10-Q 1 orc20240930c_10q.htm FORM 10-Q orc20240930c_10q.htm
0001518621 Orchid Island Capital, Inc. false --12-31 Q3 2024 5,438,185 3,885,554 99,412 148,803 99,467 79,680 0.01 0.01 20,000,000 20,000,000 0 0 0 0 0.01 0.01 100,000,000 100,000,000 78,082,645 78,082,645 51,636,074 51,636,074 0.36 0.48 1.08 1.44 1 false false false false On April 10, 2024, the Company declared a dividend of $0.12 per share to be paid on May 30, 2024. The effect of this dividend is included in the table above but is not reflected in the Company’s financial statements as of March 31, 2024. 10-Year T-Note futures contracts were valued at a price of $114.28 at September 30, 2024 and $112.89 at December 31, 2023. The contract values of the short positions were $14.3 million and $361.2 million at September 30, 2024 and December 31, 2023, respectively. 5-Year T-Note futures contracts were valued at a price of $108.77 at December 31, 2023. The contract value of the short position was $458.5 million at December 31, 2023. Cost basis represents the forward price to be paid (received) for the underlying Agency RMBS. The notional balance for the interest-only securities portfolio was $88.8 million and $98.6 million as of September 30, 2024 and December 31, 2023, respectively. Weighted average price received per share is after deducting the underwriters’ discount, if applicable, and other offering costs. Net proceeds are net of the underwriters’ discount, if applicable, and other offering costs. The number of shares of common stock issuable upon the vesting of the remaining outstanding PUs as of December 31, 2023 was reduced by 14,365 shares as a result of a book value impairment event that occurred pursuant to the terms of the long term equity incentive compensation plans (the “Plans”) established under the Company’s Incentive Plans. The book value impairment event occurred when the Company's book value per share declined by more than 15% during the quarter ended September 30, 2023 and the Company’s book value per share decline from July 1, 2023 to December 31, 2023 was more than 10%. The Plans provide that if such a book value impairment event occurs, then the number of outstanding PUs that are outstanding as of the last day of such two quarter period shall be reduced by 15%. Net carrying value represents the difference between the market value and the cost basis of the TBA securities as of period-end and is reported in derivative assets (liabilities), at fair value in our balance sheets Open equity represents the cumulative gains (losses) recorded on open futures positions from inception. The notional balance for the inverse interest-only securities portfolio was $23.4 million and $26.8 million as of September 30, 2024 and December 31, 2023, respectively. The Company has entered into eleven equity distribution agreements, ten of which have either been terminated because all shares were sold or were replaced with a subsequent agreement. Notional amount represents the par value (or principal balance) of the underlying Agency RMBS. The cost information in the table above represents the aggregate current par value, multiplied by the purchase price of each security in the portfolio. 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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

      

FORM 10-Q

 

☒         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2024

 

☐         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to ___________

 

Commission File Number: 001-35236

 

orclogo.jpg

 

Orchid Island Capital, Inc.

 

(Exact name of registrant as specified in its charter)

 

Maryland

27-3269228

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

3305 Flamingo Drive, Vero Beach, Florida 32963

(Address of principal executive offices) (Zip Code)

 

(772) 231-1400

(Registrant’s telephone number, including area code)

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

Trading Symbol:

Name of Each Exchange on Which Registered

Common Stock, $0.01 par value

ORC

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act. Check one:

 

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

  

Emerging growth company

☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

Number of shares outstanding at October 24, 2024: 78,414,645

 

 
Table of Contents

 

 

ORCHID ISLAND CAPITAL, INC.

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION
 

ITEM 1. Financial Statements

1
 

Condensed Balance Sheets (unaudited)

1
 

Condensed Statements of Comprehensive Income (Loss) (unaudited)

2
 

Condensed Statements of Stockholders’ Equity (unaudited)

3
 

Condensed Statements of Cash Flows (unaudited)

4
 

Notes to Condensed Financial Statements (unaudited)

5

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

45

ITEM 4. Controls and Procedures

48
 

PART II. OTHER INFORMATION
 

ITEM 1. Legal Proceedings

49

ITEM 1A. Risk Factors

49

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

49

ITEM 3. Defaults upon Senior Securities

49

ITEM 4. Mine Safety Disclosures

49

ITEM 5. Other Information

49

ITEM 6. Exhibits

50

SIGNATURES

51

 

 
Table of Contents

 

 

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,

 
  

2024

  

2023

 

ASSETS:

        

Mortgage-backed securities, at fair value (includes pledged assets of $5,438,185 and $3,885,554, respectively)

 $5,442,804  $3,894,012 

U.S. Treasury securities, available-for-sale (amortized cost of $99,412 and $148,803; includes pledged assets of $99,467 and $79,680, respectively)

  99,467   148,820 

Cash and cash equivalents

  322,105   171,893 

Restricted cash

  11,612   28,396 

Accrued interest receivable

  22,868   14,951 

Derivative assets

  16,846   6,420 

Receivable for investment securities and TBA transactions

  177   - 

Other assets

  614   455 

Total Assets

 $5,916,493  $4,264,947 
         

LIABILITIES AND STOCKHOLDERS' EQUITY

        
         

LIABILITIES:

        

Repurchase agreements

 $5,230,871  $3,705,649 

Payable for investment securities and TBA transactions

  68   60,454 

Dividends payable

  9,396   6,222 

Derivative liabilities

  -   12,694 

Accrued interest payable

  16,372   7,939 

Due to affiliates

  1,177   1,013 

Other liabilities

  2,585   1,031 

Total Liabilities

  5,260,469   3,795,002 
         

COMMITMENTS AND CONTINGENCIES

          
         

STOCKHOLDERS' EQUITY:

        

Preferred stock, $0.01 par value; 20,000,000 shares authorized; no shares issued and outstanding as of September 30, 2024 and December 31, 2023

  -   - 

Common Stock, $0.01 par value; 100,000,000 shares authorized, 78,082,645 shares issued and outstanding as of September 30, 2024 and 51,636,074 shares issued and outstanding as of December 31, 2023

  781   516 

Additional paid-in capital

  1,003,504   849,845 

Accumulated deficit

  (348,316)  (380,433)

Accumulated other comprehensive income

  55   17 

Total Stockholders' Equity

  656,024   469,945 

Total Liabilities and Stockholders' Equity

 $5,916,493  $4,264,947 

 

See Notes to Financial Statements

 

 

1
Table of Contents
 

 

 ORCHID ISLAND CAPITAL, INC.

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 For the Nine and Three Months Ended September 30, 2024 and 2023

($ in thousands, except per share data)

 

   

Nine Months Ended September 30,

    

Three Months Ended September 30,

  
   

2024

    

2023

    

2024

    

2023

  

Interest income

   $ 169,581     $ 128,030     $ 67,646     $ 50,107  

Interest expense

     (172,428 )     (149,593 )     (67,306 )     (58,705 )

Net interest (expense) income

     (2,847 )     (21,563 )     340       (8,598 )

Realized gains (losses) on mortgage-backed securities

     510       -       510       -  

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

     73,699       (224,576 )     161,564       (208,932 )

(Losses) gains on derivative and other hedging instruments

     (26,858 )     194,253       (140,825 )     142,042  

Net portfolio income (loss)

     44,504       (51,886 )     21,589       (75,488 )
                                 

Expenses:

                                

Management fees

     6,867       8,216       2,449       2,870  

Allocated overhead

     1,967       1,772       637       557  

Incentive compensation

     470       1,110       269       322  

Directors' fees and liability insurance

     1,015       986       343       345  

Audit, legal and other professional fees

     1,065       1,200       269       301  

Direct REIT operating expenses

     564       531       216       193  

Other administrative

     439       652       86       56  

Total expenses

     12,387       14,467       4,269       4,644  
                                 

Net income (loss)

   $ 32,117     $ (66,353 )   $ 17,320     $ (80,132 )

Unrealized gains on U.S. Treasury securities measured at fair value through other comprehensive net income (loss)

     38       16       48       16  

Comprehensive net income (loss)

   $ 32,155     $ (66,337 )   $ 17,368     $ (80,116 )
                                 

Basic and diluted net income (loss) per share

   $ 0.53     $ (1.58 )   $ 0.24     $ (1.68 )
                                 

Weighted Average Shares Outstanding

     60,700,959       42,103,532       72,377,373       47,773,409  

   

See Notes to Financial Statements

 

2
Table of Contents
 

ORCHID ISLAND CAPITAL, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

For the Nine Months Ended September 30, 2024 and 2023

(in thousands)

 

                  

Accumulated

     
                  Other     
          

Additional

  

Retained

  

Comprehensive

     
  

Common Stock

  

Paid-in

  

Earnings

  

Income

     
  

Shares

  

Par Value

  

Capital

  

(Deficit)

  

(Loss)

  

Total

 
                         

Balances, June 30, 2024

  64,824  $648  $920,913  $(365,636) $7  $555,932 

Net income

  -   -   -   17,320   -   17,320 

Unrealized gain on available-for-sale securities

  -   -   -   -   48   48 

Cash dividends declared ($0.36 per share)

  -   -   (26,887)  -   -   (26,887)

Stock based awards and amortization

  8   -   232   -   -   232 

Issuance of common stock pursuant to public offerings, net

  13,314   134   109,757   -   -   109,891 

Shares repurchased and retired

  (63)  (1)  (511)  -   -   (512)

Balances, September 30, 2024

  78,083  $781  $1,003,504  $(348,316) $55  $656,024 
                         

Balances, June 30, 2023

  43,897   439   817,074   (327,428)  -   490,085 

Net loss

  -   -   -   (80,132)  -   (80,132)

Unrealized gain on available-for-sale securities

  -   -   -   -   16   16 

Cash dividends declared ($0.48 per share)

  -   -   (23,823)  -   -   (23,823)

Stock based awards and amortization

  3   -   269   -   -   269 

Issuance of common stock pursuant to public offerings, net

  8,432   84   80,342   -   -   80,426 

Shares repurchased and retired

  -   -   -   -   -   - 

Balances, September 30, 2023

  52,332  $523  $873,862  $(407,560) $16  $466,841 
                         

Balances, January 1, 2024

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

Net income

  -   -   -   32,117   -   32,117 

Unrealized loss on available-for-sale securities

  -   -   -   -   38   38 

Cash dividends declared ($1.08 per share)

  -   -   (67,301)  -   -   (67,301)

Stock based awards and amortization

  49   -   817   -   -   817 

Issuance of common stock pursuant to public offerings, net

  26,794   269   223,429   -   -   223,698 

Shares repurchased and retired

  (396)  (4)  (3,286)  -   -   (3,290)

Balances, September 30, 2024

  78,083  $781  $1,003,504  $(348,316) $55  $656,024 
                         

Balances, January 1, 2023

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

Net loss

  -   -   -   (66,353)  -   (66,353)

Unrealized gain on available-for-sale securities

  -   -   -   -   16   16 

Cash dividends declared ($1.44 per share)

  -   -   (62,301)  -   -   (62,301)

Stock based awards and amortization

  60   1   1,240   -   -   1,241 

Issuance of common stock pursuant to public offerings, net

  15,880   157   159,281   -   -   159,438 

Shares repurchased and retired

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

Balances, September 30, 2023

  52,332  $523  $873,862  $(407,560) $16  $466,841 

 

See Notes to Financial Statements

3
Table of Contents
 

 

ORCHID ISLAND CAPITAL, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

For the Nine Months Ended September 30, 2024 and 2023

($ in thousands)

 

   

2024

    

2023

  

CASH FLOWS FROM OPERATING ACTIVITIES:

                

Net income (loss)

   $ 32,117     $ (66,353 )

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

                

Stock based compensation

     334       939  

Discount accretion on U.S. Treasury Bills

     (3,724 )     (521 )

Realized (gains) losses on mortgage-backed securities

     (510 )     -  

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

     (73,699 )     224,576  

Realized and unrealized losses (gains) on derivative instruments

     93,902       (111,100 )

Changes in operating assets and liabilities:

                

Accrued interest receivable

     (7,917 )     (5,797 )

Other assets

     (159 )     (108 )

Accrued interest payable

     8,433       6,627  

Other liabilities

     535       441  

Due to affiliates

     164       121  

NET CASH PROVIDED BY OPERATING ACTIVITIES

     49,476       48,825  
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

                

From mortgage-backed securities investments:

                

Purchases

     (2,073,150 )     (1,443,827 )

Sales and maturities

     288,242       -  

Principal repayments

     310,325       237,904  

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

     (196,026 )     (97,789 )

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

     200,000       37,500  

Net (payments on) proceeds from derivative instruments

     (126,851 )     114,494  

NET CASH USED IN INVESTING ACTIVITIES

     (1,597,460 )     (1,151,718 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

                

Proceeds from repurchase agreements

     30,279,982       27,780,008  

Principal payments on repurchase agreements

     (28,754,760 )     (26,731,506 )

Cash dividends

     (64,065 )     (59,762 )

Proceeds from issuance of common stock, net of issuance costs

     223,698       159,438  

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

     (3,443 )     (4,287 )

NET CASH PROVIDED BY FINANCING ACTIVITIES

     1,681,412       1,143,891  
                 

NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

     133,428       40,998  

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

     200,289       237,219  

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

   $ 333,717     $ 278,217  
                 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

                

Cash paid during the period for:

                

Interest

   $ 163,995     $ 142,965  

 

See Notes to Financial Statements

 

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ORCHID ISLAND CAPITAL, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

September 30, 2024

 

 

NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Business Description

 

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

 

On October 29, 2021, Orchid entered into an equity distribution agreement (the “October 2021 Equity Distribution Agreement”) with four sales agents pursuant to which the Company could offer and sell, from time to time, up to an aggregate amount of $250,000,000 of shares of the Company’s common stock in transactions that were deemed to be “at the market” offerings and privately negotiated transactions. The Company issued a total of 9,742,188 shares under the October 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately $151.8 million, and net proceeds of approximately $149.3 million, after commissions and fees, prior to its termination in March 2023. 

 

On March 7, 2023, Orchid entered into an equity distribution agreement (the “March 2023 Equity Distribution Agreement”) with three sales agents pursuant to which the Company 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 24,675,497 shares under the March 2023 Equity Distribution Agreement for aggregate gross proceeds of approximately $228.8 million and net proceeds of approximately $225.0 million, after commissions and fees, prior to its termination in June 2024.

 

On June 11, 2024, Orchid entered into an equity distribution agreement (the “June 2024 Equity Distribution Agreement”) with three sales agents pursuant to which the Company may offer and sell, from time to time, up to an aggregate amount of $250,000,000 of shares of the Company’s common stock in transactions that are deemed to be “at the market” offerings and privately negotiated transactions. Through September 30, 2024, the Company issued a total of 15,309,022 shares under the June 2024 Equity Distribution Agreement for aggregate gross proceeds of approximately $128.6 million, and net proceeds of approximately $126.5 million, after commissions and fees. Subsequent to September 30, 2024, the Company issued a total of 332,000 shares under the June 2024 Equity Distribution Agreement for aggregate gross proceeds of approximately $2.7 million, and net proceeds of approximately $2.7 million, after commissions and fees.

 

Basis of Presentation and Use of Estimates

 

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. Operating results for the nine and three month periods ended September 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.

 

The balance sheet at  December 31, 2023 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

 

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The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could significantly differ from those estimates. The significant estimates affecting the accompanying financial statements are the fair values of RMBS and derivatives. Management believes the estimates and assumptions underlying the financial statements are reasonable based on the information available as of September 30, 2024.

 

Variable Interest Entities (“VIEs”)

 

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

 

Cash and Cash Equivalents and Restricted Cash

 

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

 

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

 

(in thousands)

        
  

September 30, 2024

  

December 31, 2023

 

Cash and cash equivalents

 $322,105  $171,893 

Restricted cash

  11,612   28,396 

Total cash, cash equivalents and restricted cash

 $333,717  $200,289 

 

The Company maintains cash balances at three banks, a government securities backed overnight sweep fund, and excess margin on account with three exchange clearing members. At times, balances may exceed federally insured limits. The Company has not experienced any losses related to these balances. The Federal Deposit Insurance Corporation insures eligible accounts up to $250,000 per depositor at each financial institution. Restricted cash balances are uninsured, but are held in separate customer accounts that are segregated from the general funds of the counterparty. The Company limits uninsured balances to only large, well-known banks and exchange clearing members and believes that it is not exposed to any significant credit risk on cash and cash equivalents or restricted cash balances.

 

Mortgage-Backed Securities and U.S. Treasury Securities

 

The Company invests primarily in mortgage pass-through (“PT”) residential mortgage backed securities (“RMBS”) and collateralized mortgage obligations (“CMOs”) issued by Freddie Mac, Fannie Mae or Ginnie Mae, interest-only (“IO”) securities and inverse interest-only (“IIO”) securities representing interest in or obligations backed by pools of RMBS. The Company refers to RMBS and CMOs as PT RMBS. The Company refers to IO and IIO securities as structured RMBS. The Company also invests in U.S. Treasury Notes ("T-Notes") and U.S. Treasury Bills (collectively, "U.S. Treasury securities"), primarily to satisfy collateral requirements of derivative counterparties. The Company has elected to account for its investment in RMBS and U.S. Treasury securities under the fair value option. Electing the fair value option requires the Company to record changes in fair value in net income, which, in management’s view, more appropriately reflects the results of the Company’s operations for a particular reporting period and is consistent with the underlying economics and how the portfolio is managed. The Company has designated its U.S. Treasury securities purchased after August 2023 as available-for-sale, and changes in fair value during the period for reasons other than expected credit losses are recognized in other comprehensive income (loss). 

 

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.

 

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Fair value is defined as the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. The fair value measurement assumes that the transaction to sell the asset or transfer the liability either occurs in the principal market for the asset or liability, or in the absence of a principal market, occurs in the most advantageous market for the asset or liability. Estimated fair values for RMBS are based on independent pricing sources and/or third party broker quotes, when available. Estimated fair values for U.S. Treasury securities are based on quoted prices for identical assets in active markets.

 

Income on PT RMBS and T-Notes is based on the stated interest rate of the security. Premiums or discounts present at the date of purchase are not amortized. Premium lost and discount accretion resulting from monthly principal repayments are reflected in unrealized gains (losses) on RMBS in the statements of comprehensive income (loss). For IO securities, the income is accrued based on the carrying value and the effective yield. The difference between income accrued and the interest received on the security is characterized as a return of investment and serves to reduce the asset’s carrying value. At each reporting date, the effective yield is adjusted prospectively for future reporting periods based on the new estimate of prepayments and the contractual terms of the security. For IIO securities, effective yield and income recognition calculations also take into account the index value applicable to the security. Changes in fair value of investments for which the fair value option is elected are recorded in earnings and reported as unrealized gains or losses on mortgage-backed securities and U.S. Treasury securities in the accompanying statements of comprehensive income (loss). Realized gains and losses on sales of investments for which the fair value option has been elected, using the specific identification method, are reported as a separate component of net portfolio income on the statements of comprehensive income (loss).

 

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

 

Derivative and Other Hedging Instruments

 

The Company uses derivative and other hedging instruments to manage interest rate risk, facilitate asset/liability strategies and manage other exposures, and it may continue to do so in the future. The principal instruments that the Company has used to date are T-Note, Secured Overnight Financing Rate ("SOFR"), federal funds (“Fed Funds”) futures contracts, short positions in U.S. Treasury securities, interest rate swaps, options to enter in interest rate swaps (“interest rate swaptions”), dual digital options, interest rate caps and floors, and “to-be-announced” (“TBA”) securities transactions, but the Company may enter into other derivative and other hedging instruments in the future.

 

The Company accounts for TBA securities as derivative instruments. Gains and losses associated with TBA securities transactions are reported in gain (loss) on derivative instruments in the accompanying statements of comprehensive income (loss).

 

Derivative and other hedging instruments are carried at fair value, and changes in fair value are recorded in income as gains or losses on derivative and other hedging instruments for each period. The Company’s derivative financial instruments are not designated as hedge accounting relationships, but rather are used as economic hedges of its portfolio assets and liabilities. Gains and losses on derivatives, except those that result in cash receipts or payments, are included in operating activities on the statements of cash flows. Cash payments and cash receipts from settlements of derivatives, including current period net cash settlements on interest rate swaps, are classified as an investing activity on the statements of cash flows.

 

Holding derivatives creates exposure to credit risk related to the potential for failure on the part of counterparties and exchanges to honor their commitments. In the event of default by a counterparty, the Company may have difficulty recovering its collateral and may not receive payments provided for under the terms of the agreement. The Company’s derivative agreements require it to post or receive collateral to mitigate such risk. In addition, the Company uses only registered central clearing exchanges and well-established commercial banks as counterparties, monitors positions with individual counterparties and adjusts posted collateral as required.

 

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Financial Instruments

 

The fair value of financial instruments for which it is practicable to estimate that value is disclosed either in the body of the financial statements or in the accompanying notes. RMBS, Fed Funds, SOFR and T-Note futures contracts, interest rate swaps, interest rate swaptions, dual digital options, interest rate floors and caps, and TBA securities are accounted for at fair value in the balance sheets. The methods and assumptions used to estimate fair value for these instruments are presented in Note 13 of the financial statements.

 

Repurchase Agreements

 

The Company finances the acquisition of the majority of its RMBS through the use of repurchase agreements under master repurchase agreements. Repurchase agreements are accounted for as collateralized financing transactions, which are carried at their contractual amounts, including accrued interest, as specified in the respective agreements.

 

Manager Compensation

 

The Company is externally managed by Bimini Advisors, LLC (the “Manager” or “Bimini Advisors”), a Maryland limited liability company and wholly-owned subsidiary of Bimini. The Company’s management agreement with the Manager provides for payment to the Manager of a management fee and reimbursement of certain operating expenses, which are accrued and expensed during the period for which they are earned or incurred. Refer to Note 14 for the terms of the management agreement.

 

Earnings Per Share

 

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

 

Stock-Based Compensation

 

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

 

Income Taxes

 

Orchid has elected and is organized and operated so as to qualify to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). REITs are generally not subject to U.S. federal income tax on their REIT taxable income provided that they distribute to their stockholders all of their REIT taxable income on an annual basis. A REIT must distribute at least 90% of its REIT taxable income, determined without regard to the deductions for dividends paid and excluding net capital gain, and meet other requirements of the Code to retain its tax status.

 

Orchid assesses the likelihood, based on their technical merit, that uncertain tax positions will be sustained upon examination based on the facts, circumstances and information available at the end of each period. All of Orchid’s tax positions are categorized as highly certain. There is no accrual for any tax, interest or penalties related to Orchid’s tax position assessment. The measurement of uncertain tax positions is adjusted when new information is available, or when an event occurs that requires a change.

 

Recent Accounting Pronouncements

 

In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-07 "Segment Reporting (Topic 820): Improvements to Reportable Segment Disclosures. ASU 2023-07 requires additional disclosures about reportable segments’ significant expenses on an interim and annual basis. The guidance in ASU 2023-07 is effective in annual periods beginning after December 15, 2023 and subsequent interim periods. The Company does not expect the provisions of ASU 2023-07 to have a significant impact on its future financial statements.

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NOTE 2. MORTGAGE-BACKED SECURITIES, AT FAIR VALUE

 

The following table presents the Company’s RMBS portfolio that are remeasured at fair value through earnings as of September 30, 2024 and December 31, 2023:

 

(in thousands)

                        
  

September 30, 2024

  

December 31, 2023

 
  

Par Value

  

Cost(1)

  

Fair Value

  

Par Value

  

Cost(1)

  

Fair Value

 

Pass-Through RMBS Certificates:

                        

Fixed-rate Mortgages

 $5,487,831  $5,613,352  $5,427,069  $4,051,145  $4,198,424  $3,877,082 

Total Pass-Through Certificates

  5,487,831   5,613,352   5,427,069   4,051,145   4,198,424   3,877,082 

Structured RMBS Certificates:

                        

Interest-Only Securities(2)

  n/a   17,922   15,382   n/a   19,839   16,572 

Inverse Interest-Only Securities(3)

  n/a   1,598   353   n/a   1,825   358 

Total Structured RMBS Certificates

     19,520   15,735      21,664   16,930 

Total

 $5,487,831  $5,632,872  $5,442,804  $4,051,145  $4,220,088  $3,894,012 

 

(1)

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

(2)

The notional balance for the interest-only securities portfolio was $88.8 million and $98.6 million as of September 30, 2024 and December 31, 2023, respectively.

(3)

The notional balance for the inverse interest-only securities portfolio was $23.4 million and $26.8 million as of September 30, 2024 and December 31, 2023, respectively.

 

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, 2024 and 2023.

 

(in thousands)

        
  

Nine Months Ended September 30,

 
  

2024

  

2023

 

Proceeds from sales of RMBS (1)

 $288,242  $- 

Carrying value of RMBS sold

  (287,732)  - 

Net gain on sales of RMBS

 $510  $- 
         

Gross gain on sales of RMBS

 $510  $- 

Gross loss on sales of RMBS

  -   - 

Net gain on sales of RMBS

 $510  $- 

 

(1)

During the nine months ended  September 30, 2024, the Company resecuritized RMBS with a fair value of $221.7 million by transferring the RMBS into a larger RMBS that is backed by the transferred RMBS. The Company retained the entire larger RMBS. No gain or loss was recorded on this resecuritization.
 

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

 

As of September 30, 2024 and December 31, 2023, the Company held U.S. Treasury securities with a fair value of approximately $99.5 million and $148.8 million, respectively, that were classified as available-for-sale. U.S. Treasury securities are held primarily to satisfy collateral requirements of the Company's repurchase and derivative counterparties.

 

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The amortized cost, gross unrealized holding gains and losses, and fair value of available-for-sale investments as of September 30, 2024 and December 31, 2023 are as follows:

 

(in thousands)

                
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

September 30, 2024

                

U.S. Treasury Bill maturing 10/24/2024

 $49,836  $14  $-  $49,850 

U.S. Treasury Bill maturing 11/29/2024

  49,576   41   -   49,617 
  $99,412  $55  $-  $99,467 

December 31, 2023

                

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

 $49,671  $9  $-  $49,680 

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

  49,992   8   -   50,000 

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

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

 

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

NOTE 4. REPURCHASE AGREEMENTS

 

The Company pledges certain of its RMBS as collateral under repurchase agreements with financial institutions. Interest rates are generally fixed based on prevailing rates corresponding to the terms of the borrowings, and interest is generally paid at the termination of a borrowing. If the fair value of the pledged securities declines, lenders will typically require the Company to post additional collateral or pay down borrowings to re-establish agreed upon collateral requirements, referred to as "margin calls." Similarly, if the fair value of the pledged securities increases, lenders may release collateral back to the Company. As of September 30, 2024, the Company had met all margin call requirements.

 

As of September 30, 2024 and December 31, 2023, the Company’s repurchase agreements had remaining maturities as summarized below:

 

($ in thousands)

                    
  

OVERNIGHT

  

BETWEEN 2

  

BETWEEN 31

  

GREATER

     
  

(1 DAY OR

  

AND

  

AND

  

THAN

     
  

LESS)

  

30 DAYS

  

90 DAYS

  

90 DAYS

  

TOTAL

 

September 30, 2024

                    

Fair market value of securities pledged, including accrued interest receivable

 $-  $4,117,723  $1,343,315  $-  $5,461,038 

Repurchase agreement liabilities associated with these securities

 $-  $3,938,523  $1,292,348  $-  $5,230,871 

Net weighted average borrowing rate

  -   5.23%  5.25%  -   5.24%

December 31, 2023

                    

Fair market value of securities pledged, including accrued interest receivable

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

Repurchase agreement liabilities associated with these securities

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

Net weighted average borrowing rate

  -   5.55%  5.54%  5.46%  5.55%

 

In addition, cash pledged to counterparties for repurchase agreements was approximately $9.2 million as of September 30, 2024. There was no cash pledged to counterparties for repurchase agreements as of December 31, 2023.

 

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, 2024, the Company had an aggregate amount at risk (the difference between the amount loaned to the Company, including interest payable and securities posted by the counterparty (if any), and the fair value of securities and cash pledged (if any), including accrued interest on such securities) with all counterparties of approximately $221.0 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, 2024 or  December 31, 2023.

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NOTE 5. DERIVATIVE AND OTHER HEDGING INSTRUMENTS

 

The table below summarizes fair value information about the Company’s derivative and other hedging instruments assets and liabilities as of September 30, 2024 and December 31, 2023.

 

(in thousands)

         

Derivative and Other Hedging Instruments

Balance Sheet Location

 

September 30, 2024

  

December 31, 2023

 

Assets

         

Interest rate swaps

Derivative assets, at fair value

 $14,678  $6,348 

Payer swaption (long position)

Derivative assets, at fair value

  -   72 

TBA securities

Derivative assets, at fair value

  2,168   - 

Total derivative assets, at fair value

 $16,846  $6,420 
          

Liabilities

         

TBA securities

Derivative liabilities, at fair value

 $-  $12,694 

Total derivative liabilities, at fair value

 $-  $12,694 
          

Margin Balances Posted to (from) Counterparties

         

Futures contracts

Restricted cash

 $2,440  $4,096 

TBA securities

Restricted cash

  -   23,720 

TBA securities

Other liabilities

  (1,593)  - 

Interest rate swaption contracts

Restricted cash

  -   580 

Total margin balances on derivative contracts

 $847  $28,396 

 

Fed Funds, T-Note and SOFR futures are cash and securities settled futures contracts on their respective underlying or delivery eligible underlying U.S. Treasury security, with gains and losses credited or charged to the Company’s cash accounts on a daily basis. A minimum balance, or “margin”, is required to be maintained in the account on a daily basis. The tables below present information related to the Company’s T-Note and SOFR futures positions at September 30, 2024 and December 31, 2023.

 

($ in thousands)

                
  

September 30, 2024

 
  

Average

  

Weighted

  

Weighted

     
  

Contract

  

Average

  

Average

     
  

Notional

  

Entry

  

Effective

  

Open

 

Expiration Year

 

Amount

  

Rate

  

Rate

  

Equity(1)

 

T-Note Futures Contracts (Short Positions)(2)

                

December 2024 10-year T-Note futures (Dec 2024 - Dec 2034 Hedge Period)

 $12,500   3.73%  3.62% $(88)

SOFR Futures Contracts (Short Positions)

                

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

 $241,250   4.78%  4.73% $(110)

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

  129,250   4.23%  4.04%  (242)

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

  129,000   3.77%  3.52%  (333)

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

  129,000   3.49%  3.21%  (356)

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

  129,000   3.31%  3.07%  (320)

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

  129,000   3.21%  3.00%  (275)

June 2026 3-Month SOFR futures (Mar 2026 - Jun 2026 Hedge Period)

  104,000   3.15%  2.97%  (178)

September 2026 3-Month SOFR futures (Jun 2026 - Sep 2026 Hedge Period)

  104,000   3.11%  2.98%  (137)

December 2026 3-Month SOFR futures (Sep 2026 - Dec 2026 Hedge Period)

  29,000   3.34%  3.01%  (96)

March 2027 3-Month SOFR futures (Dec 2026 - Mar 2027 Hedge Period)

  16,250   3.10%  3.04%  (10)

 

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($ in thousands)

                
  

December 31, 2023

 
  

Average

  

Weighted

  

Weighted

     
  

Contract

  

Average

  

Average

     
  

Notional

  

Entry

  

Effective

  

Open

 

Expiration Year

 

Amount

  

Rate

  

Rate

  

Equity(1)

 

T-Note Futures Contracts (Short Positions)(2)

                

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

 $421,500   4.36%  4.04% $(9,936)

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

  320,000   4.38%  4.39%  (11,393)

SOFR Futures Contracts (Short Positions)

                

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

 $25,000   5.08%  4.99% $(24)

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

  25,000   4.67%  4.52%  (39)

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

  25,000   4.27%  4.10%  (44)

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

  25,000   3.90%  3.73%  (43)

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

  25,000   3.58%  3.42%  (41)

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

  25,000   3.37%  3.21%  (39)

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

  25,000   3.25%  3.10%  (37)

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

  25,000   3.21%  3.07%  (35)

 

(1)

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

(2)

10-Year T-Note futures contracts were valued at a price of $114.28 at  September 30, 2024 and $112.89 at  December 31, 2023. The contract values of the short positions were $14.3 million and $361.2 million at  September 30, 2024 and  December 31, 2023, respectively. 5-Year T-Note futures contracts were valued at a price of $108.77 at December 31, 2023. The contract value of the short position was $458.5 million at  December 31, 2023. 

 

Under its interest rate swap agreements, the Company typically pays a fixed rate and receives a floating rate ("payer swaps") based on an index, such as SOFR. The floating rate the Company receives under its swap agreements has the effect of offsetting the repricing characteristics of its repurchase agreements and cash flows on such liabilities. The Company is typically required to post margin on its interest rate swap agreements. The table below presents information related to the Company’s interest rate swap positions at September 30, 2024 and December 31, 2023.

 

($ in thousands)

                
      

Average

         
      

Fixed

  

Average

  

Average

 
  

Notional

  

Pay

  

Receive

  

Maturity

 
  

Amount

  

Rate

  

Rate

  

(Years)

 

September 30, 2024

                

Expiration > 1 to ≤ 5 years

 $1,450,000   1.69%  5.41%  3.6 

Expiration > 5 years

  2,036,800   3.55%  5.35%  7.2 
  $3,486,800   2.78%  5.37%  5.7 

December 31, 2023

                

Expiration > 1 to ≤ 5 years

 $500,000   0.84%  5.64%  2.7 

Expiration > 5 years

  1,826,500   2.62%  5.40%  6.8 
  $2,326,500