Orchid Island Capital(US:ORC)2023-04-28 16:24Financial Performance - Net income for Q1 2023 was $3.5 million, or $0.09 per share, compared to a net loss of $148.7 million, or $4.20 per share, in Q1 2022[138] - Interest income decreased to $38.0 million in Q1 2023 from $41.9 million in Q1 2022, a decline of approximately 9.2%[138] - Interest expense increased significantly to $42.2 million in Q1 2023 from $2.7 million in Q1 2022, reflecting a rise of approximately 1495.7%[138] - Gains on RMBS and derivative contracts were $12.7 million in Q1 2023, a substantial recovery from losses of $183.6 million in Q1 2022, representing a change of $196.3 million[138] - For the three months ended March 31, 2023, the company reported a net interest loss of $4.2 million, compared to a net interest income of $39.2 million for the same period in 2022[161] - The company generated $15.0 million of economic net interest income for the three months ended March 31, 2023, down from $37.6 million in the same period in 2022[162] - Total operating expenses for the three months ended March 31, 2023, were approximately $5.0 million, an increase of $625,000 compared to $4.4 million for the same period in 2022[182] Shareholder Actions - Total shares repurchased from inception of the stock repurchase program through March 31, 2023, amounted to 4,048,613 shares at an aggregate cost of approximately $68.8 million[135] - The company issued 9,742,188 shares under the October 2021 Equity Distribution Agreement for gross proceeds of approximately $151.8 million before its termination in March 2023[130] - The stock repurchase program has been authorized for up to 6,183,601 shares, representing approximately 18% of the company's outstanding shares as of October 2022[134] - The company declared a dividend of $0.16 per share on April 12, 2023, to be paid on May 26, 2023, contributing to a total of $552.568 million in dividends since its IPO[244] Investment Strategy - The company aims to provide attractive risk-adjusted total returns through capital appreciation and regular monthly distributions from its Agency RMBS investments[127] - The company’s investment strategy involves leveraging both traditional pass-through Agency RMBS and structured Agency RMBS to manage interest rate sensitivity and income stability[127] - The company has not elected to designate its derivative holdings for hedge accounting treatment, meaning fluctuations in their value do not impact reported interest expense[147] - The company utilizes futures contracts, interest rate swaps, and swaptions to hedge against interest rate increases, but effectiveness may vary based on prepayment rates[249] Market Conditions - The Agency RMBS market generated a total return of 2.5% for the first quarter of 2023, underperforming comparable duration SOFR swaps by 0.2%[216] - The yield on the 2-year U.S. Treasury note increased from approximately 4.43% on December 31, 2022, to a high of 5.07% on March 8, 2023, before declining to around 3.77% on March 24, 2023[214] - The Mortgage Bankers Association 30-year survey rate averaged 6.45% for the first quarter of 2023, with a high of 6.79% and a low of 6.18%[215] - The Agency RMBS market experienced a return of -1.2% compared to comparable duration SOFR swaps in Q1 2023[238] Liquidity and Borrowings - The company had cash and cash equivalents of $143.2 million as of March 31, 2023, and generated cash flows of $95.6 million from principal and interest payments on its RMBS portfolio[206] - The company had obligations outstanding under repurchase agreements of approximately $3,769.4 million as of March 31, 2023, with a net weighted average borrowing cost of 4.90%[194] - The average outstanding borrowings decreased to $3,573.9 million in Q1 2023 from $5,354.1 million in Q1 2022, contributing to the increase in interest expense despite the lower borrowing volume[171] - As of March 31, 2023, the ending balance of borrowings was $3,769,437, an increase of 11.56% from $3,378,445 on December 31, 2022[196] Risk Factors - The company faces significant liquidity risk, with potential margin calls increasing if the value of pledged Agency RMBS or derivative instruments decreases[264] - Interest rate sensitivity analysis indicates that a 200 basis point increase in interest rates could lead to a decline of 2.41% in market value and 21.39% in book value as of March 31, 2023[259] - Counterparty credit risk is present due to potential losses from counterparties failing to meet obligations under repurchase agreements and derivative contracts[267] - The company faces potential negative impacts on operations if prepayment rates decrease in a rising interest rate environment, leading to extended average life or duration of fixed-rate assets[266] Regulatory Environment - The Fed committed to purchasing $80 billion of U.S. Treasuries and $40 billion of Agency RMBS each month until tapering began in November 2021, ending net asset purchases by March 2022[218] - The LIBOR Act established SOFR as the new benchmark rate for contracts using LIBOR, providing a safe harbor from litigation for claims related to SOFR[223] - The FHFA allowed Enterprises to increase their capital buffers to $25 billion and $20 billion, respectively, from a prior limit of $3 billion each[220] - The final rule published by the FHFA on February 25, 2022, amended the Enterprise capital framework, including a dynamic leverage buffer and a reduction in the risk weight floor from 10% to 5%[220]