UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 2022
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number
:
001-35236
Orchid Island Capital, Inc.
(Exact name of registrant as specified in its charter)
Maryland
27-3269228
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
3305 Flamingo Drive
,
Vero Beach
,
Florida
32963
(Address of principal executive offices) (Zip Code)
(
772
)
231-1400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol:
Name of Each Exchange on Which
Registered
Common Stock, $0.01 par value
ORC
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes
☒
☐
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
☒
☐
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
☐
☒
Number of shares outstanding at April 28, 2022:
177,117,186
ORCHID ISLAND CAPITAL, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
1
Condensed Balance Sheets (unaudited)
1
Condensed Statements of Operations (unaudited)
2
Condensed Statements of Stockholders’ Equity (unaudited)
3
Condensed Statements of Cash Flows (unaudited)
4
Notes to Condensed Financial Statements (unaudited)
5
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
25
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
47
ITEM 4. Controls and Procedures
51
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
52
ITEM 1A. Risk Factors
52
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
52
ITEM 3. Defaults upon Senior Securities
52
ITEM 4. Mine Safety Disclosures
52
ITEM 5. Other Information
52
ITEM 6. Exhibits
53
SIGNATURES
54
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ORCHID ISLAND CAPITAL, INC.
CONDENSED BALANCE SHEETS
($ in thousands, except per share data)
(Unaudited)
March 31,
December 31,
2022
2021
ASSETS:
Mortgage-backed securities, at fair value (includes pledged assets of $
4,576,847
and $
6,506,372
, respectively)
$
4,580,594
$
6,511,095
U.S. Treasury Notes, at fair value (includes pledged assets of $
36,477
29,740
, respectively)
36,477
37,175
Cash and cash equivalents
297,246
385,143
Restricted cash
130,199
65,299
Accrued interest receivable
14,853
18,859
Derivative assets
126,910
50,786
Other assets
1,153
320
Total Assets
$
5,187,432
$
7,068,677
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements
$
4,464,109
$
6,244,106
Dividends payable
7,996
11,530
Derivative liabilities
25,535
7,589
Accrued interest payable
1,018
788
Due to affiliates
1,066
1,062
Other liabilities
95,290
35,505
Total Liabilities
4,595,014
6,300,580
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $
0.01
100,000,000
and outstanding as of March 31, 2022 and December 31, 2021
-
-
Common Stock, $
0.01
500,000,000
177,117,186
shares issued and outstanding as of March 31, 2022 and
176,993,049
and outstanding as of December 31, 2021
1,771
1,770
Additional paid-in capital
822,128
849,081
Accumulated deficit
(231,481)
(82,754)
Total Stockholders' Equity
592,418
768,097
Total Liabilities and Stockholders' Equity
$
5,187,432
$
7,068,677
See Notes to Financial Statements
2
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended March 31, 2022 and 2021
($ in thousands, except per share data)
Three Months Ended March 31,
2022
2021
Interest income
$
41,857
$
26,856
Interest expense
(2,655)
(1,941)
Net interest income
39,202
24,915
Realized losses on mortgage-backed securities
(51,086)
(7,397)
Unrealized losses on mortgage-backed securities and U.S. Treasury Notes
(309,962)
(88,866)
Gains on derivative and other hedging instruments
177,816
45,472
Net portfolio loss
(144,030)
(25,876)
Expenses:
Management fees
2,634
1,621
Allocated overhead
441
404
Incentive compensation
237
364
Directors' fees and liability insurance
311
272
Audit, legal and other professional fees
304
318
Direct REIT operating expenses
643
421
Other administrative
127
93
Total expenses
4,697
3,493
Net loss
$
(148,727)
$
(29,369)
Basic and diluted net loss per share
$
(0.84)
$
(0.34)
Weighted Average Shares Outstanding
176,997,566
85,344,954
Dividends declared per common share
$
0.155
$
0.195
See Notes to Financial Statements
3
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Three Months Ended March 31, 2022 and 2021
(in thousands)
Additional
Retained
Common Stock
Paid-in
Earnings
Shares
Par Value
Capital
(Deficit)
Total
Balances, January 1, 2021
76,073
$
761
$
432,524
$
(17,994)
$
415,291
Net loss
-
-
-
(29,369)
(29,369)
Cash dividends declared
-
-
(17,226)
-
(17,226)
Issuance of common stock pursuant to public offerings, net
18,248
182
96,726
-
96,908
Stock based awards and amortization
90
1
571
-
572
Balances, March 31, 2021
94,411
$
944
$
512,595
$
(47,363)
$
466,176
Balances, January 1, 2022
176,993
$
1,770
$
849,081
$
(82,754)
$
768,097
Net loss
-
-
-
(148,727)
(148,727)
Cash dividends declared
-
-
(27,492)
-
(27,492)
Stock based awards and amortization
124
1
539
-
540
Balances, March 31, 2022
177,117
$
1,771
$
822,128
$
(231,481)
$
592,418
See Notes to Financial Statements
4
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended March 31, 2022 and 2021
($ in thousands)
2022
2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
$
(148,727)
$
(29,369)
Adjustments to reconcile net loss to net cash provided by operating activities:
Stock based compensation
162
259
Realized and unrealized losses on mortgage-backed securities
360,350
96,263
Unrealized losses on U.S. Treasury Notes
698
-
Realized and unrealized gains on derivative instruments
(101,921)
(45,914)
Changes in operating assets and liabilities:
Accrued interest receivable
4,006
(1,050)
Other assets
(833)
(588)
Accrued interest payable
230
(236)
Other liabilities
204
5,318
Due to affiliates
4
80
NET CASH PROVIDED BY OPERATING ACTIVITIES
114,173
24,763
CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases
-
(1,764,082)
Sales
1,413,039
988,523
Principal repayments
157,112
123,880
Net proceeds from (payments on) derivative instruments
103,900
(10,674)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
1,674,051
(662,353)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements
12,861,900
7,517,156
Principal payments on repurchase agreements
(14,641,897)
(6,931,062)
Cash dividends
(31,010)
(16,030)
Proceeds from issuance of common stock, net of issuance costs
-
96,908
Shares withheld from employee stock awards for payment of taxes
(214)
(297)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
(1,811,221)
666,675
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
(22,997)
29,085
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the period
450,442
299,506
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the period
$
427,445
$
328,591
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest
$
2,425
$
2,176
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Securities acquired settled in later period
$
-
$
217,758
Securities sold settled in later period
-
154,977
See Notes to Financial Statements
5
ORCHID ISLAND CAPITAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
MARCH 31, 2022
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Description
Orchid Island Capital, Inc. (“Orchid” or the “Company”), was incorporated in Maryland on August 17, 2010 for the purpose of creating
and managing a leveraged investment portfolio consisting of residential mortgage-backed securities (“RMBS”). From incorporation to
February 20, 2013, Orchid was a wholly owned subsidiary of Bimini Capital Management, Inc. (“Bimini”). Orchid began operations on
November 24, 2010 (the date of commencement of operations). From incorporation through November 24, 2010, Orchid’s only activity
was the issuance of common stock to Bimini.
On August 4, 2020, Orchid entered into an equity distribution agreement (the “August 2020 Equity Distribution Agreement”) with
four sales agents pursuant to which the Company could offer and sell, from time to time, up to an aggregate amount of $
150,000,000
shares of the Company’s common stock in transactions that were deemed to be “at the market” offerings and privately negotiated
transactions. The Company issued a total of
27,493,650
gross proceeds of
approximately $
150.0
147.4
its termination in June 2021.
On January 20, 2021, Orchid entered into an underwriting agreement (the “January 2021 Underwriting Agreement”) with J.P.
Morgan Securities LLC (“J.P. Morgan”), relating to the offer and sale of
7,600,000
Morgan purchased the shares of the Company’s common stock from the Company pursuant to the January 2021 Underwriting
Agreement at $
5.20
1,140,000
21, 2021. The closing of the offering of
8,740,000
proceeds to the Company of approximately $
45.2
On March 2, 2021, Orchid entered into an underwriting agreement (the “March 2021 Underwriting Agreement”) with J.P. Morgan,
relating to the offer and sale of
8,000,000
Company’s common stock from the Company pursuant to the March 2021 Underwriting Agreement at $
5.45
Company granted J.P. Morgan a 30-day option to purchase up to an additional
1,200,000
the same terms and conditions, which J.P. Morgan exercised in full on March 3, 2021. The closing of the offering of
9,200,000
of the Company’s common stock occurred on March 5, 2021, with proceeds to the Company of approximately $
50.0
offering expenses.
On June 22, 2021, Orchid entered into an equity distribution agreement (the “June 2021 Equity Distribution Agreement”) with four
sales agents pursuant to which the Company could offer and sell, from time to time, up to an aggregate amount of $
250,000,000
shares of the Company’s common stock in transactions that were deemed to be “at the market” offerings and privately negotiated
transactions. The Company issued a total of
49,407,336
gross proceeds of approximately $
250.0
246.0
its termination in October 2021.
6
On October 29, 2021, Orchid entered into an equity distribution agreement (the “October 2021 Equity Distribution Agreement”) with
four sales agents pursuant to which the Company may offer and sell, from time to time, up to an aggregate amount of $
250,000,000
shares of the Company’s common stock in transactions that are deemed to be “at the market” offerings and privately negotiated
transactions. Through March 31, 2022, the Company issued a total of
15,835,700
Agreement for aggregate gross proceeds of approximately $
78.3
77.0
commissions and fees. Subsequent to March 31, 2022 through April 29, 2022, the Company issued no shares under the October 2021
Equity Distribution Agreement.
Basis of Presentation and Use of Estimates
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted
in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 2022 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2022.
The balance sheet at December 31, 2021 has been derived from the audited financial statements at that date but does not include all
of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the financial
statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The
significant estimates affecting the accompanying financial statements are the fair values of RMBS and derivatives. Management believes
the estimates and assumptions underlying the financial statements are reasonable based on the information available as of March 31,
2022.
Variable Interest Entities (“VIEs”)
We obtain interests in VIEs through our investments in mortgage-backed securities. Our interests in these VIEs are passive in
nature and are not expected to result in us obtaining a controlling financial interest in these VIEs in the future. As a result, we do not
consolidate these VIEs and we account for our interest in these VIEs as mortgage-backed securities. See Note 2 for additional
information regarding our investments in mortgage-backed securities. Our maximum exposure to loss for these VIEs is the carrying
value of the mortgage-backed securities.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash on deposit with financial institutions and highly liquid investments with original maturities of
three months or less at the time of purchase. Restricted cash includes cash pledged as collateral for repurchase agreements and other
borrowings, and interest rate swaps and other derivative instruments.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial
position that sum to the total of the same such amounts shown in the statement of cash flows.
7
(in thousands)
March 31, 2022
December 31, 2021
Cash and cash equivalents
$
297,246
$
385,143
Restricted cash
130,199
65,299
Total cash, cash equivalents and restricted cash
$
427,445
$
450,442
The Company maintains cash balances at three banks and excess margin on account with two exchange clearing members. At times,
balances may exceed federally insured limits. The Company has not experienced any losses related to these balances. The Federal
Deposit Insurance Corporation insures eligible accounts up to $250,000 per depositor at each financial institution. Restricted cash
balances are uninsured, but are held in separate customer accounts that are segregated from the general funds of the counterparty. The
Company limits uninsured balances to only large, well-known banks and exchange clearing members and believes that it is not exposed to
any significant credit risk on cash and cash equivalents or restricted cash balances.
Mortgage-Backed Securities and U.S. Treasury Notes
The Company invests primarily in mortgage pass-through (“PT”) residential mortgage backed securities (“RMBS”) and collateralized
mortgage obligations (“CMOs”) issued by Freddie Mac, Fannie Mae or Ginnie Mae, interest-only (“IO”) securities and inverse interest-only
(“IIO”) securities representing interest in or obligations backed by pools of RMBS. We refer to RMBS and CMOs as PT RMBS. We refer
to IO and IIO securities as structured RMBS. The Company also invests in U.S. Treasury Notes, primarily to satisfy collateral
requirements of derivative counterparties. The Company has elected to account for its investment in RMBS and U.S. Treasury Notes
under the fair value option. Electing the fair value option requires the Company to record changes in fair value in the statement of
operations, which, in management’s view, more appropriately reflects the results of our operations for a particular reporting period and
is consistent with the underlying economics and how the portfolio is managed.
The Company records securities transactions on the trade date. Security purchases that have not settled as of the balance sheet date
are included in the portfolio balance with an offsetting liability recorded, whereas securities sold that have not settled as of the balance
sheet date are removed from the portfolio balance with an offsetting receivable recorded.
Fair value is defined as the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction
between market participants at the measurement date. The fair value measurement assumes that the transaction to sell the asset or
transfer the liability either occurs in the principal market for the asset or liability, or in the absence of a principal market, occurs in the most
advantageous market for the asset or liability. Estimated fair values for RMBS are based on independent pricing sources and/or third party
broker quotes, when available. Estimated fair values for U.S. Treasury Notes are based on quoted prices for identical assets in active
markets.
Income on PT RMBS and U.S. Treasury Notes is based on the stated interest rate of the security. Premiums or discounts present at
the date of purchase are not amortized. Premium lost and discount accretion resulting from monthly principal repayments are reflected in
unrealized gains (losses) on RMBS in the statements of operations. For IO securities, the income is accrued based on the carrying value
and the effective yield. The difference between income accrued and the interest received on the security is characterized as a return of
investment and serves to reduce the asset’s carrying value. At each reporting date, the effective yield is adjusted prospectively for future
reporting periods based on the new estimate of prepayments and the contractual terms of the security. For IIO securities, effective yield
and income recognition calculations also take into account the index value applicable to the security. Changes in fair value of RMBS during
each reporting period are recorded in earnings and reported as unrealized gains or losses on mortgage-backed securities in the
accompanying statements of operations.
8
Derivative and Other Hedging Instruments
The Company uses derivative and other hedging instruments to manage interest rate risk, facilitate asset/liability strategies and
manage other exposures, and it may continue to do so in the future. The principal instruments that the Company has used to date are
Treasury Note (“T-Note”), federal funds (“Fed Funds”) and Eurodollar futures contracts, short positions in U.S. Treasury securities, interest
rate swaps, options to enter in interest rate swaps (“interest rate swaptions”) and “to-be-announced” (“TBA”) securities transactions, but the
Company may enter into other derivative and other hedging instruments in the future.
The Company accounts for TBA securities as derivative instruments. Gains and losses associated with TBA securities transactions
are reported in gain (loss) on derivative instruments in the accompanying statements of operations.
Derivative and other hedging instruments are carried at fair value, and changes in fair value are recorded in earnings for each period.
The Company’s derivative financial instruments are not designated as hedge accounting relationships, but rather are used as economic
hedges of its portfolio assets and liabilities. Gains and losses on derivatives, except those that result in cash receipts or payments, are
included in operating activities on the statement of cash flows. Cash payments and cash receipts from settlements of derivatives, including
current period net cash settlements on interest rates swaps, are classified as an investing activity on the statements of cash flows.
Holding derivatives creates exposure to credit risk related to the potential for failure on the part of counterparties and exchanges to
honor their commitments. In the event of default by a counterparty, the Company may have difficulty recovering its collateral and may not
receive payments provided for under the terms of the agreement. The Company’s derivative agreements require it to post or receive
collateral to mitigate such risk. In addition, the Company uses only registered central clearing exchanges and well-established commercial
banks as counterparties, monitors positions with individual counterparties and adjusts posted collateral as required.
Financial Instruments
The fair value of financial instruments for which it is practicable to estimate that value is disclosed either in the body of the financial
statements or in the accompanying notes. RMBS, Eurodollar, Fed Funds and T-Note futures contracts, interest rate swaps, interest rate
swaptions and TBA securities are accounted for at fair value in the balance sheets. The methods and assumptions used to estimate fair
value for these instruments are presented in Note 12 of the financial statements.
The estimated fair value of cash and cash equivalents, restricted cash, accrued interest receivable, receivable for securities sold,
other assets, due to affiliates, repurchase agreements, payable for unsettled securities purchased, accrued interest payable and other
liabilities generally approximates their carrying values as of March 31, 2022 and December 31, 2021 due to the short-term nature of these
financial instruments.
Repurchase Agreements
The Company finances the acquisition of the majority of its RMBS through the use of repurchase agreements under master
repurchase agreements. Repurchase agreements are accounted for as collateralized financing transactions, which are carried at their
contractual amounts, including accrued interest, as specified in the respective agreements.
Manager Compensation
The Company is externally managed by Bimini Advisors, LLC (the “Manager” or “Bimini Advisors”), a Maryland limited liability
company and wholly-owned subsidiary of Bimini. The Company’s management agreement with the Manager provides for payment to the
Manager of a management fee and reimbursement of certain operating expenses, which are accrued and expensed during the period for
which they are earned or incurred. Refer to Note 13 for the terms of the management agreement.
9
Earnings Per Share
Basic earnings per share (“EPS”) is calculated as net income or loss attributable to common stockholders divided by the weighted
average number of shares of common stock outstanding or subscribed during the period. Diluted EPS is calculated using the treasury
stock or two-class method, as applicable, for common stock equivalents, if any. However, the common stock equivalents are not included
in computing diluted EPS if the result is anti-dilutive.
Stock-Based Compensation
The Company may grant equity-based compensation to non-employee members of its Board of Directors and to the executive officers
and employees of the Manager. Stock-based awards issued include performance units, deferred stock units and immediately vested
common stock awards. Compensation expense is measured and recognized for all stock-based payment awards made to employees and
non-employee directors based on the fair value of our common stock on the date of grant. Compensation expense is recognized over each
award’s respective service period using the graded vesting attribution method. We do not estimate forfeiture rates; rather, we adjust for
forfeitures in the periods in which they occur.
Income Taxes
Orchid has elected and is organized and operated so as to qualify to be taxed as a real estate investment trust (“REIT”) under the
Internal Revenue Code of 1986, as amended (the “Code”). REITs are generally not subject to federal income tax on their REIT taxable
income provided that they distribute to their stockholders all of their REIT taxable income on an annual basis. A REIT must distribute at
least 90% of its REIT taxable income, determined without regard to the deductions for dividends paid and excluding net capital gain,
and meet other requirements of the Code to retain its tax status.
Orchid assesses the likelihood, based on their technical merit, that uncertain tax positions will be sustained upon examination
based on the facts, circumstances and information available at the end of each period. All of Orchid’s tax positions are categorized as
highly certain. There is no accrual for any tax, interest or penalties related to Orchid’s tax position assessment. The measurement of
uncertain tax positions is adjusted when new information is available, or when an event occurs that requires a change.
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04 “
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate
Reform on Financial Reporting.
” ASU 2020-04 provides optional expedients and exceptions to GAAP requirements for modifications
on debt instruments, leases, derivatives, and other contracts, related to the expected market transition from the London Interbank
Offered Rate (“LIBOR”), and certain other floating rate benchmark indices, or collectively, IBORs, to alternative reference rates. ASU
2020-04 generally considers contract modifications related to reference rate reform to be an event that does not require contract
remeasurement at the modification date nor a reassessment of a previous accounting determination. The guidance in ASU 2020-04 is
optional and may be elected over time, through December 31, 2022, as reference rate reform activities occur. The Company does not
believe the adoption of this ASU will have a material impact on its consolidated financial statements.
10
In January 2021, the FASB issued ASU 2021-01 “
Reference Rate Reform (Topic 848
).” ASU 2021-01 expands the scope of ASC
848 to include all affected derivatives and give market participants the ability to apply certain aspects of the contract modification and
hedge accounting expedients to derivative contracts affected by the discounting transition. In addition, ASU 2021-01 adds
implementation guidance to permit a company to apply certain optional expedients to modifications of interest rate indexes used for
margining, discounting or contract price alignment of certain derivatives as a result of reference rate reform initiatives and extends
optional expedients to account for a derivative contract modified as a continuation of the existing contract and to continue hedge
accounting when certain critical terms of a hedging relationship change to modifications made as part of the discounting transition. The
guidance in ASU 2021-01 is effective immediately and available generally through December 31, 2022, as reference rate reform
activities occur. The Company does not believe the adoption of this ASU will have a material impact on its financial statements.
NOTE 2. MORTGAGE-BACKED SECURITIES AND U.S. TREASURY NOTES
The following table presents the Company’s RMBS portfolio as of March 31, 2022 and December 31, 2021:
(in thousands)
March 31, 2022
December 31, 2021
Pass-Through RMBS Certificates:
Fixed-rate Mortgages
$
4,372,517
$
6,298,189
Total Pass-Through Certificates
4,372,517
6,298,189
Structured RMBS Certificates:
Interest-Only Securities
206,617
210,382
Inverse Interest-Only Securities
1,460
2,524
Total Structured RMBS Certificates
208,077
212,906
Total
$
4,580,594
$
6,511,095
As of March 31, 2022 and December 31, 2021, the Company held U.S. Treasury Notes with a fair value of approximately $
36.5
and $
37.2
The following table is a summary of our net gain (loss) from the sale of RMBS for the three months ended March 31, 2022 and 2021.
Three Months Ended March 31,
2022
2021
Proceeds from sales of RMBS
$
1,413,039
$
988,523
Carrying value of RMBS sold
(1,464,125)
(995,920)
Net (loss) gain on sales of RMBS
$
(51,086)
$
(7,397)
Gross gain on sales of RMBS
$
709
$
2,813
Gross loss on sales of RMBS
(51,795)
(10,210)
Net (loss) gain on sales of RMBS
$
(51,086)
$
(7,397)
NOTE 3. REPURCHASE AGREEMENTS
The Company pledges certain of its RMBS as collateral under repurchase agreements with financial institutions. Interest rates are
generally fixed based on prevailing rates corresponding to the terms of the borrowings, and interest is generally paid at the termination of a
borrowing. If the fair value of the pledged securities declines, lenders will typically require the Company to post additional collateral or pay
down borrowings to re-establish agreed upon collateral requirements, referred to as "margin calls." Similarly, if the fair value of the pledged
securities increases, lenders may release collateral back to the Company. As of March 31, 2022, the Company had met all margin call
requirements.
As of March 31, 2022 and December 31, 2021, the Company’s repurchase agreements had remaining maturities as summarized
below:
11
($ in thousands)
OVERNIGHT
BETWEEN 2
BETWEEN 31
GREATER
(1 DAY OR
AND
AND
THAN
LESS)
30 DAYS
90 DAYS
90 DAYS
TOTAL
March 31, 2022
Fair market value of securities pledged, including
accrued interest receivable
$
-
$
3,966,753
$
576,875
$
48,035
$
4,591,663
Repurchase agreement liabilities associated with
these securities
$
-
$
3,848,289
$
564,223
$
51,597
$
4,464,109
Net weighted average borrowing rate
-
0.36%
0.42%
0.15%
0.37%
December 31, 2021
Fair market value of securities pledged, including
accrued interest receivable
$
-
$
4,624,396
$
1,848,080
$
52,699
$
6,525,175
Repurchase agreement liabilities associated with
these securities
$
-
$
4,403,182
$
1,789,327
$
51,597
$
6,244,106
Net weighted average borrowing rate
-
0.15%
0.13%
0.15%
0.15%
In addition, cash pledged to counterparties for repurchase agreements was approximately $113.6 million and $57.3 million as of
March 31, 2022 and December 31, 2021, respectively.
If, during the term of a repurchase agreement, a lender files for bankruptcy, the Company might experience difficulty recovering its
pledged assets, which could result in an unsecured claim against the lender for the difference between the amount loaned to the Company
plus interest due to the counterparty and the fair value of the collateral pledged to such lender, including the accrued interest receivable
and cash posted by the Company as collateral. At March 31, 2022, the Company had an aggregate amount at risk (the difference
between the amount loaned to the Company, including interest payable and securities posted by the counterparty (if any), and the fair
value of securities and cash pledged (if any), including accrued interest on such securities) with all counterparties of approximately $
240.1
million. The Company did not have an amount at risk with any individual counterparty that was greater than 10% of the Company’s equity
at March 31, 2022 and December 31, 2021.
NOTE 4. DERIVATIVE AND OTHER HEDGING INSTRUMENTS
The table below summarizes fair value information about our derivative and other hedging instruments assets and liabilities as of
March 31, 2022 and December 31, 2021.
(in thousands)
Derivative and Other Hedging Instruments
Balance Sheet Location
March 31, 2022
December 31, 2021
Assets
Interest rate swaps
Derivative assets, at fair value
$
65,194
$
29,293
Payer swaptions (long positions)
Derivative assets, at fair value
60,362
21,493
Interest rate caps
Derivative assets, at fair value
1,354
-
Total derivative assets, at fair value
$
126,910
$
50,786
Liabilities
Interest rate swaps
Derivative liabilities, at fair value
$
-
$
2,862
Payer swaptions (short positions)
Derivative liabilities, at fair value
25,535
4,423
TBA securities
Derivative liabilities, at fair value
-
304
Total derivative liabilities, at fair value
$
25,535
$
7,589
Margin Balances Posted to (from) Counterparties
Futures contracts
Restricted cash
$
16,610
$
8,035
TBA securities
Other liabilities
-
(856)
Interest rate swaption contracts
Other liabilities
(34,983)
(6,350)
12
Total margin balances on derivative contracts
$
(18,373)
$
829
Eurodollar, Fed Funds and T-Note futures are cash settled futures contracts on an interest rate, with gains and losses credited or
charged to the Company’s cash accounts on a daily basis. A minimum balance, or “margin”, is required to be maintained in the account on
a daily basis.
The tables below present information related to the Company’s T-Note futures positions at March 31, 2022 and December
31, 2021.
($ in thousands)
March 31, 2022
Average
Weighted
Weighted
Contract
Average
Average
Notional
Entry
Effective
Open
Expiration Year
Amount
Rate
Rate
Equity
(1)
Treasury Note Futures Contracts (Short Positions)
(2)
June 2022 5-year T-Note futures
(Jun 2022 - Jun 2027 Hedge Period)
$
1,194,000
2.25%
2.83%
$
32,928
June 2022 10-year Ultra futures
(Jun 2022 - Jun 2032 Hedge Period)
$
270,000
1.68%
2.06%
$
10,983
($ in thousands)
December 31, 2021
Average
Weighted
Weighted
Contract
Average
Average
Notional
Entry
Effective
Open
Expiration Year
Amount
Rate
Rate
Equity
(1)
Treasury Note Futures Contracts (Short Position)
(2)
March 2022 5-year T-Note futures
(Mar 2022 - Mar 2027 Hedge Period)
$
369,000
1.56%
1.62%
$
1,013
March 2022 10-year Ultra futures
(Mar 2022 - Mar 2032 Hedge Period)
$
220,000
1.22%
1.09%
$
(3,861)
(1)
Open equity represents the cumulative gains (losses) recorded on open futures positions from inception.
(2)
5-Year T-Note futures contracts were valued at a price of $
114.69
120.98
of the short positions were $
1,369.4
446.4
contracts were valued at a price of $
135.47
146.44
$
365.8
322.2
Under our interest rate swap agreements, we typically pay a fixed rate and receive a floating rate based on an index ("payer swaps").
The floating rate we receive under our swap agreements has the effect of offsetting the repricing characteristics of our repurchase
agreements and cash flows on such liabilities. We are typically required to post collateral on our interest rate swap agreements. The table
below presents information related to the Company’s interest rate swap positions at March 31, 2022 and December 31, 2021.
13
($ in thousands)
Average
Net
Fixed
Average
Estimated
Average
Notional
Pay
Receive
Fair
Maturity
Amount
Rate
Rate
Value
(Years)
March 31, 2022
Expiration > 3 to ≤ 5 years
$
300,000
0.95%
0.93%
$
18,138
4.0
Expiration > 5 years
1,100,000
1.51%
0.37%
47,056
7.0
$
1,400,000
1.39%
0.49%
$
65,194
6.3
December 31, 2021
Expiration > 3 to ≤ 5 years
$
955,000
0.64%
0.16%
$
21,788
4.0
Expiration > 5 years
400,000
1.16%
0.21%
4,643
7.3
$
1,355,000
0.79%
0.18%
$
26,431
5.0
The table below presents information related to the Company’s interest rate cap positions at March 31, 2022.
($ in thousands)
Net
Strike
Estimated
Notional
Swap
Curve
Fair
Expiration
Amount
Cost
Rate
Spread
Value
February 8, 2024
$
200,000
$
2,350
0.09%
10Y2Y
$
1,354
The table below presents information related to the Company’s interest rate swaption positions at March 31, 2022 and
2021.
($ in thousands)
Option
Underlying Swap
Weighted
Average
Weighted
Average
Average
Adjustable
Average
Fair
Months to
Notional
Fixed
Rate
Term
Expiration
Cost
Value
Expiration
Amount
Rate
(LIBOR)
(Years)
March 31, 2022
Payer Swaptions - long
≤ 1 year
$
31,905
$
33,040
11.3
$
1,282,400
2.44%
3 Month
11.3
>1 year ≤ 2 years
15,300
27,322
18.8
728,400
2.52%
3 Month
10.0
$
47,205
$
60,362
14.0
$
2,010,800
2.47%
3 Month
10.8
Payer Swaptions - short
≤ 1 year
$
(19,540)
$
(25,535)
5.8
$
(1,433,000)
2.47%
3 Month
10.8
December 31, 2021
Payer Swaptions - long
≤ 1 year
$
4,000
$
1,575
3.2
$
400,000
1.66%
3 Month
5.0
>1 year ≤ 2 years
32,690
19,918
18.4
1,258,500
2.46%
3 Month
14.1
$
36,690
$
21,493
14.7
$
1,658,500
2.27%
3 Month
11.9
Payer Swaptions - short
≤ 1 year
$
(16,185)
$
(4,423)
5.3
$
(1,331,500)
2.29%
3 Month
11.4
14
The following table summarizes our contracts to purchase and sell TBA securities as of December 31, 2021
. There were no
outstanding TBA contracts as of March 31, 2022.
($ in thousands)
Notional
Net
Amount
Cost
Market
Carrying
Long (Short)
(1)
Basis
(2)
Value
(3)
Value
(4)
December 31, 2021
30-Year TBA securities:
3.0%
$
(575,000)
$
(595,630)
$
(595,934)
$
(304)
Total
$
(575,000)
$
(595,630)
$
(595,934)
$
(304)
(1)
Notional amount represents the par value (or principal balance) of the underlying Agency RMBS.
(2)
Cost basis represents the forward price to be paid (received) for the underlying Agency RMBS.
(3)
Market value represents the current market value of the TBA securities (or of the underlying Agency RMBS) as of period-end.
(4)
Net carrying value represents the difference between the market value and the cost basis of the TBA securities as of period-end and is reported
in derivative assets (liabilities) at fair value in our balance sheets.
Gain (Loss) From Derivative and Other Hedging Instruments, Net
The table below presents the effect of the Company’s derivative and other hedging instruments on the statements of operations for
the three months ended March 31, 2022 and 2021.
(in thousands)
Three Months Ended March 31,
2022
2021
T-Note futures contracts (short position)
$
79,895
$
2,476
Eurodollar futures contracts (short positions)
-
12
Interest rate swaps
66,284
27,123
Payer swaptions (short positions)
(10,908)
(26,167)
Payer swaptions (long positions)
40,975
40,070
Interest rate caps
(996)
-
Interest rate floors
-
1,384
TBA securities (short positions)
2,539
9,133
TBA securities (long positions)
27
(8,559)
Total
$
177,816
$
45,472
Credit Risk-Related Contingent Features
The use of derivatives and other hedging instruments creates exposure to credit risk relating to potential losses that could be
recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. We attempt to
minimize this risk by limiting our counterparties for instruments which are not centrally cleared on a registered exchange to major financial
institutions with acceptable credit ratings and monitoring positions with individual counterparties. In addition, we may be required to
pledge assets as collateral for our derivatives, whose amounts vary over time based on the market value, notional amount and remaining
term of the derivative contract. In the event of a default by a counterparty, we may not receive payments provided for under the terms of
our derivative agreements, and may have difficulty obtaining our assets pledged as collateral for our derivatives. The cash and cash
equivalents pledged as collateral for our derivative instruments are included in restricted cash on our balance sheets.
It is the Company's policy not to offset assets and liabilities associated with open derivative contracts. However, the Chicago
Mercantile Exchange (“CME”) rules characterize variation margin transfers as settlement payments, as opposed to adjustments to
collateral. As a result, derivative assets and liabilities associated with centrally cleared derivatives for which the CME serves as the central
clearing party are presented as if these derivatives had been settled as of the reporting date.
15
NOTE 5. PLEDGED ASSETS
Assets Pledged to Counterparties
The table below summarizes our assets pledged as collateral under our repurchase agreements and derivative agreements by type,
including securities pledged related to securities sold but not yet settled, as of March 31, 2022 and December 31, 2021.
(in thousands)
March 31, 2022
December 31, 2021
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Counterparties
Agreements
Agreements
Total
Agreements
Agreements
Total
PT RMBS - fair value
$
4,369,564
$
-
$
4,369,564
$
6,294,102
$
-
$
6,294,102
Structured RMBS - fair value
207,283
-
207,283
212,270
-
212,270
U.S. Treasury Notes
-
36,477
36,477
-
29,740
29,740
Accrued interest on pledged securities
14,816
3
14,819
18,804
13
18,817
Restricted cash
113,589
16,610
130,199
57,264
8,035
65,299
Total
$
4,705,252
$
53,090
$
4,758,342
$
6,582,440
$
37,788
$
6,620,228
Assets Pledged from Counterparties
The table below summarizes assets pledged to us from counterparties under our repurchase agreements and derivative agreements
as of March 31, 2022 and December 31, 2021.
(in thousands)
March 31, 2022
December 31, 2021
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Orchid
Agreements
Agreements
Total
Agreements
Agreements
Total
Cash
$
4,172
$
34,983
$
39,155
$
4,339
$
7,206
$
11,545
Total
$
4,172
$
34,983
$
39,155
$
$
4,339
$
7,206
$
11,545
Cash received as margin is recognized as cash and cash equivalents with a corresponding amount recognized as an increase in
repurchase agreements or other liabilities in the balance sheets.
NOTE 6. OFFSETTING ASSETS AND LIABILITIES
The Company’s derivative agreements and repurchase agreements and reverse repurchase agreements are subject to underlying
agreements with master netting or similar arrangements, which provide for the right of offset in the event of default or in the event of
bankruptcy of either party to the transactions. The Company reports its assets and liabilities subject to these arrangements on a gross
basis.
16
The following table presents information regarding those assets and liabilities subject to such arrangements as if the Company had
presented them on a net basis as of March 31, 2022 and December 31, 2021.
(in thousands)
Offsetting of Assets
Gross Amount Not
Net Amount
Offset in the Balance Sheet
of Assets
Financial
Gross Amount
Gross Amount
Presented
Instruments
Cash
of Recognized
Offset in the
in the
Received as
Received as
Net
Assets
Balance Sheet
Balance Sheet
Collateral
Collateral
Amount
March 31, 2022
Interest rate swaps
$
65,194
$
-
$
65,194
$
-
$
-
$
65,194
Interest rate swaptions
60,362
-
60,362
-
(34,983)
25,379
Interest rate caps
1,354
-
1,354
-
-
1,354
$
126,910
$
-
$
126,910
$
-
$
(34,983)
$
91,927
December 31, 2021
Interest rate swaps
$
29,293
$
-
$
29,293
$
-
$
-
$
29,293
Interest rate swaptions
21,493
-
21,493
-
(6,350)
15,143
$
50,786
$
-
$
50,786
$
-
$
(6,350)
$
44,436
(in thousands)
Offsetting of Liabilities
Gross Amount Not
Net Amount
Offset in the Balance Sheet
of Liabilities
Financial
Gross Amount
Gross Amount
Presented
Instruments
of Recognized
Offset in the
in the
Posted as
Cash Posted
Net
Liabilities
Balance Sheet
Balance Sheet
Collateral
as Collateral
Amount
March 31, 2022
Repurchase Agreements
$
4,464,109
$
-
$
4,464,109
$
(4,350,520)
$
(113,589)
$
-
Interest rate swaptions
25,535
-
25,535
-
-
25,535
$
4,489,644
$
-
$
4,489,644
$
(4,350,520)
$
(113,589)
$
25,535
December 31, 2021
Repurchase Agreements
$
6,244,106
$
-
$
6,244,106
$
(6,186,842)
$
(57,264)
$
-
Interest rate swaps
2,862
-
2,862
(2,862)
-
-
Interest rate swaptions
4,423
-
4,423
-
-
4,423
TBA securities
304
-
304
-
-
304
$
6,251,695
$
-
$
6,251,695
$
(6,189,704)
$
(57,264)
$
4,727
The amounts disclosed for collateral received by or posted to the same counterparty up to and not exceeding the net amount of the
asset or liability presented in the balance sheets. The fair value of the actual collateral received by or posted to the same counterparty
typically exceeds the amounts presented. See Note 5 for a discussion of collateral posted or received against or for repurchase obligations
and derivative and other hedging instruments.
17
NOTE 7. CAPITAL STOCK
Common Stock Issuances
The Company did not complete any public offerings of its common stock during the three months ended March 31, 2022. During the
year ended December 31, 2021, the Company completed the following public offerings of shares of its common stock.
($ in thousands, except per share amounts)
Weighted
Average
Price
Received
Net
Type of Offering
Period
Per Share
(1)
Shares
Proceeds
(2)
At the Market Offering Program
(3)
First Quarter
$
5.10
308,048
$
1,572
Follow-on Offerings
First Quarter
5.31
17,940,000
95,336
At the Market Offering Program
(3)
Second Quarter
5.40
23,087,089
124,746
At the Market Offering Program
(3)
Third Quarter
4.94
35,818,338
177,007
At the Market Offering Program
(3)
Fourth Quarter
4.87
23,674,698
115,398
100,828,173
$
514,059
(1)
Weighted average price received per share is after deducting the underwriters’ discount, if applicable, and other offering costs.
(2)
Net proceeds are net of the underwriters’ discount, if applicable, and other offering costs.
(3)
The Company has entered into ten equity distribution agreements, nine of which have either been terminated because all shares were sold or
were replaced with a subsequent agreement.
Stock Repurchase Program
On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to
2,000,000
common stock. On February 8, 2018, the Board of Directors approved an increase in the stock repurchase program for up to an
additional
4,522,822
783,757
2,000,000
share authorization, the increased authorization brought the total authorization to
5,306,579
Company’s then outstanding share count.
On December 9, 2021, the Board of Directors approved an increase in the number of shares of the Company’s common stock
available in the stock repurchase program for up to an additional
16,861,994
stock repurchase program to
17,699,305
common stock.
As part of the stock repurchase program, shares may be purchased in open market transactions, block purchases, through
privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). Open market repurchases will be made in accordance with Exchange Act
Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of open market stock repurchases. The timing,
manner, price and amount of any repurchases will be determined by the Company in its discretion and will be subject to economic and
market conditions, stock price, applicable legal requirements and other factors. The authorization does not obligate the Company to
acquire any particular amount of common stock and the program may be suspended or discontinued at the Company’s discretion
without prior notice.
18
From the inception of the stock repurchase program through March 31, 2022, the Company repurchased a total of
5,685,511
shares at an aggregate cost of approximately $
40.4
7.10
share. No shares were repurchased during the three months ended March 31, 2022 or during the year ended December 31, 2021. The
remaining authorization under the stock repurchase program as of March 31, 2022 was
17,699,305
Cash Dividends
The table below presents the cash dividends declared on the Company’s common stock.
(in thousands, except per share amounts)
Year
Per Share
Amount
Total
2013
$
1.395
$
4,662
2014
2.160
22,643
2015
1.920
38,748
2016
1.680
41,388
2017
1.680
70,717
2018
1.070
55,814
2019
0.960
54,421
2020
0.790
53,570
2021
0.780
97,601
2022 - YTD
(1)
0.200
35,484
Totals
$
12.635
$
475,048
(1)
On
April 13, 2022
, the Company declared a dividend of $
0.045
May 27, 2022
. The effect of this dividend is included in
the table above but is not reflected in the Company’s financial statements as of March 31, 2022.
NOTE 8. STOCK INCENTIVE PLAN
In 2021, the Company’s Board of Directors adopted, and the stockholders approved, the Orchid Island Capital, Inc. 2021 Equity
Incentive Plan (the “2021 Incentive Plan”) to replace the Orchid Island Capital, Inc. 2012 Equity Incentive Plan (the “2012 Incentive Plan”
and together with the 2021 Incentive Plan, the “Incentive Plans”). The 2021 Incentive Plan provides for the award of stock options, stock
appreciation rights, stock award, performance units, other equity-based awards (and dividend equivalents with respect to awards of
performance units and other equity-based awards) and incentive awards. The 2021 Incentive Plan is administered by the Compensation
Committee of the Company’s Board of Directors except that the Company’s full Board of Directors will administer awards made to directors
who are not employees of the Company or its affiliates. The 2021 Incentive Plan provides for awards of up to an aggregate of
10
% of the
issued and outstanding shares of our common stock (on a fully diluted basis) at the time of the awards, subject to a maximum aggregate
7,366,623
the 2012 Incentive Plan, and no further grants will be made under the 2012 Incentive Plan. However, any outstanding awards under the
2012 Incentive Plan will continue in accordance with the terms of the 2012 Incentive Plan and any award agreement executed in
connection with such outstanding awards.
19
Performance Units
The Company has issued, and may in the future issue additional, performance units under the Incentive Plans to certain executive
officers and employees of its Manager. “Performance Units” vest after the end of a defined performance period, based on satisfaction of
the performance conditions set forth in the performance unit agreement. When earned, each Performance Unit will be settled by the
issuance of one share of the Company’s common stock, at which time the Performance Unit will be cancelled. The Performance Units
contain dividend equivalent rights, which entitle the Participants to receive distributions declared by the Company on common stock, but do
not include the right to vote the underlying shares of common stock. Performance Units are subject to forfeiture should the participant no
longer serve as an executive officer or employee of the Company or the Manager. Compensation expense for the Performance Units,
included in incentive compensation on the statements of operations, is recognized over the remaining vesting period once it becomes
probable that the performance conditions will be achieved.
The following table presents information related to Performance Units outstanding during the three months ended March 31, 2022 and
2021.
($ in thousands, except per share data)
Three Months Ended March 31,
2022
2021
Weighted
Weighted
Average
Average
Grant Date
Grant Date
Shares
Fair Value
Shares
Fair Value
Unvested, beginning of period
133,223
$
5.88
4,554
$
7.45
Granted
175,572
3.31
137,897
5.88
Vested and issued
(13,322)
5.88
(2,277)
7.45
Unvested, end of period
295,473
$
4.35
140,174
$
5.91
Compensation expense during period
$
106
$
3
Unrecognized compensation expense, end of period
$
942
$
812
Intrinsic value, end of period
$
960
$
842
Weighted-average remaining vesting term (in years)
1.8
2.1
Stock Awards
The Company has issued, and may in the future issue additional, immediately vested common stock under the Incentive Plans to
certain executive officers and employees of its Manager.
The following table presents information related to fully vested common stock
issued during the three months ended March 31, 2022 and 2021. All of the fully vested shares of common stock issued during the three
months ended March 31, 2022 and 2021, and the related compensation expense, were granted with respect to service performed during
the fiscal years ended December 31, 2021 and 2020, respectively.
($ in thousands, except per share data)
Three Months Ended March 31,
2022
2021
Fully vested shares granted
175,572
137,897
Weighted average grant date price per share
$
3.31
$
5.88
Compensation expense related to fully vested shares of common stock awards
$
581
$
811
20
Deferred Stock Units
Non-employee directors receive a portion of their compensation in the form of deferred stock unit awards (“DSUs”) pursuant to the
Incentive Plans. Each DSU represents a right to receive one share of the Company’s common stock. Beginning in 2022, each non-
employee director can elect to receive all of his or her compensation in the form of DSUs The DSUs are immediately vested and are
settled at a future date based on the election of the individual participant. Compensation expense for the DSUs is included in directors’
fees and liability insurance in the statements of operations. The DSUs contain dividend equivalent rights, which entitle the participant to
receive distributions declared by the Company on common stock. These dividend equivalent rights are settled in cash or additional DSUs
at the participant’s election. The DSUs do not include the right to vote the underlying shares of common stock.
The following table presents information related to the DSUs outstanding during the three months ended March 31, 2022 and 2021.
($ in thousands, except per share data)
Three Months Ended March 31,
2022
2021
Weighted
Weighted
Average
Average
Grant Date
Grant Date
Shares
Fair Value
Shares
Fair Value
Outstanding, beginning of period
142,976
$
5.38
90,946
$
5.44
Granted and vested
15,273
4.39
10,422
5.31
Outstanding, end of period
158,249
$
5.29
101,368
$
5.43
Compensation expense during period
$
75
$
45
Intrinsic value, end of period
$
514
$
609
NOTE 9. COMMITMENTS AND CONTINGENCIES
From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of
business. Management is not aware of any reported or unreported contingencies at March 31, 2022.
NOTE 10. INCOME TAXES
The Company will generally not be subject to U.S. federal income tax on its REIT taxable income to the extent that it distributes its
REIT taxable income to its stockholders and satisfies the ongoing REIT requirements, including meeting certain asset, income and
stock ownership tests. A REIT must generally distribute at least 90% of its REIT taxable income, determined without regard to the
deductions for dividends paid and excluding net capital gain, to its stockholders, annually to maintain REIT status. An amount equal to
the sum of which 85% of its REIT ordinary income and 95% of its REIT capital gain net income, plus certain undistributed income from
prior taxable years, must be distributed within the taxable year, in order to avoid the imposition of an excise tax. The remaining
balance may be distributed up to the end of the following taxable year, provided the REIT elects to treat such amount as a prior year
distribution and meets certain other requirements.
21
NOTE 11. EARNINGS PER SHARE (EPS)
The Company had dividend eligible Performance Units and Deferred Stock Units that were outstanding during the three months
ended March 31, 2022 and 2021. The basic and diluted per share computations include these unvested Performance Units and Deferred
Stock Units if there is income available to common stock, as they have dividend participation rights. The unvested Performance Units and
Deferred Stock Units have no contractual obligation to share in losses. Because there is no such obligation, the unvested Performance
Units and Deferred Stock Units are not included in the basic and diluted EPS computations when no income is available to common stock
even though they are considered participating securities.
The table below reconciles the numerator and denominator of EPS for the three months ended March 31, 2022 and 2021.
(in thousands, except per share information)
Three Months Ended March 31,
2022
2021
Basic and diluted EPS per common share:
Numerator for basic and diluted EPS per share of common stock:
Net loss - Basic and diluted
$
(148,727)
$
(29,369)
Weighted average shares of common stock:
Shares of common stock outstanding at the balance sheet date
177,117
94,411
Effect of weighting
(119)
(9,066)
Weighted average shares-basic and diluted
176,998
85,345
Net loss per common share:
Basic and diluted
$
(0.84)
$
(0.34)
Anti-dilutive incentive shares not included in calculation
454
242
NOTE 12. FAIR VALUE
The framework for using fair value to measure assets and liabilities defines fair value as the price that would be received to sell an
asset or paid to transfer a liability (an exit price). A fair value measure should reflect the assumptions that market participants would use in
pricing the asset or liability, including the assumptions about the risk inherent in a particular valuation technique, the effect of a restriction
on the sale or use of an asset and the risk of non-performance. Required disclosures include stratification of balance sheet amounts
measured at fair value based on inputs the Company uses to derive fair value measurements. These stratifications are:
●
Level 1 valuations, where the valuation is based on quoted market prices for identical assets or liabilities traded in active markets
(which include exchanges and over-the-counter markets with sufficient volume),
●
Level 2 valuations, where the valuation is based on quoted market prices for similar instruments traded in active markets, quoted
prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all
significant assumptions are observable in the market, and
●
Level 3 valuations, where the valuation is generated from model-based techniques that use significant assumptions not
observable in the market, but observable based on Company-specific data. These unobservable assumptions reflect the
Company’s own estimates for assumptions that market participants would use in pricing the asset or liability. Valuation
techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the
use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability.
22
The Company's RMBS and TBA securities are Level 2 valuations, and such valuations currently are determined by the Company
based on independent pricing sources and/or third party broker quotes, when available. Because the price estimates may vary, the
Company must make certain judgments and assumptions about the appropriate price to use to calculate the fair values. The Company and
the independent pricing sources use various valuation techniques to determine the price of the Company’s securities. These techniques
include observing the most recent market for like or identical assets (including security coupon, maturity, yield, and prepayment speeds),
spread pricing techniques to determine market credit spreads (option adjusted spread, zero volatility spread, spread to the U.S. Treasury
curve or spread to a benchmark such as a TBA), and model driven approaches (the discounted cash flow method, Black Scholes and
SABR models which rely upon observable market rates such as the term structure of interest rates and volatility). The appropriate spread
pricing method used is based on market convention. The pricing source determines the spread of recently observed trade activity or
observable markets for assets similar to those being priced. The spread is then adjusted based on variances in certain characteristics
between the market observation and the asset being priced. Those characteristics include: type of asset, the expected life of the asset, the
stability and predictability of the expected future cash flows of the asset, whether the coupon of the asset is fixed or adjustable, the
guarantor of the security if applicable, the coupon, the maturity, the issuer, size of the underlying loans, year in which the underlying loans
were originated, loan to value ratio, state in which the underlying loans reside, credit score of the underlying borrowers and other variables
if appropriate. The fair value of the security is determined by using the adjusted spread.
The Company’s U.S. Treasury Notes are based on quoted prices for identical instruments in active markets and are classified as
Level 1 assets.
The Company’s futures contracts are Level 1 valuations, as they are exchange-traded instruments and quoted market prices are
readily available. Futures contracts are settled daily. The Company’s interest rate swaps and interest rate swaptions are Level 2
valuations. The fair value of interest rate swaps is determined using a discounted cash flow approach using forward market interest rates
and discount rates, which are observable inputs. The fair value of interest rate swaptions is determined using an option pricing model.
RMBS (based on the fair value option), derivatives and TBA securities were recorded at fair value on a recurring basis during the
three months ended March 31, 2022 and 2021. When determining fair value measurements, the Company considers the principal or most
advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset.
When possible, the Company looks to active and observable markets to price identical assets. When identical assets are not traded in
active markets, the Company looks to market observable data for similar assets.
The following table presents financial assets (liabilities) measured at fair value on a recurring basis as of March 31, 2022 and
December 31, 2021.
23
(in thousands)
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
Assets
Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
March 31, 2022
Mortgage-backed securities
$
-
$
4,580,594
$
-
U.S. Treasury Notes
36,477
-
-
Interest rate swaps
-
65,194
-
Interest rate swaptions
-
34,827
-
Interest rate caps
-
1,354
-
December 31, 2021
Mortgage-backed securities
$
-
$
6,511,095
$
-
U.S. Treasury Notes
37,175
-
-
Interest rate swaps
-
26,431
-
Interest rate swaptions
-
17,070
-
TBA securities
-
(304)
-
During the three months ended March 31, 2022 and 2021, there were no transfers of financial assets or liabilities between levels 1,
2 or 3.
NOTE 13. RELATED PARTY TRANSACTIONS
Management Agreement
The Company is externally managed and advised by Bimini Advisors, LLC (the “Manager”) pursuant to the terms of a
management agreement. The management agreement has been renewed through
February 20, 2023
year extension options thereafter and is subject to certain termination rights. Under the terms of the management agreement, the
Manager is responsible for administering the business activities and day-to-day operations of the Company. The Manager receives a
monthly management fee in the amount of:
●
One-twelfth of 1.5% of the first $250 million of the Company’s month-end equity, as defined in the management agreement,
●
One-twelfth of 1.25% of the Company’s month-end equity that is greater than $250 million and less than or equal to $500
million, and
●
One-twelfth of 1.00% of the Company’s month-end equity that is greater than $500 million.
On April 1, 2022, pursuant to the third amendment to the management agreement entered into on November 16, 2021, the
Manager began providing certain repurchase agreement trading, clearing and administrative services to the Company that had been
previously provided by AVM, L.P. under an agreement terminated on March 31, 2022. In consideration for such services, the Company
will pay the following fees to the Manager:
●
A daily fee equal to the outstanding principal balance of repurchase agreement funding in place as of the end of such day
multiplied by 1.5 basis points for the amount of aggregate outstanding principal balance less than or equal to $5 billion, and
multiplied by 1.0 basis points for any amount of aggregate outstanding principal balance in excess of $5 billion, and
●
A fee for the clearing and operational services provided by personnel of the Manager equal to $10,000 per month.
24
The Company is obligated to reimburse the Manager for any direct expenses incurred on its behalf and to pay the Manager the
Company’s pro rata portion of certain overhead costs set forth in the management agreement. Should the Company terminate the
management agreement without cause, it will pay the Manager a termination fee equal to three times the average annual management
fee, as defined in the management agreement, before or on the last day of the term of the agreement.
Total expenses recorded for the management fee and allocated overhead incurred were approximately $
3.1
2.0
million for the three months ended March 31, 2022 and 2021, respectively. At March 31, 2022 and December 31, 2021, the net amount
due to affiliates was approximately $
1.1
1.1
Other Relationships with Bimini
Robert Cauley, our Chief Executive Officer and Chairman of our Board of Directors, also serves as Chief Executive Officer and
Chairman of the Board of Directors of Bimini and owns shares of common stock of Bimini. George H. Haas, IV, our Chief Financial
Officer, Chief Investment Officer, Secretary and a member of our Board of Directors, also serves as the Chief Financial Officer, Chief
Investment Officer and Treasurer of Bimini and owns shares of common stock of Bimini. In addition, as of March 31, 2022, Bimini
owned
2,595,357
1.5
%, of the Company’s common stock.
25
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with the financial
statements and notes to those statements included in Item 1 of this Form 10-Q. The discussion may contain certain forward-looking
statements that involve risks and uncertainties. Forward-looking statements are those that are not historical in nature. As a result of
many factors, such as those set forth under “Risk Factors” in our most recent Annual Report on Form 10-K, our actual results may
differ materially from those anticipated in such forward-looking statements.
Overview
We are a specialty finance company that invests in residential mortgage-backed securities (“RMBS”) which are issued and
guaranteed by a federally chartered corporation or agency (“Agency RMBS”). Our investment strategy focuses on, and our portfolio
consists of, two categories of Agency RMBS: (i) traditional pass-through Agency RMBS, such as mortgage pass-through certificates
issued by Fannie Mae, Freddie Mac or Ginnie Mae (the “GSEs”) and collateralized mortgage obligations (“CMOs”) issued by the GSEs
(“PT RMBS”) and (ii) structured Agency RMBS, such as interest-only securities (“IOs”), inverse interest-only securities (“IIOs”) and
principal only securities (“POs”), among other types of structured Agency RMBS. We were formed by Bimini in August 2010,
commenced operations on November 24, 2010 and completed our initial public offering (“IPO”) on February 20, 2013. We are
externally managed by Bimini Advisors, an investment adviser registered with the Securities and Exchange Commission (the “SEC”).
Our business objective is to provide attractive risk-adjusted total returns over the long term through a combination of capital
appreciation and the payment of regular monthly distributions. We intend to achieve this objective by investing in and strategically
allocating capital between the two categories of Agency RMBS described above. We seek to generate income from (i) the net interest
margin on our leveraged PT RMBS portfolio and the leveraged portion of our structured Agency RMBS portfolio, and (ii) the interest
income we generate from the unleveraged portion of our structured Agency RMBS portfolio. We intend to fund our PT RMBS and
certain of our structured Agency RMBS through short-term borrowings structured as repurchase agreements. PT RMBS and structured
Agency RMBS typically exhibit materially different sensitivities to movements in interest rates. Declines in the value of one portfolio
may be offset by appreciation in the other. The percentage of capital that we allocate to our two Agency RMBS asset categories will
vary and will be actively managed in an effort to maintain the level of income generated by the combined portfolios, the stability of that
income stream and the stability of the value of the combined portfolios. We believe that this strategy will enhance our liquidity,
earnings, book value stability and asset selection opportunities in various interest rate environments.
We operate so as to qualify to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as
amended (the “Code”). We generally will not be subject to U.S. federal income tax to the extent that we currently distribute all of our
REIT taxable income (as defined in the Code) to our stockholders and maintain our REIT qualification.
The Company’s common stock trades on the New York Stock Exchange under the symbol “ORC”.
Capital Raising Activities
On August 4, 2020, we entered into an equity distribution agreement (the “August 2020 Equity Distribution Agreement”) with four
sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $150,000,000 of shares of our
common stock in transactions that were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total
of 27,493,650 shares under the August 2020 Equity Distribution Agreement for aggregate gross proceeds of approximately $150.0
million, and net proceeds of approximately $147.4 million, after commissions and fees, prior to its termination in June 2021.
26
On January 20, 2021, we entered into an underwriting agreement (the “January 2021 Underwriting Agreement”) with J.P. Morgan
Securities LLC (“J.P. Morgan”), relating to the offer and sale of 7,600,000 shares of our common stock. J.P. Morgan purchased the
shares of our common stock from the Company pursuant to the January 2021 Underwriting Agreement at $5.20 per share. In addition,
we granted J.P. Morgan a 30-day option to purchase up to an additional 1,140,000 shares of our common stock on the same terms and
conditions, which J.P. Morgan exercised in full on January 21, 2021. The closing of the offering of 8,740,000 shares of our common
stock occurred on January 25, 2021, with proceeds to us of approximately $45.2 million, net of offering expenses.
On March 2, 2021, we entered into an underwriting agreement (the “March 2021 Underwriting Agreement”) with J.P. Morgan,
relating to the offer and sale of 8,000,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from
the Company pursuant to the March 2021 Underwriting Agreement at $5.45 per share. In addition, we granted J.P. Morgan a 30-day
option to purchase up to an additional 1,200,000 shares of our common stock on the same terms and conditions, which J.P. Morgan
exercised in full on March 3, 2021. The closing of the offering of 9,200,000 shares of our common stock occurred on March 5, 2021,
with proceeds to us of approximately $50.0 million, net of offering expenses.
On June 22, 2021, we entered into an equity distribution agreement (the “June 2021 Equity Distribution Agreement”) with four
sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $250,000,000 of shares of our
common stock in transactions that were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total
of 49,407,336 shares under the June 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately $250.0
million, and net proceeds of approximately $246.2 million, after commissions and fees, prior to its termination in October 2021.
On October 29, 2021, we entered into an equity distribution agreement (the “October 2021 Equity Distribution Agreement”) with
four sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate amount of $250,000,000 of shares of
our common stock in transactions that are deemed to be “at the market” offerings and privately negotiated transactions. Through March
31, 2022, we issued a total of 15,835,700 shares under the October 2021 Equity Distribution Agreement for aggregate gross proceeds
of approximately $78.3 million, and net proceeds of approximately $77.0 million, after commissions and fees.
Stock Repurchase Agreement
On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to 2,000,000 shares of our common stock.
The timing, manner, price and amount of any repurchases is determined by the Company in its discretion and is subject to economic
and market conditions, stock price, applicable legal requirements and other factors. The authorization does not obligate the Company
to acquire any particular amount of common stock and the program may be suspended or discontinued at the Company’s discretion
without prior notice. On February 8, 2018, the Board of Directors approved an increase in the stock repurchase program for up to an
additional 4,522,822 shares of the Company’s common stock. Coupled with the 783,757 shares remaining from the original 2,000,000
share authorization, the increased authorization brought the total authorization to 5,306,579 shares, representing 10% of the
Company’s then outstanding share count. On December 9, 2021, the Board of Directors approved an increase in the number of shares
of the Company’s common stock available in the stock repurchase program for up to an additional 16,861,994 shares, bringing the
remaining authorization under the stock repurchase program to 17,699,305 shares, representing approximately 10% of the Company’s
then outstanding shares of common stock. This stock repurchase program has no termination date.
From the inception of the stock repurchase program through March 31, 2022, the Company repurchased a total of 5,685,511
shares at an aggregate cost of approximately $40.4 million, including commissions and fees, for a weighted average price of $7.10 per
share. The Company did not repurchase any shares of its common stock during the three months ended March 31, 2022 or the year
ended December 31, 2021.
27
Factors that Affect our Results of Operations and Financial Condition
A variety of industry and economic factors may impact our results of operations and financial condition. These factors include:
●
interest rate trends;
●
the difference between Agency RMBS yields and our funding and hedging costs;
●
competition for, and supply of, investments in Agency RMBS;
●
actions taken by the U.S. government, including the presidential administration, the Federal Reserve (the “Fed”), the Federal
Housing Financing Agency (the “FHFA”), Federal Housing Administration (the “FHA”), the Federal Open Market Committee
(the “FOMC”) and the U.S. Treasury;
●
prepayment rates on mortgages underlying our Agency RMBS and credit trends insofar as they affect prepayment rates; and
●
other market developments.
In addition, a variety of factors relating to our business may also impact our results of operations and financial condition. These
factors include:
●
our degree of leverage;
●
our access to funding and borrowing capacity;
●
our borrowing costs;
●
our hedging activities;
●
the market value of our investments
●
increases in our cost of funds resulting from increases in the Fed Funds rate that are controlled by the Fed and are likely to
continue to occur in 2022; and
●
the requirements to qualify as a REIT and the requirements to qualify for a registration exemption under the Investment
Company Act.
Results of Operations
Described below are the Company’s results of operations for the three months ended March 31, 2022, as compared to the
Company’s results of operations for the three months ended March 31, 2021.
Net (Loss) Income Summary
Net loss for the three months ended March 31, 2022 was $148.7 million, or $0.84 per share. Net loss for the three months ended
March 31, 2021 was $29.4 million, or $0.34 per share. The components of net loss for the three months ended March 31, 2022 and 2021,
along with the changes in those components are presented in the table below:
(in thousands)
2022
2021
Change
Interest income
$
41,857
$
26,856
$
15,001
Interest expense
(2,655)
(1,941)
(714)
Net interest income
39,202
24,915
14,287
Losses on RMBS and derivative contracts
(183,232)
(50,791)
(132,441)
Net portfolio deficiency
(144,030)
(25,876)
(118,154)
Expenses
(4,697)
(3,493)
(1,204)
Net loss
$
(148,727)
$
(29,369)
$
(119,358)
28
GAAP and Non-GAAP Reconciliations
In addition to the results presented in accordance with GAAP, our results of operations discussed below include certain non-GAAP
financial information, including “Net Earnings Excluding Realized and Unrealized Gains and Losses”, “Economic Interest Expense” and
“Economic Net Interest Income.”
Net Earnings Excluding Realized and Unrealized Gains and Losses
We have elected to account for our Agency RMBS under the fair value option. Securities held under the fair value option are
recorded at estimated fair value, with changes in the fair value recorded as unrealized gains or losses through the statements of
operations.
In addition, we have not designated our derivative financial instruments used for hedging purposes as hedges for accounting
purposes, but rather hold them for economic hedging purposes. Changes in fair value of these instruments are presented in a separate
line item in the Company’s statements of operations and are not included in interest expense. As such, for financial reporting purposes,
interest expense and cost of funds are not impacted by the fluctuation in value of the derivative instruments.
Presenting net earnings excluding realized and unrealized gains and losses allows management to: (i) isolate the net interest income
and other expenses of the Company over time, free of all fair value adjustments and (ii) assess the effectiveness of our funding and
hedging strategies on our capital allocation decisions and our asset allocation performance. Our funding and hedging strategies, capital
allocation and asset selection are integral to our risk management strategy, and therefore critical to the management of our portfolio. We
believe that the presentation of our net earnings excluding realized and unrealized gains is useful to investors because it provides a means
of comparing our results of operations to those of our peers who have not elected the same accounting treatment. Our presentation of net
earnings excluding realized and unrealized gains and losses may not be comparable to similarly-titled measures of other companies, who
may use different calculations. As a result, net earnings excluding realized and unrealized gains and losses should not be considered as a
substitute for our GAAP net income (loss) as a measure of our financial performance or any measure of our liquidity under GAAP. The
table below presents a reconciliation of our net income (loss) determined in accordance with GAAP and net earnings excluding realized
and unrealized gains and losses.
Described below are the Company’s results of operations for the three months ended March 31, 2022, as compared to the
Company’s results of operations for each of the three months ended December 31, 2021, September 30, 2021, June 30, 2021 and March
31, 2021.
Net Earnings Excluding Realized and Unrealized Gains and Losses
(in thousands, except per share data)
Per Share
Net Earnings
Net Earnings
Excluding
Excluding
Realized and
Realized and
Realized and
Realized and
Net
Unrealized
Unrealized
Net
Unrealized
Unrealized
Income
Gains and
Gains and
Income
Gains and
Gains and
(GAAP)
Losses
(1)
Losses
(GAAP)
Losses
Losses
Three Months Ended
March 31, 2022
$
(148,727)
$
(183,232)
$
34,505
$
(0.84)
$
(1.04)
$
0.20
December 31, 2021
(44,564)
(82,597)
38,033
(0.27)
(0.49)
0.22
September 30, 2021
26,038
(2,887)
28,925
0.20
(0.02)
0.22
June 30, 2021
(16,865)
(40,844)
23,979
(0.17)
(0.41)
0.24
March 31, 2021
(29,369)
(50,791)
21,422
(0.34)
(0.60)
0.26
(1)
Includes realized and unrealized gains (losses) on RMBS and derivative financial instruments, including net interest income or expense on interest
rate swaps.
29
Economic Interest Expense and Economic Net Interest Income
We use derivative and other hedging instruments, specifically Eurodollar, Fed Funds and T-Note futures contracts, short positions in
U.S. Treasury securities, interest rate swaps and swaptions, to hedge a portion of the interest rate risk on repurchase agreements in a
rising rate environment.
We have not elected to designate our derivative holdings for hedge accounting treatment. Changes in fair value of these instruments
are presented in a separate line item in our statements of operations and not included in interest expense. As such, for financial reporting
purposes, interest expense and cost of funds are not impacted by the fluctuation in value of the derivative instruments.
For the purpose of computing economic net interest income and ratios relating to cost of funds measures, GAAP interest expense
has been adjusted to reflect the realized and unrealized gains or losses on certain derivative instruments the Company uses, specifically
Eurodollar, Fed Funds and U.S. Treasury futures, and interest rate swaps and swaptions, that pertain to each period presented. We
believe that adjusting our interest expense for the periods presented by the gains or losses on these derivative instruments would not
accurately reflect our economic interest expense for these periods. The reason is that these derivative instruments may cover periods that
extend into the future, not just the current period. Any realized or unrealized gains or losses on the instruments reflect the change in
market value of the instrument caused by changes in underlying interest rates applicable to the term covered by the instrument, not just
the current period. For each period presented, we have combined the effects of the derivative financial instruments in place for the
respective period with the actual interest expense incurred on borrowings to reflect total economic interest expense for the applicable
period. Interest expense, including the effect of derivative instruments for the period, is referred to as economic interest expense. Net
interest income, when calculated to include the effect of derivative instruments for the period, is referred to as economic net interest
income. This presentation includes gains or losses on all contracts in effect during the reporting period, covering the current period as well
as periods in the future.
The Company may invest in TBAs, which are forward contracts for the purchase or sale of Agency RMBS at a predetermined price,
face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific Agency RMBS to be delivered into the
contract are not known until shortly before the settlement date. We may choose, prior to settlement, to move the settlement of these
securities out to a later date by entering into a dollar roll transaction. The Agency RMBS purchased or sold for a forward settlement date
are typically priced at a discount to equivalent securities settling in the current month. Consequently, forward purchases of Agency RMBS
and dollar roll transactions represent a form of off-balance sheet financing. These TBAs are accounted for as derivatives and marked to
market through the income statement. Gains or losses on TBAs are included with gains or losses on other derivative contracts and are not
included in interest income for purposes of the discussions below.
We believe that economic interest expense and economic net interest income provide meaningful information to consider, in addition
to the respective amounts prepared in accordance with GAAP. The non-GAAP measures help management to evaluate its financial
position and performance without the effects of certain transactions and GAAP adjustments that are not necessarily indicative of our
current investment portfolio or operations. The unrealized gains or losses on derivative instruments presented in our statements of
operations are not necessarily representative of the total interest rate expense that we will ultimately realize. This is because as interest
rates move up or down in the future, the gains or losses we ultimately realize, and which will affect our total interest rate expense in future
periods, may differ from the unrealized gains or losses recognized as of the reporting date.
Our presentation of the economic value of our hedging strategy has important limitations. First, other market participants may
calculate economic interest expense and economic net interest income differently than the way we calculate them. Second, while we
believe that the calculation of the economic value of our hedging strategy described above helps to present our financial position and
performance, it may be of limited usefulness as an analytical tool. Therefore, the economic value of our investment strategy should not be
viewed in isolation and is not a substitute for interest expense and net interest income computed in accordance with GAAP.
30
The tables below present a reconciliation of the adjustments to interest expense shown for each period relative to our derivative
instruments, and the income statement line item, gains (losses) on derivative instruments, calculated in accordance with GAAP for each
quarter of 2022 to date and 2021.
Gains (Losses) on Derivative Instruments
(in thousands)
Funding Hedges
Recognized in
Attributed to
Attributed to
Income
U.S. Treasury and TBA
Current
Future
Statement
Securities Gain (Loss)
Period
Periods
(GAAP)
(Short Positions)
(Long Positions)
(Non-GAAP)
(Non-GAAP)
Three Months Ended
March 31, 2022
$
177,816
$
2,539
$
27
$
(1,287)
$
176,537
December 31, 2021
10,945
2,568
-
(7,949)
$
16,326
September 30, 2021
5,375
(2,306)
-
(1,248)
$
8,929
June 30, 2021
(34,915)
(5,963)
-
(5,104)
$
(23,848)
March 31, 2021
45,472
9,133
(8,559)
(4,044)
$
48,942
Economic Interest Expense and Economic Net Interest Income
(in thousands)
Interest Expense on Borrowings
Gains
(Losses) on
Derivative
Instruments
Net Interest Income
GAAP
Attributed
Economic
GAAP
Economic
Interest
Interest
to Current
Interest
Net Interest
Net Interest
Income
Expense
Period
(1)
Expense
(2)
Income
Income
(3)
Three Months Ended
March 31, 2022
$
41,857
$
2,655
$
(1,287)
$
3,942
$
39,202
$
37,915
December 31, 2021
44,421
2,023
(7,949)
9,972
42,398
34,449
September 30, 2021
34,169
1,570
(1,248)
2,818
32,599
31,351
June 30, 2021
29,254
1,556
(5,104)
6,660
27,698
22,594
March 31, 2021
26,856
1,941
(4,044)
5,985
24,915
20,871
(1)
Reflects the effect of derivative instrument hedges for only the period presented.
(2)
Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP interest expense.
(3)
Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP net interest income.
Net Interest Income
During the three months ended March 31, 2022, we generated $39.2 million of net interest income, consisting of $41.9 million of
interest income from RMBS assets offset by $2.7 million of interest expense on borrowings. For the comparable period ended March 31,
2021, we generated $24.9 million of net interest income, consisting of $26.9 million of interest income from RMBS assets offset by $1.9
million of interest expense on borrowings. The $15.0 million increase in interest income was due to a 36 basis point ("bps") increase in
the yield on average RMBS, partially offset by the $1,513.1 million increase in average RMBS. The $0.7 million increase in interest
expense was due to a $1,465.5 million increase in average outstanding borrowings. We had more average assets and borrowings during
the first quarter of 2022 compared to the first quarter of 2021 as we deployed the proceeds of our capital raising activity during the year
ended December 31, 2021.
31
On an economic basis, our interest expense on borrowings for the three months ended March 31, 2022 and 2021 was $3.9 million
and $6.0 million, respectively, resulting in $37.9 million and $20.9 million of economic net interest income, respectively. The lower
economic interest expense during the three months ended March 31, 2022 was due to the positive performance of our hedging activities
during the period.
The tables below provide information on our portfolio average balances, interest income, yield on assets, average borrowings, interest
expense, cost of funds, net interest income and net interest spread for each quarter in 2022 to date and 2021 on both a GAAP and
economic basis.
($ in thousands)
Average
Yield on
Interest Expense
Average Cost of Funds
RMBS
Interest
Average
Average
GAAP
Economic
GAAP
Economic
Held
(1)
Income
RMBS
Borrowings
(1)
Basis
Basis
(2)
Basis
Basis
(3)
Three Months Ended
March 31, 2022
$
5,545,844
$
41,857
3.02%
$
5,354,107
$
2,655
$
3,942
0.20%
0.29%
December 31, 2021
6,056,259
44,421
2.93%
5,728,988
2,023
9,972
0.14%
0.70%
September 30, 2021
5,136,331
34,169
2.66%
4,864,287
1,570
2,818
0.13%
0.23%
June 30, 2021
4,504,887
29,254
2.60%
4,348,192
1,556
6,660
0.14%
0.61%
March 31, 2021
4,032,716
26,856
2.66%
3,888,633
1,941
5,985
0.20%
0.62%
($ in thousands)
Net Interest Income
Net Interest Spread
GAAP
Economic
GAAP
Economic
Basis
Basis
(2)
Basis
Basis
(4)
Three Months Ended
March 31, 2022
$
39,202
$
37,913
2.82%
2.73%
December 31, 2021
42,398
34,449
2.79%
2.23%
September 30, 2021
32,599
31,351
2.53%
2.43%
June 30, 2021
27,698
22,594
2.46%
1.99%
March 31, 2021
24,915
20,871
2.46%
2.04%
(1)
Portfolio yields and costs of borrowings presented in the tables above and the tables on pages 32 and 33 are calculated based on the
average balances of the underlying investment portfolio/borrowings balances and are annualized for the periods presented. Average
balances for quarterly periods are calculated using two data points, the beginning and ending balances.
(2)
Economic interest expense and economic net interest income
presented in the table above and the tables on page 32 include the effect
of our derivative instrument hedges for only the periods presented.
(3) Represents interest cost of our borrowings and the effect of derivative instrument hedges attributed to the period divided by average
RMBS.
(4) Economic net interest spread is calculated by subtracting average economic cost of funds from realized yield on average RMBS.
Interest Income and Average Asset Yield
Our interest income for the three months ended March 31, 2022 and 2021 was $41.9 million and $26.9 million, respectively. We had
average RMBS holdings of $5,545.8 million and $4,032.7 million for the three months ended March 31, 2022 and 2021, respectively. The
yield on our portfolio was 3.02% and 2.66% for the three months ended March 31, 2022 and 2021, respectively. For the three months
ended March 31, 2022 as compared to the three months ended March 31, 2021, there was a $15.0 million increase in interest income due
to a 36 bps increase in the yield on average RMBS, combined with a $1,513.1 million increase in average RMBS.
32
The table below presents the average portfolio size, income and yields of our respective sub-portfolios, consisting of structured RMBS
and PT RMBS for each quarter in 2022 to date and 2021.
($ in thousands)
Average RMBS Held
Interest Income
Realized Yield on Average RMBS
PT
Structured
PT
Structured
PT
Structured
Three Months Ended
RMBS
RMBS
Total
RMBS
RMBS
Total
RMBS
RMBS
Total
March 31, 2022
$
5,335,353
$
210,491
$
5,545,844
$
40,066
$
1,791
$
41,857
3.00%
3.40%
3.02%
December 31, 2021
5,878,376
177,883
6,056,259
42,673
1,748
44,421
2.90%
3.93%
2.93%
September 30, 2021
5,016,550
119,781
5,136,331
33,111
1,058
34,169
2.64%
3.53%
2.66%
June 30, 2021
4,436,135
68,752
4,504,887
29,286
(32)
29,254
2.64%
(0.18)%
2.60%
March 31, 2021
3,997,965
34,751
4,032,716
26,869
(13)
26,856
2.69%
(0.15)%
2.66%
Interest Expense and the Cost of Funds
We had average outstanding borrowings of $5,354.1 million and $3,888.6 million and total interest expense of $2.7 million and $1.9
million for the three months ended March 31, 2022 and 2021, respectively. Our average cost of funds was 0.20% for both the three months
ended March 31, 2022 and 2021. Contributing to the increase in interest expense was a $1,465.5 million increase in average outstanding
borrowings during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.
Our economic interest expense was $3.9 million and $6.0 million for the three months ended March 31, 2022 and 2021, respectively.
There was a 33 bps decrease in the average economic cost of funds to 0.29% for the three months ended March 31, 2022 from 0.62% for
the three months ended March 31, 2021.
Since all of our repurchase agreements are short-term, changes in market rates directly affect our interest expense. Our average cost
of funds calculated on a GAAP basis was 5 bps below the average one-month LIBOR and 56 bps below the average six-month LIBOR for
the quarter ended March 31, 2022. Our average economic cost of funds was 4 bps above the average one-month LIBOR and 47 bps
below the average six-month LIBOR for the quarter ended March 31, 2022. The average term to maturity of the outstanding repurchase
agreements was 22 days at March 31, 2022 and 27 days at December 31, 2021.
The tables below present the average balance of borrowings outstanding, interest expense and average cost of funds, and average
one-month and six-month LIBOR rates for each quarter in 2022 to date and 2021 on both a GAAP and economic basis.
($ in thousands)
Average
Interest Expense
Average Cost of Funds
Balance of
GAAP
Economic
GAAP
Economic
Three Months Ended
Borrowings
Basis
Basis
Basis
Basis
March 31, 2022
$
5,354,107
$
2,655
$
3,942
0.20%
0.29%
December 31, 2021
5,728,988
2,023
9,972
0.14%
0.70%
September 30, 2021
4,864,287
1,570
2,818
0.13%
0.23%
June 30, 2021
4,348,192
1,556
6,660
0.14%
0.61%
March 31, 2021
3,888,633
1,941
5,985
0.20%
0.62%
33
Average GAAP Cost of Funds
Average Economic Cost of Funds
Relative to Average
Relative to Average
Average LIBOR
One-Month
Six-Month
One-Month
Six-Month
One-Month
Six-Month
LIBOR
LIBOR
LIBOR
LIBOR
Three Months Ended
March 31, 2022
0.25%
0.76%
(0.05)%
(0.56)%
0.04%
(0.47)%
December 31, 2021
0.09%
0.23%
0.05%
(0.09)%
0.61%
0.47%
September 30, 2021
0.09%
0.16%
0.04%
(0.03)%
0.14%
0.07%
June 30, 2021
0.10%
0.18%
0.04%
(0.04)%
0.51%
0.43%
March 31, 2021
0.13%
0.23%
0.07%
(0.03)%
0.49%
0.39%
Gains or Losses
The table below presents our gains or losses for the three months ended March 31, 2022 and 2021.
(in thousands)
2022
2021
Change
Realized losses on sales of RMBS
$
(51,086)
$
(7,397)
$
(43,689)
Unrealized losses on RMBS
(309,962)
(88,866)
(221,096)
Total losses on RMBS
(361,048)
(96,263)
(264,785)
Gains on interest rate futures
79,895
2,488
77,407
Gains on interest rate swaps
66,284
27,123
39,161
Losses on payer swaptions (short positions)
(10,908)
(26,167)
15,259
Gains on payer swaptions (long positions)
40,975
40,070
905
Losses on interest rate caps
(996)
-
(996)
Gains on interest rate floors
-
1,384
(1,384)
Gains (losses) on TBA securities (long positions)
27
(8,559)
8,586
Gains on TBA securities (short positions)
2,539
9,133
(6,594)
Total
$
(183,232)
$
(50,791)
$
(132,441)
We invest in RMBS with the intent to earn net income from the realized yield on those assets over their related funding and hedging
costs, and not for the purpose of making short term gains from sales. However, we have sold, and may continue to sell, existing assets to
acquire new assets, which our management believes might have higher risk-adjusted returns in light of current or anticipated interest rates,
federal government programs or general economic conditions or to manage our balance sheet as part of our asset/liability management
strategy. During the three months ended March 31, 2022 and 2021, we received proceeds of $1,413.0 million and $988.5 million,
respectively, from the sales of RMBS.
Realized and unrealized gains and losses on RMBS are driven in part by changes in yields and interest rates, which affect the pricing
of the securities in our portfolio. As rates increased during the three months ended March 31, 2021, it had a negative impact on our RMBS
portfolio. Gains and losses on interest rate futures contracts are affected by changes in implied forward rates during the reporting period.
The table below presents historical interest rate data for each quarter end during 2022 to date and 2021.
34
5 Year
10 Year
15 Year
30 Year
Three
U.S. Treasury
U.S. Treasury
Fixed-Rate
Fixed-Rate
Month
Rate
(1)
Rate
(1)
Mortgage Rate
(2)
Mortgage Rate
(2)
LIBOR
(3)
March 31, 2022
2.42%
2.33%
3.39%
4.17%
0.84%
December 31, 2021
1.26%
1.51%
2.35%
3.10%
0.21%
September 30, 2021
1.00%
1.53%
2.18%
2.90%
0.12%
June 30, 2021
0.87%
1.44%
2.27%
2.98%
0.13%
March 31, 2021
0.94%
1.75%
2.39%
3.08%
0.19%
(1)
Historical 5 and 10 Year U.S. Treasury Rates are obtained from quoted end of day prices on the Chicago Board Options Exchange.
(2)
Historical 30 Year and 15 Year Fixed Rate Mortgage Rates are obtained from Freddie Mac’s Primary Mortgage Market Survey.
(3)
Historical LIBOR is obtained from the Intercontinental Exchange Benchmark Administration Ltd.
Expenses
Total operating expenses were approximately $4.7 million and $3.5 million for the three months ended March 31, 2022 and 2021,
respectively. The table below presents a breakdown of operating expenses for the three months ended March 31, 2022 and 2021.
(in thousands)
2022
2021
Change
Management fees
$
2,634
$
1,621
$
1,013
Overhead allocation
441
404
37
Accrued incentive compensation
237
364
(127)
Directors fees and liability insurance
311
272
39
Audit, legal and other professional fees
304
318
(14)
Other direct REIT operating expenses
643
421
222
Other expenses
127
93
34
Total expenses
$
4,697
$
3,493
$
1,204
We are externally managed and advised by Bimini Advisors, LLC (the “Manager”) pursuant to the terms of a management
agreement. The management agreement has been renewed through February 20, 2023 and provides for automatic one-year extension
options thereafter and is subject to certain termination rights. Under the terms of the management agreement, the Manager is
responsible for administering the business activities and day-to-day operations of the Company. The Manager receives a monthly
management fee in the amount of:
●
One-twelfth of 1.5% of the first $250 million of the Company’s month end equity, as defined in the management agreement,
●
One-twelfth of 1.25% of the Company’s month end equity that is greater than $250 million and less than or equal to $500
million, and
●
One-twelfth of 1.00% of the Company’s month end equity that is greater than $500 million.
Should the Company terminate the management agreement without cause, it will pay the Manager a termination fee equal to three
times the average annual management fee, as defined in the management agreement, before or on the last day of the term of the
agreement.
The Company is obligated to reimburse the Manager for any direct expenses incurred on its behalf and to pay the Manager the
Company’s pro rata portion of certain overhead costs set forth in the management agreement.
35
On April 1, 2022, pursuant to the third amendment to the management agreement entered into on November 16, 2021, the
Manager began providing certain repurchase agreement trading, clearing and administrative services to the Company that had been
previously provided by AVM, L.P. under an agreement terminated on March 31, 2022. In consideration for such services, the Company
will pay the following fees to the Manager:
●
A daily fee equal to the outstanding principal balance of repurchase agreement funding in place as of the end of such day
multiplied by 1.5 basis points for the amount of aggregate outstanding principal balance less than or equal to $5 billion, and
multiplied by 1.0 basis points for any amount of aggregate outstanding principal balance in excess of $5 billion, and
●
A fee for the clearing and operational services provided by personnel of the Manager equal to $10,000 per month.
The following table summarizes the management fee and overhead allocation expenses for each quarter in 2022 to date and
2021.
($ in thousands)
Average
Average
Advisory Services
Orchid
Orchid
Management
Overhead
Three Months Ended
MBS
Equity
Fee
Allocation
Total
March 31, 2022
$
5,545,844
$
853,576
$
2,634
$
441
$
3,075
December 31, 2021
6,056,259
806,382
2,587
443
3,030
September 30, 2021
5,136,331
672,384
2,156
390
2,546
June 30, 2021
4,504,887
542,679
1,792
395
2,187
March 31, 2021
4,032,716
456,687
1,621
404
2,025
Financial Condition:
Mortgage-Backed Securities
As of March 31, 2022, our RMBS portfolio consisted of $4,580.6 million of Agency RMBS at fair value and had a weighted average
coupon on assets of 3.11%. During the three months ended March 31, 2022, we received principal repayments of $157.1 million
compared to $123.9 million for the three months ended March 31, 2021. The average three month prepayment speeds for the quarters
ended March 31, 2022 and 2021 were 10.7% and 12.0%, respectively.
The following table presents the 3-month constant prepayment rate (“CPR”) experienced on our structured and PT RMBS sub-
portfolios, on an annualized basis, for the quarterly periods presented. CPR is a method of expressing the prepayment rate for a mortgage
pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. Specifically, the CPR in the chart
below represents the three month prepayment rate of the securities in the respective asset category.
Structured
PT RMBS
RMBS
Total
Three Months Ended
Portfolio (%)
Portfolio (%)
Portfolio (%)
March 31, 2022
8.1
19.5
10.7
December 31, 2021
9.0
24.6
11.4
September 30, 2021
9.8
25.1
12.4
June 30, 2021
10.9
29.9
12.9
March 31, 2021
9.9
40.3
12.0
36
The following tables summarize certain characteristics of the Company’s PT RMBS and structured RMBS as of March 31, 2022 and
December 31, 2021:
($ in thousands)
Weighted
Percentage
Average
of
Weighted
Maturity
Fair
Entire
Average
in
Longest
Asset Category
Value
Portfolio
Coupon
Months
Maturity
March 31, 2022
Fixed Rate RMBS
$
4,372,517
95.5%
3.01%
336
1-Dec-51
Interest-Only Securities
206,617
4.5%
3.42%
257
25-Jan-52
Inverse Interest-Only Securities
1,460
0.0%
3.75%
297
15-Jun-42
Total Mortgage Assets
$
4,580,594
100.0%
3.11%
318
25-Jan-52
December 31, 2021
Fixed Rate RMBS
$
6,298,189
96.7%
2.93%
342
1-Dec-51
Interest-Only Securities
210,382
3.2%
3.40%
263
25-Jan-52
Inverse Interest-Only Securities
2,524
0.1%
3.75%
300
15-Jun-42
Total Mortgage Assets
$
6,511,095
100.0%
3.03%
325
25-Jan-52
($ in thousands)
March 31, 2022
December 31, 2021
Percentage of
Percentage of
Agency
Fair Value
Entire Portfolio
Fair Value
Entire Portfolio
Fannie Mae
$
3,016,954
65.9%
$
4,719,349
72.5%
Freddie Mac
1,563,640
34.1%
1,791,746
27.5%
Total Portfolio
$
4,580,594
100.0%
$
6,511,095
100.0%
March 31, 2022
December 31, 2021
Weighted Average Pass-through Purchase Price
$
107.82
$
107.19
Weighted Average Structured Purchase Price
$
15.25
$
15.21
Weighted Average Pass-through Current Price
$
98.85
$
105.31
Weighted Average Structured Current Price
$
15.61
$
14.08
Effective Duration
(1)
4.890
3.390
(1)
Effective duration is the approximate percentage change in price for a 100 bps change in rates. An effective duration of 4.890 indicates that an
interest rate increase of 1.0% would be expected to cause a 4.890% decrease in the value of the RMBS in the Company’s investment portfolio
at March 31, 2022. An effective duration of 3.390 indicates that an interest rate increase of 1.0% would be expected to cause a 3.390%
decrease in the value of the RMBS in the Company’s investment portfolio at December 31, 2021. These figures include the structured securities
in the portfolio, but do not include the effect of the Company’s funding cost hedges. Effective duration quotes for individual investments are
obtained from The Yield Book, Inc.
The following table presents a summary of portfolio assets acquired during the three months ended March 31, 2022 and 2021,
including securities purchased during the period that settled after the end of the period, if any.
37
($ in thousands)
2022
2021
Total Cost
Average
Price
Weighted
Average
Yield
Total Cost
Average
Price
Weighted
Average
Yield
Pass-through RMBS
$
-
$
-
-
$
1,971,296
$
107.09
1.38%
Structured RMBS
-
-
-
4,807
6.93
14.21%
Borrowings
As of March 31, 2022, we had established borrowing facilities in the repurchase agreement market with a number of commercial
banks and other financial institutions and had borrowings in place with 22 of these counterparties. None of these lenders are affiliated with
the Company. These borrowings are secured by the Company’s RMBS and cash, and bear interest at prevailing market rates. We believe
our established repurchase agreement borrowing facilities provide borrowing capacity in excess of our needs.
As of March 31, 2022, we had obligations outstanding under the repurchase agreements of approximately $4,464.1 million with a net
weighted average borrowing cost of 0.37%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 6 to
167 days, with a weighted average remaining maturity of 22 days. Securing the repurchase agreement obligations as of March 31, 2022
are RMBS with an estimated fair value, including accrued interest, of approximately $4,591.7 million and a weighted average maturity of
340 months, and cash pledged to counterparties of approximately $113.6 million. Through April 28, 2022, we have been able to maintain
our repurchase facilities with comparable terms to those that existed at March 31, 2022 with maturities through September 14, 2022.
The table below presents information about our period end, maximum and average balances of borrowings for each quarter in
2022 to date and 2021.
($ in thousands)
Difference Between Ending
Ending
Maximum
Average
Borrowings and
Balance of
Balance of
Balance of
Average Borrowings
Three Months Ended
Borrowings
Borrowings
Borrowings
Amount
Percent
March 31, 2022
$
4,464,109
$
6,244,106
$
5,354,107
$
(889,998)
(16.62)%
(1)
December 31, 2021
6,244,106
6,419,689
5,728,988
515,118
8.99%
September 30, 2021
5,213,869
5,214,254
4,864,287
349,582
7.19%
June 30, 2021
4,514,704
4,517,953
4,348,192
166,512
3.83%
March 31, 2021
4,181,680
4,204,935
3,888,633
293,047
7.54%
(1)
The lower ending balance relative to the average balance during the quarter ended March 31, 2022 reflects the disposal of RMBS pledged as
collateral. During the quarter ended March 31, 2022, the Company’s investment in RMBS decreased $510.4 million.
Liquidity and Capital Resources
Liquidity is our ability to turn non-cash assets into cash, purchase additional investments, repay principal and interest on borrowings,
fund overhead, fulfill margin calls and pay dividends. We have both internal and external sources of liquidity. However, our material
unused sources of liquidity include cash balances, unencumbered assets and our ability to sell encumbered assets to raise cash. Our
balance sheet also generates liquidity on an on-going basis through payments of principal and interest we receive on our RMBS portfolio.
Management believes that we currently have sufficient liquidity and capital resources available for (a) the acquisition of additional
investments consistent with the size and nature of our existing RMBS portfolio, (b) the repayments on borrowings and (c) the payment of
dividends to the extent required for our continued qualification as a REIT. We may also generate liquidity from time to time by selling our
equity or debt securities in public offerings or private placements.
38
Internal Sources of Liquidity
Our internal sources of liquidity include our cash balances, unencumbered assets and our ability to liquidate our encumbered security
holdings. Our balance sheet also generates liquidity on an on-going basis through payments of principal and interest we receive on our
RMBS portfolio. Because our PT RMBS portfolio consists entirely of government and agency securities, we do not anticipate having
difficulty converting our assets to cash should our liquidity needs ever exceed our immediately available sources of cash. Our structured
RMBS portfolio also consists entirely of governmental agency securities, although they typically do not trade with comparable bid / ask
spreads as PT RMBS. However, we anticipate that we would be able to liquidate such securities readily, even in distressed markets,
although we would likely do so at prices below where such securities could be sold in a more stable market. To enhance our liquidity even
further, we may pledge a portion of our structured RMBS as part of a repurchase agreement funding, but retain the cash in lieu of acquiring
additional assets. In this way we can, at a modest cost, retain higher levels of cash on hand and decrease the likelihood we will have to
sell assets in a distressed market in order to raise cash.
Our strategy for hedging our funding costs typically involves taking short positions in interest rate futures, treasury futures, interest rate
swaps, interest rate swaptions or other instruments. When the market causes these short positions to decline in value we are required to
meet margin calls with cash. This can reduce our liquidity position to the extent other securities in our portfolio move in price in such a way
that we do not receive enough cash via margin calls to offset the derivative related margin calls. If this were to occur in sufficient
magnitude, the loss of liquidity might force us to reduce the size of the levered portfolio, pledge additional structured securities to raise
funds or risk operating the portfolio with less liquidity.
External Sources of Liquidity
Our primary external sources of liquidity are our ability to (i) borrow under master repurchase agreements, (ii) use the TBA security
market and (iii) sell our equity or debt securities in public offerings or private placements. Our borrowing capacity will vary over time as the
market value of our interest earning assets varies. Our master repurchase agreements have no stated expiration, but can be terminated at
any time at our option or at the option of the counterparty. However, once a definitive repurchase agreement under a master repurchase
agreement has been entered into, it generally may not be terminated by either party. A negotiated termination can occur, but may involve
a fee to be paid by the party seeking to terminate the repurchase agreement transaction.
Under our repurchase agreement funding arrangements, we are required to post margin at the initiation of the borrowing. The margin
posted represents the haircut, which is a percentage of the market value of the collateral pledged. To the extent the market value of the
asset collateralizing the financing transaction declines, the market value of our posted margin will be insufficient and we will be required to
post additional collateral. Conversely, if the market value of the asset pledged increases in value, we would be over collateralized and we
would be entitled to have excess margin returned to us by the counterparty. Our lenders typically value our pledged securities daily to
ensure the adequacy of our margin and make margin calls as needed, as do we. Typically, but not always, the parties agree to a minimum
threshold amount for margin calls so as to avoid the need for nuisance margin calls on a daily basis.
Our master repurchase agreements
do not specify the haircut; rather haircuts are determined on an individual repurchase transaction basis. Throughout the three months
ended March 31, 2022, haircuts on our pledged collateral remained stable and as of March 31, 2022, our weighted average haircut was
approximately 5.0% of the value of our collateral.
TBAs represent a form of off-balance sheet financing and are accounted for as derivative instruments. (See Note 4 to our Financial
Statements in this Form 10-Q for additional details on our TBAs). Under certain market conditions, it may be uneconomical for us to roll our
TBAs into future months and we may need to take or make physical delivery of the underlying securities. If we were required to take
physical delivery to settle a long TBA, we would have to fund our total purchase commitment with cash or other financing sources and our
liquidity position could be negatively impacted.
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Our TBAs are also subject to margin requirements governed by the Mortgage-Backed Securities Division ("MBSD") of the FICC and
by our Master Securities Forward Transaction Agreements (“MSFTAs”), which may establish margin levels in excess of the MBSD. Such
provisions require that we establish an initial margin based on the notional value of the TBA, which is subject to increase if the estimated
fair value of our TBAs or the estimated fair value of our pledged collateral declines. The MBSD has the sole discretion to determine the
value of our TBAs and of the pledged collateral securing such contracts. In the event of a margin call, we must generally provide additional
collateral on the same business day.
Settlement of our TBA obligations by taking delivery of the underlying securities as well as satisfying margin requirements could
negatively impact our liquidity position. However, since we do not use TBA dollar roll transactions as our primary source of financing, we
believe that we will have adequate sources of liquidity to meet such obligations.
As discussed earlier, we invest a portion of our capital in structured Agency RMBS. We generally do not apply leverage to this portion
of our portfolio. The leverage inherent in structured securities replaces the leverage obtained by acquiring PT securities and funding them
in the repurchase market. This structured RMBS strategy has been a core element of the Company’s overall investment strategy since
inception. However, we have and may continue to pledge a portion of our structured RMBS in order to raise our cash levels, but generally
will not pledge these securities in order to acquire additional assets.
In future periods, we expect to continue to finance our activities in a manner that is consistent with our current operations through
repurchase agreements. As of March 31, 2022, we had cash and cash equivalents of $297.2 million. We generated cash flows of $202.9
million from principal and interest payments on our RMBS and had average repurchase agreements outstanding of $5,354.1 million during
the three months ended March 31, 2022.
As described more fully below, we may also access liquidity by selling our equity or debt securities in public offerings or private
placements.
Stockholders’ Equity
On August 4, 2020, we entered into the August 2020 Equity Distribution Agreement with four sales agents pursuant to which we
could offer and sell, from time to time, up to an aggregate amount of $150,000,000 of shares of our common stock in transactions that
were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total of 27,493,650 shares under the
August 2020 Equity Distribution Agreement for aggregate gross proceeds of approximately $150.0 million, and net proceeds of
approximately $147.4 million, after commissions and fees, prior to its termination in June 2021.
On January 20, 2021, we entered into the January 2021 Underwriting Agreement with J.P. Morgan Securities LLC (“J.P. Morgan”),
relating to the offer and sale of 7,600,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from
the Company pursuant to the January 2021 Underwriting Agreement at $5.20 per share. In addition, we granted J.P. Morgan a 30-day
option to purchase up to an additional 1,140,000 shares of our common stock on the same terms and conditions, which J.P. Morgan
exercised in full on January 21, 2021. The closing of the offering of 8,740,000 shares of our common stock occurred on January 25,
2021, with proceeds to us of approximately $45.2 million, net of offering expenses.
On March 2, 2021, we entered into the March 2021 Underwriting Agreement with J.P. Morgan, relating to the offer and sale of
8,000,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from the Company pursuant to the
March 2021 Underwriting Agreement at $5.45 per share. In addition, we granted J.P. Morgan a 30-day option to purchase up to an
additional 1,200,000 shares of our common stock on the same terms and conditions, which J.P. Morgan exercised in full on March 3,
2021. The closing of the offering of 9,200,000 shares of our common stock occurred on March 5, 2021, with proceeds to us of
approximately $50.0 million, net of offering expenses payable.
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On June 22, 2021, we entered into the June 2021 Equity Distribution Agreement with four sales agents pursuant to which we may
could offer and sell, from time to time, up to an aggregate amount of $250,000,000 of shares of our common stock in transactions that
were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total of 49,407,336 shares under the
June 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately $250.0 million, and net proceeds of
approximately $246.2 million, after commissions and fees, prior to its termination in October 2021.
On October 29, 2021, we entered into the October 2021 Equity Distribution Agreement with four sales agents pursuant to which
we may offer and sell, from time to time, up to an aggregate amount of $250,000,000 of shares of our common stock in transactions
that are deemed to be “at the market” offerings and privately negotiated transactions. Through March 31, 2022, we issued a total of
15,835,700 shares under the October 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately $78.3 million,
and net proceeds of approximately $77.0 million, after commissions and fees.
Outlook
Economic Summary
The first quarter of 2022 was a transition period whereby the Fed migrated from reluctantly acknowledging they needed to start
removing the emergency monetary policy regime in place since the COVID-19 pandemic emerged in the U.S. during the first quarter of
2020 towards a more aggressive tightening cycle. The Fed announced the first rate hike at their March 2022 meeting and simultaneously
announced quantitative tightening would begin soon, likely in May 2022. The acceleration in the rate of inflation that first emerged during
the second quarter of 2021, and was deemed “transitory” by the Fed at the time, accelerated even further into 2022 and has continued to
do so in the second quarter of 2022 to date. All measures of inflation – personal consumption expenditures, the consumer price index and
the producer price index – are the highest levels seen since the early 1980s. Inflation has been exacerbated, both in the U.S. and globally,
by the war in Ukraine and COVID related lock-downs in China. The war in Ukraine in particular has caused global inflationary pressures
that may have yet to peak. As the war in Ukraine began in late February 2022, western nations began to impose progressively more
severe sanctions on Russia. These sanctions, and related boycotts of Russian goods, have created shortages of many commodities.
Ukraine is also a major global supplier of many commodities as well, particularly food. As cases of COVID-19 increased in many
population centers in China, authorities imposed lock-downs aggressively which led to the closure of many manufacturing operations,
further exacerbating the many supply chain constraints across the world. In the U.S., the economy continues to grow and, in particular, the
labor market continues to tighten. The unemployment rate appears poised to drop below the pre-pandemic lows, unemployment claims
are at the lowest levels since the 1950s and wages are growing rapidly, although still less than the rate of inflation.
All of these factors have led the Fed, and most market participants, to anticipate that inflation, particularly food and energy inflation,
will not recede in the near term and may even accelerate further. Inflation for goods other than food and energy may moderate, as the
necessities of life cannot be ignored and other goods can, potentially lessening price pressures for these goods. The cost of housing and
rents are expected to remain elevated as affordability continues to deteriorate due to higher mortgage rates and inflated home prices. In
sum, inflation is very far above the Fed’s target level of 2% and not likely to recede in the near-term.
Given the outlook for inflation and the Fed’s anticipated response, interest rate volatility has become very elevated and is not far below
the extreme peak seen in March of 2020 when the COVID-19 pandemic first emerged in the U.S. Given the magnitude of the forces
driving the market and the uncertainty that exists with respect to the war in Ukraine, COVID related lockdowns in China and the uncertain
capacity of the U.S. economy to weather these forces, it is likely that volatility will remain very elevated until these forces subside. The
outlook for the remainder of 2022 hinges on how these developments unfold, the extent to which the Fed has to raise rates and possibly
sell assets from their portfolio, and the impact these factors have on the growth rate of the U.S. economy and the unemployment rate.
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Interest Rates
As the outlook for inflation changed materially to the upside and the resulting change in monetary policy by the Fed unfolded over the
course of the first quarter of 2022, interest rates moved much higher and the curve flattened. During the first quarter of 2022, the yield on
the 2-year U.S. Treasury Note increased by over 160 basis points, the yield on the 5-year U.S. Treasury Note increased by almost 120
basis points and the yield on the 10-year U.S. Treasury Note increased by 82.8 basis points. The spread between the 2-year and 10-year
points thus declined, or flattened, by almost 80 basis points. In early April of 2022 the yield curve actually inverted by approximately 7.5
basis points, albeit for only a brief period. Since then, the yield curve has re-steepened and was just above 20 basis points on April 28,
2022. The impetus for the re-steepening was the release of the FOMC minutes from the Fed’s January 2022 meeting which strongly
implied the Fed may actually sell assets from their portfolio. The market expects this may occur as early as the third quarter of 2022. The
minutes also revealed that the Fed viewed such asset sales were akin to 100 to 150 basis points of tightening to the Fed Funds rate, thus
the market reduced the number of hikes priced in over the course of the next year and the curve steepened. As of April 28th, 2022 market
pricing, as reflected in the Fed Funds futures market, anticipates between 225 and 250 basis points of additional hikes by the end of the
year.
The Agency RMBS Market
The sharp increase in interest rates, the end of net Agency RMBS purchases by the Fed and the pending run-off of the Fed’s Agency
RMBS portfolio, with the potential for outright sales in addition to the prepayment related run-off, resulted in poor returns for the sector. The
poor performance has continued into the second quarter as all of these factors remain. The Agency RMBS market is transitioning away
from a prolonged period of support. The market benefited from not only daily purchases by the Fed - $40 billion per month in addition to
the reinvestment of all paydowns on their existing holdings – but also by the bank community. Demand from the bank community is a
byproduct of their deposit base growth resulting from asset purchases. Going forward the RMBS market faces meaningful headwinds as
the Fed is only purchasing enough RMBS to replace a decreasing portion of their monthly pay-downs and eventually may consider outright
sales, and the banking community will likely buy fewer RMBS assets as their deposit base shrinks as the Fed removes reserves from the
system.
The total return for Agency RMBS for the first quarter of 2022 was -5.0% and the excess return versus U.S. Treasuries was -1.2%.
Longer duration/lower coupon mortgages underperformed higher coupon/lower duration as 30-year underperformed 15-year maturities
and lower coupons of each tenor underperformed higher coupons. The same pattern held for excess returns versus comparable duration
U.S. Treasuries. The trend has also continued into the second quarter as interest rates continue to rise and volatility remains at or near
multi-year highs.
Recent Legislative and Regulatory Developments
The Fed has taken a number of actions to stabilize markets as a result of the impacts of the COVID-19 pandemic. On March 15,
2020, the Fed announced a $700 billion asset purchase program to provide liquidity to the U.S. Treasury and Agency RMBS markets.
Specifically, the Fed announced that it would purchase at least $500 billion of U.S. Treasuries and at least $200 billion of Agency RMBS.
The Fed also lowered the Fed Funds rate to a range of 0.0% – 0.25%, after having already lowered the Fed Funds rate by 50 bps on
March 3, 2020. On June 30, 2020, Fed Chairman Powell announced expectations to maintain interest rates at this level until the Fed is
confident that the economy has weathered recent events and is on track to achieve maximum employment and price stability goals. The
FOMC continued to reaffirm this commitment at all subsequent meetings through December of 2021, as well as an intention to allow
inflation to climb modestly above their 2% target and maintain that level for a period sufficient for inflation to average 2% long term. On
January 26, 2022, the FOMC reiterated its goals of maximum employment and a 2% long-run inflation rate and stated that, with a strong
labor market and inflation well above 2%, it expected it would soon be appropriate to raise the target Fed Funds rate.
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In response to the deterioration in the markets for U.S. Treasuries, Agency RMBS and other mortgage and fixed income markets as
investors liquidated investments in response to the economic crisis resulting from the actions to contain and minimize the impacts of the
COVID-19 pandemic, on the morning of Monday, March 23, 2020, the Fed announced a program to acquire U.S. Treasuries and Agency
RMBS in the amounts needed to support smooth market functioning. With these purchases, market conditions improved substantially.
Through November of 2021, the Fed was committed to purchasing $80 billion of U.S. Treasuries and $40 billion of Agency RMBS each
month. In November of 2021, it began tapering its net asset purchases each month and ended net asset purchases entirely by early March
of 2022. The minutes to the March 16, 2022 FOMC meeting implied that the Fed would begin reducing its balance sheet by a maximum of
$60 billion of U.S. Treasuries and $35 billion of Agency RMBS each month, phased in over three months and likely beginning in May 2022.
The CARES Act was passed by Congress and signed into law by President Trump on March 27, 2020. The CARES Act provided
many forms of direct support to individuals and small businesses in order to stem the steep decline in economic activity. The $2 trillion
COVID-19 relief bill, among other things, provided for direct payments to each American making up to $75,000 a year, increased
unemployment benefits for up to four months (on top of state benefits), funding to hospitals and health providers, loans and investments to
businesses, states and municipalities and grants to the airline industry. On April 24, 2020, President Trump signed an additional funding
bill into law that provides an additional $484 billion of funding to individuals, small businesses, hospitals, health care providers and
additional coronavirus testing efforts. Various provisions of the CARES Act began to expire in July 2020, including a moratorium on
evictions (July 25, 2020), expanded unemployment benefits (July 31, 2020), and a moratorium on foreclosures (August 31, 2020). On
August 8, 2020, President Trump issued Executive Order 13945, directing the Department of Health and Human Services, the Centers for
Disease Control and Prevention (“CDC”), the Department of Housing and Urban Development, and Department of the Treasury to take
measures to temporarily halt residential evictions and foreclosures, including through temporary financial assistance.
On December 27, 2020, President Trump signed into law an additional $900 billion coronavirus aid package as part of the
Consolidated Appropriations Act, 2021, providing for extensions of many of the CARES Act policies and programs as well as additional
relief. On January 29, 2021, the CDC issued guidance extending eviction moratoriums for covered persons through March 31, 2021. The
FHFA subsequently extended the foreclosure moratorium begun under the CARES Act for loans backed by Fannie Mae and Freddie Mac
and the eviction moratorium for real estate owned by Fannie Mae and Freddie Mac until July 31, 2021 and September 30, 2021,
respectively. The U.S. Housing and Urban Development Department subsequently extended the FHA foreclosure and eviction moratoria to
July 31, 2021 and September 30, 2021, respectively. Despite the expirations of these foreclosure moratoria, a final rule adopted by the
CFPB on June 28, 2021 effectively prohibited servicers from initiating a foreclosure before January 1, 2022 in most instances. Following
the end of this limitation, foreclosure starts for January and February of 2022 were up 29% and 40% month-over-month and 126% and
176% year-over-year, respectively, although they remain below pre-pandemic levels.
In January 2019, the Trump administration made statements of its plans to work with Congress to overhaul Fannie Mae and Freddie
Mac and expectations to announce a framework for the development of a policy for comprehensive housing finance reform soon. On
September 30, 2019, the FHFA announced that Fannie Mae and Freddie Mac were allowed to increase their capital buffers to $25 billion
and $20 billion, respectively, from the prior limit of $3 billion each. This step could ultimately lead to Fannie Mae and Freddie Mac being
privatized and represents the first concrete step on the road to GSE reform. On June 30, 2020, the FHFA released a proposed rule on a
new regulatory framework for the GSEs which seeks to implement both a risk-based capital framework and minimum leverage capital
requirements. The final rule on the new capital framework for the GSEs was published in the federal register in December 2020. On
January 14, 2021, the U.S. Treasury and the FHFA executed letter agreements allowing the GSEs to continue to retain capital up to their
regulatory minimums, including buffers, as prescribed in the December rule. These letter agreements provide, in part, (i) there will be no
exit from conservatorship until all material litigation is settled and the GSE has common equity Tier 1 capital of at least 3% of its assets, (ii)
the GSEs will comply with the FHFA’s regulatory capital framework, (iii) higher-risk single-family mortgage acquisitions will be restricted to
current levels, and (iv) the U.S. Treasury and the FHFA will establish a timeline and process for future GSE reform. However, no definitive
proposals or legislation have been released or enacted with respect to ending the conservatorship, unwinding the GSEs, or materially
reducing the roles of the GSEs in the U.S. mortgage market. On September 14, 2021, the U.S. Treasury and the FHFA suspended certain
policy provisions in the January agreement, including limits on loans acquired for cash consideration, multifamily loans, loans with higher
risk characteristics and second homes and investment properties. On February 25, 2022, the FHFA published a final rule, effective as of
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April 26, 2022, amending the GSE capital framework established in December 2020 by, among other things, replacing the fixed leverage
buffer equal to 1.5% of a GSE’s adjusted total assets with a dynamic leverage buffer equal to 50% of a GSE’s stability capital buffer,
reducing the risk weight floor from 10% to 5%, and removing the requirement that the GSEs must apply an overall effectiveness
adjustment to their credit risk transfer exposures.
In 2017, policymakers announced that LIBOR will be replaced by December 31, 2021. The directive was spurred by the fact that
banks are uncomfortable contributing to the LIBOR panel given the shortage of underlying transactions on which to base levels and the
liability associated with submitting an unfounded level. However, the ICE Benchmark Administration, in its capacity as administrator of
USD LIBOR, has announced that it intends to extend publication of USD LIBOR (other than one-week and two-month tenors) by 18
months to June 2023. Notwithstanding this possible extension, a joint statement by key regulatory authorities calls on banks to cease
entering into new contracts that use USD LIBOR as a reference rate by no later than December 31, 2021. The ARRC, a steering
committee comprised of large U.S. financial institutions, has proposed replacing USD-LIBOR with a new SOFR, a rate based on U.S. repo
trading. We will monitor the emergence of SOFR carefully as it appears likely to become the new benchmark for hedges and a range of
interest rate investments. At this time, however, no consensus exists as to what rate or rates may become accepted alternatives to LIBOR.
On December 7, 2021, the CFPB released a final rule that amends Regulation Z, which implemented the Truth in Lending Act, aimed
at addressing cessation of LIBOR for both closed-end (e.g., home mortgage) and open-end (e.g., home equity line of credit) products. The
rule, which mostly becomes effective in April of 2022, establishes requirements for the selection of replacement indices for existing LIBOR-
linked consumer loans. Although the rule does not mandate the use of SOFR as the alternative rate, it identifies SOFR as a comparable
rate for closed-end products and states that for open-end products, the CFPB has determined that ARRC’s recommended spread-adjusted
indices based on SOFR for consumer products to replace the one-month, three-month, or six-month USD LIBOR index “have historical
fluctuations that are substantially similar to those of the LIBOR indices that they are intended to replace.” The CFPB reserved judgment,
however, on a SOFR-based spread-adjusted replacement index to replace the one-year USD LIBOR until it obtained additional
information.
On December 8, 2021, the House of Representatives passed the Adjustable Interest Rate (LIBOR) Act of 2021 (H.R. 4616) (the
“LIBOR Act”), which provides for a statutory replacement benchmark rate for contracts that use LIBOR as a benchmark and do not contain
any fallback mechanism independent of LIBOR. Pursuant to the LIBOR Act, SOFR becomes the new benchmark rate by operation of law
for any such contract. The LIBOR Act establishes a safe harbor from litigation for claims arising out of or related to the use of SOFR as the
recommended benchmark replacement. The LIBOR Act makes clear that it should not be construed to disfavor the use of any benchmark
on a prospective basis.
The LIBOR Act also attempts to forestall challenges that it is impairing contracts. It provides that the discontinuance of LIBOR and the
automatic statutory transition to a replacement rate neither impairs or affects the rights of a party to receive payment under such contracts,
nor allows a party to discharge their performance obligations or to declare a breach of contract. It amends the Trust Indenture Act of 1939
to state that the “the right of any holder of any indenture security to receive payment of the principal of and interest on such indenture
security shall not be deemed to be impaired or affected” by application of the LIBOR Act to any indenture security. On December 9, 2021,
the United States Senate referred the LIBOR Act to the Committee on Banking, Housing and Urban Affairs.
One-week and two-month U.S. dollar LIBOR rates phased out on December 31, 2021, but other U.S. dollar tenors may continue until
June 30, 2023. We will monitor the emergence of SOFR carefully as it appears likely to become the new benchmark for hedges and a
range of interest rate investments. At this time, however, no consensus exists as to what rate or rates may become accepted alternatives
to LIBOR.
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Effective January 1, 2021, Fannie Mae, in alignment with Freddie Mac, extended the timeframe for its delinquent loan buyout policy
for Single-Family Uniform Mortgage-Backed Securities (UMBS) and Mortgage-Backed Securities (MBS) from four consecutively missed
monthly payments to twenty-four consecutively missed monthly payments (i.e., 24 months past due). This new timeframe applied to
outstanding single-family pools and newly issued single-family pools and was first reflected when January 2021 factors were released on
the fourth business day in February 2021.
For Agency RMBS investors, when a delinquent loan is bought out of a pool of mortgage loans, the removal of the loan from the pool
is the same as a total prepayment of the loan. The respective GSEs anticipated, however, that delinquent loans will be repurchased in
most cases before the 24-month deadline under one of the following exceptions listed below.
• a loan that is paid in full, or where the related lien is released and/or the note debt is satisfied or forgiven;
• a loan repurchased by a seller/servicer under applicable selling and servicing requirements;
• a loan entering a permanent modification, which generally requires it to be removed from the MBS. During any modification trial
period, the loan will remain in the MBS until the trial period ends;
• a loan subject to a short sale or deed-in-lieu of foreclosure; or
• a loan referred to foreclosure.
Because of these exceptions, the GSEs believe based on prevailing assumptions and market conditions this change will have only a
marginal impact on prepayment speeds, in aggregate. Cohort level impacts may vary. For example, more than half of loans referred to
foreclosure are historically referred within six months of delinquency. The degree to which speeds are affected depends on delinquency
levels, borrower response, and referral to foreclosure timelines.
The scope and nature of the actions the U.S. government or the Fed will ultimately undertake are unknown and will continue to evolve
Effect on Us
Regulatory developments, movements in interest rates and prepayment rates affect us in many ways, including the following:
Effects on our Assets
A change in or elimination of the guarantee structure of Agency RMBS may increase our costs (if, for example, guarantee fees
increase) or require us to change our investment strategy altogether. For example, the elimination of the guarantee structure of Agency
RMBS may cause us to change our investment strategy to focus on non-Agency RMBS, which in turn would require us to significantly
increase our monitoring of the credit risks of our investments in addition to interest rate and prepayment risks.
Lower long-term interest rates can affect the value of our Agency RMBS in a number of ways. If prepayment rates are relatively low
(due, in part, to the refinancing problems described above), lower long-term interest rates can increase the value of higher-coupon Agency
RMBS. This is because investors typically place a premium on assets with yields that are higher than market yields. Although lower long-
term interest rates may increase asset values in our portfolio, we may not be able to invest new funds in similarly-yielding assets.
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If prepayment levels increase, the value of our Agency RMBS affected by such prepayments may decline. This is because a principal
prepayment accelerates the effective term of an Agency RMBS, which would shorten the period during which an investor would receive
above-market returns (assuming the yield on the prepaid asset is higher than market yields). Also, prepayment proceeds may not be able
to be reinvested in similar-yielding assets. Agency RMBS backed by mortgages with high interest rates are more susceptible to
prepayment risk because holders of those mortgages are most likely to refinance to a lower rate. IOs and IIOs, however, may be the types
of Agency RMBS most sensitive to increased prepayment rates. Because the holder of an IO or IIO receives no principal payments, the
values of IOs and IIOs are entirely dependent on the existence of a principal balance on the underlying mortgages. If the principal balance
is eliminated due to prepayment, IOs and IIOs essentially become worthless. Although increased prepayment rates can negatively affect
the value of our IOs and IIOs, they have the opposite effect on POs. Because POs act like zero-coupon bonds, meaning they are
purchased at a discount to their par value and have an effective interest rate based on the discount and the term of the underlying loan, an
increase in prepayment rates would reduce the effective term of our POs and accelerate the yields earned on those assets, which would
increase our net income.
Higher long-term rates can also affect the value of our Agency RMBS. As long-term rates rise, rates available to borrowers also rise.
This tends to cause prepayment activity to slow and extend the expected average life of mortgage cash flows. As the expected average
life of the mortgage cash flows increases, coupled with higher discount rates, the value of Agency RMBS declines. Some of the
instruments the Company uses to hedge our Agency RMBS assets, such as interest rate futures, swaps and swaptions, are stable
average life instruments. This means that to the extent we use such instruments to hedge our Agency RMBS assets, our hedges may not
adequately protect us from price declines, and therefore may negatively impact our book value. It is for this reason we use interest only
securities in our portfolio. As interest rates rise, the expected average life of these securities increases, causing generally positive price
movements as the number and size of the cash flows increase the longer the underlying mortgages remain outstanding. This makes
interest only securities desirable hedge instruments for pass-through Agency RMBS.
As described above, the Agency RMBS market began to experience severe dislocations in mid-March 2020 as a result of the
economic, health and market turmoil brought about by COVID-19. On March 23, 2020, the Fed announced that it would purchase Agency
RMBS and U.S. Treasuries in the amounts needed to support smooth market functioning, which largely stabilized the Agency RMBS
market, but ended these purchases in March 2022 and announced plans to reduce its balance sheet. The Fed’s planned reduction of its
balance sheet could negatively impact our investment portfolio. Further, the moratoriums on foreclosures and evictions described above
will likely delay potential defaults on loans that would otherwise be bought out of Agency RMBS pools as described above. Depending on
the ultimate resolution of the foreclosure or evictions, when and if it occurs, these loans may be removed from the pool into which they
were securitized. If this were to occur, it would have the effect of delaying a prepayment on the Company’s securities until such time. As
the majority of the Company’s Agency RMBS assets were acquired at a premium to par, this will tend to increase the realized yield on the
asset in question.
Because we base our investment decisions on risk management principles rather than anticipated movements in interest rates, in a
volatile interest rate environment we may allocate more capital to structured Agency RMBS with shorter durations. We believe these
securities have a lower sensitivity to changes in long-term interest rates than other asset classes. We may attempt to mitigate our
exposure to changes in long-term interest rates by investing in IOs and IIOs, which typically have different sensitivities to changes in long-
term interest rates than PT RMBS, particularly PT RMBS backed by fixed-rate mortgages.
Effects on our borrowing costs
We leverage our PT RMBS portfolio and a portion of our structured Agency RMBS with principal balances through the use of short-
term repurchase agreement transactions. The interest rates on our debt are determined by the short term interest rate markets. Increases
in the Fed Funds rate or LIBOR typically increase our borrowing costs, which could affect our interest rate spread if there is no
corresponding increase in the interest we earn on our assets. This would be most prevalent with respect to our Agency RMBS backed by
fixed rate mortgage loans because the interest rate on a fixed-rate mortgage loan does not change even though market rates may change.
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In order to protect our net interest margin against increases in short-term interest rates, we may enter into interest rate swaps, which
economically convert our floating-rate repurchase agreement debt to fixed-rate debt, or utilize other hedging instruments such as
Eurodollar, Fed Funds and T-Note futures contracts or interest rate swaptions.
Summary
The first quarter of 2022 was extremely volatile as the Fed pivoted quickly from unprecedented monetary policy accommodation to the
rapid removal of the accommodation. Current market pricing in the futures markets implies the Fed will raise the target for the Fed Funds
rate to approximately 3.25% by the third quarter of 2023 and to over 2.5% by the end of 2022. The U.S. economy has recovered quickly
from the COVID-19 induced downturn with the help of the Fed’s monetary policy and equally unprecedented fiscal stimulus from the
government. As the economy recovered rapidly, inflationary pressures emerged and were exacerbated by numerous supply constraints,
including the supply of labor, resulting in a sub-4% unemployment rate which continues to fall and wage growth above 5%. The war in
Ukraine has further stimulated inflationary pressures as Russia and Ukraine are leading suppliers of food, energy and many other
commodities. COVID-19 induced shutdowns in China have also increased supply constraints, another source of inflationary pressure. As
the second quarter of 2022 unfolds, these trends have intensified and the Fed appears even more intent on removing their accommodation
as quickly as possible. The Fed may even begin outright sales of U.S. Treasury and Agency RMBS assets later this year.
For the Company, this means our funding costs are likely to rise materially over the course of 2022 and possibly into 2023. As interest
rates have risen the prices of the Company’s assets have fallen. Investors fear possible outright sales of Agency RMBS by the Fed, in
addition to the Fed and most banks buying far fewer Agency RMBS as well. During the first quarter of 2022, these securities have
underperformed the hedge instruments the Company has employed and they may continue to do so. This puts downward pressure on the
Company’s shareholders equity and book value per share. As interest rates have risen, refinancing and purchase activity in the residential
housing market has slowed. However, as the Company’s Agency RMBS assets are trading at discounts, this lowers the yield the Company
realizes. In sum, the current market environment is challenging for the Company’s portfolio and all Agency RMBS and/or mortgage
focused and levered investors. To counter these challenging market conditions, the Company continues to take steps to minimize their
impact through asset selection and the lower use of leverage. The Company’s share prices have traded below our book value per share
since late in 2021. The Company increased the size of the share buy-back program in late 2021 and has the option to repurchase up to
10% of our outstanding shares, which could result in accretive purchases to book value per share owing to the common stock price trading
at a discount to the Company’s book value.
Critical Accounting Estimates
Our condensed financial statements are prepared in accordance with GAAP. GAAP requires our management to make some complex
and subjective decisions and assessments. Our most critical accounting estimates involve decisions and assessments which could
significantly affect reported assets, liabilities, revenues and expenses. There have been no changes to our critical accounting estimates as
discussed in our annual report on Form 10-K for the year ended December 31, 2021.
Capital Expenditures
At March 31, 2022, we had no material commitments for capital expenditures.
Off-Balance Sheet Arrangements
At March 31, 2022, we did not have any off-balance sheet arrangements.
47
Dividends
In addition to other requirements that must be satisfied to continue to qualify as a REIT, we must pay annual dividends to our
stockholders of at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding any
net capital gains. REIT taxable income (loss) is computed in accordance with the Code, and can be greater than or less than our financial
statement net income (loss) computed in accordance with GAAP. These book to tax differences primarily relate to the recognition of
interest income on RMBS, unrealized gains and losses on RMBS, and the amortization of losses on derivative instruments that are treated
as funding hedges for tax purposes.
We intend to pay regular monthly dividends to our stockholders and have declared the following dividends since the completion of our
IPO.
(in thousands, except per share amounts)
Year
Per Share
Amount
Total
2013
$
1.395
$
4,662
2014
2.160
22,643
2015
1.920
38,748
2016
1.680
41,388
2017
1.680
70,717
2018
1.070
55,814
2019
0.960
54,421
2020
0.790
53,570
2021
0.780
97,601
2022 - YTD
(1)
0.200
35,484
Totals
$
12.635
$
475,048
(1)
On April 13, 2022, the Company declared a dividend of $0.045 per share to be paid on May 27, 2022. The effect of this dividend is included in
the table above, but is not reflected in the Company’s financial statements as of March 31, 2022.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in market factors such as interest rates, foreign currency exchange rates,
commodity prices and equity prices. The primary market risks that we are exposed to are interest rate risk, prepayment risk, spread risk,
liquidity risk, extension risk and counterparty credit risk.
Interest Rate Risk
Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international
economic and political considerations and other factors beyond our control.
Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income
earned on interest-earning assets and the interest expense incurred in connection with our interest-bearing liabilities, by affecting the
spread between our interest-earning assets and interest-bearing liabilities. Changes in the level of interest rates can also affect the rate of
prepayments of our securities and the value of the RMBS that constitute our investment portfolio, which affects our net income, ability to
realize gains from the sale of these assets and ability to borrow, and the amount that we can borrow against these securities.
48
We may utilize a variety of financial instruments in order to limit the effects of changes in interest rates on our operations. The principal
instruments that we use are futures contracts, interest rate swaps and swaptions. These instruments are intended to serve as an economic
hedge against future interest rate increases on our repurchase agreement borrowings. Hedging techniques are partly based on assumed
levels of prepayments of our Agency RMBS. If prepayments are slower or faster than assumed, the life of the Agency RMBS will be
longer or shorter, which would reduce the effectiveness of any hedging strategies we may use and may cause losses on such
transactions. Hedging strategies involving the use of derivative securities are highly complex and may produce volatile returns. Hedging
techniques are also limited by the rules relating to REIT qualification. In order to preserve our REIT status, we may be forced to terminate
a hedging transaction at a time when the transaction is most needed.
Our profitability and the value of our investment portfolio (including derivatives used for hedging purposes) may be adversely affected
during any period as a result of changing interest rates, including changes in the forward yield curve.
Our portfolio of PT RMBS is typically comprised of adjustable-rate RMBS (“ARMs”), fixed-rate RMBS and hybrid adjustable-rate
RMBS. We generally seek to acquire low duration assets that offer high levels of protection from mortgage prepayments provided that they
are reasonably priced by the market. Although the duration of an individual asset can change as a result of changes in interest rates, we
strive to maintain a hedged PT RMBS portfolio with an effective duration of less than 2.0. The stated contractual final maturity of the
mortgage loans underlying our portfolio of PT RMBS generally ranges up to 30 years. However, the effect of prepayments of the
underlying mortgage loans tends to shorten the resulting cash flows from our investments substantially. Prepayments occur for various
reasons, including refinancing of underlying mortgages and loan payoffs in connection with home sales, and borrowers paying more than
their scheduled loan payments, which accelerates the amortization of the loans.
The duration of our IO and IIO portfolios will vary greatly depending on the structural features of the securities. While prepayment
activity will always affect the cash flows associated with the securities, the interest only nature of IOs may cause their durations to become
extremely negative when prepayments are high, and less negative when prepayments are low. Prepayments affect the durations of IIOs
similarly, but the floating rate nature of the coupon of IIOs (which is inversely related to the level of one month LIBOR) causes their price
movements, and model duration, to be affected by changes in both prepayments and one month LIBOR, both current and anticipated
levels. As a result, the duration of IIO securities will also vary greatly.
Prepayments on the loans underlying our RMBS can alter the timing of the cash flows from the underlying loans to us. As a result, we
gauge the interest rate sensitivity of our assets by measuring their effective duration. While modified duration measures the price sensitivity
of a bond to movements in interest rates, effective duration captures both the movement in interest rates and the fact that cash flows to a
mortgage related security are altered when interest rates move. Accordingly, when the contract interest rate on a mortgage loan is
substantially above prevailing interest rates in the market, the effective duration of securities collateralized by such loans can be quite low
because of expected prepayments.
We face the risk that the market value of our PT RMBS assets will increase or decrease at different rates than that of our structured
RMBS or liabilities, including our hedging instruments. Accordingly, we assess our interest rate risk by estimating the duration of our assets
and the duration of our liabilities. We generally calculate duration using various third party models. However, empirical results and various
third party models may produce different duration numbers for the same securities.
The following sensitivity analysis shows the estimated impact on the fair value of our interest rate-sensitive investments and hedge
positions as of March 31, 2022 and December 31, 2021, assuming rates instantaneously fall 200 bps, fall 100 bps, fall 50 bps, rise 50 bps,
rise 100 bps and rise 200 bps, adjusted to reflect the impact of convexity, which is the measure of the sensitivity of our hedge positions and
Agency RMBS’ effective duration to movements in interest rates. We have a negatively convex asset profile and a linear to slightly
positively convex hedge portfolio (short positions). It is not uncommon for us to have losses in both directions.
49
All changes in value in the table below are measured as percentage changes from the investment portfolio value and net asset value
at the base interest rate scenario. The base interest rate scenario assumes interest rates and prepayment projections as of March 31,
2022 and December 31, 2021.
Actual results could differ materially from estimates, especially in the current market environment. To the extent that these estimates
or other assumptions do not hold true, which is likely in a period of high price volatility, actual results will likely differ materially from
projections and could be larger or smaller than the estimates in the table below. Moreover, if different models were employed in the
analysis, materially different projections could result. Lastly, while the table below reflects the estimated impact of interest rate increases
and decreases on a static portfolio, we may from time to time sell any of our agency securities as a part of the overall management of our
investment portfolio.
Interest Rate Sensitivity
(1)
Portfolio
Market
Book
Change in Interest Rate
Value
(2)(3)
Value
(2)(4)
As of March 31, 2022
-200 Basis Points
(2.12)%
(16.38)%
-100 Basis Points
(0.24)%
(1.89)%
-50 Basis Points
0.16%
1.27%
+50 Basis Points
(0.10)%
(0.80)%
+100 Basis Points
(0.50)%
(3.84)%
+200 Basis Points
(1.80)%
(13.88)%
As of December 31, 2021
-200 Basis Points
(2.01)%
(17.00)%
-100 Basis Points
(0.33)%
(2.76)%
-50 Basis Points
0.19%
1.59%
+50 Basis Points
(0.48)%
(4.04)%
+100 Basis Points
(1.64)%
(13.91)%
+200 Basis Points
(4.79)%
(40.64)%
(1) Interest rate sensitivity is derived from models that are dependent on inputs and assumptions provided by third parties as well as by our Manager,
and assumes there are no changes in mortgage spreads and assumes a static portfolio. Actual results could differ materially from these estimates.
(2) Includes the effect of derivatives and other securities used for hedging purposes.
(3) Estimated dollar change in investment portfolio value expressed as a percent of the total fair value of our investment portfolio as of such date.
(4) Estimated dollar change in portfolio value expressed as a percent of stockholders' equity as of such date.
In addition to changes in interest rates, other factors impact the fair value of our interest rate-sensitive investments, such as the shape
of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, in the event of changes
in actual interest rates, the change in the fair value of our assets would likely differ from that shown above and such difference might be
material and adverse to our stockholders.
Prepayment Risk
Because residential borrowers have the option to prepay their mortgage loans at par at any time, we face the risk that we will
experience a return of principal on our investments faster than anticipated. Various factors affect the rate at which mortgage prepayments
occur, including changes in the level of and directional trends in housing prices, interest rates, general economic conditions, loan age and
size, loan-to-value ratio, the location of the property and social and demographic conditions. Additionally, changes to government
sponsored entity underwriting practices or other governmental programs could also significantly impact prepayment rates or expectations.
Generally, prepayments on Agency RMBS increase during periods of falling mortgage interest rates and decrease during periods of rising
mortgage interest rates. However, this may not always be the case. We may reinvest principal repayments at a yield that is lower or
higher than the yield on the repaid investment, thus affecting our net interest income by altering the average yield on our assets.
50
Spread Risk
When the market spread widens between the yield on our Agency RMBS and benchmark interest rates, our net book value could
decline if the value of our Agency RMBS falls by more than the offsetting fair value increases on our hedging instruments tied to the
underlying benchmark interest rates. We refer to this as "spread risk" or "basis risk." The spread risk associated with our mortgage assets
and the resulting fluctuations in fair value of these securities can occur independent of changes in benchmark interest rates and may relate
to other factors impacting the mortgage and fixed income markets, such as actual or anticipated monetary policy actions by the Fed,
market liquidity, or changes in required rates of return on different assets. Consequently, while we use futures contracts and interest rate
swaps and swaptions to attempt to protect against moves in interest rates, such instruments typically will not protect our net book value
against spread risk.
Liquidity Risk
The primary liquidity risk for us arises from financing long-term assets with shorter-term borrowings through repurchase agreements.
Our assets that are pledged to secure repurchase agreements are Agency RMBS and cash. As of March 31, 2022, we had unrestricted
cash and cash equivalents of $297.2 million and unpledged securities of approximately $3.7 million (not including unsettled securities
purchases or securities pledged to us) available to meet margin calls on our repurchase agreements and derivative contracts, and for other
corporate purposes. However, should the value of our Agency RMBS pledged as collateral or the value of our derivative instruments
suddenly decrease, margin calls relating to our repurchase and derivative agreements could increase, causing an adverse change in our
liquidity position. Further, there is no assurance that we will always be able to renew (or roll) our repurchase agreements. In addition, our
counterparties have the option to increase our haircuts (margin requirements) on the assets we pledge against repurchase agreements,
thereby reducing the amount that can be borrowed against an asset even if they agree to renew or roll the repurchase agreement.
Significantly higher haircuts can reduce our ability to leverage our portfolio or even force us to sell assets, especially if correlated with asset
price declines or faster prepayment rates on our assets.
Extension Risk
The projected weighted average life and the duration (or interest rate sensitivity) of our investments is based on our Manager's
assumptions regarding the rate at which the borrowers will prepay the underlying mortgage loans. In general, we use futures contracts and
interest rate swaps and swaptions to help manage our funding cost on our investments in the event that interest rates rise. These hedging
instruments allow us to reduce our funding exposure on the notional amount of the instrument for a specified period of time.
However, if prepayment rates decrease in a rising interest rate environment, the average life or duration of our fixed-rate assets or the
fixed-rate portion of the ARMs or other assets generally extends. This could have a negative impact on our results from operations, as our
hedging instrument expirations are fixed and will, therefore, cover a smaller percentage of our funding exposure on our mortgage assets to
the extent that their average lives increase due to slower prepayments. This situation may also cause the market value of our Agency
RMBS and CMOs collateralized by fixed rate mortgages or hybrid ARMs to decline by more than otherwise would be the case while most
of our hedging instruments would not receive any incremental offsetting gains. In extreme situations, we may be forced to sell assets to
maintain adequate liquidity, which could cause us to incur realized losses.
51
Counterparty Credit Risk
We are exposed to counterparty credit risk relating to potential losses that could be recognized in the event that the counterparties to
our repurchase agreements and derivative contracts fail to perform their obligations under such agreements. The amount of assets we
pledge as collateral in accordance with our agreements varies over time based on the market value and notional amount of such assets as
well as the value of our derivative contracts. In the event of a default by a counterparty, we may not receive payments provided for under
the terms of our agreements and may have difficulty obtaining our assets pledged as collateral under such agreements. Our credit risk
related to certain derivative transactions is largely mitigated through daily adjustments to collateral pledged based on changes in market
value and we limit our counterparties to registered central clearing exchanges and major financial institutions with acceptable credit ratings,
monitoring positions with individual counterparties and adjusting collateral posted as required. However, there is no guarantee our efforts
to manage counterparty credit risk will be successful and we could suffer significant losses if unsuccessful.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report (the “evaluation date”), we carried out an evaluation, under the supervision and with
the participation of our management, including our Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), of the
effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act.
Based on this evaluation, the CEO and CFO concluded our disclosure controls and procedures, as designed and implemented, were
effective as of the evaluation date (1) in ensuring that information regarding the Company is accumulated and communicated to our
management, including our CEO and CFO, by our employees, as appropriate to allow timely decisions regarding required disclosure and
(2) in providing reasonable assurance that information we must disclose in our periodic reports under the Exchange Act is recorded,
processed, summarized and reported within the time periods prescribed by the SEC’s rules and forms.
Changes in Internal Controls over Financial Reporting
There were no significant changes in the Company’s internal control over financial reporting that occurred during the Company’s most
recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
52
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not party to any material pending legal proceedings as described in Item 103 of Regulation S-K.
ITEM 1A. RISK FACTORS
A description of certain factors that may affect our future results and risk factors is set forth in our Annual Report on Form 10-K for
the year ended December 31, 2021. As of March 31, 2022, there have been no material changes in our risk factors from those set forth
in our Annual Report on Form 10-K for the year ended December 31, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company did not have any unregistered sales of its equity securities during the three months ended March 31, 2022.
The table below presents the Company’s share repurchase activity for the three months ended March 31, 2022.
Shares Purchased
Maximum Number
Total Number
Weighted-Average
as Part of Publicly
of Shares That May Yet
of Shares
Price Paid
Announced
Be Repurchased Under
Repurchased
(1)
Per Share
Programs
the Authorization
January 1, 2022 - January 31, 2022
-
$
-
-
17,699,305
February 1, 2022 - February 28, 2022
-
-
-
17,699,305
March 1, 2022 - March 31, 2022
64,753
3.31
-
17,699,305
Totals / Weighted Average
64,753
$
3.31
-
17,699,305
(1)
Includes shares of the Company’s common stock acquired by the Company in connection with the satisfaction of tax withholding obligations on
vested employment related awards under equity incentive plans. These repurchases do not reduce the number of shares available under the stock
repurchase program authorization.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
53
ITEM 6. EXHIBITS
Exhibit No.
3.1
3.2
3.3
4.1
10.1
31.1
31.2
32.1
32.2
Exhibit 101.INS XBRL
Inline XBRL Instance Document – the instance document does not appear in the
Interactive Data File because its XBRL tags are embedded within the Inline XBRL
document.***
Exhibit 101.SCH XBRL
Taxonomy Extension Schema Document ***
Exhibit 101.CAL XBRL
Taxonomy Extension Calculation Linkbase Document***
Exhibit 101.DEF XBRL
Additional Taxonomy Extension Definition Linkbase Document Created***
Exhibit 101.LAB XBRL
Taxonomy Extension Label Linkbase Document ***
Exhibit 101.PRE XBRL
Taxonomy Extension Presentation Linkbase Document ***
Exhibit 104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
* Filed herewith.
** Furnished herewith.
*** Submitted electronically herewith.
† Management contract or compensatory plan.
54
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Orchid Island Capital, Inc
.
Registrant
Date: April 29, 2022
By:
/s/ Robert E. Cauley
Robert E. Cauley
Chief Executive Officer, President and Chairman of the Board
(Principal Executive Officer)
Date: April 29, 2022
By:
/s/ George H. Haas, IV
George H. Haas, IV
Secretary, Chief Financial Officer, Chief Investment Officer and
Director (Principal Financial and Accounting Officer)