Orchid Island Capital Inc
For the period ended Dec 31, 2024. Filed Feb 21, 2025.
View on SEC.govAbout this filing
A company's yearly report to the SEC, with audited financial statements. It is the fullest account a company gives of its business, its finances and the risks it sees.
FY2024 · Filed Feb 21, 2025
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-K
Period ended 2023-12-31; filed 2024-02-23.
0001437749-24-005327
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-K
Period ended 2024-12-31; filed 2025-02-21.
0001437749-25-004734
ITEM 7. 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 155 previous paragraphs and 150 current paragraphs.
103 unchanged; 31 reworded; 16 added; 21 removed; 0 previous and 0 current paragraphs rearranged.
Tables are not compared: 53 previous and 52 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 (16)
Current report
Common Stock Reverse Split
Current report
On March 7, 2023, we entered into an equity distribution agreement (the “March 2023 Equity Distribution Agreement”) with three sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $250,000,000 of shares of our common stock in transactions that were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total of 24,675,497 shares under the March 2023 Equity Distribution Agreement for aggregate gross proceeds of approximately $228.8 million and net proceeds of approximately $225.0 million, after commissions and fees, prior to its termination in June 2024.
Current report
Net Income (Loss) Summary
Current report
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 year ended December 31, 2024, the Company awarded shares of Company common stock with a fair value of $0.3 million. Accrued incentive compensation for the year ended December 31, 2024 includes a reversal of the over accrual of this liability.
Current report
On March 7, 2023, we entered into an equity distribution agreement (the “March 2023 Equity Distribution Agreement”) with three sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $250,000,000 of shares of our common stock in transactions that were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total of 24,675,497 shares under the March 2023 Equity Distribution Agreement for aggregate gross proceeds of approximately $228.8 million and net proceeds of approximately $225.0 million, after commissions and fees, prior to its termination in June 2024.
Current report
The economic trajectory in place as the third quarter of 2024 came to an end has not changed as we enter 2025. Economic growth is above the level considered sustainable – the level that can persist without causing the economy to overheat and inflation to rise. The labor market no longer appears to be cooling, hiring has stabilized, and the unemployment rate remains in the low 4% area, which is indicative of a tighter labor market, if not an overheating one. Importantly, inflation readings have stabilized at levels clearly above the Fed’s target level of 2%. In response to the resilience of the economy, interest rates have increased and market expectations for further cuts to the Fed’s overnight rate have been reduced to less than one 25 basis point cut by the end of 2025. The strength of the economy has been supported by stimulative fiscal policy on the part of the federal government as budget deficits have consistently approached $2 trillion, representing abnormally high percentages of gross domestic product. The impact of the deficits is partially offset by an expanded balance sheet of the Fed which remains above target levels, allowing the market to avoid having to fund the deficits in their entirety.
Current report
In November of 2024, the Republican party swept the U.S. national elections, and the pro-business agenda of the new president has enhanced market optimism for sustained growth at or above current levels. President Trump has stated that he intends to use tariffs to shift domestic consumption away from imports and towards domestic producers, at the potential cost of higher prices. The market anticipates that the combination of pro-growth policies on the part of the incoming administration, supported by Republican control of both houses of Congress, along with wide-spread tariffs on a host of imported goods, will both fuel growth and pressure inflation higher. Given an economy that was already growing above sustainable rates, this development casts doubt on the need for additional policy accommodation on the part of the Fed in the near term, if at all.
Current report
In response to the developments described above, interest rate movements during the fourth quarter of 2024 were significant. As the third quarter came to a close, interest rates were declining in anticipation of the first interest rate cut by the Fed since 2020. The Fed began raising the overnight rate in March of 2022 and did not stop until July of 2023, when the target range for the Fed Funds rate was 5.25% to 5.50%. At the time the Fed lowered the overnight rate by 50 basis points on September 18, 2024, the market expected at least eight more cuts over the next 18 months. Rates reversed course early in the fourth quarter, triggered by the non-farm payroll report for September released in early October. Consequently, the market's outlook for the economy, inflation and future interest rate cuts by the Fed changed dramatically over the course of the fourth quarter and into 2025.
Current report
With respect to interest rates, the most significant development may have been the dramatic change in the shape of the U.S. Treasury Note yield curve. By the end of 2024, the Fed had lowered the target range for Fed Funds by 100 basis points. The 10-year U.S. Treasury Note yield curve increased by approximately 80 basis points over the quarter, causing the first disinversion of the yield curve between the Fed Funds rate and the 10-year U.S. Treasury Note since June 2022, and between the 2-year and 10-year U.S. Treasury Notes since November 2022. As federal deficits have remained historically high since the pandemic and the market does not anticipate the incoming administration is likely to be fiscally conservative, the market anticipates federal deficits to remain elevated and issuance of U.S. Treasury securities to continue to grow. This has led swap spreads to become increasingly negative (as the market demands a higher yield for a greater supply of U.S. Treasury securities) such that the swap curve remains inverted – although the 18-month to 15-year point are upward sloping.
Current report
In sharp contrast to market expectations for the evolution of the Fed Funds rate after the Fed’s first cut in mid-September, in early 2025 market expectations are for between one and two additional 25 basis point cuts by the end of 2025.
Current report
As a proxy for the performance of the Agency RMBS market during the fourth quarter of 2024, the spread of the 30-year, fixed rate current coupon to the 10-year U.S. Treasury Note hit a multi-year low of approximately 109 basis points the day after the Fed lowered the Fed Funds rate on September 18, 2024. This is in contrast to the spread in May of 2023 of over 200 basis points. The developments described above led to higher interest rates and elevated levels of rate volatility. By the end of October of 2024, the spread had increased to approximately 147 basis points and ended the year at approximately 128 basis points. The Agency RMBS index generated a negative return for the fourth quarter of -3.2% and a return of -0.6% versus comparable duration swaps, as compared to -2.8% and 0.9%, respectively for these measures, for the investment grade corporate index, and 0.2% and 1.4%, respectively for these measures, for high yield debt. While total returns for U.S. Treasury securities were also negative, most sectors of the fixed income markets generated positive total returns for the quarter, as well as positive excess returns versus comparable duration swaps.
Current report
Within Agency RMBS for the fourth quarter of 2024, conventional 30-year mortgages generated a negative total return of -3.5%, 15-year mortgages generated a negative total return of -2.2% and Ginnie Mae 30-year mortgages generated a total return of -2.7%. Versus comparable duration swaps the returns were -0.8%, -0.5% and -0.3% for 30-year conventional, 15-year conventional and Ginnie Mae 30-year mortgages, respectively. The Company invests predominantly in 30-year conventional mortgages. Returns with the 30-year stack of coupons were negatively correlated with the duration of the respective securities, as lower coupon, longer durations bonds generated the most negative total returns and the highest coupon – 7.0% - generated positive total returns. The range for the coupon stack was -4.8% for the 2.0% coupon to +0.9% for the 7.0% coupon during the fourth quarter of 2024. Excess returns versus comparable duration swaps were in the range of -0.6% to -0.9% for all coupons between 2.0% and 6.0% during the fourth quarter of 2024. Conversely, the excess return for the 6.5% coupon was -0.2% and +0.3% for the 7.0% coupon during the fourth quarter of 2024.
Current report
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.
Current report
The outlook for the fixed income market pivoted early in the fourth quarter of 2024. As the third quarter came to an end, inflation was falling towards the Fed’s 2% target, the labor market was cooling as hiring levels moderated and the unemployment rate was slowly creeping higher, and the Fed had finally lowered the Fed Funds rate by 50 basis points. At the time, the market expected the Fed to lower the rate by over 200 basis points over the next 18 months. Beginning early in the fourth quarter, the incoming data turned. Readings on the labor market stabilized and hiring stopped slowing. The unemployment rate appeared to plateau, and most importantly, the decline in inflation rates previously in place seemed to lose momentum and inflation remained above the Fed’s 2% target level. In early November, the Republican party swept the U.S. national elections, and the new president has a very pro-growth agenda for the country. President Trump has stated that he favors using tariffs to shift domestic consumption away from imports and towards domestically produced goods. If successful, such a policy could ultimately support strong growth in domestic goods production and employment; however, it is likely to be a source of inflationary pressure in the short term, at a time when inflation is already too high.
Current report
As the economic outlook shifted, the Fed did lower the Fed Funds rate two more times during 2024 – by 25 basis points in each case. With the Fed Funds rate lowered by 100 basis points over the course of the quarter, the persistently strong economic outlook led to a disinversion of the yield curve between the Fed Funds rate and the 10-year U.S. Treasury Note, and between the 2-year U.S. Treasury Note and 10-year U.S. Treasury Note. The market’s expectation for additional reductions in the Fed Funds rate continued to decline over the course of the fourth quarter and into 2025, and current pricing is for less than two additional 25 basis point reductions. The Agency RMBS market generated negative total returns for the quarter and was one of the worst performing sectors of the fixed income markets. Returns for the Agency RMBS market versus comparable durations swaps, a proxy for returns for levered bond investors such as the Company, were also negative, albeit far less so than the absolute returns. During the fourth quarter, the lowest coupon and longest duration securities generated the worst returns, and performance generally racked these metrics as the highest coupon securities generated the best returns.
Current report
Looking forward, economic activity remains resilient if not strong, the labor market is quite healthy and inflation, while well off the peak seen in 2022, remains above the Fed’s 2% target. The Fed may reduce the Fed Funds rate again over the next year or so but the new pro-growth administration, potentially inflationary tariffs and continued large federal deficits, coupled with an already strong economy, may stand in the way.
Removed paragraphs (21)
Previous report
On August 4, 2020, we entered into an equity distribution agreement (the “August 2020 Equity Distribution Agreement”) with four sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $150,000,000 of shares of our common stock in transactions that were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total of 5,498,730 shares under the August 2020 Equity Distribution Agreement for aggregate gross proceeds of approximately $150.0 million, and net proceeds of approximately $147.4 million, after commissions and fees, prior to its termination in June 2021.
Previous report
On January 20, 2021, we entered into an underwriting agreement (the “January 2021 Underwriting Agreement”) with J.P. Morgan Securities LLC (“J.P. Morgan”), relating to the offer and sale of 1,520,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from the Company pursuant to the January 2021 Underwriting Agreement at $26.00 per share. In addition, we granted J.P. Morgan a 30-day option to purchase up to an additional 228,000 shares of our common stock on the same terms and conditions, which J.P. Morgan exercised in full on January 21, 2021. The closing of the offering of 1,748,000 shares of our common stock occurred on January 25, 2021, with proceeds to us of approximately $45.2 million, net of offering expenses.
Previous report
On March 2, 2021, we entered into an underwriting agreement (the “March 2021 Underwriting Agreement”) with J.P. Morgan, relating to the offer and sale of 1,600,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from the Company pursuant to the March 2021 Underwriting Agreement at $27.25 per share. In addition, we granted J.P. Morgan a 30-day option to purchase up to an additional 240,000 shares of our common stock on the same terms and conditions, which J.P. Morgan exercised in full on March 3, 2021. The closing of the offering of 1,840,000 shares of our common stock occurred on March 5, 2021, with proceeds to us of approximately $50.0 million, net of offering expenses.
Previous report
On June 22, 2021, we entered into an equity distribution agreement (the “June 2021 Equity Distribution Agreement”) with four sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $250,000,000 of shares of our common stock in transactions that were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total of 9,881,467 shares under the June 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately $250.0 million, and net proceeds of approximately $246.2 million, after commissions and fees, prior to its termination in October 2021.
Previous report
Net Loss Summary
Previous report
On August 4, 2020, we entered into the August 2020 Equity Distribution Agreement with four sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $150,000,000 of shares of our common stock in transactions that were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total of 5,498,730 shares under the August 2020 Equity Distribution Agreement for aggregate gross proceeds of approximately $150.0 million, and net proceeds of approximately $147.4 million, after commissions and fees, prior to its termination in June 2021.
Previous report
On January 20, 2021, we entered into the January 2021 Underwriting Agreement with J.P. Morgan Securities LLC (“J.P. Morgan”), relating to the offer and sale of 1,520,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from the Company pursuant to the January 2021 Underwriting Agreement at $26.00 per share. In addition, we granted J.P. Morgan a 30-day option to purchase up to an additional 228,000 shares of our common stock on the same terms and conditions, which J.P. Morgan exercised in full on January 21, 2021. The closing of the offering of 1,748,000 shares of our common stock occurred on January 25, 2021, with proceeds to us of approximately $45.2 million, net of offering expenses.
Previous report
On March 2, 2021, we entered into the March 2021 Underwriting Agreement with J.P. Morgan, relating to the offer and sale of 1,600,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from the Company pursuant to the March 2021 Underwriting Agreement at $27.25 per share. In addition, we granted J.P. Morgan a 30-day option to purchase up to an additional 240,000 shares of our common stock on the same terms and conditions, which J.P. Morgan exercised in full on March 3, 2021. The closing of the offering of 1,840.000 shares of our common stock occurred on March 5, 2021, with proceeds to us of approximately $50.0 million, net of offering expenses.
Previous report
On June 22, 2021, we entered into the June 2021 Equity Distribution Agreement with four sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $250,000,000 of shares of our common stock in transactions that were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total of 9,881,467 shares under the June 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately $250.0 million, and net proceeds of approximately $246.2 million, after commissions and fees, prior to its termination in October 2021.
Previous report
The fourth quarter of 2023 may prove to be the pivotal quarter in the current interest rate cycle. As the third quarter came to a close and we moved into October the trajectory of economic growth, interest rates and expectations for monetary policy were all heading higher. In addition to the usual stimulants for higher interest rates – persistent levels of elevated inflation and economic growth – surging budget deficits drove rate expectations even higher. Indeed, over the course of October incoming economic data related to the labor market and inflation exceeded market expectations. Gross domestic product for the third quarter of 2023 was 4.9%, well above levels deemed consistent with price stability and the demand/supply balance sought by the Fed. The quarterly refunding announcement for the U.S. Treasury’s planned borrowing needs in the fourth quarter significantly exceeded expectations. Risk assets were impacted as sentiment eroded and the markets contemplated the impact of still higher levels of interest rates and the potential duration that rates might remain elevated.
Previous report
The market pivoted sharply in the fourth quarter of 2023, followed shortly thereafter by the Fed. The primary impetus for the change in the market’s outlook was the trend in inflation data. While incoming data often exceeded expectations on a relative basis – the trend in inflation was nonetheless downward. While service inflation remained elevated, goods inflation was trending negative, and the net effect was persistently lower levels of both headline and core inflation. The annualized 3- and 6-month trends were below 3% and appeared headed towards the Fed’s 2% target. FOMC member Christopher Waller stated that if the trend in inflation data continued, the FOMC would likely ease monetary policy soon. Coincidentally the incoming economic data began to come in below expectations and the U.S. Treasury revised their upcoming borrowing needs downward. The reversal in the market's outlook was cemented when, at the conclusion of the FOMC’s December meeting, Chairman Powell strongly hinted that the Fed was finished with their tightening cycle and the focus of discussions had turned to a removal of restrictive monetary policy in 2024. The interest rate market and all risk assets responded strongly to the reversal and rallied strongly into year-end.
Previous report
Starting at the end of the second quarter of 2023 interest rates began to move steadily higher, driven by the factors discussed above. In late October, rates across the curve appeared headed sustainably above 5% and the market anticipated the Fed would keep the Fed funds rate above 5% through the end of 2024. The yield on the 2-year U.S. Treasury came within 9 basis points of the level of Fed funds on October 18, 2023, implying the market was pricing Fed funds to remain essentially unchanged for the next two years. Frequent comments by Fed officials supported this thinking, as they continually pushed back against market pricing of rate cuts in early 2024. The message was consistent – rates will need to be higher for longer until the Fed was assured inflation was headed sustainably lower towards their 2% target.
Previous report
The market’s apparent anxiousness for the Fed to ease monetary policy became particularly acute when the data turned in the fourth quarter of 2023, and inflation appeared headed towards the Fed’s target. When Governor Waller made his comments about the possibility of easing in the near future, which were reinforced by Chairman Powell’s comments at the Fed meeting in December, interest rates moved decisively lower. By year end, market pricing reflected six 25 basis point rate cuts by the end of 2024. As we move into 2024 the inflation data has maintained the trend in place described above. However, the labor market data remains strong, and most measures of economic growth have not softened. In fact, gross domestic product for the fourth quarter of 2023 was 3.3% on an annualized basis. Comments by Fed officials have consistently pushed back on market pricing of the timing and extent of interest rate cuts for 2024. Financial conditions have also eased since early fourth quarter and the federal government is still running stimulative deficits with little to no evidence that policy will change in the near term. The risk that inflation could re-accelerate has been mentioned by many Fed officials. To date in 2024 the market has reversed yet again, and rates have retraced some of the decline seen in November and December.
Previous report
As with interest rates across the curve, Agency RMBS spreads to comparable duration U.S. Treasuries or swaps continued widening into October as the outlook continued to deteriorate. By late October the spread of the current coupon 30-year Agency RMBS to a comparable duration U.S. Treasury security reached its cycle wide for the cycle. As the market reversed and risk appetite rapidly recovered the spread contracted quickly – declining by over 50 basis points by year-end. Since year end, the sector, as reflected by the spread of the current coupon Agency RMBS, has reversed yet again, albeit modestly. The recovery in risk sentiment, coupled with the decline in interest rates, appears to have stimulated bank demand for the Agency RMBS sector. The regional banking crisis of March of 2023, a result of the severe decline in valuations of Agency RMBS acquired by banks prior to the Fed rate hiking cycle and subsequent increase in rates across the curve, may not be fully over. A funding program put in place in March of 2023 that allows such institutions to cheaply fund RMBS positions at par and avoid having to sell them and realize significant losses, expires in March of 2024. However, the partial recovery in Agency RMBS prices that occurred in November and December has erased some of their unrealized losses. The attractiveness of the asset class, coupled with softening loan demand, appears to have enticed banks to resume purchases. It may be that the recovery of demand for the sector by these banks is supporting pricing of Agency RMBS year-to-date.
Previous report
Based on ICE Bank of America data for the fixed income indices, for the fourth quarter of 2023 Agency RMBS generated a return of 7.4% and 1.7% versus comparable duration swaps, respectively. The 30-year fixed rate sector generated returns of 7.8% and 1.8% versus comparable duration swaps, respectively. With respect to individual sectors of the Agency RMBS index, longer duration sectors and coupons outperformed owing to the significant rally of interest rates. Across the 30-year fixed rate coupon stack returns varied from 8.5% for 2.0% coupons to 3.0% for 7.0% coupons. Excess returns for the same coupons were 2.1% and 0.4%, respectively, and the distribution of returns followed the durations of the various coupons in a consistent fashion.
Previous report
The Agency RMBS sector outperformed investment grade corporates on an absolute basis but trailed sub-investment grade corporates, again on an absolute basis. Relative to comparable duration swaps for the fourth quarter, Agency RMBS trailed investment grade corporates by 120 basis points but outperformed sub-investment grades corporates by 20 basis points. Note prior to the sharp reversal in the markets at the end of October total returns for all three sectors were negative year to date, and all three sectors – Agency RMBS, investment grade and sub-investment grade corporates – generated positive absolute and excess returns for the year.
Previous report
In response to the significant increase in interest rates and volatility, with the corresponding weakness in Agency RMBS assets early in the fourth quarter, we reduced our leverage and increased hedges. Specifically, we reduced our holding of 30-year fixed rate 3.0% coupons by approximately 40% - given their long duration - and modestly added a 30-year 7.0% coupon position.
Previous report
The Agency RMBS market began to experience severe dislocations in mid-March 2020 as a result of the economic, health and market turmoil brought about by COVID-19. On March 23, 2020, the Fed announced that it would purchase Agency RMBS and U.S. Treasuries in the amounts needed to support smooth market functioning, which largely stabilized the Agency RMBS market, but ended these purchases in March 2022 and announced plans to reduce its balance sheet. The Fed’s continued reduction of its balance sheet could negatively impact our investment portfolio.
Previous report
The second half of 2023 was a very challenging period for the financial markets, especially the fixed income markets in the U.S. The U.S. economy proved incredibly resilient in the face of continued rate increases by the Fed since March of 2022 of 500 basis points. Growth for the third quarter was a surprising 4.9%, as measured by GDP. The preliminary growth rate for the fourth quarter was 3.3%, still above what is deemed to be a sustainable rate. Fiscal deficits in the U.S. continue to grow and are expected to remain at elevated levels for the next few years. The combination of these factors, among others, drove U.S. Treasury rates higher as the market expected the Fed, while at or near the end of their tightening cycle, was not going to lower rates well into 2024.
Previous report
A series of events in November and December triggered a violent reversal in the market outlook, the level of interest rates, the performance of risk assets and the outlook for monetary policy. The primary development was incoming inflation data. While the inflation data was at times above consensus expectations by economists, it was nonetheless steadily declining. Most measures of inflation now exhibit a clear downward trend towards the Fed’s 2% target. While there were some instances of labor market and/or growth data that was soft released during the fourth quarter, generally the data remains firm, and the labor market has yet to materially weaken. Yet, it appeared the Fed was willing to contemplate reducing rates if the inflation trend continued. Comments by various Fed officials, including Chairman Powell, hinted at a pending shift in the outlook for monetary policy. The market quickly responded to this development. Interest rates declined by over 100 basis points in the case of the 10-year U.S. Treasury note, from late October to late December. Fed funds futures pricing implied the market expected the Fed to lower rates by over 150 basis points in 2024. Risk assets of every type performed strongly over the last two months of the year, in many cases reversing year-to-date negative returns as of November 1, 2023, into strong positive returns for the year.
Previous report
In response to the significant increase in interest rates and volatility early in the fourth quarter, with the corresponding weakness in Agency RMBS assets, Orchid reduced its leverage and increased hedges. Specifically, holdings of 30-year fixed rate 3.0% coupons were reduced by approximately 40% - given their long duration - and a modest 30-year 7.0% coupon position was added. As the market recovered in November and December Agency RMBS had very strong absolute returns – nearly 8% for the fixed rate Agency RMBS sub-sector – and 1.7% above comparable duration U.S. Treasuries. However, public comments by Fed officials since late December have consistently pushed back against market expectations of the extent and timing of interest rate cuts. The incoming data remains quite strong – particularly labor market and growth data. Since year-end interest rates have partially reversed their declines late in the year, although the market still appears to expect significant rate cuts throughout the year – still over 80 basis points by the end of 2024. Given the suddenness of the reversal in the market – with the resulting material decline in interest rates and volatility – coupled with still strong data and persistent signaling by Fed officials that the markets are overestimating their pending policy adjustments, Orchid’s Agency RMBS portfolio has not grown since early November and the hedges have remained very high relative to the level of funding. To the extent the Fed does lower the Fed funds rate, we expect Orchid’s earnings stand to benefit as we believe current hedge positions are sufficient to off-set increased funding levels such that the net-interest margin of the portfolio is consistent with the current dividend rate. Agency RMBS securities are still very attractively priced so the portfolio could be expanded, even without additional equity capital, as the current leverage ratio is at the low end of its historical range.
Reworded paragraphs (31)
Previous wording
On March 7, 2023, we entered into an equity distribution agreement (the “March 2023 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 December 31, 2023, we issued a total of 13,190,039 shares under the March 2023 Equity Distribution Agreement for aggregate gross proceeds of approximately $129.9 million, and net proceeds of approximately $127.8 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 December 31, 2024, we issued a total of 19,842,089 shares under the June 2024 Equity Distribution Agreement for aggregate gross proceeds of approximately $164.9 million, and net proceeds of approximately $162.1 million, after commissions and fees. Subsequent to December 31, 2024, we issued a total of 10,671,164 shares under the June 2024 Equity Distribution Agreement for aggregate gross proceeds of approximately $85.1 million, and net proceeds of approximately $83.8 million, after commissions and fees.
Previous wording
From the inception of the stock repurchase program through December 31, 2023, the Company repurchased a total of 4,748,361 shares at an aggregate cost of approximately $74.2 million, including commissions and fees, for a weighted average price of $15.63 per share. During the year ended December 31, 2023, the Company repurchased a total of 1,072,789 shares of its common stock at an aggregate cost of approximately $9.4 million, including commissions and fees, for a weighted average price of $8.79 per share. Subsequent to December 31, 2023, and through February 23, 2024, the Company repurchased a total of 332,773 shares 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 December 31, 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 the year ended December 31, 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
Net loss for the year ended December 31, 2023 was $39.2 million, or $0.89 per share. Net loss for the year ended December 31, 2022 was $258.5 million, or $6.90 per share. Net loss for the year ended December 31, 2021 was $64.8 million, or $2.67 per share. The components of net loss for the years ended December 31, 2023, 2022 and 2021 are presented in the table below:
Current wording
Net income for the year ended December 31, 2024 was $37.7 million, or $0.57 per share. Net loss for the year ended December 31, 2023 was $39.2 million, or $0.89 per share. Net loss for the year ended December 31, 2022 was $258.5 million, or $6.90 per share. The components of net income (loss) for the years ended December 31, 2024, 2023 and 2022 are presented in the table below:
Previous wording
Presenting net earnings excluding realized and unrealized gains and losses allows management to: (i) isolate the net interest income and other expenses of the Company over time, free of all fair value adjustments and (ii) assess the effectiveness of our funding and hedging strategies on our capital allocation decisions and our asset allocation performance. Our funding and hedging strategies, capital allocation and asset selection are integral to our risk management strategy, and therefore critical to the management of our portfolio. We believe that the presentation of our net earnings excluding realized and unrealized gains is useful to investors because it provides a means of comparing our results of operations to those of our peers who have not elected the same accounting treatment. Our presentation of net earnings excluding realized and unrealized gains and losses may not be comparable to similarly-titled measures of other companies, who may use different calculations. As a result, net earnings excluding realized and unrealized gains and losses should not be considered as a substitute for our GAAP net income (loss) as a measure of our financial performance or any measure of our liquidity under GAAP. The table below presents a reconciliation of our net income (loss) determined in accordance with GAAP and net earnings excluding realized and unrealized gains and losses. Described below are the Company's results of operations for the years ended December 31, 2023, 2022 and 2021.
Current wording
Presenting net earnings excluding realized and unrealized gains and losses allows management to: (i) isolate the net interest income and other expenses of the Company over time, free of all fair value adjustments and (ii) assess the effectiveness of our funding and hedging strategies on our capital allocation decisions and our asset allocation performance. Our funding and hedging strategies, capital allocation and asset selection are integral to our risk management strategy, and therefore critical to the management of our portfolio. We believe that the presentation of our net earnings excluding realized and unrealized gains is useful to investors because it provides a means of comparing our results of operations to those of our peers who have not elected the same accounting treatment. Our presentation of net earnings excluding realized and unrealized gains and losses may not be comparable to similarly-titled measures of other companies, who may use different calculations. As a result, net earnings excluding realized and unrealized gains and losses should not be considered as a substitute for our GAAP net income (loss) as a measure of our financial performance or any measure of our liquidity under GAAP. The table below presents a reconciliation of our net income (loss) determined in accordance with GAAP and net earnings excluding realized and unrealized gains and losses. Described below are the Company's results of operations for the years ended December 31, 2024, 2023 and 2022, and for each quarter during 2024, 2023 and 2022.
Previous wording
Prior to 2023, we included certain expenses related to our derivative instruments in "Direct REIT operating expenses" in the statements of comprehensive income (loss). Beginning in 2023, we have included these expenses in "Gains (losses) on derivative and hedging instruments." Prior period amounts have been reclassified to conform with the current presentation. The table below presents the effect of this reclassification for each quarter in 2022 and 2021.
Current wording
Prior to 2023, we included certain expenses related to our derivative instruments in "Direct REIT operating expenses" in the statements of comprehensive income (loss). Beginning in 2023, we have included these expenses in "Gains (losses) on derivative and hedging instruments." Prior period amounts have been reclassified to conform with the current presentation. The table below presents the effect of this reclassification for each quarter in 2022.
Previous wording
We use derivative and other hedging instruments, specifically Fed Funds, SOFR and T-Note futures contracts, short positions in U.S. Treasury securities, interest rate caps, interest rate swaps and swaptions, to hedge a portion of the interest rate risk on repurchase agreements in a rising rate environment.
Current wording
We use derivative and other hedging instruments, specifically Fed Funds, SOFR and T-Note futures contracts, short positions in U.S. Treasury securities, interest rate floors and caps, dual digital options, interest rate swaps and swaptions, to hedge a portion of the interest rate risk on repurchase agreements in a rising rate environment.
Previous wording
For the purpose of computing economic net interest income and ratios relating to cost of funds measures, GAAP interest expense has been adjusted to reflect the realized and unrealized gains or losses on certain derivative instruments the Company uses, specifically Fed Funds, SOFR and T-Note futures, and interest rate swaps and swaptions, that pertain to each period presented. We believe that adjusting our interest expense for the periods presented by the gains or losses on these derivative instruments would not accurately reflect our economic interest expense for these periods. The reason is that these derivative instruments may cover periods that extend into the future, not just the current period. Any realized or unrealized gains or losses on the instruments reflect the change in market value of the instrument caused by changes in underlying interest rates applicable to the term covered by the instrument, not just the current period. For each period presented, we have combined the effects of the derivative financial instruments in place for the respective period with the actual interest expense incurred on borrowings to reflect total economic interest expense for the applicable period. Interest expense, including the effect of derivative instruments for the period, is referred to as economic interest expense. Net interest income, when calculated to include the effect of derivative instruments for the period, is referred to as economic net interest income. This presentation includes gains or losses on all contracts in effect during the reporting period, covering the current period as well as periods in the future.
Current wording
For the purpose of computing economic net interest income and ratios relating to cost of funds measures, GAAP interest expense has been adjusted to reflect the realized and unrealized gains or losses on certain derivative instruments the Company uses, specifically Fed Funds, SOFR and T-Note futures, dual digital options, interest rate floors and caps, and interest rate swaps and swaptions, that pertain to each period presented. We believe that adjusting our interest expense for the periods presented by the gains or losses on these derivative instruments would not accurately reflect our economic interest expense for these periods. The reason is that these derivative instruments may cover periods that extend into the future, not just the current period. Any realized or unrealized gains or losses on the instruments reflect the change in market value of the instrument caused by changes in underlying interest rates applicable to the term covered by the instrument, not just the current period. For each period presented, we have combined the effects of the derivative financial instruments in place for the respective period with the actual interest expense incurred on borrowings to reflect total economic interest expense for the applicable period. Interest expense, including the effect of derivative instruments for the period, is referred to as economic interest expense. Net interest income, when calculated to include the effect of derivative instruments for the period, is referred to as economic net interest income. This presentation includes gains or losses on all contracts in effect during the reporting period, covering the current period as well as periods in the future.
Previous wording
The table below presents the effect of the reclassification of derivative expenses discussed above for each quarter in 2022 and 2021.
Current wording
The table below presents the effect of the reclassification of derivative expenses discussed above for each quarter in 2022.
Previous wording
During the year ended December 31, 2023, we generated $24.4 million of net interest expense, consisting of $177.6 million of interest income from RMBS assets offset by $201.9 million of interest expense on borrowings. For the comparable period ended December 31, 2022, we generated $82.9 million of net interest income, consisting of $144.6 million of interest income from RMBS assets offset by $61.7 million of interest expense on borrowings. The $32.9 million increase in interest income was driven by an 83 basis points ("bps") increase in yield on average RMBS that was partially offset by a $34.3 million decrease in average RMBS. The $140.2 million increase in interest expense for the year ended December 31, 2023 was driven by a 354 bps increase in the average cost of funds, offset by a $57.0 million decrease in average borrowings.
Current wording
During the year ended December 31, 2024, we generated $5.3 million of net interest income, consisting of $241.6 million of interest income from RMBS assets offset by $236.3 million of interest expense on borrowings. For the comparable period ended December 31, 2023, we incurred $24.4 million of net interest expense, consisting of $177.6 million of interest income from RMBS assets offset by $201.9 million of interest expense on borrowings. The $64.0 million increase in interest income was driven by a 97 basis points ("bps") increase in yield on average RMBS, combined with a $453.0 million increase in average RMBS. The $34.4 million increase in interest expense for the year ended December 31, 2024 was driven by a 28 bps increase in the average cost of funds, combined with a $428.4 million increase in average borrowings.
Previous wording
For the year ended December 31, 2021, we generated $127.6 million of net interest income, consisting of $134.7 million of interest income from RMBS assets offset by $7.1 million of interest expense on borrowings. The $9.9 million increase in interest income for the year ended December 31, 2022, compared to the year ended December 31, 2021, was due to a 72 bps increase in yield on average RMBS, that was partially offset by a $745.5 million decrease in average RMBS. The $54.6 million increase in interest expense for the year ended December 31, 2022 was due to a 138 bps increase in the average cost of funds, partially offset by a $665.5 million decrease in average borrowings.
Current wording
For the year ended December 31, 2022, we generated $82.9 million of net interest income, consisting of $144.6 million of interest income from RMBS assets offset by $61.7 million of interest expense on borrowings. The $32.9 million increase in interest income for the year ended December 31, 2023, compared to the year ended December 31, 2022, was due to a 83 bps increase in yield on average RMBS, that was partially offset by a $34.3 million decrease in average RMBS. The $140.2 million increase in interest expense for the year ended December 31, 2023 was due to a 354 bps increase in the average cost of funds, partially offset by a $57.0 million decrease in average borrowings.
Previous wording
On an economic basis, our interest expense on borrowings for the years ended December 31, 2023, 2022 and 2021 was $109.6 million, $48.1 million and $25.8 million, respectively, resulting in $68.0 million, $96.5 million and $108.9 million of economic net interest income, respectively.
Current wording
On an economic basis, our interest expense on borrowings for the years ended December 31, 2024, 2023 and 2022 was $119.5 million, $109.6 million and $48.1 million, respectively, resulting in $122.1 million, $68.0 million and $96.5 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 each quarter in 2023, 2022 and 2021 and for the years ended December 31, 2023, 2022 and 2021 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 (expense) and net interest spread for each quarter in 2024, 2023 and 2022 and for the years ended December 31, 2024, 2023 and 2022 on both a GAAP and economic basis.
Previous wording
We had average outstanding borrowings of $3,985.0 million and $4,042.1 million and total interest expense of $201.9 million and $61.7 million for the years ended December 31, 2023 and 2022, respectively. Our average cost of funds was 5.07% for the year ended December 31, 2023, compared to 1.53% for the comparable period in 2022. There was a $57.0 million decrease in average outstanding borrowings during the year ended December 31, 2023 as compared to the year ended December 31, 2022.
Current wording
We had average outstanding borrowings of $4,413.4 million and $3,985.0 million and total interest expense of $236.3 million and $201.9 million for the years ended December 31, 2024 and 2023, respectively. Our average cost of funds was 5.35% for the year ended December 31, 2024, compared to 5.07% for the comparable period in 2023. There was a $428.4 million increase in average outstanding borrowings during the year ended December 31, 2024 as compared to the year ended December 31, 2023.
Previous wording
For the year ended December 31, 2021, we had average borrowings of $4,707.5 million and total interest expense of $7.1 million, resulting in an average cost of funds of 0.15%. There was a 138 bps increase in the average cost of funds and an $665.5 million decrease in average outstanding borrowings during the year ended December 31, 2022 as compared to the year ended December 31, 2021.
Current wording
For the year ended December 31, 2022, we had average borrowings of $4,042.1 million and total interest expense of $61.7 million, resulting in an average cost of funds of 1.53%. There was a 354 bps increase in the average cost of funds and an $57.0 million decrease in average outstanding borrowings during the year ended December 31, 2023 as compared to the year ended December 31, 2022.
Previous wording
Our economic interest expense was $109.6 million, $48.1 million and $25.8 million for the years ended December 31, 2023, 2022 and 2021, respectively. There was a 156 bps increase in the average economic cost of funds to 2.75% for the year ended December 31, 2023 from 1.19% for the year ended December 31, 2022. The reason for the increase in economic cost of funds is primarily due to the higher cost of our borrowings noted above, offset by the positive performance of our hedging activities during the period. There was a 64 bps increase in the average economic cost of funds to 1.19% for the year ended December 31, 2022 from 0.55% for the year ended December 31, 2021.
Current wording
Our economic interest expense was $119.5 million, $109.6 million and $48.1 million for the years ended December 31, 2024, 2023 and 2022, respectively. There was a 4 bps decrease in the average economic cost of funds to 2.71% for the year ended December 31, 2024 from 2.75% for the year ended December 31, 2023. The reason for the decrease in economic cost of funds is primarily due to the positive performance of our hedging activities during the period, offset by the higher cost of our borrowings noted above. There was a 156 bps increase in the average economic cost of funds to 2.75% for the year ended December 31, 2023 from 1.19% for the year ended December 31, 2022.
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 2 bps below one-month average SOFR and 22 bps above six-month average SOFR for the year ended December 31, 2023. Our average economic cost of funds was 234 bps below one-month average SOFR and 210 bps below six-month average SOFR for the year ended December 31, 2023. The average term to maturity of the outstanding repurchase agreements was 26 days at December 31, 2023 and 27 days at December 31, 2022.
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 26 bps above one-month average SOFR and 6 bps above six-month average SOFR for the year ended December 31, 2024. Our average economic cost of funds was 238 bps below one-month average SOFR and 258 bps below six-month average SOFR for the year ended December 31, 2024. The average term to maturity of the outstanding repurchase agreements was 26 days at December 31, 2024 and 26 days at December 31, 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 years ended December 31, 2023, 2022 and 2021, the Company received proceeds of $835.1 million, $2,759.9 million, and $2,851.7 million, respectively, from the sales and maturities of RMBS and U.S. Treasury securities.
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 years ended December 31, 2024, 2023 and 2022, the Company received proceeds of $904.3 million, $835.1 million, and $2,759.9 million, respectively, from the sales and maturities of RMBS and U.S. Treasury securities. Approximately $221.7 million of these proceeds received in 2024 consisted of pools that were consolidated into a larger pool and simultaneously acquired by us. No gain or loss was recorded on this resecuritization.
Previous wording
Total operating expenses were $18.5 million, $17.5 million and $14.9 million for the years ended December 31, 2023, 2022 and 2021, respectively. The table below provides a breakdown of operating expenses for the years ended December 31, 2023, 2022 and 2021.
Current wording
Total operating expenses were $16.7 million, $18.5 million and $17.5 million for the years ended December 31, 2024, 2023 and 2022, respectively. The table below provides a breakdown of operating expenses for the years ended December 31, 2024, 2023 and 2022.
Previous wording
On April 1, 2022, pursuant to the third amendment to the management agreement entered into on November 16, 2021, the Manager began providing certain repurchase agreement trading, clearing and administrative services to the Company that had been previously provided by AVM, L.P. under an agreement terminated on March 31, 2022. In consideration for such services, the Company will pay the following fees to the Manager:
Current wording
On April 1, 2022, pursuant to the third amendment to the management agreement entered into on November 16, 2021, the Manager began providing certain repurchase agreement trading, clearing and administrative services to the Company that had been previously provided by AVM, L.P. under an agreement terminated on March 31, 2022. In consideration for such services, the Company pays the following fees to the Manager:
Previous wording
As of December 31, 2023, our RMBS portfolio consisted of $3,894.0 million of Agency RMBS at fair value and had a weighted average coupon on assets of 4.30%. During the year ended December 31, 2023, we received principal repayments of $326.7 million compared to $440.1 million for the year ended December 31, 2022. The average three month prepayment speeds for the quarters ended December 31, 2023 and 2022 were 5.5% and 5.0%, respectively.
Current wording
As of December 31, 2024, our RMBS portfolio consisted of $5,253.3 million of Agency RMBS at fair value and had a weighted average coupon on assets of 4.99%. During the year ended December 31, 2024, we received principal repayments of $495.3 million, compared to $326.7 million for the year ended December 31, 2023. The average three month prepayment speeds for the quarters ended December 31, 2024 and 2023 were 10.5% and 5.5%, respectively.
Previous wording
As of December 31, 2023, 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 21 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 December 31, 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 December 31, 2023, we had obligations outstanding under the repurchase agreements of approximately $3,705.6 million with a net weighted average borrowing cost of 5.55%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 4 to 113 days, with a weighted average remaining maturity of 26 days. Securing the repurchase agreement obligations as of December 31, 2023 are RMBS with an estimated fair value, including accrued interest, of approximately $3,900.5 million. Through February 23, 2024, we have been able to maintain our repurchase facilities with comparable terms to those that existed at December 31, 2023 with maturities extending to various dates through July 15, 2024.
Current wording
As of December 31, 2024, we had obligations outstanding under the repurchase agreements of approximately $5,025.5 million with a net weighted average borrowing cost of 4.66%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 8 to 139 days, with a weighted average remaining maturity of 26 days. Securing the repurchase agreement obligations as of December 31, 2024 are RMBS with an estimated fair value, including accrued interest, of approximately $5,231.9 million. Through February 21, 2025, we have been able to maintain our repurchase facilities with comparable terms to those that existed at December 31, 2024 with maturities extending to various dates through May 19, 2025.
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, divided by stockholders' equity. Adjusted leverage is calculated by dividing our repurchase agreements by stockholders' equity. Our economic leverage at December 31, 2023 was 6.7 to 1, compared to 6.3 to 1 as of December 31, 2022. Our adjusted leverage at December 31, 2023 was 7.9 to 1, compared to 7.7 to 1 as of December 31, 2022. 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 December 31, 2024 was 7.3 to 1, compared to 6.7 to 1 as of December 31, 2023. Our adjusted leverage at December 31, 2024 was 7.5 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
Liquidity is our ability to turn non-cash assets into cash, purchase additional investments, repay principal and interest on borrowings, fund overhead, fulfill margin calls and pay dividends. We have both internal and external sources of liquidity. However, our material unused sources of liquidity include cash balances, unencumbered assets and our ability to sell encumbered assets to raise cash. Our balance sheet also generates liquidity on an on-going basis through payments of principal and interest we receive on our RMBS portfolio. Management believes that we currently have sufficient liquidity and capital resources available for (a) the acquisition of additional investments consistent with the size and nature of our existing RMBS portfolio, (b) the repayments on borrowings and (c) the payment of dividends to the extent required for our continued qualification as a REIT. We may also generate liquidity from time to time by selling our equity or debt securities in public offerings or private placements.
Current wording
Liquidity is our ability to turn non-cash assets into cash, purchase additional investments, repay principal and interest on borrowings, fund overhead, fulfill margin calls and pay dividends. We have both internal and external sources of liquidity. However, our material unused sources of liquidity include cash balances, unencumbered assets and our ability to sell encumbered assets to raise cash. Our balance sheet also generates liquidity on an on-going basis through payments of principal and interest we receive on our RMBS portfolio. Management believes that we currently have sufficient short-term and long-term liquidity and capital resources available for (a) the acquisition of additional investments consistent with the size and nature of our existing RMBS portfolio, (b) the repayments on borrowings and (c) the payment of dividends to the extent required for our continued qualification as a REIT. We may also generate liquidity from time to time by selling our equity or debt securities in public offerings or private placements.
Previous wording
Our strategy for hedging our funding costs typically involves taking short positions in interest rate futures, treasury futures, interest rate swaps, interest rate swaptions or other instruments. When the market causes these short positions to decline in value we are required to meet margin calls with cash. This can reduce our liquidity position to the extent other securities in our portfolio move in price in such a way that we do not receive enough cash via margin calls to offset the derivative related margin calls. If this were to occur in sufficient magnitude, the loss of liquidity might force us to reduce the size of the levered portfolio, pledge additional structured securities to raise funds or risk operating the portfolio with less liquidity.
Current wording
Our strategy for hedging our funding costs typically involves taking short positions in interest rate futures, interest rate swaps, interest rate swaptions or other instruments. When the market causes these short positions to decline in value we are required to meet margin calls with cash. This can reduce our liquidity position to the extent other securities in our portfolio move in price in such a way that we do not receive enough cash via margin calls to offset the derivative related margin calls. If this were to occur in sufficient magnitude, the loss of liquidity might force us to reduce the size of the levered portfolio, pledge additional structured securities to raise funds or risk operating the portfolio with less liquidity.
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 year ended December 31, 2023, haircuts on our pledged collateral remained stable and as of December 31, 2023, our weighted average haircut was approximately 4.5% 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 year ended December 31, 2024, haircuts on our pledged collateral remained stable and as of December 31, 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 December 31, 2023, we had cash and cash equivalents of $171.9 million. We generated cash flows of $490.0 million from principal and interest payments on our RMBS and had average repurchase agreements outstanding of $3,985.0 million during the year ended December 31, 2023.
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 December 31, 2024, we had cash and cash equivalents of $309.3 million. We generated cash flows of $711.4 million from principal and interest payments on our RMBS and had average repurchase agreements outstanding of $4,413.4 million during the year ended December 31, 2024.
Previous wording
On March 7, 2023, we entered into an equity distribution agreement (the “March 2023 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 December 31, 2023, we issued a total of 13,190,039 shares under the March 2023 Equity Distribution Agreement for aggregate gross proceeds of approximately $129.9 million, and net proceeds of approximately $127.8 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 December 31, 2024, we issued a total of 19,842,089 shares under the June 2024 Equity Distribution Agreement for aggregate gross proceeds of approximately $164.9 million, and net proceeds of approximately $162.1 million, after commissions and fees. Subsequent to December 31, 2024, we issued a total of 10,671,164 shares under the June 2024 Equity Distribution Agreement for aggregate gross proceeds of approximately $85.1 million, and net proceeds of approximately $83.8 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. As interest rates have increased and prepayment speeds have slowed, the actual balance sheet reduction of Agency RMBS has trended well below the cap during 2023. Recently the Fed has indicated they may taper their quantitative tightening by slowing the rate of run-off of their portfolio, although it is likely they will allow their holdings of Agency RMBS to continue at the current pace and slow the run-off of U.S. Treasuries in a way that achieves their desired rate of portfolio run-off.
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. As of December 31, 2024, the Fed had reduced its balance sheet for Agency RMBS by approximately $507 billion from the peak to $2.2 trillion, shedding approximately 37% of the Agency RMBS added during pandemic quantitative easing and representing the lowest level since May 2021.
Previous wording
On September 30, 2019, the FHFA announced that Fannie Mae and Freddie Mac* were allowed to increase their capital buffers to $25 billion and $20 billion, respectively, from the prior limit of $3 billion each. This step could ultimately lead to 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. 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, to become effective April 1, 2024, which will, amo…
Excerpt shortened here; the source contains the full paragraph.
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 (the "September 2021 Provisions"). 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 reduced the risk weight and credit conversion factor for guarantees on commingled securities to 5% and 50%, respectively; replaced 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; updated the credit score assumption to 680 for single-family mortgage exposures originated without a representative credit score; and introduced a risk weight of 20% for guarantee assets. On January 2, 2025, the U.S. Treasury and FHFA entered into a letter agreement deleting the September 2021 Provisions entirely, as well as providing additional guidance on the process for a potential end to the conservatorship of the Enterprises.
Previous wording
In order to protect our net interest margin against increases in short-term interest rates, we may enter into interest rate swaps, which economically convert our floating-rate repurchase agreement debt to fixed-rate debt or utilize other hedging instruments such as Fed Funds, SOFR and T-Note futures contracts or interest rate swaptions.
Current wording
In order to protect our net interest margin against increases in short-term interest rates, we may enter into interest rate swaps, which economically convert our floating-rate repurchase agreement debt to fixed-rate debt or utilize other hedging instruments such as Fed Funds, SOFR and T-Note futures contracts, dual digital options or interest rate swaptions.