Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
ORC > SEC Filings for ORC > Form 10-K on 21-Feb-2014All Recent SEC Filings

Show all filings for ORCHID ISLAND CAPITAL, INC.

Form 10-K for ORCHID ISLAND CAPITAL, INC.


21-Feb-2014

Annual Report


ITEM 7. 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 8 of this Form 10-K. 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 this 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 Agency RMBS. Our investment strategy focuses on, and our portfolio consists of, two categories of Agency RMBS: (i) traditional pass-through Agency RMBS and (ii) structured Agency RMBS, such as CMOs, IOs, IIOs and POs, among other types of structured Agency RMBS. From inception through the closing of the initial public offering of our common stock, we were managed by Bimini. Upon completion of that offering, we became externally managed by Bimini Advisors, a registered investment adviser with the Securities and Exchange Commission.


We were formed by Bimini in August 2010 and commenced operations on November 24, 2010. At December 31, 2012, Bimini was our sole stockholder. We completed our initial public offering on February 20, 2013. In that offering we raised gross proceeds of $35.4 million from the sale of 2,360,000 shares of our common stock. We completed a secondary offering in January 2014, raising net proceeds of approximately $24.2 million from the sale of 2,070,000 shares of our common stock.

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 pass-through Agency 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 pass-through Agency RMBS and certain of our structured Agency RMBS through short-term borrowings structured as repurchase agreements. Pass-through Agency 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 intend to qualify and will elect to be taxed as a REIT under the Code commencing with our short taxable year ended December 31, 2013 upon the filing of our federal income tax return for the year. 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 to our stockholders and maintain our REIT qualification.

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;

prepayment rates on mortgages underlying our Agency RMBS, and credit trends insofar as they affect prepayment rates;

the difference between Agency RMBS yields and our funding and hedging costs;

competition for investments in Agency RMBS;

recent actions taken by the Federal Reserve and the U.S. Treasury; 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; and

the requirements to qualify as a REIT and the requirements to qualify for a registration exemption under the Investment Company Act.

We anticipate that, for any period during which changes in the interest rates for our adjustable rate assets do not coincide with interest rate changes on the corresponding liabilities, such assets will re-price more slowly than the corresponding liabilities. Consequently, changes in interest rates, particularly short term interest rates, may significantly influence our net income.


Our net income may be affected by a difference between actual prepayment rates and our projections. Prepayments on loans and securities may be influenced by changes in market interest rates and homeowners' abilities and desires to refinance their mortgages.

Results of Operations

Described below are the Company's results of operations for the year ended December 31, 2013, as compared to the Company's results of operations for the year ended December 31, 2012.

Net (Loss) Income Summary

Net loss for the year ended December 31, 2013 was $0.7 million, or $0.23 per
share. Net income for the year ended December 31, 2012 was $0.5 million, or
$0.54 per share. The components of net (loss) income for the years ended
December 31, 2013 and 2012, along with the changes in those components are
presented in the table below:

(in thousands)
                                          2013         2012        Change
Interest income                         $  9,199     $  2,698     $  6,501
Interest expense                          (1,126 )       (277 )       (849 )
Net interest income                        8,073        2,421        5,652
Losses on RMBS and Eurodollar futures     (7,103 )     (1,154 )     (5,949 )
Net portfolio income                         970        1,267         (297 )
Expenses                                  (1,668 )       (733 )       (935 )
Net (loss) income                       $   (698 )   $    534     $ (1,232 )

GAAP and Non-GAAP Reconciliation

To date, the Company has used derivatives, specifically Eurodollar futures contracts, to hedge the interest rate risk on repurchase agreements in a rising rate environment. Each Eurodollar contract covers a specific three month period, but the Company typically has many contracts in place at any point in time - usually covering several years in the aggregate. The Company has not elected to designate its derivative holdings for hedge accounting treatment under the Financial Accounting Standards Board, (the "FASB"), Accounting Standards Codification, ("ASC"), Topic 815, Derivatives and Hedging. Changes in fair value of these instruments are presented in a separate line item in the Company's 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 Eurodollar futures contracts. In the future, the Company may use other derivative instruments to hedge its interest expense and/or elect to designate its derivative holdings for hedge accounting treatment.

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 gains or losses on specific Eurodollar contracts that pertain to each period presented. As of December 31, 2013, the Company has Eurodollar futures contracts in place through 2018. Since the Company has taken short positions on these contracts, when interest rates move higher the value of our short position may increase in value. The opposite would be true if interest rates were to decrease. Adjusting our interest expense for the periods presented by the gains on all Eurodollar futures would not accurately reflect our economic interest expense for these periods. For each period presented the Company has combined the effects of the Eurodollar positions in place for the respective period with the actual interest expense incurred on repurchase agreements to reflect total expense for the applicable period. Interest expense, including the effect of Eurodollar futures contracts for the period, is referred to as economic interest expense. Net interest income, when calculated to include the effect of Eurodollar futures contracts for the period, is referred to as economic net interest income.


However, under ASC 815, because the Company has not elected hedging treatment, the gains or losses on all of the Company's Eurodollar futures contracts held during the period are reflected in our statements of operations. 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 believes that economic interest expense and economic net interest income provides meaningful information to consider, in addition to the respective amounts prepared in accordance with GAAP. The non-GAAP measures help the Company to evaluate its financial position and performance without the effects of certain transactions and GAAP adjustments that are not necessarily indicative of its current investment portfolio or operations. The realized and unrealized gains or losses presented in the Company's statement of operations are not necessarily representative of the total interest rate expense that the Company will ultimately realize. This is because as interest rates move up or down in the future, the gains or losses the Company ultimately realizes, and which will affect the Company's total interest rate expense in future periods, may differ from the unrealized gains or losses recognized as of the reporting date.

The Company's presentation of the economic value of its hedging strategy has important limitations. First, other market participants may calculate economic interest expense and economic net interest income differently than the Company calculate them. Second, while the Company believes 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 the Company's 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.

The tables below present a reconciliation of the adjustments to interest expense shown for each period related to our Eurodollar futures, and the income statement line item, gains (losses) on Eurodollar futures, calculated in accordance with GAAP for the years ended December 31, 2013 and 2012 and for each quarter during 2013 and 2012.

                Gains (Losses) on Eurodollar Futures Contracts
(in thousands)
                         Recognized in       Attributed to       Attributed to
                            Income              Current             Future
                           Statement            Period              Periods
                            (GAAP)            (Non-GAAP)          (Non-GAAP)
Three Months Ended
December 31, 2013       $           732     $           (42 )   $           774
September 30, 2013               (2,272 )               (28 )            (2,244 )
June 30, 2013                     6,852                  (4 )             6,856
March 31, 2013                     (484 )               (65 )              (419 )
December 31, 2012                    (1 )               (62 )                61
September 30, 2012                  (14 )               (28 )                14
June 30, 2012                        (1 )               (10 )                 9
March 31, 2012                      (24 )                (4 )               (20 )
Years Ended
December 31, 2013       $         4,828     $          (139 )   $         4,967
December 31, 2012                   (40 )              (104 )                64


                                     Economic Interest Expense and Economic Net Interest Income
(in thousands)
                                             Interest Expense on Repurchase Agreements
                                                              Gains
                                                           (Losses) on
                                                            Eurodollar
                                                             Futures
                                                            Contracts                                    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
December 31, 2013       $    2,806     $         309       $        (42 )     $          351     $        2,497       $        2,455
September 30, 2013           2,551               294                (28 )                322              2,257                2,229
June 30, 2013                2,429               322                 (4 )                326              2,107                2,103
March 31, 2013               1,412               201                (65 )                266              1,211                1,146
December 31, 2012              473                94                (62 )                156                379                  317
September 30, 2012             697                58                (28 )                 86                639                  611
June 30, 2012                  769                74                (10 )                 84                695                  685
March 31, 2012                 759                51                 (4 )                 55                708                  704
Years Ended
December 31, 2013       $    9,198     $       1,126       $       (139 )     $        1,265     $        8,072                7,933
December 31, 2012            2,698               277               (104 )                381              2,421                2,317

(1) Reflects the effect of Eurodollar futures contract hedges for only the period presented

(2) Calculated by subtracting the effect of Eurodollar hedges attributed to the period presented from GAAP interest expense.

(3) Calculated by adding the effect of Eurodollar hedges attributed to the period presented to GAAP net interest income

Net Interest Income

During the year ended December 31, 2013, we generated $8.1 million of net interest income, consisting of $9.2 million of interest income from RMBS assets offset by $1.1 million of interest expense on repurchase liabilities. For the comparable period ended December 31, 2012, we generated $2.4 million of net interest income, consisting of $2.7 million of interest income from RMBS assets offset by $0.3 million of interest expense on repurchase liabilities. The increases in interest income and interest expense for the year ended December 31, 2013 primarily reflects the deployment of our IPO proceeds into the RMBS portfolio on a leveraged basis.

On an economic basis, our interest expense on repurchase liabilities for the years ended December 31, 2013 and 2012 was $1.3 million and $0.4 million, respectively, resulting in $7.9 million and $2.3 million of economic net interest income, respectively.


The tables below provide information on our portfolio average balances, interest income, yield on assets, average repurchase agreement balances, interest expense, cost of funds, net interest income and net interest spread for each quarter in 2013 and 2012 and for the years ended December 31, 2013 and 2012 on both a GAAP and economic basis.

(dollars in thousands)
                           Average                         Yield on
                             RMBS                          Average            Average             Interest Expense             Average Cost of Funds
                          Securities       Interest          RMBS           Repurchase           GAAP         Economic         GAAP           Economic
                           Held(1)        Income(2)       Securities       Agreements(1)        Basis         Basis(3)        Basis           Basis(4)
Three Months Ended
December 31, 2013        $    341,505     $    2,806             3.29 %   $       310,107     $      309     $      351           0.40 %           0.45 %
September 30, 2013            335,467          2,551             3.04 %           305,196            294            322           0.39 %           0.42 %
June 30, 2013                 349,704          2,429             2.78 %           312,591            322            326           0.41 %           0.42 %
March 31, 2013                237,820          1,412             2.38 %           210,194            201            266           0.38 %           0.51 %
December 31, 2012              91,094            473             2.08 %            80,256             94            156           0.47 %           0.78 %
September 30, 2012             64,378            697             4.33 %            53,698             58             86           0.43 %           0.64 %
June 30, 2012                  73,559            769             4.18 %            62,407             74             84           0.47 %           0.54 %
March 31, 2012                 70,585            759             4.30 %            59,157             51             55           0.34 %           0.37 %
Years Ended
December 31, 2013        $    316,124     $    9,198             2.91 %   $       284,522     $    1,126     $    1,265           0.40 %           0.44 %
December 31, 2012              74,904          2,698             3.60 %            63,880            277            381           0.43 %           0.60 %



(dollars in thousands)
                             Net Interest Income             Net Interest Spread
                            GAAP           Economic         GAAP           Economic
                           Basis           Basis(3)        Basis           Basis(5)
Three Months Ended
December 31, 2013        $    2,497       $    2,455           2.89 %           2.84 %
September 30, 2013            2,257            2,229           2.65 %           2.62 %
June 30, 2013                 2,107            2,103           2.37 %           2.36 %
March 31, 2013                1,211            1,146           2.00 %           1.87 %
December 31, 2012               379              317           1.61 %           1.30 %
September 30, 2012              639              611           3.90 %           3.69 %
June 30, 2012                   695              685           3.71 %           3.64 %
March 31, 2012                  708              704           3.96 %           3.93 %
Years Ended
December 31, 2013        $    8,072       $    7,933           2.51 %           2.47 %
December 31, 2012             2,421            2,317           3.17 %           3.00 %

(1) Portfolio yields and costs of borrowings presented in the tables above and the tables on pages 49 and 50 are calculated based on the average balances of the underlying investment portfolio/repurchase agreement balances and are annualized for the quarterly periods presented. Average balances for quarterly periods are calculated using two data points, the beginning and ending balances. Average balances for the year to date periods are calculated as the average of the average quarterly periods.

(2) Interest income presented in the table above includes only interest earned on the Company's RMBS investments and excludes interest earned on cash balances, and excludes the impact of discounts or premiums on RMBS investments, as discounts or premiums are not amortized under the fair value option. Interest income and net portfolio interest income may not agree with the information presented in the statements of operations.

(3) Economic interest expense and economic net interest income presented in the table above and the tables on page 50 includes the effect of our Eurodollar futures contract hedges for only the periods presented.

(4) Represents interest cost of our borrowings and effect on Eurodollar futures contracts hedges attributed to the period related to hedging activities Divided by Average RMBS Held.

(5) Economic Net Interest Spread is calculated by subtracting Average Economic Cost of Funds from Yield on Average RMBS Securities.


Interest Income and Average Asset Yield

Our interest income for the years ended December 31, 2013 and 2012 was $9.2 million and $2.7 million, respectively. We had average RMBS holdings of $316.1 million and $74.9 million for the years ended December 31, 2013 and 2012, respectively. The yield on our portfolio was 2.91% and 3.60% for the years ended December 31, 2013 and 2012, respectively. For the year ended December 31, 2013 as compared to the year ended December 31, 2012, there was a $6.5 million increase in interest income due to a $241.2 million increase in average RMBS, partially offset by a 69 basis point decrease in the yield on average RMBS for the year ended December 31, 2013 when compared to the year ended December 31, 2012. The increase in average RMBS during the year ended December 31, 2013 reflects the deployment of the proceeds of our initial public offering.

The table below presents the average portfolio size, income and yields of our respective sub-portfolios, consisting of structured RMBS and pass-through RMBS ("PT RMBS").

(dollars
in
thousands)
                        Average RMBS Held                            Interest Income                      Realized Yield on Average RMBS
                PT          Structured                       PT        Structured                      PT            Structured
               RMBS            RMBS           Total         RMBS          RMBS          Total         RMBS              RMBS           Total
Three Months Ended,
December
31, 2013     $ 318,996     $     22,509     $ 341,505     $  2,726     $        80     $  2,806          3.42 %             1.42 %        3.29 %
September
30, 2013       314,096           21,371       335,467        2,412             139        2,551          3.07 %             2.60 %        3.04 %
June 30,
2013           326,977           22,727       349,704        2,514             (85 )      2,429          3.08 %            (1.51 )%       2.78 %
March 31,
2013           223,191           14,629       237,820        1,415              (3 )      1,412          2.54 %            (0.06 )%       2.38 %
December
31, 2012        84,617            6,477        91,094          597            (124 )        473          2.82 %            (7.66 )%       2.08 %
September
30, 2012        56,519            7,859        64,378          410             287          697          2.90 %            14.59 %        4.33 %
June 30,
2012            65,320            8,239        73,559          593             176          769          3.63 %             8.56 %        4.18 %
March 31,
2012            61,936            8,649        70,585          530             229          759          3.43 %            10.56 %        4.30 %
Years Ended,
December
31, 2013     $ 295,815     $     20,309     $ 316,124     $  9,067     $       131     $  9,198          3.06 %             0.65 %        2.91 %
December
31, 2012        67,098            7,806        74,904        2,130             568        2,698          3.17 %             7.27 %        3.60 %

Interest Expense and the Cost of Funds

We had average outstanding repurchase agreements of $284.5 million and $63.9 million and total interest expense of $1.1 million and $0.3 million for the years ended December 31, 2013 and 2012, respectively. Our average cost of funds was 0.40% and 0.43% for years ended December 31, 2013 and 2012, respectively. There was a 3 basis point decrease in the average cost of funds and a $220.6 million increase in average outstanding repurchase agreements during the year ended December 31, 2013 as compared to the year ended December 31, 2012. The increase in average outstanding repurchase agreements reflects the deployment of the proceeds of our initial public offering on a leveraged basis.

Our economic interest expense was $1.3 million and $0.4 million for the years ended December 31, 2013 and 2012, respectively. There was a 16 basis point decrease in the average economic cost of funds to 0.44% for the year ended December 31, 2013 from 0.60% for the previous year.

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 23 basis points above average one-month LIBOR and 4 basis points above average six-month LIBOR for the quarter ended December 31, 2013. Our average economic cost of funds was 28 basis points above average one-month LIBOR and 9 basis points above average six-month LIBOR for the quarter ended December 31, 2013. The average term to maturity of the outstanding repurchase agreements was 15 days at both December 31, 2013 and 2012.


The tables below presents the average repurchase agreements outstanding, interest expense and average cost of funds, and average one-month and six-month LIBOR rates for each quarter in 2013 and 2012 and for the years ended December 31, 2013 and 2012 on both a GAAP and economic basis.

(dollars in thousands)
                                    Average
                                   Balance of          Interest Expense             Average Cost of Funds
                                   Repurchase         GAAP         Economic         GAAP           Economic
                                   Agreements        Basis          Basis          Basis            Basis
Three Months Ended
December 31, 2013                 $    310,107     $      309     $      350           0.40 %           0.45 %
September 30, 2013                     305,196            294            322           0.39 %           0.42 %
June 30, 2013                          312,591            322            326           0.41 %           0.42 %
March 31, 2013                         210,194            201            266           0.38 %           0.51 %
December 31, 2012                       80,256             94            156           0.47 %           0.78 %
September 30, 2012                      53,698             58             86           0.43 %           0.64 %
June 30, 2012                           62,407             74             84           0.47 %           0.54 %
March 31, 2012                          59,157             51             55           0.34 %           0.37 %
Years Ended
. . .
  Add ORC to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for ORC - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.