UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
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incorporation or organization)
(I.R.S. Employer
Identification No.)
,
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol:
Name of Each Exchange on Which
Registered
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.
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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
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files).
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
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Number of shares outstanding at October 27, 2022:
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 $
and $
, respectively)
$
$
U.S. Treasury Notes, at fair value (includes pledged assets of $
, respectively)
Cash and cash equivalents
Restricted cash
Accrued interest receivable
Derivative assets
Receivable for securities sold, pledged to counterparties
Other assets
Total Assets
$
$
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements
$
$
Dividends payable
Derivative liabilities
Accrued interest payable
Due to affiliates
Other liabilities
Total Liabilities
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $
and outstanding as of September 30, 2022 and December 31, 2021
Common Stock, $
shares issued and outstanding as of September 30, 2022 and
and outstanding as of December 31, 2021
Additional paid-in capital
Accumulated deficit
(376,133 )
(82,754 )
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
$
$
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
$
$
$
$
Interest expense
(32,196 )
(5,067 )
(21,361 )
(1,570 )
Net interest income
Realized (losses) gains on mortgage-backed securities
(132,672 )
(3,068 )
(66,143 )
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
Net portfolio (loss) income
(278,520 )
(9,310 )
(79,295 )
Expenses:
Management fees
Allocated overhead
Incentive compensation
Directors' fees and liability insurance
Audit, legal and other professional fees
Direct REIT operating expenses
Other administrative
Total expenses
Net (loss) income
$
(293,379 )
$
(20,196 )
$
(84,513 )
$
Basic and diluted net (loss) income per share
$
(8.31
$
(0.95
$
(2.40
$
Weighted Average Shares Outstanding
Dividends declared per common share
$
$
$
$
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
$
$
$
(17,994 )
$
Net loss
-
(29,369 )
(29,369 )
Cash dividends declared
-
(17,226 )
(17,226
Issuance of common stock pursuant to public offerings, net
Stock based awards and amortization
Balances, March 31, 2021
$
$
$
(47,363 )
$
Net income
-
(16,865 )
(16,865 )
Cash dividends declared
-
(20,416 )
(20,416 )
Issuance of common stock pursuant to public offerings, net
Stock based awards and amortization
Balances, June 30, 2021
$
$
$
(64,228 )
$
Net income
-
Cash dividends declared
-
(26,420 )
(26,420 )
Issuance of common stock pursuant to public offerings, net
Stock based awards and amortization
-
Balances, September 30, 2021
30,664
$
$
$
(38,190 )
$
Balances, January 1, 2022
$
$
$
(82,754 )
$
Net loss
-
(148,727 )
(148,727 )
Cash dividends declared
-
(27,492 )
(27,492 )
Stock based awards and amortization
Balances, March 31, 2022
$
$
$
(231,481 )
$
Net loss
-
(60,139 )
(60,139 )
Cash dividends declared
-
(23,936 )
(23,936 )
Stock based awards and amortization
Shares repurchased and retired
(175 )
(1 )
(2,217 )
(2,218 )
Balances, June 30, 2022
$
$
$
(291,620 )
$
Net income
-
(84,513 )
(84,513 )
Cash dividends declared
-
(19,231 )
(19,231 )
Stock based awards and amortization
Shares repurchased and retired
(186 )
(2 )
(2,382 )
(2,384 )
Balances, September 30, 2022
$
$
$
(376,133 )
$
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
Realized losses on mortgage-backed securities
Unrealized losses on mortgage-backed securities and U.S. Treasury Notes
Realized and unrealized gains on derivative instruments
(261,364 )
(22,180 )
Changes in operating assets and liabilities:
Accrued interest receivable
(5,449 )
Other assets
(353 )
Accrued interest payable
(404 )
Other liabilities
(2,031 )
Due to affiliates
NET CASH PROVIDED BY OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases
(622,535 )
(4,816,301 )
Sales
Principal repayments
Purchases of U.S. Treasury Notes
(37,440 )
Net proceeds from (payments on) derivative instruments
(1,228 )
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
(1,843,071 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements
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
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 )
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
(169,490 )
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the period
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the period
$
$
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest
$
$
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Securities acquired settled in later period
$
$
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 $
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
gross proceeds of
approximately $
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
Morgan purchased the shares of the Company’s common stock from the Company pursuant to the January 2021 Underwriting
Agreement at $
2021. The closing of the offering of
the Company of approximately $
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
Company’s common stock from the Company pursuant to the March 2021 Underwriting Agreement at $
the Company granted J.P. Morgan a 30-day option to purchase up to an additional
the same terms and conditions, which J.P. Morgan exercised in full on March 3, 2021. The closing of the offering of
of the Company’s common stock occurred on March 5, 2021, with proceeds to the Company of approximately $
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 $
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
proceeds of approximately $
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 $
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
Distribution Agreement for aggregate gross proceeds of approximately $
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
$
$
Restricted cash
Total cash, cash equivalents and restricted cash
$
$
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
$
$
Total Pass-Through Certificates
Structured RMBS Certificates:
Interest-Only Securities
Inverse Interest-Only Securities
Total Structured RMBS Certificates
Total
$
$
As of September 30, 2022 and December 31, 2021, the Company held U.S. Treasury Notes with a fair value of approximately $
million and $
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
$
$
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
$
$
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
$
$
$
$
$
Repurchase agreement liabilities associated with
these securities
$
$
$
$
$
Net weighted average borrowing rate
-
December 31, 2021
Fair market value of securities pledged, including
accrued interest receivable
$
$
$
$
$
Repurchase agreement liabilities associated with
these securities
$
$
$
$
$
Net weighted average borrowing rate
-
1)
Includes repurchase agreements with outstanding principal balances of approximately $
rates indexed to Secured Overnight Financing Rate (“SOFR”) that reprice daily.
In addition, cash pledged to counterparties for repurchase agreements was approximately $
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 $
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
$
$
Payer swaptions (long positions)
Derivative assets, at fair value
Interest rate caps
Derivative assets, at fair value
TBA securities
Derivative assets, at fair value
Total derivative assets, at fair value
$
$
Liabilities
Interest rate swaps
Derivative liabilities, at fair value
$
$
Payer swaptions (short positions)
Derivative liabilities, at fair value
TBA securities
Derivative liabilities, at fair value
Total derivative liabilities, at fair value
$
$
Margin Balances Posted to (from) Counterparties
Futures contracts
Restricted cash
$
$
TBA securities
Restricted cash
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 )
$
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)
$
$
December 2022 10-year Ultra futures
(Dec 2022 - Dec 2032 Hedge Period)
$
$
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)
$
$
March 2022 10-year Ultra futures
(Mar 2022 - Mar 2032 Hedge Period)
$
$
(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 $
values of the short positions were $
futures contracts were valued at a price of $
position was $
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
$
$
Expiration > 5 years
$
$
December 31, 2021
Expiration > 3 to ≤ 5 years
$
$
Expiration > 5 years
$
$
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
$
$
2Y10Y
$
14
The table below presents information related to the Company’s interest rate swaption positions at September 30, 2022 and
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
$
$
$
3 Month
>10 years
3 Month
$
$
$
3 Month
Payer Swaptions - short
≤ 1 year
$
(17,500 )
$
$
(958,300 )
3 Month
December 31, 2021
Payer Swaptions - long
≤ 1 year
$
$
$
3 Month
>1 year ≤ 2 years
3 Month
$
$
$
3 Month
Payer Swaptions - short
≤ 1 year
$
(16,185 )
$
(4,423 )
$
(1,331,500 )
3 Month
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)
$
$
$
$
Eurodollar futures contracts (short positions)
(14 )
(7 )
Interest rate swaps
Payer swaptions (short positions)
(80,183 )
(35,239 )
Payer swaptions (long positions)
Interest rate caps
(499 )
Interest rate floors
TBA securities (short positions)
(2,306 )
TBA securities (long positions)
(8,559 )
Total
$
$
$
$
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
$
$
$
$
$
$
Structured RMBS - fair value
U.S. Treasury Notes
Accrued interest on pledged securities
Restricted cash
Total
$
$
$
$
$
$
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
$
$
$
$
$
$
Total
$
$
$
$
$
$
$
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
$
$
$
$
$
$
Interest rate swaptions
(27,149 )
Interest rate caps
TBA securities
305
-
305
-
(305)
-
$
$
$
$
$
(27,454 )
$
December 31, 2021
Interest rate swaps
$
$
$
$
$
$
Interest rate swaptions
(6,350 )
$
$
$
$
$
(6,350 )
$
(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
$
$
$
$
(3,084,484 )
$
(49,377 )
$
Interest rate swaptions
TBA securities
(698 )
$
$
$
$
(3,084,484 )