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orc10ka20201231p1i0.gif
UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
 
FORM
10-K/A
(Amendment No. 1)
 
ANNUAL REPORT PURSUANT TO
 
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
 
ACT OF 1934
For the fiscal year ended
December 31, 2020
 
 
TRANSITION REPORT PURSUANT TO
 
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
 
ACT OF 1934
 
For the transition period from __ to __
Commission File Number
:
 
001-35236
 
Orchid Island Capital, Inc.
(Exact name of registrant as specified in its charter)
 
 
Maryland
27-3269228
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
3305 Flamingo Drive
,
Vero Beach
,
Florida
32963
 
(Address of principal executive offices) (Zip Code)
 
 
(
772
)
231-1400
 
(Registrant’s telephone number, including area code)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
Trading Symbol:
Name of Each Exchange on Which
Registered
Common Stock, $0.01 par value
ORC
New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
 
No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
 
Yes
 
No
 
Indicate by check
 
mark whether the
 
registrant (1) has filed
 
all reports required
 
to be filed
 
by Section 13 or
 
15(d) of the
 
Securities Exchange Act
 
of
1934 during the preceding 12 months (or for such shorter
 
period that the registrant was required to file such
 
reports), and (2) has been subject to such
filing requirements for the past 90 days.
 
Yes
 
No
 
Indicate by check mark whether
 
the registrant has submitted electronically
 
every Interactive Data File required
 
to be submitted pursuant to
 
Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
 
(or for such shorter period that the registrant was required
 
to submit such
files).
 
Yes
 
No
 
Indicate by check mark whether the
 
registrant is a large accelerated
 
filer, an accelerated filer,
 
a non-accelerated filer, a
 
smaller reporting company or
an emerging growth company.
 
See the definitions of “large accelerated
 
filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2
 
of the Exchange Act.
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
Emerging growth company
 
If an emerging growth company,
 
indicate by check mark if the registrant has elected
 
not to use the extended transition period for complying with
 
any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
Indicate by check mark
 
whether the registrant has
 
filed a report on and
 
attestation to its management's assessment
 
of the effectiveness of
 
its internal
control over financial
 
reporting under Section
 
404(b) of the
 
Sarbanes-Oxley Act (15
 
U.S.C. 7262(b)) by
 
the registered public
 
accounting firm that
prepared or issued its audit report.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
 
Yes
 
No
 
As of June 30, 2020 the aggregate market value of the common stock held by nonaffiliates was $
298,895,633
Number of shares outstanding at March 11, 2021:
94,321,365
 
DOCUMENTS INCORPORATED
 
BY REFERENCE:
 
Portions of the Registrant's definitive
 
Proxy Statement, to be issued
 
in connection with the 2021
 
Annual Meeting of Stockholders
of the Registrant, are incorporated by reference
 
into Part III of this Annual Report on Form 10-K.
EXPLANATORY NOTE
 
On February 26, 2021, Orchid Island Capital, Inc. (the “Company”) filed its annual report on Form 10-K for the fiscal year ended
December 31, 2020 (“2020 Form 10-K”). The Company is filing this Amendment No. 1 on Form 10-K/A (“Amendment No. 1”) solely to
correct typographical errors that resulted during the creation of the EDGAR version of the 2020 Form 10-K. These typographical errors
are limited to correcting the numbering of the notes to the financial statements included in Item 8.
Except as described above, no changes have been made to the 2020 Form 10-K, and this Amendment No. 1 does not modify,
amend or update in any way any of the financial or other information contained in the 2020 Form 10-K. This Amendment No. 1 does
not reflect events that may have occurred subsequent to February 26, 2021. Accordingly, this Amendment No. 1 should be read in
conjunction with the 2020 Form 10-K.
Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, this Amendment No. 1 also contains new
certifications of the Company’s Chief Executive Officer and Chief Financial Officer, which are filed as exhibits hereto.
 
 
1
 
ITEM 8. FINANCIAL
 
STATEMENTS AND SUPPLEMENTARY DATA
 
Index to Financial
 
Statements
 
Page
Report of
 
Independent
 
Registered
 
Public Accounting
 
Firm
2
Balance Sheets
4
Statements
 
of Operations
5
Statements
 
of Stockholders’
 
Equity
6
Statements
 
of Cash Flows
7
Notes to Financial
 
Statements
8
 
 
2
 
Report of Independent Registered Public Accounting Firm
 
Stockholders and Board of Directors
 
Orchid Island Capital, Inc.
 
Vero Beach, Florida
 
 
 
Opinion on the Financial Statements
 
 
We have audited the accompanying balance sheets of Orchid Island Capital, Inc. (the “Company”) as of December
 
31, 2020 and
2019, the related statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2020, and the related notes (collectively referred to as the “financial statements”).
 
In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and
 
the
results of its operations and its cash flows for each of the three years in the period ended
 
December 31, 2020
,
 
in conformity with
accounting principles generally accepted in the United States of America.
 
 
We also have audited, in accordance with the standards of the Public Company Accounting
 
Oversight Board (United States)
(“PCAOB”), the Company's internal control over financial reporting as of December 31,
 
2020, based on criteria established in
Internal
Control – Integrated Framework (2013)
 
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)
and our report dated February 26, 2021 expressed an unqualified opinion thereon.
 
 
Basis for Opinion
 
 
These financial statements are the responsibility of the Company’s management. Our responsibility
 
is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB
 
and are required to
be independent with respect to the Company in accordance with the U.S. federal
 
securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
 
 
We conducted our audits in accordance with the standards of the PCAOB. Those standards
 
require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
 
of material misstatement, whether due to error or
fraud.
 
 
Our audits included performing procedures to assess the risks of material misstatement
 
of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures
 
included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also
 
included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall
 
presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
 
 
Critical Audit Matter
 
 
The critical audit matter communicated below is a matter arising from the current
 
period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that: (1)
 
relates to accounts or disclosures that are material
to the financial statements and (2) involved our especially challenging, subjective,
 
or complex judgments. The communication
of the critical audit matter does not alter in any way our opinion on the financial statements,
 
taken as a whole, and we are not, by
communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts
 
or disclosures
to which it relates.
 
 
Valuation of Investments in Mortgage-Backed Securities
 
 
As described in Notes
 
1
 
and
 
12
 
to the financial statements, the Company
 
accounts for its
 
Level 2
 
mortgage-backed securities at fair
value, which
 
totaled
 
$3.7
 
billion at December 31, 2020.
  
The fair value of mortgage-backed securities is
 
based on independent pricing
sources and/or third-party broker
 
quotes, when available. Because the price estimates may vary, management must make certain
judgments and assumptions about the appropriate price to use to calculate the fair
 
values based on various techniques including
observing the most recent market for like or identical assets (including security
 
coupon rate, maturity, yield, prepayment speed), market
credit spreads, and model driven approaches.
 
3
 
  
 
We identified the valuation of mortgage-backed securities
 
as
 
a critical audit matter.
  
The principal considerations for our determination
are: (i)
 
the potential for bias in how management subjectively selects the price from
 
multiple pricing sources to determine the fair value
of the mortgage-backed securities and (ii)
 
the audit effort involved, including the use of
 
valuation
 
professionals with specialized skill and
knowledge.
   
 
 
 
The primary procedures we performed to address this critical audit matter included:
  
 
 
 
Testing the
 
design and operating
 
effectiveness of
 
controls
 
relating to the valuation of mortgaged-backed securities,
including
 
controls over
 
management’s
 
process to select the price from multiple pricing sources.
  
 
 
 
Reviewing
 
the
 
range of values used for each investment position,
 
and
 
assessing
 
the price selected
 
for management bias
by comparing the price
 
to the high, low and average of the range of pricing sources.
   
 
 
 
Testing the reasonableness of fair values determined by management by comparing the fair value of certain securities to
recent transactions, if applicable.
 
 
Utilizing
 
a
 
third-party valuation specialist
 
to
 
develop an independent estimate of the fair value of each investment
position
 
by considering the stated security coupon rate, yield, maturity, and prepayment speeds, and comparing to the fair
value used by management.
 
 
 
/s/ BDO USA, LLP
Certified Public Accountants
 
We have served as the Company's auditor since 2011.
 
West Palm Beach, Florida
February 26, 2021
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4
 
ORCHID ISLAND CAPITAL, INC.
BALANCE SHEETS
($ in thousands, except per share data)
December 31, 2020
December 31, 2019
ASSETS:
Mortgage-backed securities, at fair value
Pledged to counterparties
$
3,719,906
$
3,584,354
Unpledged
6,989
6,567
Total mortgage
 
-backed securities
3,726,895
3,590,921
Cash and cash equivalents
220,143
193,770
Restricted cash
79,363
84,885
Accrued interest receivable
9,721
12,404
Derivative assets, at fair value
20,999
-
Receivable for securities sold, pledged to counterparties
414
-
Other assets
516
100
Total Assets
$
4,058,051
$
3,882,080
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements
$
3,595,586
$
3,448,106
Dividends payable
4,970
5,045
Derivative liabilities, at fair value
33,227
20,658
Accrued interest payable
1,157
11,101
Due to affiliates
632
622
Other liabilities
7,188
1,041
Total Liabilities
3,642,760
3,486,573
 
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $
0.01
 
par value;
100,000,000
 
shares authorized; no shares issued
and outstanding as of December 31, 2020 and December 31, 2019
-
-
Common Stock, $
0.01
 
par value;
500,000,000
 
shares authorized,
76,073,317
shares issued and outstanding as of December 31, 2020 and
63,061,781
 
shares issued
and outstanding as of December 31, 2019
761
631
Additional paid-in capital
432,524
414,998
Accumulated deficit
(17,994)
(20,122)
Total Stockholders' Equity
415,291
395,507
Total Liabilities
 
and Stockholders' Equity
$
4,058,051
$
3,882,080
See Notes to Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5
 
ORCHID ISLAND CAPITAL, INC.
STATEMENTS
 
OF OPERATIONS
For the Years Ended December 31, 2020,
 
2019 and 2018
($ in thousands, except per share data)
2020
2019
2018
Interest income
$
116,045
$
142,324
$
154,581
Interest expense
(25,056)
(83,666)
(70,360)
Net interest income
90,989
58,658
84,221
Realized losses on mortgage-backed securities
(24,986)
(10,877)
(30,289)
Unrealized gains (losses) on mortgage-backed securities
25,761
38,045
(110,668)
(Losses) gains on derivative instruments
(79,092)
(51,176)
24,311
Net portfolio income (loss)
12,672
34,650
(32,425)
Expenses:
Management fees
5,281
5,528
6,204
Allocated overhead
1,514
1,380
1,567
Accrued incentive compensation
38
115
407
Directors' fees and liability insurance
998
998
968
Audit, legal and other professional fees
1,045
1,105
851
Direct REIT operating expenses
1,057
997
1,631
Other administrative
611
262
334
Total expenses
10,544
10,385
11,962
Net income (loss)
$
2,128
$
24,265
$
(44,387)
Basic and diluted net income (loss) per share
$
0.03
$
0.43
$
(0.85)
Weighted Average Shares Outstanding
67,210,815
56,328,027
52,198,175
See Notes to Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6
 
ORCHID ISLAND CAPITAL, INC.
STATEMENT
 
OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2020,
 
2019 and 2018
(in thousands, except per share data)
Additional
Retained
Common Stock
Paid-in
Earnings
Shares
Par Value
Capital
(Deficit)
Total
Balances, January 1, 2018
53,062
$
531
$
461,680
$
-
$
462,211
Net loss
-
-
-
(44,387)
(44,387)
Cash dividends declared, $1.07 per share
-
-
(55,814)
-
(55,814)
Stock based compensation
49
-
492
-
492
Shares repurchased and retired
(3,979)
(40)
(26,383)
-
(26,423)
Balances, December 31, 2018
49,132
491
379,975
(44,387)
336,079
Net income
-
-
-
24,265
24,265
Cash dividends declared, $0.96 per share
-
-
(54,421)
-
(54,421)
Issuance of common stock pursuant to public offerings, net
14,377
145
92,169
-
92,314
Stock based compensation
23
-
294
-
294
Shares repurchased and retired
(470)
(5)
(3,019)
-
(3,024)
Balances, December 31, 2019
63,062
631
414,998
(20,122)
395,507
Net income
-
-
-
2,128
2,128
Cash dividends declared, $0.79 per share
-
-
(53,570)
-
(53,570)
Issuance of common stock pursuant to public offerings, net
13,019
130
70,920
-
71,050
Stock based compensation
12
-
244
-
244
Shares repurchased and retired
(20)
-
(68)
-
(68)
Balances, December 31, 2020
76,073
$
761
$
432,524
$
(17,994)
$
415,291
See Notes to Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
7
 
ORCHID ISLAND CAPITAL, INC.
STATEMENTS
 
OF CASH FLOWS
For the Years Ended December 31, 2020,
 
2019 and 2018
($ in thousands)
2020
2019
2018
CASH FLOWS FROM OPERATING
 
ACTIVITIES:
Net income (loss)
$
2,128
$
24,265
$
(44,387)
Adjustments to reconcile net income (loss) to net cash provided by
 
operating activities:
Stock based compensation
244
294
492
Realized and unrealized (gains) losses on mortgage-backed securities
(775)
(27,168)
140,957
Realized and unrealized losses on interest rate swaptions
2,972
1,379
1,502
Realized and unrealized losses (gains) on interest rate swaps
59,055
39,471
(1,027)
Realized and unrealized losses on U.S. Treasury Securities
95
-
-
Realized (gains) losses on forward settling to-be-announced securities
(3,231)
4,357
(4,527)
Changes in operating assets and liabilities:
Accrued interest receivable
2,683
837
1,203
Other assets
(446)
80
(3)
Accrued interest payable
(9,944)
4,656
(71)
Other liabilities
2,583
22
4
Due to affiliates
10
(32)
(143)
NET CASH PROVIDED BY OPERATING
 
ACTIVITIES
55,374
48,161
94,000
CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases
(4,859,434)
(4,241,822)
(3,893,828)
Sales
4,200,536
3,321,206
3,885,817
Principal repayments
523,699
594,833
373,934
Payments on U.S. Treasury securities
(139,807)
-
-
Proceeds from U.S. Treasury securities
139,712
-
-
Net proceeds from reverse repurchase agreements
30
-
-
(Payments on) proceeds from net settlement of to-be-announced securities
(881)
(8,423)
7,292
Purchase of derivative financial instruments, net of margin cash received
(63,195)
(20,600)
6,805
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
(199,340)
(354,806)
380,020
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements
33,140,625
45,595,010
52,096,292
Principal payments on repurchase agreements
(32,993,145)
(45,171,956)
(52,605,026)
Cash dividends
(53,645)
(53,307)
(59,312)
Proceeds from issuance of common stock, net of issuance costs
71,050
92,314
-
Common stock repurchases
(68)
(3,024)
(26,423)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
164,817
459,037
(594,469)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS
 
AND RESTRICTED
CASH
20,851
152,392
(120,449)
CASH, CASH EQUIVALENTS AND
 
RESTRICTED CASH, beginning of the period
278,655
126,263
246,712
CASH, CASH EQUIVALENTS AND
 
RESTRICTED CASH, end of the period
$
299,506
$
278,655
$
126,263
SUPPLEMENTAL DISCLOSURE OF
 
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest
$
35,000
$
79,010
$
70,431
SUPPLEMENTAL DISCLOSURE OF
 
NONCASH INVESTING ACTIVITIES:
Securities sold settled in later period
$
-
$
-
$
220,655
See Notes to Financial Statements
 
8
 
ORCHID ISLAND
 
CAPITAL, INC.
NOTES TO FINANCIAL
 
STATEMENTS
DECEMBER
 
31, 2020
 
NOTE 1.
 
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
 
Organization
 
and Business
 
Description
 
Orchid Island
 
Capital, Inc.
 
(“Orchid”
 
or the “Company”),
 
was incorporated
 
in Maryland
 
on August
 
17, 2010 for
 
the purpose
 
of creating
and managing
 
a leveraged
 
investment
 
portfolio
 
consisting
 
of residential
 
mortgage-backed
 
securities
 
(“RMBS”).
 
From incorporation
 
to
February 20,
 
2013 Orchid
 
was a wholly
 
owned subsidiary
 
of Bimini Capital
 
Management,
 
Inc. (“Bimini”).
 
Orchid began
 
operations
 
on
November 24,
 
2010 (the
 
date of commencement
 
of operations).
 
From incorporation
 
through November
 
24, 2010,
 
Orchid’s only
 
activity
was the issuance
 
of common stock
 
to Bimini.
 
On August 2, 2017, Orchid entered into an equity distribution agreement (the “August 2017
 
Equity Distribution Agreement”) with
two sales agents pursuant to which the Company could offer and sell, from time to time, up
 
to an aggregate amount of $
125,000,000
 
of
shares of the Company’s common stock in transactions that were deemed to be “at the market” offerings and privately
 
negotiated
transactions.
 
The Company issued a total of
15,123,178
 
shares under the August 2017 Equity Distribution Agreement for aggregate
gross proceeds of approximately $
125.0
 
million, and net proceeds of approximately $
123.1
 
million, net of commissions and fees,
 
prior
to its termination in July 2019.
 
On July 30, 2019, Orchid entered into an underwriting agreement (the “2019 Underwriting
 
Agreement”) with Morgan Stanley & Co.
LLC, Citigroup Global Markets Inc. and J.P. Morgan Securities LLC, as representatives of the underwriters named therein, relating to
the offer and sale of
7,000,000
 
shares of the Company’s common stock at a price to the public of $
6.55
 
per share. The underwriters
purchased the shares pursuant to the 2019 Underwriting Agreement at a price of $
6.3535
 
per share. The closing of the offering of
7,000,000
 
shares of common stock occurred on August 2, 2019, with net proceeds to the Company
 
of approximately $
44.2
 
million after
deduction of underwriting discounts and commissions and other estimated offering expenses.
 
On January 23, 2020, Orchid entered into an equity distribution agreement (the
 
“January 2020 Equity Distribution Agreement”) with
three sales agents pursuant to which the Company could offer and sell, from time to time, up
 
to an aggregate amount of $
200,000,000
of shares of the Company’s common stock in transactions that were deemed to be “at the market” offerings and
 
privately negotiated
transactions.
 
The Company issued a total of
3,170,727
 
shares under the January 2020 Equity Distribution Agreement for aggregate
gross proceeds of $
19.8
 
million, and net proceeds of approximately $
19.4
 
million, net of commissions and fees, prior to its termination
in August 2020.
 
On August 4, 2020, Orchid entered into an equity distribution agreement (the “August 2020
 
Equity Distribution Agreement”) with
four sales agents pursuant to which the Company may offer and sell, from time to time, up to
 
an aggregate amount of $
150,000,000
 
of
shares of the Company’s common stock in transactions that are deemed to be “at the market”
 
offerings and privately negotiated
transactions.
 
Through December 31, 2020, the Company issued a total of
9,848,513
 
shares under the August 2020 Equity Distribution
Agreement for aggregate gross proceeds of approximately $
52.5
 
million, and net proceeds of approximately $
51.6
 
million, net of
commissions and fees. Subsequent to December 31, 2020 through February 26, 2021,
 
the Company issued a total of
308,048
 
shares
under the August 2020 Equity Distribution Agreement for aggregate gross proceeds of approximately
 
$
1.6
 
million.
 
COVID-19
 
Impact
 
Beginning
 
in mid-March
 
2020, the
 
global pandemic
 
associated
 
with the novel
 
coronavirus
 
(“COVID-19”)
 
and related
 
economic
conditions
 
began to impact
 
our financial
 
position and
 
results of
 
operations.
 
As a result
 
of the economic,
 
health and
 
market turmoil
 
brought
about by COVID-19,
 
the Agency
 
RMBS market
 
experienced
 
severe dislocations.
 
This resulted
 
in falling
 
prices of our
 
assets and
 
increased
 
9
 
margin calls
 
from our repurchase
 
agreement
 
lenders. Further,
 
as interest
 
rates declined,
 
we faced additional
 
margin calls
 
related to
 
our
various hedge
 
positions.
 
In order
 
to maintain
 
sufficient cash
 
and liquidity, reduce
 
risk and satisfy
 
margin calls,
 
we were forced
 
to sell assets
at levels significantly
 
below their
 
carrying values
 
and closed
 
several hedge
 
positions.
 
During this
 
period, we
 
sold approximately
 
$
1.1
 
billion
of Agency
 
RMBS, resulting
 
in losses of
 
approximately
 
$
31.4
 
million.
 
Also during
 
this period,
 
we terminated
 
interest rate
 
swap positions
with an aggregate
 
notional value
 
of $
860.0
 
million and
 
incurred
 
approximately
 
$
45.0
 
million in
 
fair value
 
losses on the
 
positions
 
through the
date of the
 
respective
 
terminations.
 
The Agency
 
RMBS market
 
largely stabilized
 
after the
 
Federal Reserve
 
announced
 
on March 23,
 
2020 that
 
it would purchase
 
Agency
RMBS and
 
U.S. Treasuries
 
in the amounts
 
needed to
 
support smooth
 
market functioning.
 
As of December
 
31, 2020,
 
we had timely
satisfied all
 
margin calls.
 
 
Although the
 
Company cannot
 
estimate the
 
length or
 
gravity of
 
the impact
 
of the COVID-19
 
outbreak at
 
this time,
 
if the pandemic
continues,
 
it may continue
 
to have adverse
 
effects on the
 
Company’s results
 
of future
 
operations,
 
financial position,
 
and liquidity
 
in fiscal
year 2021.
 
In addition,
 
President
 
Trump signed
 
into law the
 
Coronavirus
 
Aid, Relief,
 
and Economic
 
Security (CARES)
 
Act, which
 
has provided
billions of
 
dollars of
 
relief to
 
individuals,
 
businesses,
 
state and local
 
governments,
 
and the health
 
care system
 
suffering the
 
impact of
 
the
pandemic, including
 
mortgage
 
loan forbearance
 
and modification
 
programs to
 
qualifying
 
borrowers
 
who may have
 
difficulty making
 
their
loan payments.
 
As certain
 
time limits
 
imposed in
 
the CARES
 
Act programs
 
began to expire,
 
on December
 
27, 2020,
 
President
 
Trump
signed into
 
law an additional
 
coronavirus
 
aid package
 
as part of
 
the Consolidated
 
Appropriations
 
Act, 2021,
 
providing for
 
extensions of
many of the
 
CARES Act
 
policies and
 
programs as
 
well as billions
 
of dollars
 
of additional
 
relief. The
 
Company has
 
evaluated the
 
provisions
of the CARES
 
Act and the
 
Consolidated
 
Appropriations
 
Act, 2021
 
and has determined
 
that it will
 
not have a
 
material effect
 
on the
Company’s business,
 
results of
 
operations
 
and financial
 
condition.
 
 
Basis of
 
Presentation
 
and Use of
 
Estimates
 
The accompanying
 
financial
 
statements
 
have been
 
prepared in
 
accordance
 
with accounting
 
principles
 
generally accepted
 
in the
United States
 
(“GAAP”).
The preparation
 
of financial
 
statements
 
in conformity
 
with GAAP
 
requires management
 
to make estimates
 
and
assumptions
 
that affect
 
the reported
 
amounts of
 
assets and
 
liabilities
 
and disclosure
 
of contingent
 
assets and
 
liabilities
 
at the date
 
of the
financial
 
statements
 
and the reported
 
amounts of
 
revenues and
 
expenses during
 
the reporting
 
period. Actual
 
results could
 
differ from
 
those
estimates.
 
The significant
 
estimates
 
affecting the
 
accompanying
 
financial statements
 
are the fair
 
values of RMBS
 
and derivatives.
 
Management
 
believes the
 
estimates
 
and assumptions
 
underlying
 
the financial
 
statements
 
are reasonable
 
based on the
 
information
available as
 
of December
 
31, 2020;
 
however, uncertainty
 
over the ultimate
 
impact that
 
COVID-19
 
will have on
 
the global
 
economy
generally, and on
 
Orchid’s business
 
in particular,
 
makes any
 
estimates and
 
assumptions
 
as of December
 
31, 2020 inherently
 
less certain
than they
 
would be absent
 
the current
 
and potential
 
impacts of
 
COVID-19.
 
Variable Interest Entities (VIEs)
 
We obtain interests in VIEs through our investments in mortgage-backed securities.
 
Our interests in these VIEs are passive in
nature and are not expected to result in us obtaining a controlling financial interest in
 
these VIEs in the future.
 
As a result, we do not
consolidate these VIEs and we account for our interest in these VIEs as mortgage-backed
 
securities.
 
See Note 2 for additional
information regarding our investments in mortgage-backed securities.
 
Our maximum exposure to loss for these VIEs is the carrying
value of the mortgage-backed securities.
 
Cash and Cash Equivalents and Restricted Cash
 
Cash and cash
 
equivalents
 
include cash
 
on deposit
 
with financial
 
institutions
 
and highly
 
liquid investments
 
with original
 
maturities
 
of
three months
 
or less at
 
the time
 
of purchase.
 
Restricted
 
cash includes
 
cash pledged
 
as collateral
 
for repurchase
 
agreements
 
and other
 
 
 
 
 
 
 
 
 
 
 
 
 
10
 
borrowings,
 
and interest
 
rate swaps
 
and other
 
derivative
 
instruments.
The following
 
table provides
 
a reconciliation
 
of cash, cash
 
equivalents,
 
and restricted
 
cash reported
 
within the
 
statement
 
of financial
position that
 
sum to the
 
total of the
 
same such amounts
 
shown in
 
the statement
 
of cash flows.
 
(in thousands)
December 31, 2020
December 31, 2019
Cash and cash equivalents
$
220,143
$
193,770
Restricted cash
79,363
84,885
Total cash, cash equivalents
 
and restricted cash
$
299,506
$
278,655
 
The Company
 
maintains cash
 
balances at
 
three banks
 
and excess
 
margin on
 
account with
 
two exchange
 
clearing members.
 
At times,
balances may
 
exceed federally
 
insured limits.
 
The Company
 
has not experienced
 
any losses
 
related to
 
these balances.
 
The Federal
Deposit Insurance
 
Corporation
 
insures eligible
 
accounts up
 
to $250,000
 
per depositor
 
at each financial
 
institution.
 
Restricted
 
cash
balances are
 
uninsured,
 
but are held
 
in separate
 
customer accounts
 
that are segregated
 
from the general
 
funds of the
 
counterparty.
 
The
Company limits
 
uninsured
 
balances to
 
only large,
 
well-known
 
banks
 
and exchange
 
clearing members
 
and believes
 
that it is
 
not exposed
 
to
any significant
 
credit risk
 
on cash and
 
cash equivalents
 
or restricted
 
cash balances.
 
Mortgage-Backed
 
Securities
 
The Company
 
invests primarily
 
in mortgage
 
pass-through
 
residential
 
mortgage backed
 
certificates
 
issued by Freddie
 
Mac, Fannie
Mae or Ginnie
 
Mae (“RMBS”),
 
collateralized
 
mortgage obligations
 
(“CMOs”),
 
interest-only
 
(“IO”) securities
 
and inverse
 
interest-only
 
(“IIO”)
securities
 
representing interest in or obligations backed by pools of RMBS. We refer to RMBS
 
and CMOs as PT RMBS.
 
We refer to IO
and IIO securities as structured RMBS. The Company has elected to account for
 
its investment in RMBS under the fair value
option. Electing the fair value option requires the Company to record changes in
 
fair value in the statement of operations, which, in
management’s view, more appropriately reflects the results of our operations for a particular reporting period and is consistent with the
underlying economics and how the portfolio is managed.
 
The Company
 
records RMBS
 
transactions
 
on the trade
 
date. Security
 
purchases that
 
have not
 
settled as
 
of the balance
 
sheet date
are included
 
in the RMBS
 
balance with
 
an offsetting
 
liability recorded,
 
whereas securities
 
sold that
 
have not settled
 
as of the
 
balance sheet
date are removed
 
from the RMBS
 
balance with
 
an offsetting
 
receivable recorded.
 
Fair value
 
is defined
 
as the price
 
that would
 
be received
 
to sell the
 
asset or paid
 
to transfer
 
the liability
 
in an orderly
 
transaction
between market
 
participants
 
at the measurement
 
date.
 
The fair value
 
measurement
 
assumes that
 
the transaction
 
to sell the
 
asset or
transfer the
 
liability either
 
occurs in
 
the principal
 
market for
 
the asset or
 
liability, or in
 
the absence
 
of a principal
 
market, occurs
 
in the most
advantageous
 
market for
 
the asset or
 
liability. Estimated
 
fair values
 
for RMBS
 
are based
 
on independent
 
pricing sources
 
and/or third
 
party
broker quotes,
 
when available.
 
 
Income on PT
 
RMBS securities
 
is based on
 
the stated
 
interest rate
 
of the security.
 
Premiums or
 
discounts present
 
at the date
 
of
purchase are
 
not amortized.
 
Premium lost
 
and discount
 
accretion
 
resulting from
 
monthly principal
 
repayments
 
are reflected
 
in unrealized
gains (losses)
 
on RMBS in
 
the statements
 
of operations.
 
For IO securities,
 
the income
 
is accrued
 
based on the
 
carrying value
 
and the
effective yield.
 
The difference
 
between income
 
accrued and
 
the interest
 
received on
 
the security
 
is characterized
 
as a return
 
of investment
and serves
 
to reduce
 
the asset’s
 
carrying value.
 
At each reporting
 
date, the
 
effective yield
 
is adjusted
 
prospectively
 
for future
 
reporting
periods
 
based on the
 
new estimate
 
of prepayments
 
and the contractual
 
terms of the
 
security. For IIO
 
securities,
 
effective yield
 
and income
recognition
 
calculations
 
also take
 
into account
 
the index value
 
applicable
 
to the security.
 
Changes in
 
fair value
 
of RMBS during
 
each
reporting
 
period are
 
recorded in
 
earnings and
 
reported as
 
unrealized
 
gains or losses
 
on mortgage-backed
 
securities
 
in the accompanying
statements
 
of operations.
 
Derivative Financial Instruments
 
 
 
11
 
The Company
 
uses derivative
 
and other
 
hedging instruments
 
to manage
 
interest rate
 
risk, facilitate
 
asset/liability
 
strategies
 
and
manage other
 
exposures,
 
and it may
 
continue to
 
do so in the
 
future. The
 
principal instruments
 
that the Company
 
has used to
 
date are
Treasury Note
 
(“T-Note”),
 
Fed Funds and
 
Eurodollar
 
futures contracts,
 
short positions
 
in U.S. Treasury
 
securities,
 
interest rate
 
swaps,
options to
 
enter in interest
 
rate swaps
 
(“interest
 
rate swaptions”)
 
and “to-be-announced”
 
(“TBA”) securities
 
transactions,
 
but the Company
may enter
 
into other
 
derivative
 
and other
 
hedging instruments
 
in the future.
 
 
The Company
 
accounts for
 
TBA securities
 
as derivative
 
instruments.
 
Gains and losses
 
associated
 
with TBA
 
securities
 
transactions
are reported
 
in gain (loss)
 
on derivative
 
instruments
 
in the accompanying
 
statements
 
of operations.
 
Derivative
 
and other
 
hedging instruments
 
are carried
 
at fair value,
 
and changes
 
in fair value
 
are recorded
 
in earnings
 
for each period.
The Company’s
 
derivative
 
financial
 
instruments
 
are not designated
 
as hedge accounting
 
relationships,
 
but rather
 
are used as
 
economic
hedges of
 
its portfolio
 
assets and
 
liabilities.
 
Holding derivatives
 
creates exposure
 
to credit
 
risk related
 
to the potential
 
for failure
 
on the part
 
of counterparties
 
and exchanges
 
to
honor their
 
commitments.
 
In the event
 
of default
 
by a counterparty,
 
the Company
 
may have difficulty
 
recovering
 
its collateral
 
and may not
receive payments
 
provided for
 
under the
 
terms of the
 
agreement.
 
The Company’s
 
derivative
 
agreements
 
require it
 
to post or
 
receive
collateral
 
to mitigate
 
such risk.
 
In addition,
 
the Company
 
uses only
 
registered
 
central clearing
 
exchanges and
 
well-established
 
commercial
banks as counterparties,
 
monitors positions
 
with individual
 
counterparties
 
and adjusts
 
posted collateral
 
as required.
 
Financial
 
Instruments
 
The fair value
 
of financial
 
instruments
 
for which
 
it is practicable
 
to estimate
 
that value
 
is disclosed,
 
either in
 
the body of
 
the financial
statements
 
or in the
 
accompanying
 
notes. RMBS,
 
Eurodollar,
 
Fed Funds
 
and T-Note
 
futures contracts,
 
interest rate
 
swaps, interest
 
rate
swaptions
 
and TBA securities
 
are accounted
 
for at fair
 
value in the
 
balance sheets.
 
The methods
 
and assumptions
 
used to estimate
 
fair
value for
 
these instruments
 
are presented
 
in Note 12
 
of the financial
 
statements.
 
The estimated
 
fair value
 
of cash and
 
cash equivalents,
 
restricted
 
cash, accrued
 
interest receivable,
 
receivable
 
for securities
 
sold,
other assets,
 
due to affiliates,
 
repurchase
 
agreements,
 
payable for
 
unsettled securities
 
purchased,
 
accrued interest
 
payable and
 
other
liabilities
 
generally approximates
 
their carrying
 
values as of
 
December
 
31, 2020 and
 
December 31,
 
2019 due to
 
the short-term
 
nature of
these financial
 
instruments.
 
 
Repurchase
 
Agreements
 
The Company
 
finances the
 
acquisition
 
of the majority
 
of its RMBS
 
through the
 
use of repurchase
 
agreements
 
under master
repurchase
 
agreements.
 
Repurchase
 
agreements
 
are accounted
 
for as collateralized
 
financing
 
transactions,
 
which are
 
carried at
 
their
contractual
 
amounts, including
 
accrued interest,
 
as specified
 
in the respective
 
agreements.
 
Reverse Repurchase
 
Agreements
 
and Obligations
 
to Return Securities
 
Borrowed under
 
Reverse Repurchase
 
Agreements
 
The Company
 
borrows securities
 
to cover short
 
sales of U.S.
 
Treasury securities
 
through reverse
 
repurchase
 
transactions
 
under our
master repurchase
 
agreements.
 
We account for
 
these as securities
 
borrowing
 
transactions
 
and recognize
 
an obligation
 
to return the
borrowed
 
securities
 
at fair value
 
on the balance
 
sheet based
 
on the value
 
of the underlying
 
borrowed
 
securities
 
as of the
 
reporting date.
The securities
 
received as
 
collateral
 
in connection
 
with our reverse
 
repurchase
 
agreements
 
mitigate our
 
credit risk
 
exposure to
counterparties.
 
Our reverse
 
repurchase
 
agreements
 
typically
 
have maturities
 
of 30 days
 
or less.
 
Manager Compensation
 
The Company
 
is externally
 
managed by
 
Bimini Advisors,
 
LLC (the
 
“Manager”
 
or “Bimini
 
Advisors”),
 
a Maryland
 
limited liability
company and
 
wholly-owned
 
subsidiary
 
of Bimini.
 
The Company’s
 
management
 
agreement
 
with the
 
Manager provides
 
for payment
 
to the
 
12
 
Manager of
 
a management
 
fee and reimbursement
 
of certain
 
operating
 
expenses, which
 
are accrued
 
and expensed
 
during the
 
period for
which they
 
are earned
 
or incurred.
 
Refer to
 
Note 13 for
 
the terms of
 
the management
 
agreement.
 
Earnings
 
Per Share
 
Basic earnings
 
per share
 
(“EPS”) is
 
calculated
 
as net income
 
or loss attributable
 
to common stockholders
 
divided by
 
the weighted
average number
 
of shares
 
of common stock
 
outstanding
 
or subscribed
 
during the
 
period. Diluted
 
EPS is calculated
 
using the treasury
stock or two-class
 
method, as
 
applicable,
 
for common
 
stock equivalents,
 
if any. However, the
 
common stock
 
equivalents
 
are not included
in computing
 
diluted EPS
 
if the result
 
is anti-dilutive.
 
 
Income Taxes
 
 
Orchid has qualified and elected to be taxed as a REIT under the Code.
 
REITs are generally not subject to federal income tax on
their REIT taxable income provided that they distribute to their stockholders
 
at least 90% of their REIT taxable income on an annual
basis. In addition, a REIT must meet other provisions of the Code to retain its tax
 
status.
 
Orchid assesses the likelihood, based on their technical merit, that uncertain tax positions
 
will be sustained upon examination
based on the facts, circumstances and information available at the end of each period.
 
All of Orchid’s tax positions are categorized as
highly certain.
 
There is no accrual for any tax, interest or penalties related to Orchid’s tax position
 
assessment.
 
The measurement of
uncertain tax positions is adjusted when new information is available, or
 
when an event occurs that requires a change.
 
Recent Accounting
 
Pronouncements
 
On January 1, 2020, we adopted Accounting Standards Update (“ASU”) 2016-13,
Financial Instruments – Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments.
ASU 2016-13 requires credit losses on most financial assets measured
at amortized cost and certain other instruments to be measured using an expected credit
 
loss model (referred to as the current
expected credit loss model). The Company’s adoption of this ASU did not have a material effect on its financial
 
statements as its
financial assets were already measured at fair value through earnings.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
13
 
In March 2020, the FASB issued ASU 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate
Reform on Financial Reporting.”
 
ASU 2020-04 provides optional expedients and exceptions to GAAP requirements for
 
modifications
on debt instruments, leases, derivatives, and other contracts, related to the expected market
 
transition from the London Interbank
Offered Rate (“LIBOR”), and certain other floating rate benchmark indices, or collectively, IBORs, to alternative reference rates. ASU
2020-04 generally considers contract modifications related to reference rate reform to
 
be an event that does not require contract
remeasurement at the modification date nor a reassessment of a previous accounting
 
determination. The guidance in ASU 2020-04 is
optional and may be elected over time, through December 31, 2022, as reference
 
rate reform activities occur. The Company does not
believe the adoption of this ASU will have a material impact on its financial statements.
 
In January 2021, the FASB issued ASU 2021-01 “Reference Rate Reform (Topic 848).
 
ASU 2021-01 expands the scope of ASC
848 to include all affected derivatives and give market participants the ability to apply certain
 
aspects of the contract modification and
hedge accounting expedients to derivative contracts affected by the discounting transition. In
 
addition, ASU 2021-01 adds
implementation guidance to permit a company to apply certain optional expedients
 
to modifications of interest rate indexes used for
margining, discounting or contract price alignment of certain derivatives as a result
 
of reference rate reform initiatives and
 
extends
optional expedients to account for a derivative contract modified as a continuation of
 
the existing contract and to continue hedge
accounting when certain critical terms of a hedging relationship change to modifications
 
made as part of the discounting transition. The
guidance in ASU 2021-01 is effective immediately and available generally through December
 
31, 2022, as reference rate reform
activities occur. The Company does not believe the adoption of this ASU will have a material impact on its financial statements.
 
NOTE 2.
 
MORTGAGE-BACKED SECURITIES
 
 
The following
 
table presents
 
the Company’s
 
RMBS portfolio
 
as of December
 
31, 2020 and
 
December 31,
 
2019:
 
 
(in thousands)
December 31, 2020
December 31, 2019
Pass-Through RMBS Certificates:
Adjustable-rate Mortgages
 
$
-
$
1,014
Fixed-rate Mortgages
 
3,560,746
3,206,013
Fixed-rate CMOs
137,453
299,205
Total Pass-Through
 
Certificates
3,698,199
3,506,232
Structured RMBS Certificates:
Interest-Only Securities
28,696
60,986
Inverse Interest-Only Securities
-
23,703
Total Structured
 
RMBS Certificates
28,696
84,689
Total
$
3,726,895
$
3,590,921
 
NOTE 3.
 
REPURCHASE AGREEMENTS
 
The Company
 
pledges certain
 
of its RMBS
 
as collateral
 
under repurchase
 
agreements
 
with financial
 
institutions.
 
Interest rates
 
are
generally fixed
 
based on prevailing
 
rates corresponding
 
to the terms
 
of the borrowings,
 
and interest
 
is generally
 
paid at the
 
termination
 
of a
borrowing.
 
If the fair
 
value of the
 
pledged securities
 
declines,
 
lenders will
 
typically require
 
the Company
 
to post additional
 
collateral
 
or pay
down borrowings
 
to re-establish
 
agreed upon
 
collateral
 
requirements,
 
referred to
 
as "margin
 
calls." Similarly,
 
if the fair
 
value of the
 
pledged
securities
 
increases,
 
lenders may
 
release collateral
 
back to the
 
Company. As of December
 
31, 2020,
 
the Company
 
had met all
 
margin call
requirements.
 
As of December
 
31, 2020 and
 
2019, the
 
Company’s repurchase
 
agreements
 
had remaining
 
maturities
 
as summarized
 
below:
 
($ in thousands)
OVERNIGHT
BETWEEN 2
BETWEEN 31
GREATER
 
(1 DAY OR
AND
AND
THAN
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
14
 
LESS)
30 DAYS
90 DAYS
90 DAYS
TOTAL
December 31, 2020
Fair market value of securities pledged, including
accrued interest receivable
$
-
$
2,112,969
$
1,560,798
$
55,776
$
3,729,543
Repurchase agreement liabilities associated with
these securities
$
-
$
2,047,897
$
1,494,500
$
53,189
$
3,595,586
Net weighted average borrowing rate
-
 
0.23%
0.22%
0.30%
0.23%
December 31, 2019
Fair market value of securities pledged, including
accrued interest receivable
$
-
$
2,470,263
$
1,005,517
$
120,941
$
3,596,721
Repurchase agreement liabilities associated with
these securities
$
-
$
2,361,378
$
964,368
$
122,360
$
3,448,106
Net weighted average borrowing rate
-
2.04%
1.94%
2.60%
2.03%
 
In addition,
 
cash pledged
 
to counterparties
 
as collateral
 
for repurchase
 
agreements
 
was approximately
 
$
58.8
 
million and
 
$
65.9
 
million
as of December
 
31, 2020 and
 
2019, respectively.
 
If, during
 
the term of
 
a repurchase
 
agreement,
 
a lender files
 
for bankruptcy,
 
the Company
 
might experience
 
difficulty recovering
 
its
pledged assets,
 
which could
 
result in
 
an unsecured
 
claim against
 
the lender
 
for the difference
 
between the
 
amount loaned
 
to the Company
plus interest
 
due to the
 
counterparty
 
and the fair
 
value of the
 
collateral
 
pledged to
 
such lender,
 
including the accrued interest receivable
and cash posted by the Company as collateral. At December
 
31, 2020,
 
the Company
 
had an aggregate
 
amount at
 
risk (the difference
between the
 
amount loaned
 
to the Company,
 
including interest
 
payable and
 
securities
 
posted by
 
the counterparty
 
(if any),
 
and the fair
value of securities
 
and cash pledged
 
(if any),
 
including accrued
 
interest on
 
such securities)
 
with all
 
counterparties
 
of approximately
 
$
176.3
million.
 
The Company
 
did not have
 
an amount
 
at risk with
 
any individual
 
counterparty
 
greater than
 
10% of the
 
Company’s equity
 
at
December 31,
 
2020 and 2019
.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
15
 
NOTE 4. DERIVATIVE AND OTHER HEDGING INSTRUMENTS
 
The table
 
below summarizes
 
fair value
 
information
 
about our
 
derivative
 
and other
 
hedging instruments
 
assets and
 
liabilities
 
as of
December 31,
 
2020 and 2019.
 
(in thousands)
Derivative and Other Hedging Instruments
Balance Sheet Location
December 31, 2020
December 31, 2019
Assets
Interest rate swaps
Derivative assets, at fair value
$
7
$
-
Payer swaptions (long positions)
Derivative assets, at fair value
17,433
-
TBA securities
Derivative assets, at fair value
3,559
-
Total derivative
 
assets, at fair value
$
20,999
$
-
Liabilities
Interest rate swaps
Derivative liabilities, at fair value
$
24,711
$
20,146
Payer swaptions (short positions)
Derivative liabilities, at fair value
7,730
-
TBA securities
Derivative liabilities, at fair value
786
512
Total derivative
 
liabilities, at fair value
$
33,227
$
20,658
Margin Balances Posted to (from) Counterparties
Futures contracts
Restricted cash
$
489
$
1,338
TBA securities
Restricted cash
284
246
TBA securities
Other liabilities
(2,520)
-
Interest rate swaption contracts
Other liabilities
(3,563)
-
Interest rate swap contracts
Restricted cash
19,761
17,450
Total margin
 
balances on derivative contracts
$
14,451
$
19,034
 
Eurodollar, Fed
 
Funds and
 
T-Note futures
 
are cash settled
 
futures contracts
 
on an interest
 
rate, with
 
gains and losses
 
credited
 
or
charged to
 
the Company’s
 
cash accounts
 
on a daily
 
basis. A
 
minimum balance,
 
or “margin”,
 
is required
 
to be maintained
 
in the account
 
on
a daily basis.
 
The tables
 
below present
 
information
 
related to
 
the Company’s
 
Eurodollar
 
and T-Note futures
 
positions at
 
December 31,
2020 and 2019.
 
 
($ in thousands)
December 31, 2020
Average
Weighted
Weighted
Contract
Average
Average
Notional
Entry
Effective
Open
Expiration Year
Amount
Rate
Rate
Equity
(1)
Eurodollar Futures Contracts (Short Positions)
2021
$
50,000
1.03%
0.18%
$
(424)
U.S. Treasury Note Futures Contracts
 
(Short Position)
(2)
March 2021 5-year T-Note futures
(Mar 2021 - Mar 2026 Hedge Period)
$
69,000
0.72%
0.67%
$
(186)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
16
 
($ in thousands)
December 31, 2019
Average
Weighted
Weighted
Contract
Average
Average
Notional
Entry
Effective
Open
Expiration Year
Amount
Rate
Rate
Equity
(1)
Eurodollar Futures Contracts (Short Positions)
2020
$
500,000
2.97%
1.67%
$
(6,505)
U.S. Treasury Note Futures Contracts
 
(Short Position)
(2)
March 2020 5 year T-Note futures
(Mar 2020 - Mar 2025 Hedge Period)
$
69,000
1.96%
2.06%
$
302
 
(1)
 
Open equity represents the cumulative gains (losses) recorded on open
 
futures positions from inception.
(2)
 
T-Note futures contracts were valued
 
at a price of $
126.16
 
at December 31, 2020 and $
118.61
 
at December 31, 2019.
 
The contract values of
the short positions were $
87.1
 
million and $
81.8
 
million at December 31, 2020 and December 31, 2019, respectively.
 
Under our
 
interest rate
 
swap agreements,
 
we typically
 
pay a fixed
 
rate and receive
 
a floating
 
rate based
 
on LIBOR ("payer
 
swaps").
The floating
 
rate we receive
 
under our
 
swap agreements
 
has the effect
 
of offsetting
 
the repricing
 
characteristics
 
of our repurchase
agreements
 
and cash flows
 
on such liabilities.
 
We are typically
 
required to
 
post collateral
 
on our interest
 
rate swap
 
agreements.
 
The table
below presents
 
information
 
related to
 
the Company’s
 
interest rate
 
swap positions
 
at December
 
31, 2020 and
 
2019.
 
($ in thousands)
Average
Net
Fixed
Average
Estimated
Average
Notional
Pay
Receive
Fair
Maturity
Amount
Rate
Rate
Value
(Years)
December 31, 2020
Expiration > 3 to ≤ 5 years
$
620,000
1.29%
0.22%
$
(23,760)
3.6
Expiration > 5 years
$
200,000
0.67%
0.23%
$
(944)
6.4
$
820,000
1.14%
0.23%
$
(24,704)
4.3
December 31, 2019
Expiration > 1 to ≤ 3 years
$
360,000
2.05%
1.90%
$
(3,680)
2.3
Expiration > 3 to ≤ 5 years
910,000
2.03%
1.93%
(16,466)
4.4
$
1,270,000
2.03%
1.92%
$
(20,146)
3.8
 
The table
 
below presents
 
information
 
related to
 
the Company’s
 
interest rate
 
swaption positions
 
at December
 
31, 2020.
 
There were
 
no
open swaption
 
positions at
 
December 31,
 
2019.
 
($ in thousands)
Option
Underlying Swap
Weighted
Average
Weighted
Average
Average
Adjustable
Average
Fair
Months to
Notional
Fixed
Rate
Term
Expiration
Cost
Value
Expiration
Amount
Rate
(LIBOR)
(Years)
December 31, 2020
Payer Swaptions (long positions)
≤ 1 year
$
3,450
$
5
2.5
500,000
0.95%
3 Month
4.0
> 1 year ≤ 2 years
13,410
17,428
17.4
675,000
1.49%
3 Month
12.8
$
16,860
$
17,433
11.0
$
1,175,000
1.26%
3 Month
9.0
Payer Swaptions (short positions)
≤ 1 year
$
(4,660)
$
(7,730)
5.4
$
507,700
1.49%
3 Month
12.8
 
The following table summarizes our contracts to purchase and sell TBA
 
securities as of December 31, 2020 and 2019.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
17
 
 
($ in thousands)
Notional
Net
Amount
Cost
Market
Carrying
Long (Short)
(1)
Basis
(2)
Value
(3)
Value
(4)
December 31, 2020
30-Year TBA securities:
2.0%
$
465,000
$
479,531
$
483,090
$
3,559
3.0%
(328,000)
(342,896)
(343,682)
(786)
Total
$
137,000
$
136,635
$
139,408
$
2,773
December 31, 2019
30-Year TBA securities:
4.5%
$
(300,000)
$
(315,426)
$
(315,938)
$
(512)
Total
$
(300,000)
$
(315,426)
$
(315,938)
$
(512)
 
(1)
 
Notional amount represents the par value (or principal balance) of the
 
underlying Agency RMBS.
(2)
 
Cost basis represents the forward price to be paid (received) for the
 
underlying Agency RMBS.
(3)
 
Market value represents the current market value of the TBA securities
 
(or of the underlying Agency RMBS) as of period-end.
(4)
 
Net carrying value represents the difference between the market
 
value and the cost basis of the TBA securities as of period-end
 
and is reported
in derivative assets (liabilities), at fair value in our balance sheets.
 
 
Gain (Loss) From Derivative and Other Hedging Instruments, Net
 
The table below presents the effect of the Company’s derivative and other hedging instruments on the statements of operations for
the years ended December 31, 2020, 2019 and 2018.
 
(in thousands)
2020
2019
2018
Eurodollar futures contracts (short positions)
$
(8,337)
$
(13,860)
$
7,170
U.S. Treasury Note futures contracts (short position)
(4,707)
(5,175)
5,507
Fed Funds futures contracts (short positions)
-
177
-
Interest rate swaps
(66,212)
(26,582)
8,609
Receiver swaptions
-
-
105
Payer swaptions (long positions)
98
(1,379)
(1,607)
Payer swaptions (short positions)
(3,070)
-
-
TBA securities (short positions)
(6,719)
(6,264)
4,327
TBA securities (long positions)
9,950
1,907
200
U.S. Treasury securities (short positions)
(95)
-
-
Total
$
(79,092)
$
(51,176)
$
24,311
 
Credit Risk-Related Contingent Features
 
The use
 
of derivatives
 
and other
 
hedging instruments
 
creates exposure
 
to credit
 
risk relating
 
to potential
 
losses that
 
could be
recognized in the event
 
that the counterparties to
 
these instruments fail to
 
perform their obligations
 
under the contracts. We
 
minimize this
risk by limiting our counterparties for instruments which are not centrally cleared on a registered exchange to major financial institutions
with acceptable credit ratings and monitoring
 
positions with individual counterparties. In addition, we
 
may be required to pledge assets
as collateral for our derivatives, whose
 
amounts vary over time based on
 
the market value, notional amount and
 
remaining term of the
derivative contract. In
 
the event of
 
a default by
 
a counterparty, we may
 
not receive payments
 
provided for under
 
the terms of
 
our derivative
agreements, and may
 
have difficulty obtaining
 
our assets pledged
 
as collateral for
 
our derivatives. The
 
cash and cash
 
equivalents pledged
as collateral for our derivative instruments are included in restricted cash on our
 
balance sheets.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
18
 
It is
 
the Company's
 
policy not
 
to offset
 
assets and
 
liabilities associated
 
with open
 
derivative contracts.
 
However, the
 
Chicago
Mercantile Exchange
 
(“CME”) rules
 
characterize variation
 
margin transfers
 
as settlement
 
payments, as
 
opposed to
 
adjustments to
collateral. As a
 
result, derivative assets
 
and liabilities associated
 
with centrally cleared
 
derivatives for which
 
the CME serves
 
as the central
clearing party are presented as if these derivatives had been settled as of the reporting
 
date.
 
NOTE 5. PLEDGED ASSETS
 
Assets Pledged
 
to Counterparties
 
The table
 
below summarizes
 
our assets
 
pledged as
 
collateral
 
under our
 
repurchase
 
agreements
 
and derivative
 
agreements
 
by type,
including securities
 
pledged related
 
to securities
 
sold but not
 
yet settled,
 
as of December
 
31, 2020 and
 
2019.
 
(in thousands)
December 31, 2020
December 31, 2019
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Counterparties
Agreements
Agreements
Total
Agreements
Agreements
Total
PT RMBS - fair value
$
3,692,811
$
-
$
3,692,811
$
3,500,394
$
-
$
3,500,394
Structured RMBS - fair value
27,095
-
27,095
83,960
-
83,960
Accrued interest on pledged securities
9,636
-
9,636
12,367
-
12,367
Restricted cash
58,829
20,534
79,363
65,851
19,034
84,885
Total
$
3,788,371
$
20,534
$
3,808,905
$
3,662,572
$
19,034
$
3,681,606
 
Assets Pledged
 
from Counterparties
 
The table
 
below summarizes
 
our assets
 
pledged to
 
us from counterparties
 
under our
 
repurchase
 
agreements
 
and derivative
agreements
 
as of December
 
31, 2020 and
 
2019.
 
(in thousands)
December 31, 2020
December 31, 2019
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Orchid
Agreements
Agreements
Total
Agreements
Agreements
Total
Cash
$
120
$
6,083
$
6,203
$
1,418
$
-
$
1,418
U.S. Treasury securities - fair value
253
-
253
-
-
-
Total
$
373
$
6,083
$
6,456
$
1,418
$
-
$
1,418
 
PT RMBS and
 
U.S. Treasury
 
securities
 
received as
 
margin under
 
our repurchase
 
agreements
 
are not recorded
 
in the balance
 
sheets
because the
 
counterparty
 
retains ownership
 
of the security.
 
Cash received
 
as margin is
 
recognized
 
in cash and
 
cash equivalents
 
with a
corresponding
 
amount recognized
 
as an increase
 
in repurchase
 
agreements
 
or other liabilities
 
in the balance
 
sheets.
 
NOTE 6. OFFSETTING ASSETS AND LIABILITIES
 
The Company’s
 
derivative
 
agreements
 
and repurchase
 
agreements
 
are subject
 
to underlying
 
agreements
 
with master
 
netting or
similar arrangements,
 
which provide
 
for the right
 
of offset in
 
the event
 
of default
 
or in the
 
event of bankruptcy
 
of either
 
party to the
transactions.
 
The Company
 
reports its
 
assets and
 
liabilities
 
subject to
 
these arrangements
 
on a gross
 
basis.
 
 
The following
 
table presents
 
information
 
regarding
 
those assets
 
and liabilities
 
subject to
 
such arrangements
 
as if the Company
 
had
presented
 
them on a
 
net basis as
 
of December
 
31, 2020 and
 
2019.
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
19
 
Offsetting of Assets
Gross Amount Not
Net Amount
Offset in the Balance Sheet
of Assets
Financial
Gross Amount
Gross Amount
Presented
Instruments
Cash
of Recognized
Offset in the
in the
Received as
Received as
Net
Assets
Balance Sheet
Balance Sheet
Collateral
Collateral
Amount
December 31, 2020
Interest rate swaps
$
7
$
-
$
7
$
-
$
-
$
7
Interest rate swaptions
17,433
-
17,433
-
(3,563)
13,870
TBA securities
3,559
-
3,559
-
(2,520)
1,039
$
20,999
$
-
$
20,999
$
-
$
(6,083)
$
14,916
 
(in thousands)
Offsetting of Liabilities
Gross Amount Not
Net Amount
Offset in the Balance Sheet
of Liabilities
Financial
Gross Amount
Gross Amount
Presented
Instruments
of Recognized
Offset in the
in the
Posted as
Cash Posted
Net
Liabilities
Balance Sheet
Balance Sheet
Collateral
Collateral
Amount
December 31, 2020
Repurchase Agreements
$
3,595,586
$
-
$
3,595,586
$
(3,536,757)
$
(58,829)
$
-
Interest rate swaps
24,711
-
24,711
-
(19,761)
4,950
Interest rate swaptions
7,730
-
7,730
-
-
-
TBA securities
786
-
786
-
(284)
502
$
3,628,813
$
-
$
3,628,813
$
(3,536,757)
$
(78,874)
$
5,452
December 31, 2019
Repurchase Agreements
$
3,448,106
$
-
$
3,448,106
$
(3,382,255)
$
(65,851)
$
-
Interest rate swaps
20,146
-
20,146
-
(17,450)
2,696
TBA securities
512
-
512
-
(246)
266
$
3,468,764
$
-
$
3,468,764
$
(3,382,255)
$
(83,547)
$
2,962
 
The amounts
 
disclosed for
 
collateral
 
received by
 
or posted
 
to the same
 
counterparty
 
up to and
 
not exceeding
 
the net amount
 
of the
asset or liability
 
presented
 
in the balance
 
sheets. The
 
fair value
 
of the actual
 
collateral
 
received by
 
or posted
 
to the same
 
counterparty
typically exceeds
 
the amounts
 
presented.
 
See Note
 
5 for a discussion
 
of collateral
 
posted or
 
received against
 
or for repurchase
 
obligations
and derivative
 
and other
 
hedging instruments.
 
NOTE 7.
 
CAPITAL STOCK
 
 
Common Stock
 
Issuances
 
During 2020
 
and 2019,
 
the Company
 
completed the
 
following
 
public offerings
 
of shares
 
of its common
 
stock.
 
 
($ in thousands, except per share amounts)
Weighted
Average
Price
Received
Net
Type of Offering
Period
Per Share
(1)
Shares
Proceeds
(2)
2020
At the Market Offering Program
(3)
First Quarter
$
6.23
3,170,727
$
19,447
At the Market Offering Program
(3)
Third Quarter
5.15
3,073,326
15,566
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
20
 
At the Market Offering Program
(3)
Fourth Quarter
5.41
6,775,187
36,037
13,019,240
$
71,050
2019
At the Market Offering Program
(3)
First Quarter
$
6.84
1,267,894
$
8,503
At the Market Offering Program
(3)
Second Quarter
6.70
4,337,931
28,495
At the Market Offering Program
(3)
Third Quarter
6.37
1,771,301
11,098
Follow-on Offering
(3)
Third Quarter
6.35
7,000,000
44,218
14,377,126
$
92,314
 
(1)
 
Weighted average price received per share is before deducting
 
the underwriters’ discount, if applicable, and other offering costs.
(2)
 
Net proceeds are net of the underwriters’ discount, if applicable, and
 
other offering costs.
(3)
 
As of December 31, 2020, the Company had entered into eight equity distribution
 
agreements, seven of which have either been terminated
because all shares were sold or were replaced with a subsequent agreement.
 
 
Stock Repurchase Program
 
On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to
2,000,000
 
shares of the Company’s
common stock. On February 8, 2018, the Board of Directors approved an increase
 
in the stock repurchase program for up to an
additional
4,522,822
 
shares of the Company's common stock. Coupled with the
783,757
 
shares remaining from the original 2,0000,000
share authorization, the increased authorization brought the total authorization to
5,306,579
 
shares, representing 10% of the then
outstanding share count. As part of the stock repurchase program, shares may be purchased
 
in open market transactions, block
purchases, through privately negotiated transactions, or pursuant to any trading
 
plan that may be adopted in accordance with Rule
10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange
 
Act”).
 
Open market repurchases will be made in
accordance with Exchange Act Rule 10b-18, which sets certain restrictions on
 
the method, timing, price and volume of open market
stock repurchases. The timing, manner, price and amount of any repurchases will be determined by the Company in
 
its discretion and
will be subject to economic and market conditions, stock price, applicable legal requirements
 
and other factors.
 
The authorization does
not obligate the Company to acquire any particular amount of common stock
 
and the program may be suspended or discontinued at
the Company’s discretion without prior notice.
 
 
From the inception of the stock repurchase program through December 31, 2020, the
 
Company repurchased a total of
5,685,511
shares at an aggregate cost of approximately $
40.4
 
million, including commissions and fees, for a weighted average price
 
of $
7.10
 
per
share. During the year ended December 31, 2020, the Company repurchased a
 
total of
19,891
 
shares at an aggregate cost of
approximately $
0.1
 
million, including commissions and fees, for a weighted average price of
 
$
3.42
 
per share. During the year ended
December 31, 2019, the Company repurchased a total of
469,975
 
shares at an aggregate cost of approximately $
3.0
 
million, including
commissions and fees, for a weighted average price of $
6.43
 
per share. During the year ended December 31, 2018, the Company
repurchased a total of
3,979,402
 
shares at an aggregate cost of approximately $
26.4
 
million, including commissions and fees, for a
weighted average price of $
6.64
 
per share. The remaining authorization under the repurchase program as of December
 
31, 2020 is
837,311
 
shares.
 
 
Cash Dividends
 
The table below presents the cash dividends declared on the Company’s common stock.
 
(in thousands, except per share amounts)
Year
Per Share
Amount
Total
2013
$
1.395
$
4,662
2014
2.160
22,643
2015
1.920
38,748
2016
1.680
41,388
2017
1.680
70,717
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
21
 
2018
1.070
55,814
2019
0.960
54,421
2020
0.790
53,570
2021 - YTD
(1)
0.130
11,079
Totals
$
11.785
$
353,042
 
(1)
 
On January 14, 2021, the Company declared a dividend of $0.065 per
 
share to be paid on February 24, 2021. On February 10, 2021, the
Company declared a dividend of $0.065 per share to be paid on March
 
29, 2021. The dollar amount of the dividend declared in February 2021
is estimated based on the number of shares outstanding at February
 
26, 2021. The effect of these dividends are included in the table above,
but are not reflected in the Company’s financial statements as of December
 
31, 2020.
 
NOTE 8.
 
STOCK INCENTIVE PLAN
 
In October 2012, the Company’s Board of Directors adopted and Bimini, then the Company’s sole stockholder, approved, the
Orchid Island Capital, Inc. 2012 Equity Incentive Plan (the “Incentive Plan”)
 
to recruit and retain employees, directors and other service
providers, including employees of the Manager and other affiliates. The Incentive Plan provides
 
for the award of stock options, stock
appreciation rights, stock award, performance units, other equity-based awards
 
(and dividend equivalents with respect to awards of
performance units and other equity-based awards) and incentive awards.
 
The Incentive Plan is administered by the Compensation
Committee of the Company’s Board of Directors except that the Company’s full Board of Directors
 
will administer awards made to
directors who are not employees of the Company or its affiliates.
 
The Incentive Plan provides for awards of up to an aggregate of
10
%
of the issued and outstanding shares of our common stock (on a fully diluted
 
basis) at the time of the awards, subject to a maximum
aggregate
4,000,000
 
shares of the Company’s common stock that may be issued under the Incentive Plan.
 
Stock Awards
 
The Company may in the future issue immediately vested common stock under
 
the Incentive Plan to certain executive officers and
employees of its Manager. Although no such awards were granted in fiscal years 2020 or 2019, such awards
 
have previously been
issued.
 
Performance Units
 
The Company has issued, and may in the future issue additional performance units under
 
the Incentive Plan to certain executive
officers and employees of its Manager.
 
“Performance Units” vest after the end of a defined performance period,
 
based on satisfaction
of the performance conditions set forth in the performance unit agreement. When
 
earned, each Performance Unit will be settled by the
issuance of one share of the Company’s common stock, at which time the Performance
 
Unit will be cancelled.
 
The Performance Units
contain dividend equivalent rights, which entitle the Participants to receive distributions
 
declared by the Company on common stock,
but do not include the right to vote the underlying shares of common stock.
 
Performance Units are subject to forfeiture should the
participant no longer serve as an executive officer or employee of the Company.
 
Compensation expense for the Performance Units is
recognized over the remaining vesting period once it becomes probable that
 
the performance conditions will be achieved.
 
The following table presents information related to Performance Units outstanding during the
 
years ended December 31, 2020 and
2019.
 
 
($ in thousands, except per share data)
2020
2019
Weighted
Weighted
Average
Average
Grant Date
Grant Date
 
Shares
Fair Value
Shares
Fair Value
Unvested, beginning of period
19,021
$
7.78
43,672
$
8.34
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
22
 
Forfeited
(1,607)
7.45
-
-
Vested and issued
(12,860)
7.93
(24,651)
8.78
Unvested, end of period
4,554
$
7.45
19,021
$
7.78
Compensation expense during period
$
38
$
115
Unrecognized compensation expense, end of period
$
4
$
42
Intrinsic value, end of period
$
24
$
111
Weighted-average remaining vesting term (in years)
0.4
0.8
 
The number of shares of common stock issuable upon the vesting of the remaining
 
outstanding Performance Units was reduced
as a result of the book value impairment event that occurred pursuant to the Company's
 
Long Term Incentive Compensation Plans (the
"Plans"). The book value impairment event occurred when the Company's book value
 
per share declined by more than 15% during the
quarter ended March 31, 2020 and the Company's book value per share
 
decline from January 1, 2020 to June 30, 2020 was more than
10%. The Plans provide that if such a book value impairment event occurs, then
 
the number of outstanding Performance Units that are
outstanding as of the last day of such two-quarter period shall be reduced by 15%.
 
Deferred Stock Units
 
Non-employee directors began to receive a portion of their compensation
 
in the form of deferred stock unit awards (“DSUs”)
pursuant to the Incentive Plan beginning with the awards for the second quarter of 2018.
 
Each DSU represents a right to receive one
share of the Company’s common stock. The DSUs are immediately vested and are settled at
 
a future date based on the election of the
individual participant.
 
The DSUs contain dividend equivalent rights, which entitle the participant
 
to receive distributions declared by the
Company on common stock.
 
These distributions will be made in the form of cash or additional DSUs at the
 
participant’s election. The
DSUs do not include the right to vote the underlying shares of common stock.
 
The following table presents information related to the DSUs outstanding during the years
 
ended December 31, 2020 and 2019.
 
($ in thousands, except per share data)
2020
2019
Weighted
Weighted
Average
Average
Grant Date
Grant Date
 
Shares
Fair Value
Shares
Fair Value
Outstanding, beginning of period
43,570
$
6.56
12,434
$
7.37
Granted and vested
47,376
4.41
31,136
6.23
Outstanding, end of period
90,946
$
5.44
43,570
$
6.56
Compensation expense during period
$
180
$
180
Intrinsic value, end of period
$
473
$
255
 
NOTE 9.
 
COMMITMENTS AND CONTINGENCIES
 
From time to time, the Company may become involved in various claims and
 
legal actions arising in the ordinary course of
business. Management is not aware of any reported or unreported contingencies
 
at December 31, 2020.
 
NOTE 10.
 
INCOME TAXES
 
The Company
 
will generally
 
not be subject
 
to federal
 
income tax
 
on its REIT
 
taxable income
 
to the extent
 
that it distributes
 
its REIT
taxable income
 
to its stockholders
 
and satisfies
 
the ongoing
 
REIT requirements,
 
including meeting
 
certain asset,
 
income and
 
stock
ownership
 
tests.
 
A REIT must
 
generally distribute
 
at least 90%
 
of its REIT
 
taxable income
 
to its stockholders,
 
of which 85%
 
generally
must be distributed
 
within the
 
taxable year, in
 
order to avoid
 
the imposition
 
of an excise
 
tax.
 
The remaining
 
balance may
 
be distributed
 
up
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
23
 
to the end
 
of the following
 
taxable year, provided
 
the REIT
 
elects to treat
 
such amount
 
as a prior
 
year distribution
 
and meets
 
certain other
requirements.
 
REIT taxable
 
income (loss)
 
is computed
 
in accordance
 
with the Code,
 
which is different
 
than the Company’s
 
financial statement
 
net
income (loss)
 
computed in
 
accordance
 
with GAAP. Book to
 
tax differences
 
primarily relate
 
to the recognition
 
of interest
 
income on RMBS,
unrealized
 
gains and losses
 
on RMBS,
 
and the amortization
 
of losses on
 
derivative
 
instruments
 
that are treated
 
as hedges for
 
tax
purposes.
 
As of December
 
31, 2020,
 
we had distributed
 
all of our
 
estimated
 
REIT taxable
 
income through
 
fiscal year
 
2020. Accordingly,
 
no
income tax
 
provision was
 
recorded
 
for 2020,
 
2019 and 2018.
 
NOTE 11.
 
EARNINGS PER SHARE (EPS)
 
 
The Company
 
had dividend
 
eligible Performance
 
Units and
 
Deferred Stock
 
Units that
 
were outstanding
 
during the
 
years ended
December 31,
 
2020, 2019
 
and 2018.
 
The basic and
 
diluted per
 
share computations
 
include these
 
unvested Performance
 
Units and
Deferred
 
Stock Units
 
if there is
 
income available
 
to common
 
stock, as
 
they have dividend
 
participation
 
rights. The
 
unvested Performance
Units and
 
Deferred
 
Stock Units
 
have no contractual
 
obligation
 
to share in
 
losses. Because
 
there is
 
no such obligation,
 
the unvested
Performance
 
Units and
 
Deferred Stock
 
Units are
 
not included
 
in the basic
 
and diluted
 
EPS computations
 
when no income
 
is available
 
to
common stock
 
even though
 
they are considered
 
participating
 
securities.
 
The table
 
below reconciles
 
the numerator
 
and denominator
 
of EPS for
 
the years
 
ended December
 
31, 2020,
 
2019 and 2018.
 
(in thousands, except per-share information)
2020
2019
2018
Basic and diluted EPS per common share:
Numerator for basic and diluted EPS per share of common stock:
Net income (loss) - Basic and diluted
$
2,128
$
24,265
$
(44,387)
Weighted average shares of common stock:
Shares of common stock outstanding at the balance sheet date
76,073
63,062
49,132
Unvested dividend eligible share based compensation
outstanding at the balance sheet date
96
63
-
Effect of weighting
 
(8,958)
(6,797)
3,066
Weighted average shares-basic and diluted
67,211
56,328
52,198
Net income (loss) per common share:
Basic and diluted
$
0.03
$
0.43
$
(0.85)
Anti-dilutive incentive shares not included in calculation.
-
-
56
 
NOTE 12.
 
FAIR VALUE
 
The framework
 
for using
 
fair value
 
to measure
 
assets and
 
liabilities
 
defines fair
 
value as the
 
price that
 
would be received
 
to sell an
asset or paid
 
to transfer
 
a liability
 
(an exit price).
 
A fair value
 
measure should
 
reflect the
 
assumptions
 
that market