Details of First Quarter 2017 Results of Operations

Management of Orchid Island Capital, Inc.

Orchid is managed and advised by Bimini.  As Manager, Bimini is responsible for administering Orchid's business activities and day-to-day operations.  Pursuant to the terms of the management agreement, Bimini Advisors provides Orchid with its management team, including its officers, along with appropriate support personnel.

Bimini also maintains a common stock investment in Orchid which is accounted for under the fair value option, with changes in fair value recorded in the statement of operations for the current period.  For the three months ended March 31, 2017, Bimini's statement of operations included a fair value adjustment of $(1.1) million and dividends of $0.6 million from its investment in Orchid common stock.  Also during the three months ended March 31, 2017, Bimini recorded $1.7 million in advisory services revenue for managing Orchid's portfolio consisting of $1.3 million of management fees and $0.4 million in overhead reimbursement.

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Capital Allocation and Return on Invested Capital

The tables below present the allocation of capital between the respective portfolios at March 31, 2017 and December 31, 2016, and the return on invested capital for each sub-portfolio for the three month period ended March 31, 2017.   Capital allocation is defined as the sum of the market value of securities held, less associated repurchase agreement borrowings, plus cash and cash equivalents and restricted cash associated with repurchase agreements. Capital allocated to non-portfolio assets is not included in the calculation.

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Prepayments

For the first quarter of 2017, the Company received approximately $2.3 million in scheduled and unscheduled principal repayments and prepayments, which equated to a constant prepayment rate ("CPR") of approximately 8.8% for the first quarter of 2017.  Prepayment rates on the two MBS sub-portfolios were as follows (in CPR):

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Portfolio

The following tables summarize the MBS portfolio as of March 31, 2017 and December 31, 2016:

 

($ in thousands)
					Weighted		Weighted
			Percentage		Average		Average	Weighted	Weighted
			of	Weighted	Maturity		Coupon	Average	Average
		Fair	Entire	Average	in	Longest	Reset in	Lifetime	Periodic
Asset Category		Value	Portfolio	Coupon	Months	Maturity	Months	Cap	Cap
March 31, 2017
Fixed Rate MBS	$	122,028	96.9%	4.24%	344	1-Oct-46	NA	NA	NA
Total PT MBS		122,028	96.9%	4.24%	344	1-Oct-46	NA	NA	NA
Interest-Only Securities		2,352	1.9%	3.46%	241	25-Dec-39	NA	NA	NA
Inverse Interest-Only Securities		1,514	1.2%	5.57%	287	25-Apr-41	NA	6.54%	NA
Total Structured MBS		3,866	3.1%	4.28%	259	25-Apr-41	NA	NA	NA
Total Mortgage Assets	$	125,894	100.0%	4.24%	341	1-Oct-46	NA	NA	NA
December 31, 2016
Fixed Rate MBS	$	124,299	95.4%	4.24%	347	1-Oct-46	NA	NA	NA
Total PT MBS		124,299	95.4%	4.24%	347	1-Oct-46	NA	NA	NA
Interest-Only Securities		2,654	2.0%	3.48%	245	25-Dec-39	NA	NA	NA
Inverse Interest-Only Securities		3,349	2.6%	5.52%	325	25-Dec-46	NA	3.25%	NA
Total Structured MBS		6,003	4.6%	4.62%	290	25-Dec-46	NA	NA	NA
Total Mortgage Assets	$	130,302	100.0%	4.26%	344	25-Dec-46	NA	NA	NA

 

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Financing and Liquidity

As of March 31, 2017, the Company had outstanding repurchase obligations of approximately $118.0 million with a net weighted average borrowing rate of 0.98%.  These agreements were collateralized by MBS with a fair value, including accrued interest, of approximately $125.7 million.  At March 31, 2017, the Company's liquidity was approximately $4.9 million, consisting of unpledged MBS and cash and cash equivalents.

We may pledge more of our structured MBS as part of a repurchase agreement funding, but retain cash in lieu of acquiring additional assets.  In this way, we can, at a modest cost, retain higher levels of cash on hand and decrease the likelihood we will have to sell assets in a distressed market in order to raise cash.  Below is a listing of outstanding borrowings under repurchase obligations at March 31, 2017.

Hedging

In connection with its interest rate risk management strategy, the Company economically hedges a portion of the cost of its repurchase agreement funding and also its junior subordinated notes by entering into derivative financial instrument contracts.  The Company has not elected hedging treatment under U.S. generally accepted accounting principles ("GAAP") in order to align the accounting treatment of its derivative instruments with the treatment of its portfolio assets under the fair value option election. As such, all gains or losses on these instruments are reflected in earnings for all periods presented.  As of March 31, 2017, such instruments were comprised entirely of Eurodollar futures contracts.

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Management Commentary

Commenting on the first quarter, Robert E. Cauley, Chairman and Chief Executive Officer, said, "As the year 2017 unfolded, risk markets and particularly the equity markets were buoyed by optimism stemming from developments in Washington generated by the incoming Trump administration.  The President-elect made every effort to let the world and markets know that a Trump administration was going to be very pro-business, and pursue an aggressive legislative agenda that encompassed health-care reform, tax reform, infrastructure projects and regulatory relief. As various cabinet nominations were announced, most of which were from the business world, and the new President continuously met with leaders of most major industries, the equity and risk markets continued to rally, setting new all-time highs in the case of the Dow Industrials and S&P 500 in early March.  Optimism was so high that when the Federal Reserve raised the Fed Funds Rate by 25 bps at their March meeting the markets reacted calmly. By quarter end, the treasury curve in the US was close to unchanged from year end 2016 levels.  The 10-year point of the curve was less than 5 bps lower in yield and short rates were slightly higher – approximately 6.5 bps in the case of the 2 year note and just over 30 bps in the case of the 1 month bill.

"Various members of the Federal Open Market Committee and Fed governors have increasingly discussed the reduction of the Fed's balance sheet as the next phase of the removal of monetary accommodation, in addition to increasing the Fed Funds Rate.  Members of the Fed have indicated that this reduction in the Fed's balance sheet would be accomplished by tapering the reinvestment of the paydowns it receives on its MBS holdings and maturities of the treasury and agency debt holdings. The market, particularly the MBS market, is keenly focused on the timing and extent of a reduction in Fed purchases. The prospect of the largest source of demand for agency MBS reducing its purchases has caused agency MBS assets to cheapen to comparable duration treasuries.  Further, the flattening of the US treasury yield curve described above also negatively impacted MBS asset valuations, as the prospects for net interest income from owning the assets diminished.  Prepayment speeds moderated during the quarter with the combination of the typical seasonal slowdown coupled with substantially higher mortgage rates versus levels prior to the election.  Prepayment speeds appear to have hit their trough in February – based on the report released in March – before picking up again slightly in March and again in April – based on the reports released in April and May, respectively.

"These developments in the rates and MBS markets caused both our PT RMBS and structured RMBS to incur modest mark to market losses for the quarter.    Inclusive of these mark to market losses returns for the various sub-portfolios for the quarter were 7.9% for the pass-through sub-portfolio and (0.7%) for the structured sub-portfolio, not annualized. There was no significant trading activity in either portfolio this quarter. We sold one large inverse IO position which, in conjunction with pay-downs, caused the capital allocation to shift away from structured RMBS during the first quarter.  The allocation to the structured securities portfolio declined from 43.3% at December 31, 2016 to 29.9% at March 31, 2017. This is not intended to represent a shift in our strategy, as the structured securities allocation will move back towards the December 31, 2016 level once a suitable asset can be acquired.  This will be done in conjunction with growth in the pass-through portfolio as our cash balances continue to grow.

"The early days of the second quarter of 2017 have been quite volatile.  The 10-year T-Note rallied approximately 40 bps from March 13, 2017 through April 18, 2017 but has since reversed most of this move and currently yields 2.36% as of this morning.  The rally was caused by a combination of geo-political events, softer economic data in March and Q1 generally, and a lack of progress by the Trump administration on its legislative agenda. The market reversal was driven by the same factors reversing course and/or abating in the case of geo-political events.  In fact, last week the Fed concluded their May meeting and the statement issued strongly hinted at another hike in June.  The market reaction was again muted, implying the markets and economy are strong enough to withstand additional removal of accommodation. To the extent the Trump administration has any success with its legislative agenda such legislation will likely be even more supportive of a very healthy economy.

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Summarized Financial Statements

The following is a summarized presentation of the unaudited consolidated balance sheets as of March 31, 2017, and December 31, 2016, and the unaudited consolidated statements of operations for the three months ended March 31, 2017 and 2016.  Amounts presented are subject to change.

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