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UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
 
FORM
10-Q
 
 
QUARTERLY
 
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 
THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended
March 31, 2021
 
 
 
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
 
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. Check one:
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 is a shell company (as defined in Rule 12b-2
 
of the Exchange Act).
 
Yes
 
No
 
Number of shares outstanding at April 30, 2021:
94,410,960
ORCHID ISLAND
 
CAPITAL, INC.
 
TABLE OF CONTENTS
 
PART I. FINANCIAL
 
INFORMATION
ITEM 1. Financial
 
Statements
1
Condensed
 
Balance Sheets
 
(unaudited)
1
Condensed
 
Statements
 
of Operations
 
(unaudited)
2
Condensed
 
Statements
 
of Stockholders’
 
Equity (unaudited)
3
Condensed
 
Statements
 
of Cash Flows
 
(unaudited)
4
Notes to Condensed
 
Financial Statements
5
ITEM 2. Management’s
 
Discussion
 
and Analysis
 
of Financial
 
Condition
 
and Results
 
of Operations
23
ITEM 3. Quantitative
 
and Qualitative
 
Disclosures
 
about Market
 
Risk
44
ITEM 4. Controls
 
and Procedures
47
PART II. OTHER INFORMATION
ITEM 1. Legal
 
Proceedings
48
ITEM 1A.
 
Risk Factors
48
ITEM 2. Unregistered
 
Sales of Equity
 
Securities
 
and Use of
 
Proceeds
48
ITEM 3. Defaults
 
upon Senior
 
Securities
48
ITEM 4. Mine
 
Safety Disclosures
48
ITEM 5. Other
 
Information
48
ITEM 6. Exhibits
49
SIGNATURES
50
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
PART I. FINANCIAL
 
INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
 
ORCHID ISLAND CAPITAL, INC.
CONDENSED BALANCE SHEETS
($ in thousands, except per share data)
(Unaudited)
March 31, 2021
December 31, 2020
ASSETS:
Mortgage-backed securities, at fair value
Pledged to counterparties
$
4,120,500
$
3,719,906
Unpledged
218,036
6,989
Total mortgage
 
-backed securities
4,338,536
3,726,895
Cash and cash equivalents
211,436
220,143
Restricted cash
117,155
79,363
Accrued interest receivable
10,852
9,721
Derivative assets, at fair value
95,752
20,999
Receivable for securities sold, pledged to counterparties
154,977
414
Other assets
2,058
516
Total Assets
$
4,930,766
$
4,058,051
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements
$
4,181,680
$
3,595,586
Payable for unsettled securities purchased
217,758
-
Dividends payable
6,156
4,970
Derivative liabilities, at fair value
35,057
33,227
Accrued interest payable
921
1,157
Due to affiliates
712
632
Other liabilities
22,306
7,188
Total Liabilities
4,464,590
3,642,760
 
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $
0.01
 
par value;
100,000,000
 
shares authorized; no shares issued
and outstanding as of March 31, 2021 and December 31, 2020
-
-
Common Stock, $
0.01
 
par value;
500,000,000
 
shares authorized,
94,410,960
shares issued and outstanding as of March 31, 2021 and
76,073,317
 
shares issued
and outstanding as of December 31, 2020
944
761
Additional paid-in capital
512,595
432,524
Accumulated deficit
(47,363)
(17,994)
Total Stockholders' Equity
466,176
415,291
Total Liabilities
 
and Stockholders' Equity
$
4,930,766
$
4,058,051
See Notes to Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS
 
OF OPERATIONS
(Unaudited)
For the Three Months Ended March 31, 2021 and 2020
($ in thousands, except per share data)
Three Months Ended March 31,
2021
2020
Interest income
$
26,856
$
35,671
Interest expense
(1,941)
(16,523)
Net interest income
24,915
19,148
Realized losses on mortgage-backed securities
(7,397)
(28,380)
Unrealized (losses) gains on mortgage-backed securities
(88,866)
3,032
Gains (losses) on derivative and other hedging instruments
45,472
(82,858)
Net portfolio loss
(25,876)
(89,058)
Expenses:
Management fees
1,621
1,377
Allocated overhead
404
347
Accrued incentive compensation
364
(436)
Directors' fees and liability insurance
272
260
Audit, legal and other professional fees
318
255
Direct REIT operating expenses
421
206
Other administrative
93
132
Total expenses
3,493
2,141
Net loss
$
(29,369)
$
(91,199)
Basic net loss per share
$
(0.34)
$
(1.41)
Diluted net loss per share
$
(0.34)
$
(1.41)
Weighted Average Shares Outstanding
85,344,954
64,590,205
Dividends declared per common share
$
0.195
$
0.240
See Notes to Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS
 
OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Three Months Ended March 31, 2021 and 2020
(in thousands)
Additional
Retained
Common Stock
Paid-in
Earnings
Shares
Par Value
Capital
(Deficit)
Total
Balances, January 1, 2020
63,062
$
631
$
414,998
$
(20,122)
$
395,507
Net loss
-
-
-
(91,199)
(91,199)
Cash dividends declared
-
-
(15,670)
-
(15,670)
Issuance of common stock pursuant to public offerings, net
3,171
31
19,416
-
19,447
Stock based awards and amortization
4
-
59
-
59
Balances, March 31, 2020
66,237
$
662
$
418,803
$
(111,321)
$
308,144
Balances, January 1, 2021
76,073
$
761
$
432,524
$
(17,994)
$
415,291
Net loss
-
-
-
(29,369)
(29,369)
Cash dividends declared
-
-
(17,226)
-
(17,226)
Issuance of common stock pursuant to public offerings, net
18,248
182
96,726
-
96,908
Stock based awards and amortization
90
1
571
-
572
Balances, March 31, 2021
94,411
$
944
$
512,595
$
(47,363)
$
466,176
See Notes to Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4
ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS
 
OF CASH FLOWS
(Unaudited)
For the Three Months Ended March 31, 2021 and 2020
($ in thousands)
2021
2020
CASH FLOWS FROM OPERATING
 
ACTIVITIES:
Net loss
$
(29,369)
$
(91,199)
Adjustments to reconcile net loss to net cash provided by (used in) operating
 
activities:
Stock based compensation
259
59
Realized and unrealized losses on mortgage-backed securities
96,263
25,348
Realized and unrealized (gains) losses on interest rate swaptions
(13,903)
2,589
Realized and unrealized gains on interest rate floors
(1,384)
-
Realized and unrealized (gains) losses on interest rate swaps
(30,053)
54,934
Realized (gains) losses on forward settling to-be-announced securities
(574)
7,090
Changes in operating assets and liabilities:
Accrued interest receivable
(1,050)
2,350
Other assets
(588)
(655)
Accrued interest payable
(236)
(7,287)
Other liabilities
5,318
(223)
Due to (from) affiliates
80
(102)
NET CASH PROVIDED BY (USED IN) OPERATING
 
ACTIVITIES
24,763
(7,096)
CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases
(1,764,082)
(1,334,350)
Sales
988,523
1,808,867
Principal repayments
123,880
142,259
Payments on net settlement of to-be-announced securities
(3,289)
(7,602)
Purchase of derivative financial instruments, net of margin cash received
(7,385)
(45,458)
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
(662,353)
563,716
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements
7,517,156
13,602,710
Principal payments on repurchase agreements
(6,931,062)
(14,240,566)
Cash dividends
(16,030)
(15,416)
Proceeds from issuance of common stock, net of issuance costs
96,908
19,447
Shares withheld from employee stock awards for payment of taxes
(297)
-
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
666,675
(633,825)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS
 
AND RESTRICTED CASH
29,085
(77,205)
CASH, CASH EQUIVALENTS AND
 
RESTRICTED CASH, beginning of the period
299,506
278,655
CASH, CASH EQUIVALENTS AND
 
RESTRICTED CASH, end of the period
$
328,591
$
201,450
SUPPLEMENTAL DISCLOSURE OF
 
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest
$
2,176
$
23,809
SUPPLEMENTAL DISCLOSURE OF
 
NONCASH INVESTING ACTIVITIES:
Securities acquired settled in later period
$
217,758
$
3,450
Securities sold settled in later period
154,977
-
See Notes to Financial Statements
 
5
ORCHID ISLAND
 
CAPITAL, INC.
NOTES TO CONDENSED
 
FINANCIAL
 
STATEMENTS
(Unaudited)
MARCH 31,
 
2021
 
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 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
 
approximately $
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 March 31, 2021, the Company issued a total of
10,156,561
 
shares under the August 2020 Equity Distribution
Agreement for aggregate gross proceeds of
 
approximately $
54.1
 
million, and net proceeds of approximately $
53.2
 
million, net of
commissions and fees.
 
On January 20, 2021, Orchid 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
7,600,000
 
shares of the Company’s common stock. J.P.
Morgan purchased the shares of the Company’s common stock from the Company pursuant
 
to the January 2021 Underwriting
Agreement at $
5.20
 
per share. In addition, the Company granted J.P. Morgan a 30-day option to purchase up to an additional
1,140,000
 
shares of the Company’s 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
8,740,000
 
shares of the Company’s common stock occurred on January 25, 2021, with net
proceeds to the Company of approximately $
45.2
 
million, net of offering expenses.
 
On March 2, 2021, Orchid entered into an underwriting agreement (the “March 2021
 
Underwriting Agreement”) with J.P. Morgan,
relating to the offer and sale of
8,000,000
 
shares of the Company’s common stock. J.P. Morgan purchased the shares of the
Company’s common stock from the Company pursuant to the March 2021 Underwriting
 
Agreement at $
5.45
 
per share. In addition, the
Company granted J.P. Morgan a 30-day option to purchase up to an additional
1,200,000
 
shares of the Company’s 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
9,200,000
 
shares
of the Company’s common stock occurred on March 5, 2021, with net proceeds to the Company
 
of approximately $
50.1
 
million, net of
offering expenses.
 
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
 
6
about by COVID-19,
 
the Agency
 
RMBS market
 
experienced
 
severe dislocations.
 
This resulted
 
in falling
 
prices of our
 
assets and
 
increased
margin calls
 
from our repurchase
 
agreement
 
lenders, resulting
 
in material
 
adverse effects
 
on our results
 
of operations
 
and to our
 
financial
condition.
 
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 March
 
31, 2021,
 
we have timely
 
satisfied
all margin
 
calls. The
 
RMBS market
 
continues to
 
react to the
 
pandemic and
 
the various
 
measures put
 
in place to
 
stabilize the
 
market.
 
To
the extent
 
the financial
 
or mortgage
 
markets do
 
not respond
 
favorably to
 
any of these
 
actions, or
 
such actions
 
do not function
 
as intended,
our business,
 
results of
 
operations
 
and financial
 
condition may
 
continue to
 
be materially
 
adversely
 
affected. Although
 
the Company
 
cannot
estimate the
 
length or
 
gravity of
 
the impact
 
of the COVID-19
 
pandemic at
 
this time,
 
if the pandemic
 
continues,
 
it may continue
 
to have
materially
 
adverse effects
 
on the Company’s
 
results of
 
future operations,
 
financial position,
 
and liquidity
 
during 2021.
 
 
Basis of
 
Presentation
 
and Use of
 
Estimates
 
The accompanying
 
unaudited
 
financial
 
statements
 
have been
 
prepared in
 
accordance
 
with accounting
 
principles
 
generally
 
accepted
in the United
 
States (“GAAP”)
 
for interim
 
financial information
 
and with the
 
instructions
 
to Form 10-Q
 
and Article
 
8 of Regulation
 
S-X.
 
Accordingly, they
 
do not include
 
all of the
 
information
 
and footnotes
 
required by
 
GAAP for
 
complete financial
 
statements.
 
In the opinion
 
of
management,
 
all adjustments
 
(consisting
 
of normal
 
recurring
 
accruals)
 
considered
 
necessary
 
for a fair
 
presentation
 
have been
 
included.
 
Operating
 
results for
 
the three
 
month period
 
ended March
 
31, 2021 are
 
not necessarily
 
indicative
 
of the results
 
that may be
 
expected for
the year ending
 
December 31,
 
2021.
 
The balance
 
sheet at December
 
31, 2020 has
 
been derived
 
from the audited
 
financial statements
 
at that date
 
but does not
 
include all
of the information
 
and footnotes
 
required by
 
GAAP for
 
complete financial
 
statements.
 
For further
 
information,
 
refer to the
 
financial
statements
 
and footnotes
 
thereto included
 
in the Company’s
 
Annual Report
 
on Form 10-K
 
for the year
 
ended December
 
31, 2020.
 
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 March 31,
2021.
 
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
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.
 
 
 
 
 
 
 
 
 
 
 
 
 
7
 
(in thousands)
March 31, 2021
December 31, 2020
Cash and cash equivalents
$
211,436
$
220,143
Restricted cash
117,155
79,363
Total cash, cash equivalents
 
and restricted cash
$
328,591
$
299,506
 
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
 
(“PT”) 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 and Other Hedging Instruments
 
 
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,
 
8
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
 
March 31,
 
2021 and December
 
31, 2020 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
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.
 
9
 
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 real estate investment trust (“REIT”) under
 
the Internal Revenue Code of 1986,
as amended (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.
 
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 consolidated 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10
The following
 
table presents
 
the Company’s
 
RMBS portfolio
 
as of March
 
31, 2021 and
 
December 31,
 
2020:
 
 
(in thousands)
March 31, 2021
December 31, 2020
Pass-Through RMBS Certificates:
Fixed-rate Mortgages
 
$
4,297,731
$
3,560,746
Fixed-rate CMOs
-
137,453
Total Pass-Through
 
Certificates
4,297,731
3,698,199
Structured RMBS Certificates:
Interest-Only Securities
35,521
28,696
Inverse Interest-Only Securities
5,284
-
Total Structured
 
RMBS Certificates
40,805
28,696
Total
$
4,338,536
$
3,726,895
 
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 March
 
31, 2021,
 
the Company
 
had met all
 
margin call
requirements.
 
As of March
 
31, 2021 and
 
December 31,
 
2020, 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
LESS)
30 DAYS
90 DAYS
90 DAYS
TOTAL
March 31, 2021
Fair market value of securities pledged, including
accrued interest receivable
$
58,219
$
2,288,135
$
1,316,896
$
622,666
$
4,285,916
Repurchase agreement liabilities associated with
these securities
$
53,526
$
2,233,561
$
1,289,617
$
604,976
$
4,181,680
Net weighted average borrowing rate
0.24%
0.18%
0.18%
0.18%
0.18%
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%
 
In addition, cash pledged to counterparties for repurchase agreements was approximately
 
$
102.6
 
million and $
58.8
 
million as of
March 31, 2021 and December 31, 2020, 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 March
 
31, 2021,
 
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
 
$
205.9
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
11
million.
 
The Company
 
did not have
 
an amount
 
at risk with
 
any individual
 
counterparty
 
greater than
 
10% of the
 
Company’s equity
 
at March
31, 2021 and
 
December 31,
 
2020.
 
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
March 31,
 
2021 and December
 
31, 2020.
 
(in thousands)
Derivative and Other Hedging Instruments
Balance Sheet Location
March 31, 2021
December 31, 2020
Assets
Interest rate swaps
Derivative assets, at fair value
$
25,254
$
7
Payer swaptions (long positions)
Derivative assets, at fair value
58,643
17,433
Interest rate floors
Derivative assets, at fair value
2,399
-
TBA securities
Derivative assets, at fair value
9,456
3,559
Total derivative
 
assets, at fair value
$
95,752
$
20,999
Liabilities
Interest rate swaps
Derivative liabilities, at fair value
$
-
$
24,711
Payer swaptions (short positions)
Derivative liabilities, at fair value
35,057
7,730
TBA securities
Derivative liabilities, at fair value
-
786
Total derivative
 
liabilities, at fair value
$
35,057
$
33,227
Margin Balances Posted to (from) Counterparties
Futures contracts
Restricted cash
$
585
$
489
TBA securities
Restricted cash
1,781
284
TBA securities
Other liabilities
(7,407)
(2,520)
Interest rate swaption contracts
Other liabilities
(13,962)
(3,563)
Interest rate swap contracts
Restricted cash
12,214
19,761
Total margin
 
balances on derivative contracts
$
(6,789)
$
14,451
 
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
 
March 31,
 
2021
and December
 
31, 2020.
 
 
($ in thousands)
March 31, 2021
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
1.01%
0.21%
$
(301)
Treasury Note Futures Contracts (Short
 
Position)
(2)
June 2021 5-year T-Note futures
(Jun 2021 - Jun 2026 Hedge Period)
$
69,000
0.88%
1.17%
$
1,036
 
($ in thousands)
December 31, 2020
Average
Weighted
Weighted
Contract
Average
Average
Notional
Entry
Effective
Open
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12
Expiration Year
Amount
Rate
Rate
Equity
(1)
Eurodollar Futures Contracts (Short Positions)
2021
$
50,000
1.03%
0.18%
$
(424)
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)
 
(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 $
123.40
 
at March 31, 2021 and $
126.16
 
at December 31, 2020.
 
The contract values of the
short positions were $
85.1
 
million and $
87.1
 
million at March 31, 2021 and December 31, 2020, 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 March 31,
 
2021 and December
 
31, 2020.
 
($ in thousands)
Average
Net
Fixed
Average
Estimated
Average
Notional
Pay
Receive
Fair
Maturity
Amount
Rate
Rate
Value
(Years)
March 31, 2021
Expiration > 3 to ≤ 5 years
$
955,000
0.64%
0.21%
$
15,286
4.8
Expiration > 5 years
400,000
1.16%
0.18%
9,968
8.1
$
1,355,000
0.79%
0.20%
$
25,254
5.7
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
 
The table
 
below presents
 
information
 
related to
 
the Company’s
 
interest rate
 
floor positions
 
at March 31,
 
2021.
 
($ in thousands)
Net
Strike
Estimated
Notional
Swap
Curve
Fair
Expiration
Amount
Cost
Rate
Spread
Value
February 3, 2023
$
70,000
$
511
0.76%
30Y5Y
$
1,435
February 3, 2023
80,000
504
1.10%
10Y2Y
964
$
150,000
$
1,015
0.94%
2,399
 
The table
 
below presents
 
information
 
related to
 
the Company’s
 
interest rate
 
swaption positions
 
at March 31,
 
2021 and
 
December 31,
2020.
 
($ in thousands)
Option
Underlying Swap
Weighted
Average
Weighted
Average
Average
Adjustabl
e
Average
Fair
Months to
Notional
Fixed
Rate
Term
Expiration
Cost
Value
Expiration
Amount
Rate
(LIBOR)
(Years)
March 31, 2021
Payer Swaptions - long
>1 year ≤ 2 years
$
25,390
$
58,643
22.1
$
1,027,200
2.20%
3 Month
15.0
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
13
Payer Swaptions - short
≤ 1 year
$
(10,720)
$
(35,057)
10.1
$
(782,850)
2.20%
3 Month
15.0
December 31, 2020
Payer Swaptions - long
≤ 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
≤ 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 March 31, 2021 and December 31, 2020
.
 
 
($ in thousands)
Notional
Net
Amount
Cost
Market
Carrying
Long (Short)
(1)
Basis
(2)
Value
(3)
Value
(4)
March 31, 2021
30-Year TBA securities:
2.5%
$
(250,000)
$
(257,188)
$
(256,270)
$
918
3.0%
(1,062,000)
(1,114,345)
(1,105,807)
8,538
Total
$
(1,312,000)
$
(1,371,533)
$
(1,362,077)
$
9,456
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
 
(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 three months ended March 31, 2021 and 2020.
 
(in thousands)
Three Months Ended March 31,
2021
2020
Eurodollar futures contracts (short positions)
$
12
$
(8,217)
T-Note futures contracts (short position)
2,476
(4,339)
Interest rate swaps
27,123
(60,623)
Payer swaptions (short positions)
(26,167)
-
Payer swaptions (long positions)
40,070
(2,589)
Interest rate floors
1,384
-
TBA securities (short positions)
9,133
(7,090)
TBA securities (long positions)
(8,559)
-
Total
$
45,472
$
(82,858)
 
Credit Risk-Related Contingent Features
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
14
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.
 
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 March
 
31, 2021 and
 
December 31,
 
2020.
 
(in thousands)
March 31, 2021
December 31, 2020
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Counterparties
Agreements
Agreements
Total
Agreements
Agreements
Total
PT RMBS - fair value
$
4,081,596
$
-
$
4,081,596
$
3,692,811
$
-
$
3,692,811
Structured RMBS - fair value
38,904
-
38,904
27,095
-
27,095
Accrued interest on pledged securities
10,572
-
10,572
9,636
-
9,636
Receivable for securities sold
154,977
-
154,977
-
-
-
Restricted cash
102,575
14,580
117,155
58,829
20,534
79,363
Total
$
4,388,624
$
14,580
$
4,403,204
$
3,788,371
$
20,534
$
3,808,905
 
Assets Pledged
 
from Counterparties
 
The table
 
below summarizes
 
our assets
 
pledged to
 
us from counterparties
 
under our
 
repurchase
 
agreements,
 
reverse repurchase
agreements
 
and derivative
 
agreements
 
as of March
 
31, 2021 and
 
December 31,
 
2020.
 
(in thousands)
March 31, 2021
December 31, 2020
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Orchid
Agreements
Agreements
Total
Agreements
Agreements
Total
Cash
$
99
$
21,369
$
21,468
$
120
$
6,083
$
6,203
U.S. Treasury securities - fair value
737
-
737
253
-
253
Total
$
836
$
21,369
$
22,205
$
$
373
$
6,083
$
6,456
 
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.
 
U.S. Treasury
 
securities
 
received from
 
counterparties
 
as collateral
 
under our
reverse repurchase
 
agreements
 
are recognized
 
as obligations
 
to return
 
securities
 
borrowed
 
under reverse
 
repurchase
 
agreements
 
in the
balance sheet.
 
Cash received
 
as margin is
 
recognized
 
as cash and
 
cash equivalents
 
with a corresponding
 
amount recognized
 
as an
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
15
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
 
and reverse
 
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 March 31,
 
2021 and December
 
31, 2020.
 
(in thousands)
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
March 31, 2021
Interest rate swaps
$
25,254
$
-
$
25,254
$
-
$
-
$
25,254
Interest rate swaptions
58,643
-
58,643
-
(13,962)
44,681
Interest rate floors
2,399
-
2,399
-
-
2,399
TBA securities
9,456
-
9,456
-
(7,407)
2,049
$
95,752
$
-
$
95,752
$
-
$
(21,369)
$
74,383
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
as Collateral
Amount
March 31, 2021
Repurchase Agreements
$
4,181,680
$
-
$
4,181,680
$
(4,079,105)
$
(102,575)
$
-
Interest rate swaptions
35,057
-
35,057
-
-
35,057
$
4,216,737
$
-
$
4,216,737
$
(4,079,105)
$
(102,575)
$
35,057
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
-
-
7,730
TBA securities
786
-
786
-
(284)
502
$
3,628,813
$
-
$
3,628,813
$
(3,536,757)
$
(78,874)
$
13,182
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
16
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 the
 
three months
 
ended March
 
31, 2021 and
 
the year ended
 
December 31,
 
2020, 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)
2021
At the Market Offering Program
(3)
First Quarter
$
5.10
308,048
$
1,572
Follow-on Offerings
First Quarter
5.31
17,940,000
95,336
Total
18,248,048
$
96,908
2020
At the Market Offering Program
(3)
First Quarter
$
6.13
3,170,727
$
19,447
At the Market Offering Program
(3)
Second Quarter
-
-
-
At the Market Offering Program
(3)
Third Quarter
5.06
3,073,326
15,566
At the Market Offering Program
(3)
Fourth Quarter
5.32
6,775,187
36,037
13,019,240
$
71,050
 
(1)
 
Weighted average price received per share is after 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)
 
The Company has 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
2,000,000
share authorization, the increased authorization brought the total authorization to
5,306,579
 
shares, representing 10% of the
Company’s 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 March 31, 2021, 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. No shares were repurchased during the three months ended March 31, 2021
 
and 2020. The remaining authorization under the
repurchase program as of March 31, 2021 was
837,311
 
shares.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
17
 
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
2018
1.070
55,814
2019
0.960
54,421
2020
0.790
53,570
2021 - YTD
(1)
0.260
23,374
Totals
$
11.915
$
365,337
 
(1)
 
On
April 14, 2021
, the Company declared a dividend of $
0.065
 
per share to be paid on
May 26, 2021
.
 
The effect of this dividend is included in
the table above but is not reflected in the Company’s financial statements
 
as of March 31, 2021.
 
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.
 
 
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 or the Manager.
 
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 three months ended
March 31, 2021 and 2020.
 
 
($ in thousands, except per share data)
Three Months Ended March 31,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
18
2021
2020
Weighted
Weighted
Average
Average
Grant Date
Grant Date
 
Shares
Fair Value
Shares
Fair Value
Unvested, beginning of period
4,554
$
7.45
19,021
$
7.78
Granted
137,897
5.88
-
-
Vested and issued
(2,277)
7.45
(4,153)
8.20
Unvested, end of period
140,174
$
5.91
14,868
$
7.66
Compensation expense during period
$
3
$
14
Unrecognized compensation expense, end of period
$
812
$
27
Intrinsic value, end of period
$
842
$
44
Weighted-average remaining vesting term (in years)
2.1
0.7
 
The number of shares of common stock issuable upon the vesting of the remaining outstanding Performance Units was
reduced in the third quarter of 2020 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%.
 
Stock Awards
 
The Company has issued, and may in the future issue additional, immediately vested common stock under the
Incentive Plan to certain executive officers and employees of its Manager. The following table presents information related
to fully vested common stock issued during the three months ended March 31, 2021 and 2020. All of the fully vested shares
of common stock issued during the three months ended March 31, 2021, and the related compensation expense, were
granted with respect to service performed during the previous fiscal year.
 
($ in thousands, except per share data)
Three Months Ended March 31,
2021
2020
Fully vested shares granted
137,897
-
Weighted average grant date price per share
$
5.88
-
Compensation expense related to fully vested shares of common stock awards
(1)
$
811
$
-
 
(1)
 
The awards issued during the three months ended March 31, 2021 were granted
 
with respect to service performed in 2020. Approximately
$600,000 of compensation expense related to the 2021 awards was
 
accrued and recognized in 2020.
 
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 dividend equivalent rights are settled
in 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 three months ended March 31,
2021 and 2020.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
19
 
($ in thousands, except per share data)
Three Months Ended March 31,
2021
2020
Weighted
Weighted
Average
Average
Grant Date
Grant Date
 
Shares
Fair Value
Shares
Fair Value
Outstanding, beginning of period
90,946
$
5.44
43,570
$
6.56
Granted and vested
10,422
5.31
9,008
5.69
Issued
-
-
-
-
Outstanding, end of period
101,368
$
5.43
52,578
$
6.41
Compensation expense during period
$
45
$
45
Intrinsic value, end of period
$
609
$
155
 
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 March 31, 2021.
 
NOTE 10. INCOME TAXES
 
The Company will generally not be subject to federal income tax on its REIT taxable
 
income to the extent 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 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.
 
 
NOTE 11.
 
EARNINGS PER SHARE (EPS)
 
 
The Company
 
had dividend
 
eligible Performance
 
Units and
 
Deferred Stock
 
Units that
 
were outstanding
 
during the
 
three months
ended March
 
31, 2021 and
 
2020. 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 three months
 
ended March
 
31, 2021 and
 
2020.
 
(in thousands, except per share information)
Three Months Ended March 31,
2021
2020
Basic and diluted EPS per common share:
Numerator for basic and diluted EPS per share of common stock:
Net loss - Basic and diluted
$
(29,369)
$
(91,199)
Weighted average shares of common stock:
Shares of common stock outstanding at the balance sheet date
94,411
66,237
Effect of weighting
 
(9,066)
(1,647)
Weighted average shares-basic and diluted
85,345
64,590
Net loss per common share:
 
 
 
 
 
 
 
 
 
 
 
20
Basic and diluted
$
(0.34)
$
(1.41)
Anti-dilutive incentive shares not included in calculation.
242
67
 
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
 
participants
 
would use
 
in
pricing the
 
asset or liability,
 
including
 
the assumptions
 
about the
 
risk inherent
 
in a particular
 
valuation
 
technique,
 
the effect of
 
a restriction
on the sale
 
or use of
 
an asset and
 
the risk of
 
non-performance.
 
Required disclosures
 
include stratification
 
of balance
 
sheet amounts
measured at
 
fair value
 
based on
 
inputs the
 
Company uses
 
to derive
 
fair value
 
measurements.
 
These stratifications
 
are:
 
 
 
Level 1 valuations,
 
where the
 
valuation
 
is based on
 
quoted market
 
prices for
 
identical assets
 
or liabilities
 
traded in
 
active markets
(which include
 
exchanges and
 
over-the-counter
 
markets with
 
sufficient volume),
 
 
Level 2 valuations,
 
where the
 
valuation
 
is based on
 
quoted market
 
prices for
 
similar instruments
 
traded in
 
active markets,
 
quoted
prices for
 
identical or
 
similar instruments
 
in markets
 
that are not
 
active and
 
model-based
 
valuation
 
techniques
 
for which
 
all
significant
 
assumptions
 
are observable
 
in the market,
 
and
 
Level 3 valuations,
 
where the
 
valuation
 
is generated
 
from model-based
 
techniques
 
that use significant
 
assumptions
 
not
observable
 
in the market,
 
but observable
 
based on Company-specific
 
data. These
 
unobservable
 
assumptions
 
reflect the
Company’s own
 
estimates for
 
assumptions
 
that market
 
participants
 
would use
 
in pricing
 
the asset or
 
liability. Valuation
techniques
 
typically
 
include option
 
pricing models,
 
discounted
 
cash flow
 
models and
 
similar techniques,
 
but may also
 
include the
use of market
 
prices of assets
 
or liabilities
 
that are not
 
directly comparable
 
to the subject
 
asset or
 
liability.
 
The Company's
 
RMBS and
 
TBA securities
 
are Level
 
2 valuations,
 
and such valuations
 
currently are
 
determined
 
by the Company
based on independent
 
pricing sources
 
and/or third
 
party broker
 
quotes, when
 
available. Because
 
the price
 
estimates may
 
vary, the
Company must
 
make certain
 
judgments
 
and assumptions
 
about the
 
appropriate
 
price to use
 
to calculate
 
the fair values.
 
The Company
 
and
the independent
 
pricing sources
 
use various
 
valuation techniques
 
to determine
 
the price
 
of the Company’s
 
securities.
 
These techniques
include observing
 
the most recent
 
market for
 
like or identical
 
assets (including
 
security coupon,
 
maturity, yield,
 
and prepayment
 
speeds),
spread pricing
 
techniques
 
to determine
 
market credit
 
spreads
 
(option adjusted
 
spread, zero
 
volatility
 
spread, spread
 
to the U.S.
 
Treasury
curve or spread
 
to a benchmark
 
such as a TBA),
 
and model driven
 
approaches
 
(the discounted
 
cash flow
 
method, Black
 
Scholes and
SABR models
 
which rely
 
upon observable
 
market rates
 
such as the
 
term structure
 
of interest
 
rates and
 
volatility).
 
The appropriate
 
spread
pricing method
 
used is based
 
on market
 
convention.
 
The pricing
 
source determines
 
the spread
 
of recently
 
observed trade
 
activity or
observable
 
markets for
 
assets similar
 
to those being
 
priced. The
 
spread is then
 
adjusted based
 
on variances
 
in certain
 
characteristics
between the
 
market observation
 
and the asset
 
being priced.
 
Those characteristics
 
include: type
 
of asset, the
 
expected life
 
of the asset,
 
the
stability and
 
predictability
 
of the expected
 
future cash
 
flows of the
 
asset, whether
 
the coupon
 
of the asset
 
is fixed or
 
adjustable,
 
the
guarantor
 
of the security
 
if applicable,
 
the coupon,
 
the maturity, the
 
issuer, size of
 
the underlying
 
loans, year
 
in which the
 
underlying
 
loans
were originated,
 
loan to value
 
ratio, state
 
in which the
 
underlying
 
loans reside,
 
credit score
 
of the underlying
 
borrowers
 
and other variables
if appropriate.
 
The fair value
 
of the security
 
is determined
 
by using the
 
adjusted spread.
 
 
The Company’s
 
futures contracts
 
are Level
 
1 valuations,
 
as they are
 
exchange-traded
 
instruments
 
and quoted
 
market prices
 
are
readily available.
 
Futures contracts
 
are settled
 
daily. The Company’s
 
interest rate
 
swaps and
 
interest rate
 
swaptions
 
are Level
 
2
valuations.
 
The fair value
 
of interest
 
rate swaps
 
is determined
 
using a discounted
 
cash flow
 
approach
 
using forward
 
market interest
 
rates
and discount
 
rates, which
 
are observable
 
inputs. The
 
fair value
 
of interest
 
rate swaptions
 
is determined
 
using an option
 
pricing model.
 
 
RMBS (based
 
on the fair
 
value option),
 
derivatives
 
and TBA securities
 
were recorded
 
at fair value
 
on a recurring
 
basis during
 
the
three months
 
ended March
 
31, 2021 and
 
2020. When
 
determining
 
fair value
 
measurements,
 
the Company
 
considers the
 
principal or
 
most
advantageous
 
market in which
 
it would transact
 
and considers
 
assumptions
 
that market
 
participants
 
would use
 
when pricing
 
the asset.
When possible,
 
the Company
 
looks to active
 
and observable
 
markets to
 
price identical
 
assets.
 
When identical
 
assets are
 
not traded
 
in
active markets,
 
the Company
 
looks to market
 
observable
 
data for
 
similar assets.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
21
 
The following
 
table presents
 
financial assets
 
(liabilities)
 
measured
 
at fair value
 
on a recurring
 
basis as of
 
March 31,
 
2021 and
December 31,
 
2020.
 
Derivative
 
contracts are
 
reported as
 
a net position
 
by contract
 
type, and
 
not based
 
on master
 
netting arrangements.
 
 
(in thousands)
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
 
Observable
Unobservable
Assets
Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
March 31, 2021
Mortgage-backed securities
$
-
$
4,338,536
$
-
Interest rate swaps
-