Orchid Island Capital Inc
For the period ended Sep 30, 2024. Filed Oct 25, 2024.
View on SEC.govAbout this filing
A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Sep 30, 2024 · Filed Oct 25, 2024
ORC$4.94-1.0%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2024-06-30; filed 2024-07-26.
0001437749-24-023551
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-Q
Period ended 2024-09-30; filed 2024-10-25.
0001437749-24-032105
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 134 previous paragraphs and 134 current paragraphs.
93 unchanged; 34 reworded; 7 added; 7 removed; 0 previous and 0 current paragraphs rearranged.
Tables are not compared: 53 previous and 53 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (7)
Current report
The trajectory of the economy that existed as the second quarter of 2024 ended continued into the third quarter. The trend was apparent in the incoming economic data, the level of interest rates and the outlook for monetary policy on the part of the Fed. With respect to the latter, the Fed finally lowered the Fed Funds rate in late September by 50 basis points, the first interest rate cut since the Fed stopped tightening monetary policy in March of 2023. The move was well telegraphed by various Fed officials during their public comments leading up to the event as the Fed was careful not to surprise the market with the cut. Throughout the third quarter, incoming labor market and inflation data was consistent with the Fed’s view that inflation was approaching its 2% target and would soon get there. The Fed's focus has shifted to the labor market and ensuring the supply/demand balance that had led to a low unemployment rate and outsized wage gains did not slow too much and jeopardize its efforts to fulfill its second mandate of full employment. Further, elevated interest rate levels had materially impacted the housing market and other interest rate sensitive sectors of the economy, so the Fed feared that if the labor market cooled too much then economic growth could as well. The manufacturing side of the economy was already weak, so all things considered the Fed's movement of monetary policy back towards the neutral rate was consistent with its mandates.
Current report
Unlike the inflation and labor market data, consumer spending levels and economic growth generally – as measured by GDP – were still quite robust during the third quarter and, in the case of the latter, trending at or above sustainable trend growth rates. However, as long as inflation data continued to move towards its target level – and such data was already there when three- or six-month measures were annualized – the Fed appeared comfortable lowering the Fed Funds rate to ensure the labor market did not cool too much. As the fourth quarter of 2024 begins, the latest reading on the labor market appears to have reversed the slowing trend apparent over the last several months as the September reading was very strong, previous months data was revised higher and the unemployment rate declined. Also, in late September, the government revised previously released data on gross domestic income (“GDI”), another measure of economic growth. GDI data over the past several quarters had been quite low and inconsistent with GDP data and consumer spending levels. Most economists believed the GDI data painted the more accurate picture of the true level of economic growth in the economy. However, the GDI data was revised higher and was now consistent with the GDP data. Together with the latest labor market data, the economy now appears quite healthy and the market expects that the Fed will be more conservative in the timing and extent of further reductions in the Fed Funds rate.
Current report
Over the course of the third quarter of 2024, interest rates continued to decrease as they had through the last two months of the second quarter. After the yield on the 10-year T-Note peaked at 4.7% in late April 2024, the yield trended downward until hitting a year-to-date low near 3.6% on September 16, 2024. However, the GDI revisions in late September, coupled with the resurgence in the labor market data released in early October, drove 10-year U.S. Treasury rates back above 4% in early October. Otherwise, the U.S Treasury and swap curves steepened throughout the third quarter of 2024. The spread between the 2-year and 10-year T-Notes turned positive in early September 2024 for the first time since mid-2022, ending the longest period of inversion ever recorded.
Current report
As noted above, the Fed reduced the overnight Fed Funds rate at its meeting in September by 50 basis points. Given developments discussed above that occurred prior to the Fed’s meeting in September – cooling inflation data, a slowing labor market and comments by Fed officials regarding their desire to start to remove overly restrictive monetary policy – the market anticipated two such 50 basis point cuts and at least one additional 25 basis point cut by year-end based on price levels in the futures and related markets. The developments late in the third quarter of 2024 and early in the fourth quarter of 2024 – the GDI revisions, September labor market report and even the September inflation report released in early October, which was slightly higher than expectations – have reduced market expectations of further Fed Funds rate cuts this year to less than two more 25 basis point cuts. Some economists believe the economy may have achieved a “soft” landing after the 500+ basis point hikes initiated by the Fed. A soft landing refers to the outcome where the economy does not suffer a contraction or even slowdown growth following a tightening cycle by the Fed. Such instances are very rare, and it remains to be seen if this will prove to be the case.
Current report
Interest rate volatility embedded in interest rate derivatives, as measured by the MOVE index, was elevated throughout the third quarter of 2024 and even increased further still late in the quarter after the Fed Funds rate cut, likely in response to the developments discussed above, geopolitical events in the Middle East and uncertainty surrounding the U.S. presidential election in November. The value of the index approached a year-to-date high reading in early October. Given that uncertainty surrounding these same events remains, it is likely interest rate volatility will remain elevated through the fourth quarter of 2024.
Current report
The long-awaited impacts of tight monetary policy orchestrated by the Fed appear to have finally slowed inflation sufficiently such that the Fed could re-focus on its second mandate – full employment in the economy. The labor market data over the course of the second and third quarters of 2024 reflected greater balance between the supply and demand for labor, such that hiring and wage growth were slowing and the unemployment rate was rising gradually. In late September 2024, the Fed reduced the Fed funds rate by 50 basis points, and the market anticipated it was the first of many such cuts. In contrast, growth in the economy, as measured by both GDP and GDI as well as consumer spending, has remained robust throughout. However, the non-farm payroll report for September 2024, released in early October, as well as the latest readings on inflation suggest that the Fed may be more conservative in the timing and extent of further reductions in the Fed Funds rate than the market had expected at the beginning of the third quarter.
Current report
Interest rates decreased over the course of the third quarter of 2024, continuing the trend started in late April 2024. The U.S. Treasury curve also steepened as the market anticipated additional easing of monetary policy by the Fed and the spread between the 2-year and 10-year T-Notes finally turned positive in early September 2024 after being inverted since mid-2022, the longest inversion ever. Cheaper funding levels coupled with a still healthy economy were supportive of risk assets, and domestic fixed income securities all generated positive returns for the quarter. Agency RMBS also generated positive excess returns versus comparable duration swaps. Based on recent positive economic data, it is unclear how much further the Fed will go in relaxing monetary policy. Further, geo-political events around the world, especially in the Middle East, as well as the U.S. presidential election in November, are cause for uncertainty in the outlook for markets and the economy. The market in which the Company invests the preponderance of its capital, the Agency RMBS market, has performed well so far in 2024, and potential returns available in the market remain attractive. While additional Fed Funds rate cuts by the Fed may be supportive of the Company’s earnings going forward, the Company also expects that its hedge positions in place will allow it to continue to generate attractive dividends if current market rates persist.
Removed paragraphs (7)
Previous report
The extended recovery from the devastating effects on the U.S. economy of the pandemic in 2020 continued in late 2023 and early 2024. While economic growth was strong, the labor market remained out of balance with corresponding wage pressures and inflation, particularly services inflation, remained well above the Federal Reserve’s (the “Fed") target level. These conditions persisted despite over 500 basis points of monetary policy tightening on the part of the Fed over the period from March of 2022 through July of 2023. Inflation was clearly moderating over the course of the second half of 2023, but growth remained quite strong, well above the economy’s long-run potential. Despite the strong growth, the Fed appeared to be on the brink of relaxing monetary policy beginning in 2024 based on the persistent trend lower in reported inflation figures in late 2023. The market was further encouraged by comments from various Fed governors, including the chairman, that there would be eases in 2024. This changed rapidly as 2024 unfolded and inflation readings reversed course and appeared to accelerate. The tone of comments by all Fed officials pivoted away from potential near-term easing to the need to maintain higher rates. The continued strength of the economy enabled the Fed to keep policy restrictive until inflation resumed, moderating towards its 2% target range. The Fed also made it clear to markets that it was prepared to raise rates further if inflation did indeed accelerate further, although it did not anticipate this would be likely.
Previous report
These trends continued into April as data for March was released and interest rates continued to increase from the low levels observed in December of 2023. However, as economic data for April, May and June was released, the data appeared to moderate. Inflation readings have resumed the trend observed in late 2023 and appear to be headed towards the Fed’s 2% target again. Job gains – as reflected in the monthly non-farm payroll reports released by the labor department – have moderated as well. Measures of consumer spending and business activity have slowed as well. While these readings are not consistent with a recession, they are consistent with growth rates at or near the economy's potential, which appears to indicate the supply/demand imbalances that existed for the last two years have receded. It appears the brief re-acceleration of inflation during the first quarter of 2024 will not be sustained and represents a one-off incident. Given this development, the Fed is anticipated to start loosening monetary policy during the second half of 2024. Current market pricing is for between two and three 25 basis point cuts by the end of the year, as the Fed is perceived to be equally concerned with slowing economic growth as they are with a re-acceleration of inflation.
Previous report
Movements in interest rate levels across the curve as well as the shape of the curve followed the same pattern as the economic developments described above. As economic data remained strong in late 2023 and into early 2024 and inflation appeared to reaccelerate, long maturity rates steadily increased. Starting in late 2023, the yield on the 10-year U.S. Treasury note increased from 3.80% to just over 4.7% in late April. Likewise, the shape of the U.S. Treasury curve, as measured by the difference between the yields on the 2-year U.S. Treasury note and the 10-year U.S. Treasury note, flattened during the first quarter of 2024, becoming more inverted as the prospects for interest rate cuts by the Fed were priced out of the market.
Previous report
As the economic data softened and inflation appeared to slow and resume a steady decline towards the Fed’s 2% target, starting with the April data released in May, the 10-year U.S. Treasury note yield declined from just over 4.7% in late April to approximately 4.3% currently. However, the slope of the U.S. Treasury curve – again, as measured by the difference in yield between the 2-year and 10-year U.S. Treasury notes – actually continued to flatten until late June. In the last week of the second quarter, the yield curve began to steepen by over 20 basis points. However, the catalyst for the steepening in the curve that occurred in late June does not appear to have been driven by economic data, but perhaps by political developments in the United States and European Union, including both the evolving landscape of the U.S. presidential election in November and the recent elections in France and the United Kingdom, which resulted in a shift in control to more left-leaning parties with the potential for higher fiscal spending and government deficits.
Previous report
Interest rate volatility embedded in interest rate derivatives, as measured by the MOVE index, reversed the pattern observed during the first quarter of 2024 – gradually declining – and spiked higher in early April, only to moderate again over the balance of the second quarter. The level of the index ended only slightly higher than the level at the beginning of the second quarter – the index value was 98.6 on June 30, 2024, versus 86.4 on March 28, 2024. The spike in early April was likely driven by strong jobs and inflation data for March released in early April of 2024.
Previous report
The long-awaited pivot on the part of Federal Reserve may finally be at hand. Persistently strong growth of the U.S. economy and above trend inflation appear to have moderated sufficiently that the Fed now sees the risks to the economy as balanced – implying there is equal risk of more growth or a slow-down. Because the Fed sees its current monetary policy as restrictive, the Fed may begin to reverse some of the tightening that occurred in 2022 and 2023 and ease monetary policy. Current market pricing is for between two and three 25 basis point cuts by year end with several more in 2025. Economic data released for April, May and June show moderating inflation that appears headed towards the Fed’s 2% target as well as a labor market more in balance with supply and demand roughly equal. Should such conditions persist, the Fed should begin lowering the Fed funds rate this year, perhaps starting in September.
Previous report
The developments described above led risk assets to perform very well during the second quarter of 2024, with the S&P 500 returning nearly 5%. Less risky assets also generated positive returns for the quarter, although the returns were much more modest. Agency RMBS returns for the quarter were 0.2% (absolute total return), but returns versus comparable duration swaps (a proxy for hedge returns) were slightly negative, owing largely to very poor relative performance over the last week of the second quarter. Returns across the coupon stack of 30-year, fixed rate Agency RMBS, where the Company deploys most of its capital, were coupon dependent – ranging from 0.1% for the lowest coupons to 1.3% for the 7.0% coupon, the highest coupon. Returns versus hedges were mixed, with the “wings,” or the lowest and highest coupons, better than the “belly” or middle coupons. The Company currently deploys its capital with a bias towards these wing coupons versus the belly coupons and intends to continue to do so for the time being.
Reworded paragraphs (34)
Previous wording
On June 11, 2024, we entered into an equity distribution agreement (the “June 2024 Equity Distribution Agreement”) with three 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 June 30, 2024, we issued a total of 1,995,000 shares under the June 2024 Equity Distribution Agreement for aggregate gross proceeds of approximately $16.9 million, and net proceeds of approximately $16.6 million, after commissions and fees. Subsequent to June 30, 2024, we issued a total of 6,514,200 shares under the June 2024 Equity Distribution Agreement for aggregate gross proceeds of approximately $55.5 million, and net proceeds of approximately $54.6 million, after commissions and fees.
Current wording
On June 11, 2024, we entered into an equity distribution agreement (the “June 2024 Equity Distribution Agreement”) with three 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 September 30, 2024, we issued a total of 15,309,022 shares under the June 2024 Equity Distribution Agreement for aggregate gross proceeds of approximately $128.6 million, and net proceeds of approximately $126.5 million, after commissions and fees. Subsequent to September 30, 2024, we issued a total of 332,000 shares under the June 2024 Equity Distribution Agreement for aggregate gross proceeds of approximately $2.7 million, and net proceeds of approximately $2.7 million, after commissions and fees.
Previous wording
From the inception of the stock repurchase program through June 30, 2024, the Company repurchased a total of 5,081,134 shares at an aggregate cost of approximately $77.0 million, including commissions and fees, for a weighted average price of $15.16 per share. During thesix months ended June 30, 2024, the Company repurchased a total of 332,773 shares of its common stock at an aggregate cost of approximately $2.8 million, including commissions and fees, for a weighted average price of $8.35 per share.
Current wording
From the inception of the stock repurchase program through September 30, 2024, the Company repurchased a total of 5,144,602 shares at an aggregate cost of approximately $77.5 million, including commissions and fees, for a weighted average price of $15.07 per share. During thenine months ended September 30, 2024, the Company repurchased a total of 396,241 shares of its common stock at an aggregate cost of approximately $3.3 million, including commissions and fees, for a weighted average price of $8.30 per share.
Previous wording
Described below are the Company’s results of operations for the six and three months ended June 30, 2024, as compared to the Company’s results of operations for the six and three months ended June 30, 2023.
Current wording
Described below are the Company’s results of operations for the nine and three months ended September 30, 2024, as compared to the Company’s results of operations for the nine and three months ended September 30, 2023.
Previous wording
Net income for thesix months ended June 30, 2024 was $14.8 million, or $0.27 per share. Net income for thesix months ended June 30, 2023 was $13.8 million, or $0.35 per share. Net loss for the three months ended June 30, 2024 was $5.0 million, or $0.09 per share. Net income for the three months ended June 30, 2023 was $10.2 million, or $0.25 per share. The components of net income (loss) for thesix and three months ended June 30, 2024 and 2023, along with the changes in those components are presented in the table below:
Current wording
Net income for thenine months ended September 30, 2024 was $32.1 million, or $0.53 per share. Net loss for thenine months ended September 30, 2023 was $66.4 million, or $1.58 per share. Net income for the three months ended September 30, 2024 was $17.3 million, or $0.24 per share. Net loss for the three months ended September 30, 2023 was $80.1 million, or $1.68 per share. The components of net income (loss) for thenine and three months ended September 30, 2024 and 2023, along with the changes in those components are presented in the table below:
Previous wording
Described below are the Company’s results of operations for the six months ended June 30, 2024 and 2023, and for each quarter in 2024 to date and 2023.
Current wording
Described below are the Company’s results of operations for the nine months ended September 30, 2024 and 2023, and for each quarter in 2024 to date and 2023.
Previous wording
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 the six months ended June 30, 2024 and 2023, and for each quarter of 2024 to date and 2023.
Current wording
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 the nine months ended September 30, 2024 and 2023, and for each quarter of 2024 to date and 2023.
Previous wording
During the six months ended June 30, 2024, we incurred net interest expenseof $3.2 million consisting of $101.9 millionof interest income from RMBS assets offset by $105.1 millionof interest expense on borrowings. For the comparable period ended June 30, 2023, we incurred $13.0 millionof net interest expense, consisting of $77.9 millionof interest income from RMBS assets offset by $90.9 millionof interest expense on borrowings. The $24.0 million increase in interest income was due to a 112 basis point ("bps") increase in the yield on average RMBS, combined with a $67.1 million increasein average RMBS. The $14.2 million increasein interest expense was due to a 62 bps increasein the average cost of funds, combined with an $88.8 million increasein average outstanding borrowings.
Current wording
During thenine months ended September 30, 2024, we incurred net interest expenseof $2.8 million consisting of $169.6 millionof interest income from RMBS assets offset by $172.4 millionof interest expense on borrowings. For the comparable period ended September 30, 2023, we incurred $21.6 millionof net interest expense, consisting of $128.0 millionof interest income from RMBS assets offset by $149.6 millionof interest expense on borrowings. The $41.6 million increase in interest income was due to a 106 basis point ("bps") increase in the yield on average RMBS, combined with a $223.7 million increasein average RMBS. The $22.8 million increasein interest expense was due to a 47 bps increasein the average cost of funds, combined with an $217.2 million increasein average outstanding borrowings.
Previous wording
During the three months ended June 30, 2024, we incurred net interest expense of$0.7 million consisting of$53.1 million of interest income from RMBS assets offset by$53.8 million of interest expense on borrowings. For the comparable period ended June 30, 2023, we incurred$8.8 million of net interest expense, consisting of$39.9 million of interest income from RMBS assets offset by$48.7 million of interest expense on borrowings. The$13.2 million increase in interest income was due to a 124 bpsincrease in the yield on average RMBS, combined with a $16.5 million increase in average RMBS. The$5.1 million increase in interest expense was due to a 46 bpsincrease in the average cost of funds, combined with a$43.0 million increase in average outstanding borrowings.
Current wording
During the three months ended September 30, 2024, we earned net interest income of$0.3 million consisting of$67.6 million of interest income from RMBS assets offset by$67.3 million of interest expense on borrowings. For the comparable period ended September 30, 2023, we incurred$8.6 million of net interest expense, consisting of$50.1 million of interest income from RMBS assets offset by$58.7 million of interest expense on borrowings. The$17.5 million increase in interest income was due to a 92 bpsincrease in the yield on average RMBS, combined with a $537.2 million increase in average RMBS. The$8.6 million increase in interest expense was due to an 18 bpsincrease in the average cost of funds, combined with a$474.0 million increase in average outstanding borrowings.
Previous wording
On an economic basis, our interest expense on borrowings for the six months ended June 30, 2024 and 2023 was $48.1 million and $48.2 million, respectively, resulting in $53.9 million and $29.7 million of economic net interest income, respectively.
Current wording
On an economic basis, our interest expense on borrowings for thenine months ended September 30, 2024 and 2023 was $83.5 million and $82.5 million, respectively, resulting in $86.1 million and $45.6 million of economic net interest income, respectively.
Previous wording
On an economic basis, our interest expense on borrowings for the three months ended June 30, 2024 and 2023 was $24.3 millionand$25.2 million, respectively, resulting in$28.8 million and$14.7 million of economic net interest income, respectively.
Current wording
On an economic basis, our interest expense on borrowings for the three months ended September 30, 2024 and 2023 was $35.4 millionand$34.3 million, respectively, resulting in$32.3 million and$15.8 million of economic net interest income, respectively.
Previous wording
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 the six months ended June 30, 2024 and 2023, and each quarter of 2024 to date and 2023 on both a GAAP and economic basis.
Current wording
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 the nine months ended September 30, 2024 and 2023, and each quarter of 2024 to date and 2023 on both a GAAP and economic basis.
Previous wording
The table below presents the average portfolio size, income and yields of our respective sub-portfolios, consisting of structured RMBS and PT RMBS, for the six months ended June 30, 2024 and 2023, and for each quarter of 2024 to date and 2023.
Current wording
The table below presents the average portfolio size, income and yields of our respective sub-portfolios, consisting of structured RMBS and PT RMBS, for the nine months ended September 30, 2024 and 2023, and for each quarter of 2024 to date and 2023.
Previous wording
We had average outstanding borrowings of $3.9 billion and $3.8 billion and total interest expense of $105.1 million and $90.9 million for the six months ended June 30, 2024 and 2023, respectively. Our average cost of funds was 5.43% for the six months ended June 30, 2024, compared to 4.81% for the comparable period in 2023. The $14.2 million increase in interest expense was due to the 62 bps increase in the average cost of funds, combined with a $88.8 million increase in average outstanding borrowings during the six months ended June 30, 2024, as compared to the comparable period in 2023.
Current wording
We had average outstanding borrowings of $4.2 billion and $4.0 billion and total interest expense of $172.4 million and $149.6 million for the nine months ended September 30, 2024 and 2023, respectively. Our average cost of funds was 5.51% for the nine months ended September 30, 2024, compared to 5.04% for the comparable period in 2023. The $22.8 million increase in interest expense was due to the 47 bps increase in the average cost of funds, combined with a $217.2 million increase in average outstanding borrowings during the nine months ended September 30, 2024, as compared to the comparable period in 2023.
Previous wording
We had average outstanding borrowings of $4.0 billion and $4.0 billion and total interest expense of $53.8 million and $48.7 million for the three months ended June 30, 2024 and 2023, respectively. Our average cost of funds was 5.34% for the three months ended June 30, 2024, compared to 4.88% for the comparable period in 2023. The $5.1 million increase in interest expense was due to the 46 bps increase in the average cost of funds, combined with a $43.0 million increase in average outstanding borrowings during the three months ended June 30, 2024, as compared to the comparable period in 2023.
Current wording
We had average outstanding borrowings of $4.8 billion and $4.3 billion and total interest expense of $67.3 million and $58.7 million for the three months ended September 30, 2024 and 2023, respectively. Our average cost of funds was 5.62% for the three months ended September 30, 2024, compared to 5.44% for the comparable period in 2023. The $8.6 million increase in interest expense was due to the 18 bps increase in the average cost of funds, combined with a $474.0 million increase in average outstanding borrowings during the three months ended September 30, 2024, as compared to the comparable period in 2023.
Previous wording
Our economic interest expense was $48.1 million and $48.2 million for the six months ended June 30, 2024 and 2023, respectively. There was a 6 bps decrease in the average economic cost of funds to 2.49% for the six months ended June 30, 2024, from 2.55% for the six months ended June 30, 2023.
Current wording
Our economic interest expense was $83.5 million and $82.5 million for the nine months ended September 30, 2024 and 2023, respectively. There was an 11 bps decrease in the average economic cost of funds to 2.67% for the nine months ended September 30, 2024, from 2.78% for the nine months ended September 30, 2023.
Previous wording
Our economic interest expense was $24.3 million and $25.2 million for the three months ended June 30, 2024 and 2023, respectively. There was a 12 bps decrease in the average economic cost of funds to 2.41% for the three months ended June 30, 2024, from 2.53% for the three months ended June 30, 2023.
Current wording
Our economic interest expense was $35.4 million and $34.3 million for the three months ended September 30, 2024 and 2023, respectively. There was a 22 bps decrease in the average economic cost of funds to 2.96% for the three months ended September 30, 2024, from 3.18% for the three months ended September 30, 2023.
Previous wording
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 equal to the one-month average SOFR and 5 bps below the six-month average SOFR for the quarter ended June 30, 2024. Our average economic cost of funds was 293 bps below the average one-month SOFR and 298 bps below the average six-month SOFR for the quarter ended June 30, 2024. The average term to maturity of the outstanding repurchase agreements was 29 days at June 30, 2024 and 26 days at December 31, 2023.
Current wording
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 46 bps above the one-month average SOFR and 25 bps above the six-month average SOFR for the quarter ended September 30, 2024. Our average economic cost of funds was 220 bps below the average one-month SOFR and 241 bps below the average six-month SOFR for the quarter ended September 30, 2024. The average term to maturity of the outstanding repurchase agreements was 25 days at September 30, 2024 and 26 days at December 31, 2023.
Previous wording
The tables below present the average balance of borrowings outstanding, interest expense and average cost of funds, and average one-month and six-month SOFR rates for the six months ended June 30, 2024 and 2023, and for each quarter in 2024 to date and 2023, on both a GAAP and economic basis.
Current wording
The tables below present the average balance of borrowings outstanding, interest expense and average cost of funds, and average one-month and six-month SOFR rates for the nine months ended September 30, 2024 and 2023, and for each quarter in 2024 to date and 2023, on both a GAAP and economic basis.
Previous wording
The table below presents our gains or losses for the six and three months ended June 30, 2024 and 2023.
Current wording
The table below presents our gains or losses for the nine and three months ended September 30, 2024 and 2023.
Previous wording
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 six months ended June 30, 2024, we received proceeds of $221.7 million from the sales of RMBS. These sales consisted entirely of pools that were consolidated into a larger pool and simultaneously acquired by us. No gain or loss was recorded on these sales. We did not sell any RMBS during the three months ended June 30, 2024, or the three and six months ended June 30, 2023.
Current wording
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 nine months ended September 30, 2024, we received proceeds of $288.2 million. Approximately $221.7 million of these proceeds consisted of pools that were consolidated into a larger pool and simultaneously acquired by us. No gain or loss was recorded on this resecuritization. During the three months ended September 30, 2024, we received proceeds of approximately $66.5 million from the sales of RMBS, resulting in gains of approximately $0.5 million. We did not sell any RMBS during the three and nine months ended September 30, 2023.
Previous wording
For the six and three months ended June 30, 2024, the Company’s total operating expenses were approximately $8.1 million and $4.4 million, compared to approximately $9.8 million and $4.8 million for the six and three months ended June 30, 2023. The table below presents a breakdown of operating expenses for the six and three months ended June 30, 2024 and 2023.
Current wording
For the nine and three months ended September 30, 2024, the Company’s total operating expenses were approximately $12.4 million and $4.3 million, compared to approximately $14.5 million and $4.6 million for the nine and three months ended September 30, 2023. The table below presents a breakdown of operating expenses for the nine and three months ended September 30, 2024 and 2023.
Previous wording
As of December 31, 2023, the Company had accrued a liability of $0.6 million for bonuses to be paid to the Manager's employees. During the first six months of 2024, the Company awarded shares of Company common stock with a fair value of $0.3 million. Accrued incentive compensation for the six months ended June 30, 2024 includes a reversal of the over accrual of this liability.
Current wording
As of December 31, 2023, the Company had accrued a liability of $0.6 million for bonuses to be paid to the Manager's employees. During the first nine months of 2024, the Company awarded shares of Company common stock with a fair value of $0.3 million. Accrued incentive compensation for the nine months ended September 30, 2024 includes a reversal of the over accrual of this liability.
Previous wording
The following table summarizes the management fee and overhead allocation expenses for the six months ended June 30, 2024 and 2023, and for each quarter in 2024 to date and 2023.
Current wording
The following table summarizes the management fee and overhead allocation expenses for the nine months ended September 30, 2024 and 2023, and for each quarter in 2024 to date and 2023.
Previous wording
As of June 30, 2024, our RMBS portfolio consisted of $4,525.8 million of Agency RMBS at fair value and had a weighted average coupon on assets of 4.68%. During the six months ended June 30, 2024, we received principal repayments of $172.6 million, compared to $138.4 million for the six months ended June 30, 2023. The average three month prepayment speeds for the quarters ended June 30, 2024 and 2023 were 7.6% and 5.6%, respectively.
Current wording
As of September 30, 2024, our RMBS portfolio consisted of $5,442.8 million of Agency RMBS at fair value and had a weighted average coupon on assets of 4.90%. During the nine months ended September 30, 2024, we received principal repayments of $310.3 million, compared to $237.9 million for the nine months ended September 30, 2023. The average three month prepayment speeds for the quarters ended September 30, 2024 and 2023 were 8.8% and 6.0%, respectively.
Previous wording
The following table presents a summary of portfolio assets acquired during the six months ended June 30, 2024 and 2023, including securities purchased during the period that settled after the end of the period, if any.
Current wording
The following table presents a summary of portfolio assets acquired during the nine months ended September 30, 2024 and 2023, including securities purchased during the period that settled after the end of the period, if any.
Previous wording
As of June 30, 2024, 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.
Current wording
As of September 30, 2024, 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 25 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.
Previous wording
As of June 30, 2024, we had obligations outstanding under the repurchase agreements of approximately $4,345.7 million with a net weighted average borrowing cost of 5.46%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 8 to 89 days, with a weighted average remaining maturity of 29 days. Securing the repurchase agreement obligations as of June 30, 2024 are RMBS with an estimated fair value, including accrued interest, of approximately $4,540.1 million, and cash pledged to counterparties of approximately $11.2 million. Through July 26, 2024, we have been able to maintain our repurchase facilities with comparable terms to those that existed at June 30, 2024, with maturities through September 27, 2024.
Current wording
As of September 30, 2024, we had obligations outstanding under the repurchase agreements of approximately $5,230.9 million with a net weighted average borrowing cost of 5.24%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 9 to 51 days, with a weighted average remaining maturity of 25 days. Securing the repurchase agreement obligations as of September 30, 2024 are RMBS with an estimated fair value, including accrued interest, of approximately $5,461.0 million, and cash pledged to counterparties of approximately $9.2 million. Through October 25, 2024, we have been able to maintain our repurchase facilities with comparable terms to those that existed at September 30, 2024, with maturities through November 20, 2024.
Previous wording
We use two primary measures of leverage. Economic leverage is calculated by dividing the sum of total liabilities and our net notional TBA position, by stockholders' equity. We include our net TBA position in our calculation of economic leverage because a forward contract to purchase or sell an Agency RMBS in the TBA market carries similar risks to an Agency RMBS purchased or sold in the cash market and funded with repurchase agreement liabilities. Adjusted leverage is calculated by dividing our repurchase agreements by stockholders' equity. Our economic leverage at June 30, 2024 was 7.1 to 1, compared to 6.7 to 1 as of December 31, 2023. Our adjusted leverage at June 30, 2024 was 7.8 to 1, compared to 7.9 to 1 as of December 31, 2023. The following table presents information related to our historical leverage.
Current wording
We use two primary measures of leverage. Economic leverage is calculated by dividing the sum of total liabilities and our net notional TBA position, by stockholders' equity. We include our net TBA position in our calculation of economic leverage because a forward contract to purchase or sell an Agency RMBS in the TBA market carries similar risks to an Agency RMBS purchased or sold in the cash market and funded with repurchase agreement liabilities. Adjusted leverage is calculated by dividing our repurchase agreements by stockholders' equity. Our economic leverage at September 30, 2024 was 7.6 to 1, compared to 6.7 to 1 as of December 31, 2023. Our adjusted leverage at September 30, 2024 was 8.0 to 1, compared to 7.9 to 1 as of December 31, 2023. The following table presents information related to our historical leverage.
Previous wording
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 repo transaction basis. Throughout the six months ended June 30, 2024, haircuts on our pledged collateral remained stable and as of June 30, 2024, our weighted average haircut was approximately 4.4% of the value of our collateral.
Current wording
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 repo transaction basis. Throughout the nine months ended September 30, 2024, haircuts on our pledged collateral remained stable and as of September 30, 2024, our weighted average haircut was approximately 4.3% of the value of our collateral.
Previous wording
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 June 30, 2024, we had cash and cash equivalents of $241.0 million. We generated cash flows of $262.3 million from principal and interest payments on our RMBS and had average repurchase agreements outstanding of $3,868.6 million during the six months ended June 30, 2024.
Current wording
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 September 30, 2024, we had cash and cash equivalents of $322.1 million. We generated cash flows of $459.4 million from principal and interest payments on our RMBS and had average repurchase agreements outstanding of $4,175.2 million during the nine months ended September 30, 2024.
Previous wording
On June 11, 2024, we entered into an equity distribution agreement (the “June 2024 Equity Distribution Agreement”) with three 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 June 30, 2024, we issued a total of 1,995,000 shares under the June 2024 Equity Distribution Agreement for aggregate gross proceeds of approximately $16.9 million, and net proceeds of approximately $16.6 million, after commissions and fees. Subsequent to June 30, 2024, we issued a total of 6,514,200 shares under the June 2024 Equity Distribution Agreement for aggregate gross proceeds of approximately $55.5 million, and net proceeds of approximately $54.6 million, after commissions and fees.
Current wording
On June 11, 2024, we entered into an equity distribution agreement (the “June 2024 Equity Distribution Agreement”) with three 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 September 30, 2024, we issued a total of 15,309,022 shares under the June 2024 Equity Distribution Agreement for aggregate gross proceeds of approximately $128.6 million, and net proceeds of approximately $126.5 million, after commissions and fees. Subsequent to September 30, 2024, we issued a total of 332,000 shares under the June 2024 Equity Distribution Agreement for aggregate gross proceeds of approximately $2.7 million, and net proceeds of approximately $2.7 million, after commissions and fees.
Previous wording
In response to the deterioration in the markets for U.S. Treasuries, Agency RMBS and other mortgage and fixed income markets resulting from the impacts of the COVID-19 pandemic, the Fed implemented a program of quantitative easing. 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, ended net asset purchases by early March of 2022, and ended asset purchases entirely in September of 2022. On May 4, 2022, the FOMC announced a plan for reducing the Fed’s balance sheet. In June of 2022, in accordance with this plan, the Fed began reducing its balance sheet by a maximum of $30 billion of U.S. Treasuries and $17.5 billion of Agency RMBS each month. On September 21, 2022, the FOMC announced the Fed’s decision to continue reducing the balance sheet by a maximum of $60 billion of U.S. Treasuries and $35 billion of Agency RMBS per month. On May 1, 2024, the FOMC announced the Fed’s decision to reduce the balance sheet by a maximum of $25 billion of U.S. Treasuries and $35 billion of Agency RMBS per month. As interest rates have remained high and prepayment speeds have slowed, the actual balance sheet reduction of Agency RMBS has trended well below the cap. On September 30, 2019, the FHFA announced that Fannie Mae and Feddie 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 the Enterprises being privatized and represents the first concrete step on the road to Enterprise reform. In December 2020, the FHFA released a final rule on a new regulatory framework for the Enterprises which seeks to implement both a risk-based capital framework and minimum leverage capital requirements. On January 14, 2021, the U.S. Treasury and the FHFA executed letter agreements allowing the Enterprises 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 Enterprise has common equity Tier 1 capital of at least 3% of its assets, (ii) the Enterprises *will comply with the FHFA’s regulatory capital framework, (iii) higher-risk single-family mortgage acquisitions will be restricted to then current levels, and (iv) the U.S. Treasury and the FHFA will establish a timeline and process for future Enterprise reform. However, no definitive proposals or legislation have been released or enacted with respect to ending the conservatorship, unwinding the Enterprises, or materially reducing the roles of the Enterprises in the U.S. mortgage market.
Current wording
In response to the deterioration in the markets for U.S. Treasuries, Agency RMBS and other mortgage and fixed income markets resulting from the impacts of the COVID-19 pandemic, the Fed implemented a program of quantitative easing. 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, ended net asset purchases by early March of 2022, and ended asset purchases entirely in September of 2022. On May 4, 2022, the FOMC announced a plan for reducing the Fed’s balance sheet. In June of 2022, in accordance with this plan, the Fed began reducing its balance sheet by a maximum of $30 billion of U.S. Treasuries and $17.5 billion of Agency RMBS each month. On September 21, 2022, the FOMC announced the Fed’s decision to continue reducing its balance sheet by a maximum of $60 billion of U.S. Treasuries and $35 billion of Agency RMBS per month. On May 1, 2024, the FOMC announced the Fed’s decision to reduce its balance sheet by a maximum of $25 billion of U.S. Treasuries and remove the cap on Agency RMBS reduction, with any amounts in excess of $35 billion per month being reinvested in U.S. Treasury securities. Relatively high interest rates and slow prepayment speeds have kept the balance sheet reduction for Agency RMBS below $20 billion per month throughout 2024, although an increase in mortgage refinance applications following the announcement of the Fed Funds rate cut in September 2024 may accelerate the process. As of August 2024, the Fed had reduced its balance sheet for Agency RMBS by approximately $440 billion from the peak to $2.3 trillion, shedding approximately 32% of the Agency RMBS added during pandemic quantitative easing and representing the lowest level since June 2021.
Previous wording
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 April 26, 2022, amending the Enterprise capital framework established in December 2020 by, among other things, replacing the fixed leverage buffer equal to 1.5% of an Enterprise’s adjusted total assets with a dynamic leverage buffer equal to 50% of an Enterprise’s stability capital buffer, reducing the risk weight floor from 10% to 5%, and removing the requirement that the Enterprises must apply an overall effectiveness adjustment to their credit risk transfer exposures. On June 14, 2022, the Enterprises announced that they would each charge a 50 bps fee for commingled securities issued on or after July 1, 2022 to cover the additional capital required for such securities under the Enterprise capital framework, which was subsequently reduced on January 19, 2023 to 9.375 bps for commingled securities issued on or after April 1, 2023 to address industry concern that the fee posed a risk to the fungibility of the Uniform Mortgage-Backed Security (“UMBS”) and negatively impacted liquidity and pricing in the market for TBA securities. On November 30, 2023, the FHFA published a final rule, which became effective April 1, 2024, which will, among other things, reduce the risk weight and credit conversion factor for guarantees on commingled securities to 5% and 50%, respectively; replace the current exposure methodology with the standardized approach for counterparty credit risk as the method for computing exposure and risk-weighted asset amounts for derivatives and cleared transactions; update the credit score assumption to 680 for single-family mortgage exposures originated without a representative credit score; and introduce a risk weight of 20% for guarantee assets.
Current wording
On September 14, 2021, the U.S. Treasury and the FHFA suspended certain policy provisions in the Enterprise capital framework established in December 2020, including limits on loans acquired for cash consideration, multifamily loans, loans with higher risk characteristics and second homes and investment properties. Effective April 26, 2022, the FHFA further amended this framework by, among other things, replacing the fixed leverage buffer equal to 1.5% of an Enterprise’s adjusted total assets with a dynamic leverage buffer equal to 50% of an Enterprise’s stability capital buffer, reducing the risk weight floor from 10% to 5%, and removing the requirement that the Enterprises must apply an overall effectiveness adjustment to their credit risk transfer exposures. On June 14, 2022, the Enterprises announced that they would each charge a 50 bps fee for commingled securities issued on or after July 1, 2022 to cover the additional capital required for such securities under the Enterprise capital framework, which was subsequently reduced on January 19, 2023 to 9.375 bps for commingled securities issued on or after April 1, 2023 to address industry concern that the fee posed a risk to the fungibility of the Uniform Mortgage-Backed Security and negatively impacted liquidity and pricing in the market for TBA securities. On November 30, 2023, the FHFA published a final rule, which became effective April 1, 2024, which will, among other things, reduce the risk weight and credit conversion factor for guarantees on commingled securities to 5% and 50%, respectively; replace the current exposure methodology with the standardized approach for counterparty credit risk as the method for computing exposure and risk-weighted asset amounts for derivatives and cleared transactions; update the credit score assumption to 680 for single-family mortgage exposures originated without a representative credit score; and introduce a risk weight of 20% for guarantee assets.
Previous wording
On July 27, 2023, the federal banking regulators, including the Office of the Comptroller of the Currency, (the "OCC") the FDIC and the Fed, jointly issued a proposed rule that would revise large bank capital requirements (the "Basel III Endgame"). The Basel III Endgame, if implemented as proposed, would significantly increase the credit weight risk for balance-sheet mortgages and for Agency RMBS sold to the GSEs, which could disincentivize banks from originating mortgages for sale to the GSEs and impact pricing in the Agency RMBS markets. The comment period for the Basel III Endgame closed on January 16, 2024, and the proposed rule was met with strong objections from the banking industry. In testimony before the United States Senate Committee on Banking, Housing and Urban Affairs in July 2024, Fed chairman Jerome Powell stated that the OCC, the FDIC and the Fed were in discussions to materially revise the proposed rule, and that there was consensus at the Fed to undergo another comment period. This would likely delay the process into 2025 and a new presidential administration.
Current wording
On July 27, 2023, the federal banking regulators, including the Office of the Comptroller of the Currency, (the "OCC") the FDIC and the Fed, jointly issued a proposed rule that would revise large bank capital requirements (the "Basel III Endgame"). The Basel III Endgame, if implemented as proposed, would significantly increase the credit weight risk for balance-sheet mortgages and for Agency RMBS sold to the GSEs, which could disincentivize banks from originating mortgages for sale to the GSEs and impact pricing in the Agency RMBS markets. The comment period for the Basel III Endgame closed on January 16, 2024, and the proposed rule was met with strong objections from the banking industry. In testimony before the United States Senate Committee on Banking, Housing and Urban Affairs in July 2024, Fed chairman Jerome Powell stated that the OCC, the FDIC and the Fed were in discussions to materially revise the proposed rule, and that there was consensus at the Fed to undergo another comment period. In remarks given on September 10, 2024, Michael Barr, the Fed's Vice Chair for Supervision, confirmed that the Basel III Endgame was being rewritten to, among other things, reduce the risk weights for residential real estate and retail exposures, extend the scope of the reduced risk weight for certain low-risk corporate debt, and eliminate the minimum haircut for securities financing transactions.