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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
 
No
Indicate by check
 
mark whether the registrant
 
has submitted electronically every
 
Interactive Data File required
 
to be submitted pursuant
 
to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12
 
months (or for such shorter period that the registrant was
 
required to submit such
files).
 
Yes
 
No
Indicate by check mark whether the registrant is
 
a large accelerated filer,
 
an accelerated filer, a non-accelerated filer,
 
a smaller reporting company,
 
or
an emerging growth company. See the definitions of "large accelerated filer,"
 
"accelerated filer", "smaller reporting company", and "emerging growth
company" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company,
 
indicate by check mark if the registrant has
 
elected not to use the extended transition period
 
for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes
 
No
Number of shares outstanding at April 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
 
and $
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
 
par value;
100,000,000
 
shares authorized; no shares issued
and outstanding as of March 31, 2022 and December 31, 2021
-
-
Common Stock, $
0.01
 
par value;
500,000,000
 
shares authorized,
177,117,186
shares issued and outstanding as of March 31, 2022 and
176,993,049
 
shares issued
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
 
of
shares of the Company’s common stock in transactions that were deemed to be “at the market” offerings and privately
 
negotiated
transactions.
 
The Company issued a total of
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, 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
 
shares of the Company’s common stock. J.P.
Morgan purchased the shares of the Company’s common stock from the Company pursuant
 
to the January 2021 Underwriting
Agreement at $
5.20
 
per share. In addition, the Company granted J.P. Morgan a 30-day option to purchase up to an additional
1,140,000
 
shares of the Company’s common stock on the same terms and conditions, which
 
J.P.
 
Morgan exercised in full on January
21, 2021. The closing of the offering of
8,740,000
 
shares of the Company’s common stock occurred on January 25, 2021, with
proceeds to the Company of approximately $
45.2
 
million, net of offering expenses.
On March 2, 2021, Orchid entered into an underwriting agreement (the “March 2021
 
Underwriting Agreement”) with J.P. Morgan,
relating to the offer and sale of
8,000,000
 
shares of the Company’s common stock. J.P. Morgan purchased the shares of the
Company’s common stock from the Company pursuant to the March 2021 Underwriting
 
Agreement at $
5.45
 
per share. In addition, the
Company granted J.P. Morgan a 30-day option to purchase up to an additional
1,200,000
 
shares of the Company’s common stock on
the same terms and conditions, which J.P. Morgan exercised in full on March 3, 2021. The closing of the offering of
9,200,000
 
shares
of the Company’s common stock occurred on March 5, 2021, with proceeds to the Company
 
of approximately $
50.0
 
million, net of
offering expenses.
On June 22, 2021, Orchid entered into an equity distribution agreement (the “June
 
2021 Equity Distribution Agreement”) with four
sales agents pursuant to which the Company could offer and sell, from time to time, up to
 
an aggregate amount of $
250,000,000
 
of
shares of the Company’s common stock in transactions that were deemed to be “at the market” offerings and privately
 
negotiated
transactions. The Company issued a total of
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 $
246.0
 
million, after commissions and fees, prior to
its termination in October 2021.
6
On October 29, 2021, Orchid entered into an equity distribution agreement (the
 
“October 2021 Equity Distribution Agreement”) with
four sales agents pursuant to which the Company may offer and sell, from time to time,
 
up to an aggregate amount of $
250,000,000
 
of
shares of the Company’s common stock in transactions that are deemed to be “at the market”
 
offerings and privately negotiated
transactions.
 
Through March 31, 2022, the Company 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. 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
 
million
and $
37.2
 
million, respectively,
 
primarily
 
to satisfy
 
collateral
 
requirements
 
of one of
 
its derivative
 
counterparties.
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
 
at March 31, 2022 and $
120.98
 
at December 31, 2021.
 
The contract values
of the short positions were $
1,369.4
 
million and $
446.4
 
million at March 31, 2022 and December 31, 2021, respectively.
 
10-Year Ultra
 
futures
contracts were valued at a price of $
135.47
 
at March 31, 2022 and $
146.44
 
at December 31, 2021. The contract value of the short position was
$
365.8
 
million and $
322.2
 
million at March 31, 2022 and December 31, 2021, respectively
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
 
December
 
31,
2021.
($ in thousands)
Option
Underlying Swap
Weighted
Average
Weighted
Average
Average
Adjustable
Average
Fair
Months to
Notional
Fixed
Rate
Term
Expiration
Cost
Value
Expiration
Amount
Rate
(LIBOR)
(Years)
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
 
shares of the Company’s
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
 
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.
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
 
million, including commissions and fees, for a weighted average price
 
of $
7.10
 
per
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
 
shares.
 
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
 
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.
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
 
shares of
 
the Company’s
 
common stock
 
that may
 
be issued
 
under the
 
2021 Incentive
 
Plan. The
 
2021 Incentive
 
Plan replaces
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.
 
Derivative
 
contracts
 
are reported
 
as a net
 
position by
 
contract
 
type, and
 
not based
 
on master
 
netting arrangements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
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.
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
 
million and $
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
 
million and $
1.1
 
million, respectively.
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
 
shares, or
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.
 
39
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.
40
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.
 
41
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.
42
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
43
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.
44
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.
45
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.
46
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)
orc10q20220331x10.1
Exhibit 10.1
ORCHID ISLAND CAPITAL,
 
INC.
2022 LONG-TERM EQUITY INCENTIVE COMPENSATION PLAN
This 2022 Long-Term Equity Incentive Compensation Plan (the “2022 Plan”) sets forth
terms and conditions on which equity awards may be made by Orchid Island Capital, Inc. (the
“Company”).
 
All employees of Bimini Advisors, LLC, which is the Company’s external manager (the
“Manager”), and employees of entities affiliated with the Manager (collectively,
 
the
“Employees”) are eligible to participate in the 2022 Plan. Members of our Manager’s and its
affiliates’ senior management team also serve as the Company’s
 
executive officers, including the
Company’s Chief Executive Officer and Chief Financial Officer.
 
All of the Employees are
referred to as “Participants.” Being a Participant does not entitle the individual to an award under
the 2022 Plan. The Compensation Committee of the Board of Directors of the Company (the
“Committee”) will have absolute sole discretion over all aspects of the 2022 Plan, including but
not limited to the ability to reduce the amount of any bonus award or the size of the bonus pool
even if the performance objectives and other terms of the 2022 Plan are satisfied and to adjust
the Company’s book value for purposes of the 2022 Plan due to dilutive issuances of the
Company’s common stock.
 
 
Participants will be eligible to earn awards under the 2022 Plan for performance over the
next one-year, three-year and five-year periods. A bonus pool will be established under the 2022
Plan for each of the one-, three- and five-year measurement periods. The amount credited to the
bonus pool will be based on the Company’s performance under each of the three performance
criteria (which are described below) of the 2022 Plan for each of the three measurement periods.
The Committee, in its discretion, will determine each Participant’s award (
i.e.
, the percentage of
the bonus pool paid to each Participant).
 
 
The maximum amount that may be credited to the bonus pool for each measurement
period will equal the average management fees paid by the Company to the Manager (pursuant
to the terms of the management agreement between the Company and the Manager) for such
period multiplied by the applicable percentage described in the table below. Under the 2022
Plan, the maximum bonus pool for awards to be issued for performance during (i) the one-year
measurement period will equal 20% of the average monthly management fee earned during 2022
multiplied by 12, (ii) the three-year measurement period will equal 35% of the average annual
management fee paid for 2022 through 2024 and (iii) for the five-year measurement period will
equal 45% of the average annual management fee paid for 2022 through 2026.
 
 
As noted above, the amount credited to the bonus pool for each measurement period will
reflect the Company’s performance measured against the three performance criteria described
below. The table below illustrates the maximum amount that may be credited to the bonus pool
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
for each measurement period (as a percentage of the average management fees for the applicable
period). The table also shows the amount that may be credited to the bonus pool for each
measurement period (also as a percentage of the average management fees for the applicable
period) for achievement of objectives with respect to each of the performance criteria. For
example, the maximum amount that may be credited to the bonus pool for the three-year
measurement period based on Agency RMBS rate (as defined below) relative performance is
10.50% of the average management fees paid for 2022 through 2024.
1-year
3-year
5-year
Peer-relative financial performance
9.00%
15.75%
20.25%
Agency RMBS rate relative performance
6.00%
10.50%
13.50%
Peer-relative book value performance
5.00%
8.75%
11.25%
Total for Measurement Period
20.00%
35.00%
45.00%
The Committee established the following performance measures and the performance
thresholds that must be satisfied for awards to be earned under the 2022 Plan.
 
 
Peer-Relative Financial Performance.
No amount will be earned for this performance
measure unless the Company’s financial performance for the applicable measurement period
exceeds the mean of the financial performance of the companies in the Peer Group (defined
below) for the applicable measurement period. The financial performance of the Company and
those in the Peer Group will equal the sum of total dividends paid during the measurement period
and the change in book value during the measurement period divided by the book value on the
first day of the applicable measurement period. The “Peer Group” consists of the following
companies: AGNC Investment Corp., Annaly Capital Management, Inc., Arlington Asset
Investment Corp., ARMOUR Residential REIT, Inc., Cherry Hill Mortgage
 
Investment
Corporation, Dynex Capital, Inc. and Invesco Mortgage Capital Inc. In the event that a company
in the Peer Group merges with another entity,
 
sells all or a significant portion of its business,
dissolves, liquidates or the Committee determines that a company has substantially changed its
business in such a way that it no longer conducts a similar business to the Company’s business,
then such company will be removed from the Peer Group for the measurement period(s) when
such event occurs.
 
Agency RMBS Rate Relative Performance.
The Company’s performance under this
performance measure will equal the sum of the change in book value during the applicable
measurement period and total dividends paid during the measurement period. No amount will be
earned for this performance measure unless the Company’s performance as calculated in the
preceding sentence for the applicable measurement period exceeds the Agency RMBS rate
multiplied by the number of years in the measurement period. The “Agency RMBS rate” will
equal the yield on the Fannie Mae 30-year fixed rate current coupon mortgage as of the
beginning of 2022 of 2.067% (determined by averaging the rate as of the last business day of
2021 and the first business day of 2022) plus 400 bps, or 6.067%.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Peer-Relative Book Value
 
Performance.
 
No amount will be earned for this performance
measure unless the Company’s change in book value for the applicable measurement period
(calculated in accordance with the following sentence) exceeds the mean change in book value
for the companies in the Peer Group. The change in book value for the Company and those in the
Peer Group will be determined by subtracting the book value on the first day of the measurement
period from the book value on the last day in the measurement period, with such amount divided
by the book value on the first day of the measurement period.
 
If the Company’s results for a performance measure equal or are less than the threshold
for a measurement period, no amount will be added to the bonus pool for the measurement
period with respect to that measurement criterion. The table below details the amounts by which
the Company’s performance must exceed the threshold performance measures described above
for the maximum bonus award to be added to the bonus pool. Linear interpolation will be used
for results falling between the threshold and the result that must be achieved to earn the
maximum award.
1-year
3-year
5-year
Peer-relative financial performance
Threshold + 5.0%
Threshold + 10.0%
Threshold + 15.0%
Agency RMBS rate relative performance
Threshold + 5.0%
Threshold + 10.0%
Threshold + 15.0%
Peer-relative book value performance
Threshold + 2.0%
Threshold + 4.0%
Threshold + 6.0%
 
Awards for
 
these three measurement periods will be paid no later than March 30 of the
year
following the end of the relevant measurement period. The Committee anticipates that 50% of
earned bonuses will be paid in unrestricted shares of the Company’s common stock and 50% will
be paid in the form of “Performance Units,” all of which will be issued under the 2021 Equity
Incentive Plan (the “2021 Plan”). The number of unrestricted shares of the Company’s common
stock and Performance Units to be issued in satisfaction of the earned bonuses will be
determined by dividing the amount of such bonus by the average closing price of the Company’s
common stock on the New York
 
Stock Exchange for the 10 trading days preceding the grant date
of the common stock and Performance Units rounded to the nearest whole number. The
Performance Units will vest at the rate of 10% per quarter commencing with the first quarter
after the one year anniversary of the end of the applicable measurement period, with the
Participant receiving one share of the Company’s common stock for each Performance Unit that
vests. The Participant must continue to be employed by the Company as of the end of each such
quarter in order to vest in the number of Performance Units scheduled to vest on that date. In the
event of a Change in Control (as defined in the 2021 Plan) or the death or disability of the
Participant, all of his or her Performance Units will be vested. When vested, each Performance
Unit will be settled by the issuance of one share of the Company’s common stock, at which time
the Performance Unit shall be cancelled immediately, but in no case later than March 30 of the
year after the year in which the Performance Units vest.
 
 
The Performance Units will contain dividend equivalent rights which entitle the
Participants to receive distributions declared by the Company on common stock. One
Performance Unit is equivalent to one share of common stock for purposes of the dividend
equivalent rights. Other than dividend equivalent rights, the Performance Units do not entitle the
Participants to any of the rights of a stockholder of the Company.
 
 
The number of outstanding Performance Units will be subject to the following
adjustments prior to the date on which such Performance Unit vests:
 
Book Value
 
Impairment
.
 
A “Book Value
 
Impairment” will occur if over any two
consecutive quarters the following conditions are satisfied: (i) the Company’s book value per
share declines by 15% or more during the first of such two quarters and (ii) the Company’s book
value per share decline from the beginning of such two quarters to the end of such two quarters is
at least 10%. If a Book Value
 
Impairment occurs, then the number of Performance Units that are
outstanding as of the last day of such two quarter period shall be reduced by 15%.
 
Extraordinary Book Value
 
Preservation
.
 
“Extraordinary Book Value
 
Preservation” will
occur in any quarter in which the following conditions are satisfied: (i) the median change in the
book value per share of the companies in the Peer Group (the “Median Book Value
 
Decline”) is
a decline of 6% or more and (ii) the Company’s book value per share either (a) increases or (b)
declines by a percentage that is less than 50% of the Median Book Value
 
Decline. If an event of
Extraordinary Book Value
 
Preservation occurs, then the number of Performance Units that are
outstanding as of the last day of the quarter in which the Extraordinary Book Value
 
Preservation
has occurred shall be increased by 5 basis points for every 1 basis point of difference between
the Company’s book value per share percentage change and the Median Book Value
 
Decline
during such quarter.
 
Outperform All Peer Companies
.
 
The Company will “Outperform All Peer Companies”
in any quarter in which the following conditions are satisfied: (i) the companies in the Peer
Group all experience a decline in book value per share and (ii) the Company’s book value per
share either (a) increases or (b) declines by an amount that is less than the decline experienced by
each company in the Peer Group. If the Company Outperforms All Peer Companies in any
quarter, then the number of Performance Units that are outstanding as of the last day of such
quarter shall increase by 10%.
 
The Committee anticipates adopting similar plans for future years with modifications to
the performance measures and hurdle rates as the Committee deems appropriate.
 
orc10q20220331x311
Exhibit 31.1
CERTIFICATIONS
I, Robert E. Cauley, certify
 
that:
 
 
1.
 
I have reviewed this quarterly report on Form 10-Q of Orchid Island
 
Capital, Inc. (the "registrant");
 
 
2.
 
Based on my knowledge, this report does not contain any untrue statement of
 
a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances
 
under which such statements
were made, not misleading with respect to the period covered by this report;
 
 
3.
 
Based on my knowledge, the financial statements, and other financial information
 
included in this report, fairly
present in all material respects the financial condition, results of operations and
 
cash flows of the registrant as
of, and for, the periods presented in this report;
 
 
4.
 
The registrant's other certifying officer and I are responsible
 
for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e)
 
and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
 
for the registrant and have:
 
 
 
a)
designed such disclosure controls and procedures, or caused such disclosure
 
controls and procedures to be
designed under our supervision, to ensure that material information relating
 
to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly
 
during the
period in which this report is being prepared;
 
 
 
b)
designed such internal control over financial reporting, or caused such
 
internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance
 
regarding the reliability of
financial reporting and the preparation of financial statements for external
 
purposes in accordance with
generally accepted accounting principles;
 
 
c)
evaluated the effectiveness of the registrant's disclosure controls
 
and procedures and presented in this
report our conclusions about the effectiveness of the disclosure
 
controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
 
 
 
d)
disclosed in this report any change in the registrant’s
 
internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter
 
(the registrant’s fourth fiscal quarter in the case of
 
an
annual report) that has materially affected, or is reasonably likely
 
to materially affect, the registrant’s
internal control over financial reporting; and
 
 
5.
 
The registrant's other certifying officer and I have disclosed, based
 
on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee
 
of the registrant's board of
directors (or persons performing the equivalent functions):
 
 
 
a)
all significant deficiencies and material weaknesses in the design or operation
 
of internal control over
financial reporting which are reasonably likely to adversely affect
 
the registrant's ability to record, process,
summarize and report financial information; and
 
 
b)
any fraud, whether or not material, that involves management or other employees
 
who have a significant
role in the registrant's internal control over financial reporting.
 
Date: April 29, 2022
/s/ Robert E. Cauley
Robert E. Cauley
Chairman of the Board, Chief Executive Officer and
President
orc10q20220331x312
Exhibit 31.2
CERTIFICATIONS
I, George H. Haas, certify that:
 
 
1.
 
I have reviewed this quarterly report on Form 10-Q of Orchid Island Capital,
 
Inc. (the "registrant");
 
 
2.
 
Based on my knowledge, this report does not contain any untrue
 
statement of a material fact or omit
to state a material fact necessary to make the statements made, in light
 
of the circumstances under
which such statements were made, not misleading with respect to
 
the period covered by this report;
 
 
3.
 
Based on my knowledge, the financial statements, and other financial
 
information included in this
report, fairly present in all material respects the financial condition,
 
results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
 
 
4.
 
The registrant's other certifying officer and I are responsible for establishing and
 
maintaining
disclosure controls and procedures (as defined in Exchange Act Rules
 
13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange
 
Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
 
 
 
a)
designed such disclosure controls and procedures, or caused such disclosure
 
controls and
procedures to be designed under our supervision, to ensure that material
 
information relating to
the registrant, including its consolidated subsidiaries, is made known
 
to us by others within those
entities, particularly during the period in which this report is being prepared;
 
 
 
b)
designed such internal control over financial reporting, or caused
 
such internal control over
financial reporting to be designed under our supervision, to provide
 
reasonable assurance
regarding the reliability of financial reporting and the preparation
 
of financial statements for
external purposes in accordance with generally accepted accounting
 
principles;
 
 
c)
evaluated the effectiveness of the registrant's disclosure controls and procedures and
 
presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures,
 
as
of the end of the period covered by this report based on such evaluation;
 
and
 
 
 
d)
disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely
 
to materially
affect, the registrant’s internal control over financial reporting; and
 
 
5.
 
The registrant's other certifying officer and I have disclosed, based on our
 
most recent evaluation of
internal control over financial reporting, to the registrant's auditors
 
and the audit committee of the
registrant's board of directors (or persons performing the equivalent functions):
 
 
 
 
a)
all significant deficiencies and material weaknesses in the design or
 
operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant's
 
ability to
record, process, summarize and report financial information; and
 
 
b)
any fraud, whether or not material, that involves management or other
 
employees who have a
significant role in the registrant's internal control over financial reporting.
Date: April 29, 2022
/s/ George H. Haas, IV
George H. Haas, IV
Chief Financial Officer
orc10q20220331x321
 
Exhibit 32.1
 
CERTIFICATION
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350
In connection with the quarterly report on Form 10-Q of Orchid Island Capital,
 
Inc. (the “Company”) for
the period ended March 31, 2022 to be filed with the Securities and Exchange
 
Commission on or about
the date hereof (the ”Report”), I, Robert E. Cauley, Chairman of the Board and Chief Executive Officer of
the Company, certify,
 
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
 
18 U.S.C.
Section 1350, that:
 
1.
The Report fully complies with the requirements of Section 13(a) or 15(d)
 
of the Securities Exchange
Act of 1934, as amended; and
2.
The information contained in the Report fairly presents, in all
 
material respects, the financial
condition and results of operations of the Company at the dates of, and
 
for the periods covered by, the
Report.
It is not intended that this statement be deemed to be filed for purposes of the
 
Securities Exchange Act of
1934.
April 29, 2022
/s/ Robert E. Cauley
Robert E. Cauley,
Chairman of the Board and
Chief Executive Officer
orc10q20220331x322
 
Exhibit 32.2
 
 
CERTIFICATION
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350
In connection with the quarterly report on Form 10-Q of Orchid Island Capital,
 
Inc. (the “Company”) for
the period ended March 31, 2022 to be filed with the Securities and Exchange
 
Commission on or about
the date hereof (the ”Report”), I, George H. Haas, Chief Financial Officer of the Company, certify,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
 
Section 1350, that:
 
1.
The Report fully complies with the requirements of Section 13(a) or 15(d)
 
of the Securities Exchange
Act of 1934, as amended; and
2.
The information contained in the Report fairly presents, in all
 
material respects, the financial
condition and results of operations of the Company at the dates of, and
 
for the periods covered by, the
Report.
It is not intended that this statement be deemed to be filed for purposes of the
 
Securities Exchange Act of
1934.
April 29, 2022
/s/ George H. Haas, IV
George H. Haas, IV
Chief Financial Officer