
(958,300)
2.95%
3 Month
10.0
December 31, 2021
Payer Swaptions - long
≤ 1 year
$
4,000
$
1,575
3.2
$
400,000
1.66%
3 Month
5.0
>1 year ≤ 2 years
32,690
19,918
18.4
1,258,500
2.46%
3 Month
14.1
$
36,690
$
21,493
14.7
$
1,658,500
2.27%
3 Month
11.9
Payer Swaptions - short
≤ 1 year
$
(16,185)
$
(4,423)
5.3
$
(1,331,500)
2.29%
3 Month
11.4
The
 
following
 
table
 
summarizes
 
the
 
Company’s
 
contracts
 
to
 
purchase
 
and
 
sell
 
TBA
 
securities
 
as
 
of
 
September
 
30,
 
2022
 
and
December 31, 2021.
($ in thousands)
Notional
Net
Amount
Cost
Market
Carrying
Long (Short)
(1)
Basis
(2)
Value
(3)
Value
(4)
September 30, 2022
30-Year TBA securities:
2.0%
$
(175,000)
$
(141,329)
$
(141,723)
$
(394)
3.0%
(300,000)
(261,047)
(261,047)
-
Total
$
(475,000)
$
(402,376)
$
(402,770)
$
(394)
December 31, 2021
30-Year TBA securities:
3.0%
$
(575,000)
$
(595,630)
$
(595,934)
$
(304)
Total
$
(575,000)
$
(595,630)
$
(595,934)
$
(304)
(1)
Notional amount represents the par value (or principal balance) of the underlying
 
Agency RMBS.
(2)
Cost basis represents the forward price to be paid (received) for the underlying
 
Agency RMBS.
(3)
Market value represents the current market value of the TBA securities
 
(or of the underlying Agency RMBS) as of period-end.
(4)
Net carrying value represents the difference between the market
 
value and the cost basis of the TBA securities as of period-end and
 
is reported
in derivative assets (liabilities) at fair value in the balance sheets.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
15
Gain (Loss) From Derivative and Other Hedging Instruments, Net
The table below presents the effect of the Company’s derivative and other hedging instruments on the statements of operations for
the nine and three months ended September 30, 2022 and 2021.
(in thousands)
Nine Months Ended September 30,
Three Months Ended September 30,
2022
2021
2022
2021
T-Note futures contracts (short position)
$
207,681
$
866
$
84,713
$
581
Eurodollar futures contracts (short positions)
-
(14)
-
(7)
Interest rate swaps
172,069
12,446
65,966
3,000
Payer swaptions (short positions)
(80,183)
3,507
(35,239)
2,295
Payer swaptions (long positions)
150,445
5,477
59,131
1,767
Interest rate caps
988
-
(499)
-
Interest rate floors
-
1,345
-
45
TBA securities (short positions)
14,194
864
10,642
(2,306)
TBA securities (long positions)
1,200
(8,559)
106
-
Total
$
466,394
$
15,932
$
184,820
$
5,375
Credit Risk-Related Contingent Features
The
 
use
 
of
 
derivatives
 
and
 
other
 
hedging
 
instruments
 
creates
 
exposure
 
to
 
credit
 
risk
 
relating
 
to
 
potential
 
losses
 
that
 
could
 
be
recognized in the event
 
that the counterparties to these
 
instruments fail to perform their
 
obligations under the contracts. The
 
Company
attempts to minimize
 
this risk by
 
limiting its counterparties
 
for instruments which
 
are not centrally
 
cleared on a
 
registered exchange to
major financial institutions
 
with acceptable credit
 
ratings and
 
monitoring positions with
 
individual counterparties. In
 
addition, the Company
may be
 
required to
 
pledge assets
 
as collateral
 
for its
 
derivatives, whose
 
amounts vary over
 
time based
 
on the
 
market value, notional
amount and remaining
 
term of
 
the derivative contract.
 
In the event
 
of a default
 
by a counterparty, the
 
Company may
 
not receive payments
provided
 
for
 
under
 
the
 
terms
 
of
 
its
 
derivative
 
agreements,
 
and
 
may
 
have
 
difficulty
 
obtaining
 
its
 
assets
 
pledged
 
as
 
collateral
 
for
 
its
derivatives. The cash and cash equivalents pledged as collateral for the Company derivative instruments
 
are included in restricted cash
on its balance sheets.
It is the Company's policy not
 
to offset assets and liabilities associated
 
with open derivative contracts. However, Chicago
 
Mercantile
Exchange
 
(“CME”)
 
and
 
Intercontinental
 
Exchange
 
(“ICE”)
 
rules
 
characterize
 
variation
 
margin
 
transfers
 
as
 
settlement
 
payments,
 
as
opposed to adjustments to collateral. As
 
a result, derivative assets and liabilities
 
associated with centrally cleared derivatives for
 
which
the CME or ICE serves as the central clearing party are presented as if these derivatives
 
had been settled as of the reporting date.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
16
NOTE 5. PLEDGED ASSETS
Assets Pledged
 
to Counterparties
The table
 
below summarizes
 
the Company’s
 
assets pledged
 
as collateral
 
under repurchase
 
agreements
 
and derivative
 
agreements
by type, including
 
securities
 
pledged
 
related to
 
securities
 
sold but
 
not yet settled,
 
as of September
 
30, 2022
 
and December
 
31, 2021.
(in thousands)
September 30, 2022
December 31, 2021
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Counterparties
Agreements
Agreements
Total
Agreements
Agreements
Total
PT RMBS - fair value
$
3,145,035
$
-
$
3,145,035
$
6,294,102
$
-
$
6,294,102
Structured RMBS - fair value
50,811
-
50,811
212,270
-
212,270
U.S. Treasury Notes
-
36,118
36,118
-
29,740
29,740
Accrued interest on pledged securities
10,507
4
10,511
18,804
13
18,817
Restricted cash
49,377
17,392
66,769
57,264
8,035
65,299
Total
$
3,255,730
$
53,514
$
3,309,244
$
6,582,440
$
37,788
$
6,620,228
Assets Pledged
 
from Counterparties
The table
 
below summarizes
 
assets pledged
 
to the Company
 
from counterparties
 
under repurchase
 
agreements
 
and derivative
agreements
 
as of September
 
30, 2022
 
and December
 
31, 2021.
(in thousands)
September 30, 2022
December 31, 2021
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Orchid
Agreements
Agreements
Total
Agreements
Agreements
Total
Cash
$
-
$
38,571
$
38,571
$
4,339
$
7,206
$
11,545
Total
$
-
$
38,571
$
38,571
$
$
4,339
$
7,206
$
11,545
Cash received
 
as margin
 
is recognized
 
as cash and
 
cash equivalents
 
with a corresponding
 
amount recognized
 
as an increase
 
in
repurchase
 
agreements
 
or other
 
liabilities
 
in the balance
 
sheets.
NOTE 6. OFFSETTING ASSETS AND LIABILITIES
The Company’s
 
derivative
 
agreements
 
and repurchase
 
agreements
 
and reverse
 
repurchase
 
agreements
 
are subject
 
to underlying
agreements
 
with master
 
netting or
 
similar arrangements,
 
which provide
 
for the right
 
of offset in
 
the event
 
of default
 
or in the
 
event of
bankruptcy
 
of either
 
party to
 
the transactions.
 
The Company
 
reports its
 
assets and
 
liabilities
 
subject to
 
these arrangements
 
on a gross
basis.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
17
The following
 
table presents
 
information
 
regarding
 
those assets
 
and liabilities
 
subject to
 
such arrangements
 
as if the
 
Company had
presented
 
them on a
 
net basis
 
as of September
 
30, 2022
 
and December
 
31, 2021.
(in thousands)
Offsetting of Assets
Gross Amount Not
Net Amount
Offset in the Balance Sheet
of Assets
Financial
Gross Amount
Gross Amount
Presented
Instruments
Cash
of Recognized
Offset in the
in the
Received as
Received as
Net
Assets
Balance Sheet
Balance Sheet
Collateral
Collateral
Amount
September 30, 2022
Interest rate swaps
$
169,630
$
-
$
169,630
$
-
$
-
$
169,630
Interest rate swaptions
91,195
-
91,195
-
(27,149)
64,046
Interest rate caps
1,188
-
1,188
-
-
1,188
TBA securities
305
-
305
-
(305)
-
$
262,318
$
-
$
262,318
$
-
$
(27,454)
$
234,864
December 31, 2021
Interest rate swaps
$
29,293
$
-
$
29,293
$
-
$
-
$
29,293
Interest rate swaptions
21,493
-
21,493
-
(6,350)
15,143
$
50,786
$
-
$
50,786
$
-
$
(6,350)
$
44,436
(in thousands)
Offsetting of Liabilities
Gross Amount Not
Net Amount
Offset in the Balance Sheet
of Liabilities
Financial
Gross Amount
Gross Amount
Presented
Instruments
of Recognized
Offset in the
in the
Posted as
Cash Posted
Net
Liabilities
Balance Sheet
Balance Sheet
Collateral
as Collateral
Amount
September 30, 2022
Repurchase Agreements
$
3,133,861
$
-
$
3,133,861
$
(3,084,484)
$
(49,377)
$
-
Interest rate swaptions
52,315
-
52,315
-
-
52,315
TBA securities
698
-
698
-
(698)
-
$
3,186,874
$
-
$
3,186,874
$
(3,084,484)