Orchid Island Capital, Inc. - FORM 10-Q

Attached files

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EX-32.2 - EXHIBIT 32.2 - Orchid Island Capital, Inc.	orc10q20200331x322.htm
EX-32.1 - EXHIBIT 32.1 - Orchid Island Capital, Inc.	orc10q20200331x321.htm
EX-31.2 - EXHIBIT 31.2 - Orchid Island Capital, Inc.	orc10q20200331x312.htm
EX-31.1 - EXHIBIT 31.1 - Orchid Island Capital, Inc.	orc10q20200331x311.htm
EX-10.1 - EXHIBIT 10.1 - Orchid Island Capital, Inc.	orc10q20200331x101.htm

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, 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

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 ý 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 ý 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 ý

Number of shares outstanding at May 1, 2020: 66,236,639

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 Statement 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	43
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	50
ITEM 3. Defaults upon Senior Securities	50
ITEM 4. Mine Safety Disclosures	50
ITEM 5. Other Information	50
ITEM 6. Exhibits	51
SIGNATURES	52

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ORCHID ISLAND CAPITAL, INC.
CONDENSED BALANCE SHEETS
($ in thousands, except per share data)

	(Unaudited)
	March 31, 2020			December 31, 2019
ASSETS:
Mortgage-backed securities, at fair value
Pledged to counterparties	$	2,937,749		$	3,584,354
Unpledged		11,048			6,567
Total mortgage-backed securities		2,948,797			3,590,921
Cash and cash equivalents		162,725			193,770
Restricted cash		38,725			84,885
Accrued interest receivable		10,054			12,404
Derivative assets, at fair value		1,336			-
Other assets		755			100
Total Assets	$	3,162,392		$	3,882,080

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
Repurchase agreements	$	2,810,250		$	3,448,106
Payable for unsettled securities purchased		3,450			-
Dividends payable		5,299			5,045
Derivative liabilities, at fair value		30,097			20,658
Accrued interest payable		3,814			11,101
Due to affiliates		520			622
Other liabilities		818			1,041
Total Liabilities		2,854,248			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 March 31, 2020 and December 31, 2019		-			-
Common Stock, $0.01 par value; 500,000,000 shares authorized, 66,236,639
shares issued and outstanding as of March 31, 2020 and 63,061,781 shares issued
and outstanding as of December 31, 2019		662			631
Additional paid-in capital		418,803			414,998
Accumulated deficit		(111,321	)		(20,122	)
Total Stockholders' Equity		308,144			395,507
Total Liabilities and Stockholders' Equity	$	3,162,392		$	3,882,080
See Notes to Financial Statements

ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended March 31, 2020 and 2019
($ in thousands, except per share data)

	Three Months Ended March 31,
	2020			2019
Interest income	$	35,671		$	32,433
Interest expense		(16,523	)		(18,892	)
Net interest income		19,148			13,541
Realized (losses) gains on mortgage-backed securities		(28,380	)		243
Unrealized gains on mortgage-backed securities		3,032			18,041
Losses on derivative instruments		(82,858	)		(19,032	)
Net portfolio (loss) income		(89,058	)		12,793

Expenses:
Management fees		1,377			1,285
Allocated overhead		347			323
Accrued incentive compensation		(436	)		(408	)
Directors' fees and liability insurance		260			253
Audit, legal and other professional fees		255			301
Direct REIT operating expenses		206			375
Other administrative		132			67
Total expenses		2,141			2,196

Net (loss) income	$	(91,199	)	$	10,597

Basic and diluted net (loss) income per share	$	(1.41	)	$	0.22

Weighted Average Shares Outstanding		64,590,205			48,904,587

Dividends declared per common share	$	0.24		$	0.24
See Notes to Financial Statements

ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
For the Three Months Ended March 31, 2020 and 2019
(in thousands)

							Additional			Retained
	Common Stock						Paid-in			Earnings
	Shares			Par Value			Capital			(Deficit)			Total
Balances, January 1, 2019		49,132		$	491		$	379,975		$	(44,387	)	$	336,079
Net income		-			-			-			10,597			10,597
Cash dividends declared		-			-			(11,822	)		-			(11,822	)
Issuance of common stock pursuant to public offerings, net		1,268			13			8,490			-			8,503
Issuance of common stock pursuant to stock based
compensation plan		7			-			(6	)		-			(6	)
Amortization of stock based compensation		-			-			87			-			87
Shares repurchased and retired		(469	)		(5	)		(3,019	)		-			(3,024	)
Balances, March 31, 2019		49,938		$	499		$	373,705		$	(33,790	)	$	340,414

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
Issuance of common stock pursuant to stock based
compensation plan		4			-			-			-			-
Amortization of stock based compensation		-			-			59			-			59
Balances, March 31, 2020		66,237		$	662		$	418,803		$	(111,321	)	$	308,144
See Notes to Financial Statements

ORCHID ISLAND CAPITAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended March 31, 2020 and 2019
($ in thousands)

	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(91,199	)	$	10,597
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Stock based compensation		59			87
Realized and unrealized losses (gains) on mortgage-backed securities		25,348			(18,284	)
Realized and unrealized losses on interest rate swaptions		2,589			378
Realized and unrealized losses on interest rate swaps		54,934			2,522
Realized losses on forward settling to-be-announced securities		7,090			4,641
Changes in operating assets and liabilities:
Accrued interest receivable		2,350			696
Other assets		(655	)		(339	)
Accrued interest payable		(7,287	)		(1,299	)
Other liabilities		(223	)		(477	)
Due from affiliates		(102	)		(113	)
NET CASH USED IN OPERATING ACTIVITIES		(7,096	)		(1,591	)

CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases		(1,334,350	)		(547,417	)
Sales		1,808,867			655,359
Principal repayments		142,259			94,785
Payments on net settlement of to-be-announced securities		(7,602	)		(11,146	)
Purchase of derivative financial instruments, net of margin cash received		(45,458	)		(8,723	)
NET CASH PROVIDED BY INVESTING ACTIVITIES		563,716			182,858

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements		13,602,710			11,573,937
Principal payments on repurchase agreements		(14,240,566	)		(11,732,251	)
Cash dividends		(15,416	)		(11,758	)
Proceeds from issuance of common stock, net of issuance costs		19,447			8,503
Common stock repurchases		-			(3,030	)
NET CASH USED IN FINANCING ACTIVITIES		(633,825	)		(164,599	)

NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		(77,205	)		16,668
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the period		278,655			126,263
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the period	$	201,450		$	142,931

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	23,809		$	20,190

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Securities acquired settled in later period	$	3,450		$	35,026
See Notes to Financial Statements

ORCHID ISLAND CAPITAL, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

MARCH 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 “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 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 may 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 are deemed to be “at the market” offerings and privately negotiated transactions. Through March 31, 2020, 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.

COVID-19 Impact

Beginning in mid-March 2020, the global pandemic associated with the novel coronavirus COVID-19 (“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 margin calls from our repurchase agreement lenders. 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. We timely satisfied all margin calls. 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. The following summarizes the impact COVID-19 has had on our financial position and results of operations through March 31, 2020.

•

We sold approximately $1.8 billion of RMBS during the three months ended March 31, 2020, realizing losses of approximately $28.4 million. Approximately $1.1 billion of these sales were executed on March 19th and March 20th and resulted in losses of approximately $31.4 million. The losses sustained on these two days were a direct result of the adverse RMBS market conditions associated with COVID-19.

•	We terminated interest rate swap positions with an aggregate notional value of $860.0 million and incurred approximately $45.0 million in mark to market losses on the positions through the date of the respective terminations.

•	Our RMBS portfolio had a fair market value of approximately $2.9 billion as of March 31, 2020, compared to $3.6 billion as of December 31, 2019.

•	Our outstanding balances under our repurchase agreement borrowings as of March 31, 2020 were approximately $2.8 billion, compared to $3.4 billion as of December 31, 2019.

•	Our stockholders’ equity was $308.1 million as of March 31, 2020, compared to $395.5 million as of December 31, 2019.

In response to the Shelter in Place order issued in Florida, our manager has invoked its Disaster Recovery Plan and its employees are working remotely. Prior planning resulted in the successful implementation of this plan and key operational team members maintain daily communication.

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 2020.

In addition, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which will provide 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. The Company has evaluated the provisions of the CARES Act and does not believe it will have material effect on the financial statements.The Federal Housing Financing Agency (the “FHFA”) has instructed the GSEs on how they will handle servicer advances for loans that back Agency RMBS that enter into forbearance, which should limit prepayments during the forbearance period that could have resulted otherwise. There can be no assurance as to how, in the long term, these and other actions by the U.S. government will affect the efficiency, liquidity and stability of the financial and mortgage markets. 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.

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, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

The balance sheet at December 31, 2019 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, 2019.

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, 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 March 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 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)
	March 31, 2020			December 31, 2019
Cash and cash equivalents		$	162,725		$	193,770
Restricted cash			38,725			84,885
Total cash, cash equivalents and restricted cash		$	201,450		$	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 (“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 Financial Instruments

The Company uses derivative 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, 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 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 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 addition, the Company may be required to post collateral based on any declines in the market value of the derivatives. 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. To mitigate this risk, the Company uses only well-established commercial banks and exchanges as counterparties.

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, 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.

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.

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

In June 2016, the Financial Accounting Standards Board (“FASB”) issued 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). ASU 2016-13 is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2019. 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 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.

NOTE 2. MORTGAGE-BACKED SECURITIES

The following table presents the Company’s RMBS portfolio as of March 31, 2020 and December 31, 2019:

(in thousands)
	March 31, 2020		December 31, 2019
Pass-Through RMBS Certificates:
Adjustable-rate Mortgages	$	984	$	1,014
Fixed-rate Mortgages		2,734,310		3,206,013
Fixed-rate CMOs		173,409		299,205
Total Pass-Through Certificates		2,908,703		3,506,232
Structured RMBS Certificates:
Interest-Only Securities		40,094		60,986
Inverse Interest-Only Securities		-		23,703
Total Structured RMBS Certificates		40,094		84,689
Total	$	2,948,797	$	3,590,921

NOTE 3. REPURCHASE AGREEMENTS AND OTHER BORROWINGS

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, 2020, the Company had met all margin call requirements.

As of March 31, 2020 and December 31, 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
	LESS)		30 DAYS			90 DAYS			90 DAYS			TOTAL
March 31, 2020
Fair market value of securities pledged, including
accrued interest receivable	$	-	$	1,856,721		$	1,090,882		$	-		$	2,947,603
Repurchase agreement liabilities associated with
these securities	$	-	$	1,768,968		$	1,041,282		$	-		$	2,810,250
Net weighted average borrowing rate		-		1.11	%		1.76	%		-			1.35	%
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 for repurchase agreements was approximately $22.2 million and $65.9 million as of March 31, 2020 and December 31, 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 March 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 $155.8 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, 2020 and December 31, 2019.

NOTE 4. DERIVATIVE FINANCIAL INSTRUMENTS

Derivative Assets (Liabilities), at Fair Value

The table below summarizes fair value information about our derivative assets and liabilities as of March 31, 2020 and December 31, 2019.

(in thousands)
Derivative Instruments and Related Accounts	Balance Sheet Location	March 31, 2020		December 31, 2019
Assets
Payer swaptions	Derivative assets, at fair value	$	1,336	$	-
Total derivative assets, at fair value		$	1,336	$	-

Liabilities
Interest rate swaps	Derivative liabilities, at fair value	$	30,097	$	20,146
TBA securities	Derivative liabilities, at fair value		-		512
Total derivative liabilities, at fair value		$	30,097	$	20,658

Margin Balances Posted to (from) Counterparties
Futures contracts	Restricted cash	$	898	$	1,338
TBA securities	Restricted cash		-		246
Interest rate swap contracts	Restricted cash		15,588		17,450
Total margin balances on derivative contracts		$	16,486	$	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 March 31, 2020 and December 31, 2019.

($ in thousands)
	March 31, 2020
	Average		Weighted			Weighted
	Contract		Average			Average
	Notional		Entry			Effective			Open
Expiration Year	Amount		Rate			Rate			Equity⁽¹⁾
Eurodollar Futures Contracts (Short Positions)
2020	$	50,000		3.24	%		0.41	%	$	(1,064	)
2021		50,000		1.03	%		0.30	%		(362	)
Total / Weighted Average	$	50,000		1.98	%		0.35	%	$	(1,426	)
Treasury Note Futures Contracts (Short Position)⁽²⁾
June 2020 5-year T-Note futures
(Jun 2020 - Jun 2025 Hedge Period)	$	69,000		1.57	%		0.81	%	$	(3,175	)

($ 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	)
Total / Weighted Average	$	500,000		2.97	%		1.67	%	$	(6,505	)
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 $125.36 at March 31, 2020 and $118.61 at December 31, 2019. The notional contract values of the short positions were $86.5 million and $81.8 million at March 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 the London Interbank Offered Rate (“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, 2020 and December 31, 2019.

($ in thousands)
			Average						Net
			Fixed			Average			Estimated			Average
	Notional		Pay			Receive			Fair			Maturity
	Amount		Rate			Rate			Value			(Years)
March 31, 2020
Expiration > 3 to ≤ 5 years	$	625,000		1.65	%		1.74	%	$	(30,097	)		4.2
	$	625,000		1.65	%		1.74	%	$	(30,097	)		4.2
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 March 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)
March 31, 2020
≤ 1 year
	Payer Swaptions	$3,925	$1,336	8.0	$750,000	1.22%	3 Month	4.3

The following table summarizes our contracts to purchase and sell TBA securities as of December 31, 2019. There were no open TBA securities positions at March 31, 2020.

($ in thousands)
			Notional									Net
			Amount			Cost			Market			Carrying
			Long (Short)⁽¹⁾			Basis⁽²⁾			Value⁽³⁾			Value⁽⁴⁾
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 Instruments, Net

The table below presents the effect of the Company’s derivative financial instruments on the statements of operations for the three months ended March 31, 2020 and 2019.

(in thousands)
	Three Months Ended March 31,
	2020			2019
Eurodollar futures contracts (short positions)	$	(8,217	)	$	(10,041	)
T-Note futures contracts (short position)		(4,339	)		(1,677	)
Interest rate swaps		(60,623	)		(2,295	)
Payer swaptions		(2,589	)		(378	)
Net TBA securities		(7,090	)		(4,641	)
Total	$	(82,858	)	$	(19,032	)

Credit Risk-Related Contingent Features

The use of derivatives 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, 2020 and December 31, 2019.

(in thousands)
	March 31, 2020									December 31, 2019
	Repurchase			Derivative						Repurchase			Derivative
Assets Pledged to Counterparties	Agreements			Agreements			Total			Agreements			Agreements			Total
PT RMBS - fair value		$	2,900,536		$	-		$	2,900,536		$	3,500,394		$	-		$	3,500,394
Structured RMBS - fair value			37,213			-			37,213			83,960			-			83,960
Accrued interest on pledged securities			9,853			-			9,853			12,367			-			12,367
Restricted cash			22,239			16,486			38,725			65,851			19,034			84,885
Total		$	2,969,841		$	16,486		$	2,986,327		$	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 March 31, 2020 and December 31, 2019.

(in thousands)
	March 31, 2020										December 31, 2019
	Repurchase			Derivative						Repurchase			Derivative
Assets Pledged to Orchid	Agreements			Agreements			Total			Agreements			Agreements			Total
Cash		$	427		$	-		$	427		$	1,418		$	-		$	1,418
Total		$	427		$	-		$	427		$	1,418		$	-		$	1,418

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 derivatives 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 March 31, 2020 and December 31, 2019.

(in thousands)

Offsetting of Assets

Gross Amount Not

Net Amount

Offset in the Balance Sheet

of Assets

Financial

Gross Amount

Presented

Instruments

Cash

of Recognized

Offset in the

in the

Received as

Net

Assets

Balance Sheet

Collateral

Amount

March 31, 2020

Interest rate swaptions

$1,336

(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, 2020
Repurchase Agreements		$	2,810,250		$	-		$	2,810,250		$	(2,788,011	)		$	(22,239	)		$	-
Interest rate swaps			30,097			-			30,097			-				(15,588	)			14,509
		$	2,840,347		$	-		$	2,840,347		$	(2,788,011	)		$	(37,827	)		$	14,509
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 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
Total					3,170,727	$	19,447
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	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)	The Company has entered into seven equity distribution agreements, six 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 March 31, 2020, the Company repurchased a total of 5,665,620 shares at an aggregate cost of approximately $40.3 million, including commissions and fees, for a weighted average price of $7.11 per share. During the three months ended March 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. The Company did not repurchase any shares of its common stock during the three months ended March 31, 2020. The remaining authorization under the repurchase program as of March 31, 2020 was 857,202 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
2018		1.070		55,814
2019		0.960		54,421
2020 - YTD⁽¹⁾		0.295		19,322
Totals	$	11.160	$	307,715

(1)	On April 8, 2020, the Company declared a dividend of $0.055 per share to be paid on May 27, 2020. 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, 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.

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 shares. 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 three months ended March 31, 2020 and 2019.

($ in thousands, except per share data)
	Three Months Ended March 31,
	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
Vested and issued		(4,153	)		8.20		(8,173	)		9.08
Unvested, end of period		14,868		$	7.66		35,499		$	8.17

Compensation expense during period				$	14				$	42
Unrecognized compensation expense, end of period				$	27				$	115
Intrinsic value, end of period				$	44				$	234
Weighted-average remaining vesting term (in years)					0.7					1.0

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, 2020 and 2019.

($ in thousands, except per share data)
	Three Months Ended March 31,
	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		9,008		5.69		7,350		6.41
Issued		-		-		-		-
Outstanding, end of period		52,578	$	6.41		19,784	$	7.01

Compensation expense during period			$	45			$	45
Intrinsic value, end of period			$	155			$	130

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, 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 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, 2020 and 2019. 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, 2020 and 2019.

(in thousands, except per share information)
	Three Months Ended March 31,
	2020			2019
Basic and diluted EPS per common share:
Numerator for basic and diluted EPS per share of common stock:
Net (loss) income - Basic and diluted	$	(91,199	)	$	10,597
Weighted average shares of common stock:
Shares of common stock outstanding at the balance sheet date		66,237			49,938
Unvested dividend eligible share based compensation
outstanding at the balance sheet date		-			55
Effect of weighting		(1,647	)		(1,088	)
Weighted average shares-basic and diluted		64,590			48,905
Net (loss) income per common share:
Basic and diluted	$	(1.41	)	$	0.22
Anti-dilutive incentive shares not included in calculation.		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, interest rate swaps, interest rate swaptions and TBA securities are valued using 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, spread pricing techniques (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.

RMBS (based on the fair value option), interest rate swaps, interest rate swaptions, TBA securities and futures contracts were recorded at fair value on a recurring basis during the three months ended March 31, 2020 and 2019. 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.

The following table presents financial assets (liabilities) measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019. 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
	Fair Value			Assets		Inputs			Inputs
	Measurements			(Level 1)		(Level 2)			(Level 3)
March 31, 2020
Mortgage-backed securities	$	2,948,797		$	-	$	2,948,797		$	-
Interest rate swaps		(30,097	)		-		(30,097	)		-
Interest rate swaptions		1,336			-		1,336			-
December 31, 2019
Mortgage-backed securities	$	3,590,921		$	-	$	3,590,921		$	-
Interest rate swaps		(20,146	)		-		(20,146	)		-
TBA securities		(512	)		-		(512	)		-

During the three months ended March 31, 2020 and 2019, there were no transfers of financial assets or liabilities between levels 1, 2 or 3.

NOTE 13. RELATED PARTY TRANSACTIONS

Management Agreement

The Company is externally managed and advised by Bimini Advisors, LLC (the “Manager”) pursuant to the terms of a management agreement. The management agreement has been renewed through February 20, 2021 and provides for automatic one-year extension options thereafter and is subject to certain termination rights. Under the terms of the management agreement, the Manager is responsible for administering the business activities and day-to-day operations of the Company. The Manager receives a monthly management fee in the amount of:

•	One-twelfth of 1.5% of the first $250 million of the Company’s month-end equity, as defined in the management agreement,

•	One-twelfth of 1.25% of the Company’s month-end equity that is greater than $250 million and less than or equal to $500 million, and

•	One-twelfth of 1.00% of the Company’s month-end equity that is greater than $500 million.

The Company is obligated to reimburse the Manager for any direct expenses incurred on its behalf and to pay the Manager the Company’s pro rata portion of certain overhead costs set forth in the management agreement. Should the Company terminate the management agreement without cause, it will pay the Manager a termination fee equal to three times the average annual management fee, as defined in the management agreement, before or on the last day of the term of the agreement.

Total expenses recorded for the management fee and costs incurred were approximately $1.7 million and $1.6 million for the three months ended March 31, 2020 and 2019, respectively. At March 31, 2020 and December 31, 2019, the net amount due to affiliates was approximately $0.5 million and $0.6 million, respectively.

Other Relationships with Bimini

Robert Cauley, our Chief Executive Officer and Chairman of our Board of Directors, also serves as Chief Executive Officer and Chairman of the Board of Directors of Bimini and owns shares of common stock of Bimini. George H. Haas, IV, our Chief Financial Officer, Chief Investment Officer, Secretary and a member of our Board of Directors, also serves as the Chief Financial Officer, Chief Investment Officer and Treasurer of Bimini and owns shares of common stock of Bimini. In addition, as of March 31, 2020, Bimini owned 1,520,036 shares, or 2.3%, of the Company’s common stock.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes to those statements included in Item 1 of this Form 10-Q. The discussion may contain certain forward-looking statements that involve risks and uncertainties. Forward-looking statements are those that are not historical in nature. As a result of many factors, such as those set forth under “Risk Factors” in our most recent Annual Report on Form 10-K and this quarterly report on Form 10-Q, our actual results may differ materially from those anticipated in such forward-looking statements.

Overview

We are a specialty finance company that invests in residential mortgage-backed securities (“RMBS”) which are issued and guaranteed by a federally chartered corporation or agency (“Agency RMBS”). Our investment strategy focuses on, and our portfolio consists of, two categories of Agency RMBS: (i) traditional pass-through Agency RMBS, such as mortgage pass-through certificates issued by Fannie Mae, Freddie Mac or Ginnie Mae (the “GSEs”) and collateralized mortgage obligations (“CMOs”) issued by the GSEs (“PT RMBS”) and (ii) structured Agency RMBS, such as interest-only securities (“IOs”), inverse interest-only securities (“IIOs”) and principal only securities (“POs”), among other types of structured Agency RMBS. We were formed by Bimini in August 2010, commenced operations on November 24, 2010 and completed our initial public offering (“IPO”) on February 20, 2013. We are externally managed by Bimini Advisors, an investment adviser registered with the Securities and Exchange Commission (the “SEC”).

Our business objective is to provide attractive risk-adjusted total returns over the long term through a combination of capital appreciation and the payment of regular monthly distributions. We intend to achieve this objective by investing in and strategically allocating capital between the two categories of Agency RMBS described above. We seek to generate income from (i) the net interest margin on our leveraged PT RMBS portfolio and the leveraged portion of our structured Agency RMBS portfolio, and (ii) the interest income we generate from the unleveraged portion of our structured Agency RMBS portfolio. We intend to fund our PT RMBS and certain of our structured Agency RMBS through short-term borrowings structured as repurchase agreements. PT RMBS and structured Agency RMBS typically exhibit materially different sensitivities to movements in interest rates. Declines in the value of one portfolio may be offset by appreciation in the other. The percentage of capital that we allocate to our two Agency RMBS asset categories will vary and will be actively managed in an effort to maintain the level of income generated by the combined portfolios, the stability of that income stream and the stability of the value of the combined portfolios. We believe that this strategy will enhance our liquidity, earnings, book value stability and asset selection opportunities in various interest rate environments.

We operate so as to qualify to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). We generally will not be subject to U.S. federal income tax to the extent that we currently distribute all of our REIT taxable income (as defined in the Code) to our stockholders and maintain our REIT qualification.

The Company’s common stock trades on the New York Stock Exchange under the symbol “ORC”.

Impact of the COVID-19 Pandemic

Beginning in March 2020, the global pandemic associated with the novel coronavirus COVID-19 (“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 margin calls from our repurchase agreement lenders. 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. We timely satisfied all margin calls. 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. The following summarizes the impact COVID-19 has had on our financial position and results of operations through March 31, 2020.

•

•	We terminated interest rate swap positions with an aggregate notional value of $860.0 million and incurred approximately $45.0 million in mark to market losses on the positions through the date of the respective terminations.

•	Our RMBS portfolio had a fair market value of approximately $2.9 billion as of March 31, 2020, compared to $3.6 billion as of December 31, 2019.

•	Our outstanding balances under our repurchase agreement borrowings as of March 31, 2020 were approximately $2.8 billion, compared to $3.4 billion as of December 31, 2019.

•	Our stockholders’ equity was $308.1 million as of March 31, 2020, compared to $395.5 million as of December 31, 2019.

Largely as a result of actions taken by the Federal Reserve (the “Fed”) in late March, Agency RMBS valuations have increased and the market for these assets has stabilized.

Our manager has invoked its Disaster Recovery Plan and its employees are working remotely. Prior planning resulted in the successful implementation of this plan and key operational team members maintain daily communication. We do not anticipate incurring additional material costs, nor have we identified any operational or internal control issues related to this remote working plan.

Capital Raising Activities

On August 2, 2017, we entered into an equity distribution agreement (the “August 2017 Equity Distribution Agreement”) with two sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount of $125,000,000 of shares of our common stock in transactions that were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total of 15,123,178 shares under the August 2017 Equity Distribution Agreement for aggregate gross proceeds of $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, we entered into an underwriting agreement (the “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 our common stock at a price to the public of $6.55 per share. The underwriters purchased the shares pursuant to the 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 us of approximately $44.2 million after deduction of underwriting discounts and commissions and other estimated offering expenses.

On January 23, 2020, we entered into an equity distribution agreement (the “January 2020 Equity Distribution Agreement”) with three sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate amount of $200,000,000 of shares of our common stock in transactions that are deemed to be “at the market” offerings and privately negotiated transactions. Through March 31, 2020, we 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.

Stock Repurchase Agreement

On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to 2,000,000 shares of our common stock. The timing, manner, price and amount of any repurchases is determined by the Company in its discretion and is 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. 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. This stock repurchase program has no termination date.

Factors that Affect our Results of Operations and Financial Condition

A variety of industry and economic factors may impact our results of operations and financial condition. These factors include:

•	interest rate trends;

•	the difference between Agency RMBS yields and our funding and hedging costs;

•	competition for, and supply of, investments in Agency RMBS;

•	actions taken by the U.S. government, including the presidential administration, the Fed, the Federal Housing Financing Agency (the “FHFA”), the Federal Open Market Committee (the “FOMC”) and the U.S. Treasury;

•	prepayment rates on mortgages underlying our Agency RMBS and credit trends insofar as they affect prepayment rates; and

•	other market developments.

In addition, a variety of factors relating to our business may also impact our results of operations and financial condition. These factors include:

•	our degree of leverage;

•	our access to funding and borrowing capacity;

•	our borrowing costs;

•	our hedging activities;

•	the market value of our investments; and

•	the requirements to qualify as a REIT and the requirements to qualify for a registration exemption under the Investment Company Act.

Results of Operations

Described below are the Company’s results of operations for the three months ended March 31, 2020, as compared to the Company’s results of operations for the three months ended March 31, 2019.

Net (Loss) Income Summary

Net loss for the three months ended March 31, 2020 was $91.2 million, or $1.41 per share. Net income for the three months ended March 31, 2019 was $10.6 million, or $0.22 per share. The components of net (loss) income for the three months ended March 31, 2020 and 2019, along with the changes in those components are presented in the table below:

(in thousands)
	2020			2019			Change
Interest income	$	35,671		$	32,433		$	3,238
Interest expense		(16,523	)		(18,892	)		2,369
Net interest income		19,148			13,541			5,607
Losses on RMBS and derivative contracts		(108,206	)		(748	)		(107,458	)
Net portfolio (deficiency) income		(89,058	)		12,793			(101,851	)
Expenses		(2,141	)		(2,196	)		55
Net (loss) income	$	(91,199	)	$	10,597		$	(101,796	)

GAAP and Non-GAAP Reconciliations

In addition to the results presented in accordance with GAAP, our results of operations discussed below include certain non-GAAP financial information, including “Net Earnings Excluding Realized and Unrealized Gains and Losses”, “Economic Interest Expense” and “Economic Net Interest Income.”

Net Earnings Excluding Realized and Unrealized Gains and Losses

We have elected to account for our Agency RMBS under the fair value option. Securities held under the fair value option are recorded at estimated fair value, with changes in the fair value recorded as unrealized gains or losses through the statements of operations.

In addition, we have not designated our derivative financial instruments in hedge accounting relationships, but rather hold them for economic hedging purposes. Changes in fair value of these instruments are presented in a separate line item in the Company’s statements of operations and not included in interest expense. As such, for financial reporting purposes, interest expense and cost of funds are not impacted by the fluctuation in value of the derivative instruments.

Presenting net earnings excluding realized and unrealized gains allows management to: (i) isolate the net interest income and other expenses of the Company over time, free of all fair value adjustments and (ii) assess the effectiveness of our funding and hedging strategies on our capital allocation decisions and our asset allocation performance. Our funding and hedging strategies, capital allocation and asset selection are integral to our risk management strategy, and therefore critical to the management of our portfolio. We believe that the presentation of our net earnings excluding realized and unrealized gains is useful to investors because it provides a means of comparing our results of operations to those of our peers who have not elected the same accounting treatment. Our presentation of net earnings excluding realized and unrealized gains and losses may not be comparable to similarly-titled measures of other companies, who may use different calculations. As a result, net earnings excluding realized and unrealized gains and losses should not be considered as a substitute for our GAAP net income (loss) as a measure of our financial performance or any measure of our liquidity under GAAP. The table below presents a reconciliation of our net income (loss) determined in accordance with GAAP and net earnings excluding realized and unrealized gains.

Net Earnings Excluding Realized and Unrealized Gains and Losses
(in thousands, except per share data)
									Per Share
							Net Earnings								Net Earnings
							Excluding								Excluding
				Realized and			Realized and					Realized and			Realized and
	Net			Unrealized			Unrealized		Net			Unrealized			Unrealized
	Income			Gains and			Gains and		Income			Gains and			Gains and
	(GAAP)			Losses⁽¹⁾			Losses		(GAAP)			Losses			Losses
Three Months Ended
March 31, 2020	$	(91,199	)	$	(108,206	)	$	17,007	$	(1.41	)	$	(1.68	)	$	0.27
December 31, 2019		18,614			3,841			14,773		0.29			0.06			0.23
September 30, 2019		(8,477	)		(19,429	)		10,952		(0.14	)		(0.32	)		0.18
June 30, 2019		3,530			(7,672	)		11,202		0.07			(0.15	)		0.22
March 31, 2019		10,597			(748	)		11,345		0.22			(0.02	)		0.24

(1)	Includes realized and unrealized gains (losses) on RMBS and derivative financial instruments, including net interest income or expense on interest rate swaps.

Economic Interest Expense and Economic Net Interest Income

We use derivative instruments, specifically Eurodollar, Fed Funds and Treasury Note (“T-Note”) futures contracts, interest rate swaps and swaptions, to hedge a portion of the interest rate risk on repurchase agreements in a rising rate environment.

We have not elected to designate our derivative holdings for hedge accounting treatment. Changes in fair value of these instruments are presented in a separate line item in our statements of operations and not included in interest expense. As such, for financial reporting purposes, interest expense and cost of funds are not impacted by the fluctuation in value of the derivative instruments.

For the purpose of computing economic net interest income and ratios relating to cost of funds measures, GAAP interest expense has been adjusted to reflect the realized and unrealized gains or losses on certain derivative instruments the Company uses, specifically Eurodollar, Fed Funds and U.S. Treasury futures, and interest rate swaps and swaptions, that pertain to each period presented. We believe that adjusting our interest expense for the periods presented by the gains or losses on these derivative instruments would not accurately reflect our economic interest expense for these periods. The reason is that these derivative instruments may cover periods that extend into the future, not just the current period. Any realized or unrealized gains or losses on the instruments reflect the change in market value of the instrument caused by changes in underlying interest rates applicable to the term covered by the instrument, not just the current period. For each period presented, we have combined the effects of the derivative financial instruments in place for the respective period with the actual interest expense incurred on borrowings to reflect total economic interest expense for the applicable period. Interest expense, including the effect of derivative instruments for the period, is referred to as economic interest expense. Net interest income, when calculated to include the effect of derivative instruments for the period, is referred to as economic net interest income. This presentation includes gains or losses on all contracts in effect during the reporting period, covering the current period as well as periods in the future.

We believe that economic interest expense and economic net interest income provide meaningful information to consider, in addition to the respective amounts prepared in accordance with GAAP. The non-GAAP measures help management to evaluate its financial position and performance without the effects of certain transactions and GAAP adjustments that are not necessarily indicative of our current investment portfolio or operations. The unrealized gains or losses on derivative instruments presented in our statements of operations are not necessarily representative of the total interest rate expense that we will ultimately realize. This is because as interest rates move up or down in the future, the gains or losses we ultimately realize, and which will affect our total interest rate expense in future periods, may differ from the unrealized gains or losses recognized as of the reporting date.

Our presentation of the economic value of our hedging strategy has important limitations. First, other market participants may calculate economic interest expense and economic net interest income differently than the way we calculate them. Second, while we believe that the calculation of the economic value of our hedging strategy described above helps to present our financial position and performance, it may be of limited usefulness as an analytical tool. Therefore, the economic value of our investment strategy should not be viewed in isolation and is not a substitute for interest expense and net interest income computed in accordance with GAAP.

The tables below present a reconciliation of the adjustments to interest expense shown for each period relative to our derivative instruments, and the income statement line item, gains (losses) on derivative instruments, calculated in accordance with GAAP for each quarter of 2020 to date and 2019.

Gains (Losses) on Derivative Instruments
(in thousands)
							Funding Hedges
	Recognized in						Attributed to			Attributed to
	Income			TBA			Current			Future
	Statement			Securities			Period			Periods
	(GAAP)			Income (Loss)			(Non-GAAP)			(Non-GAAP)
Three Months Ended
March 31, 2020	$	(82,858	)	$	(7,090	)	$	(4,900	)	$	(70,868	)
December 31, 2019		10,792			(512	)		3,823		$	7,481
September 30, 2019		(8,648	)		2,479			1,244		$	(12,371	)
June 30, 2019		(34,288	)		(1,684	)		1,464		$	(34,068	)
March 31, 2019		(19,032	)		(4,641	)		2,427		$	(16,818	)

Economic Interest Expense and Economic Net Interest Income
(in thousands)
			Interest Expense on Borrowings
					Gains
					(Losses) on
					Derivative
					Instruments					Net Interest Income
			GAAP		Attributed			Economic		GAAP		Economic
	Interest		Interest		to Current			Interest		Net Interest		Net Interest
	Income		Expense		Period⁽¹⁾			Expense⁽²⁾		Income		Income⁽³⁾
Three Months Ended
March 31, 2020	$	35,671	$	16,523	$	(4,900	)	$	21,423	$	19,148	$	14,248
December 31, 2019		37,529		20,022		3,823			16,199		17,507		21,330
September 30, 2019		35,907		22,321		1,244			21,077		13,586		14,830
June 30, 2019		36,455		22,431		1,464			20,967		14,024		15,488
March 31, 2019		32,433		18,892		2,427			16,465		13,541		15,968

(1)	Reflects the effect of derivative instrument hedges for only the period presented.

(2)	Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP interest expense.

(3)	Calculated by adding the effect of derivative instrument hedges attributed to the period presented to GAAP net interest income.

Net Interest Income

During the three months ended March 31, 2020, we generated $19.1 million of net interest income, consisting of $35.7 million of interest income from RMBS assets offset by $16.5 million of interest expense on borrowings. For the comparable period ended March 31, 2019, we generated $13.5 million of net interest income, consisting of $32.4 million of interest income from RMBS assets offset by $18.9 million of interest expense on borrowings. The $3.2 million increase in interest income was due to the $218.4 million increase in average RMBS, combined with an 11 basis point ("bps") increase in the yield on average RMBS. The $2.4 million decrease in interest expense was due to a 46 bps decrease in the average cost of funds, partially offset by a $183.3 million increase in average outstanding borrowings. We had more average assets and borrowings during the first quarter of 2020 compared to the first quarter of 2019 as a result of our capital raising activity during 2019 and the first quarter of 2020.

On an economic basis, our interest expense on borrowings for the three months ended March 31, 2020 and 2019 was $21.4 million and $16.5 million, respectively, resulting in $14.2 million and $16.0 million of economic net interest income, respectively. The higher economic interest expense during the three months ended March 31, 2020 was due to the negative performance of our hedging activities during the period.

The tables below provide information on our portfolio average balances, interest income, yield on assets, average borrowings, interest expense, cost of funds, net interest income and net interest spread for each quarter in 2020 and 2019 on both a GAAP and economic basis.

($ in thousands)
	Average				Yield on					Interest Expense				Average Cost of Funds
	RMBS		Interest		Average			Average		GAAP		Economic		GAAP			Economic
	Held⁽¹⁾		Income		RMBS			Borrowings⁽¹⁾		Basis		Basis⁽²⁾		Basis			Basis⁽³⁾
Three Months Ended
March 31, 2020	$	3,269,859	$	35,671		4.36	%	$	3,129,178	$	16,523	$	21,423		2.11	%		2.74	%
December 31, 2019		3,705,920		37,529		4.05	%		3,631,042		20,022		16,199		2.21	%		1.78	%
September 30, 2019		3,674,087		35,907		3.91	%		3,571,752		22,321		21,077		2.50	%		2.36	%
June 30, 2019		3,307,885		36,455		4.41	%		3,098,133		22,431		20,967		2.90	%		2.71	%
March 31, 2019		3,051,509		32,433		4.25	%		2,945,895		18,892		16,465		2.57	%		2.24	%

($ in thousands)
	Net Interest Income				Net Interest Spread
	GAAP		Economic		GAAP			Economic
	Basis		Basis⁽²⁾		Basis			Basis⁽⁴⁾
Three Months Ended
March 31, 2020	$	19,148	$	14,248		2.25	%		1.62	%
December 31, 2019		17,507		21,330		1.84	%		2.27	%
September 30, 2019		13,586		14,830		1.41	%		1.55	%
June 30, 2019		14,024		15,488		1.51	%		1.70	%
March 31, 2019		13,541		15,968		1.68	%		2.01	%

(1)

Portfolio yields and costs of borrowings presented in the tables above and the tables on page 30 are calculated based on the average balances of the underlying investment portfolio/borrowings balances and are annualized for the periods presented. Average balances for quarterly periods are calculated using two data points, the beginning and ending balances.

(2)	Economic interest expense and economic net interest income presented in the table above and the tables on page 30 include the effect of our derivative instrument hedges for only the periods presented.

(3)	Represents interest cost of our borrowings and the effect of derivative instrument hedges attributed to the period divided by average RMBS.

(4)	Economic net interest spread is calculated by subtracting average economic cost of funds from realized yield on average RMBS.

Interest Income and Average Asset Yield

Our interest income for the three months ended March 31, 2020 and 2019 was $35.7 million and $32.4 million, respectively. We had average RMBS holdings of $3,269.9 million and $3,051.5 million for the three months ended March 31, 2020 and 2019, respectively. The yield on our portfolio was 4.36% and 4.25% for the three months ended March 31, 2020 and 2019, respectively. For the three months ended March 31, 2020 as compared to the three months ended March 31, 2019, there was a $3.2 million increase in interest income due to a $218.4 million increase in average RMBS, combined with an 11 bps increase in the yield on average RMBS.

The table below presents the average portfolio size, income and yields of our respective sub-portfolios, consisting of structured RMBS and PT RMBS for each quarter in 2020 to date and 2019.

($ in thousands)
	Average RMBS Held						Interest Income							Realized Yield on Average RMBS
	PT		Structured				PT		Structured					PT			Structured
Three Months Ended	RMBS		RMBS		Total		RMBS		RMBS			Total		RMBS			RMBS			Total
March 31, 2020	$	3,207,467	$	62,392	$	3,269,859	$	35,286	$	385		$	35,671		4.40	%		2.47	%		4.36	%
December 31, 2019		3,611,461		94,459		3,705,920		36,600		929			37,529		4.05	%		3.93	%		4.05	%
September 30, 2019		3,558,075		116,012		3,674,087		36,332		(425	)		35,907		4.08	%		(1.47	)%		3.91	%
June 30, 2019		3,181,976		125,909		3,307,885		34,992		1,463			36,455		4.40	%		4.65	%		4.41	%
March 31, 2019		2,919,415		132,094		3,051,509		30,328		2,105			32,433		4.16	%		6.37	%		4.25	%

Interest Expense and the Cost of Funds

We had average outstanding borrowings of $3,129.2 million and $2,945.9 million and total interest expense of $16.5 million and $18.9 million for the three months ended March 31, 2020 and 2019, respectively. Our average cost of funds was 2.11% and 2.57% for the three months ended March 31, 2020 and 2019, respectively. Contributing to the decrease in interest expense was a 46 bps decrease in the average cost of funds, partially offset by a $183.3 million increase in average outstanding borrowings during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.

Our economic interest expense was $21.4 million and $16.5 million for the three months ended March 31, 2020 and 2019, respectively. There was a 50 bps increase in the average economic cost of funds to 2.74% for the three months ended March 31, 2020 from 2.24% for the three months ended March 31, 2019.

Since all of our repurchase agreements are short-term, changes in market rates directly affect our interest expense. Our average cost of funds calculated on a GAAP basis was 77 bps above the average one-month LIBOR and 68 bps above the average six-month LIBOR for the quarter ended March 31, 2020. Our average economic cost of funds was 140 bps above the average one-month LIBOR and 131 bps above the average six-month LIBOR for the quarter ended March 31, 2020. The average term to maturity of the outstanding repurchase agreements was 24 days at March 31, 2020 and 25 days at December 31, 2019.

The tables below present the average balance of borrowings outstanding, interest expense and average cost of funds, and average one-month and six-month LIBOR rates for each quarter in 2020 and 2019 on both a GAAP and economic basis.

($ in thousands)
	Average		Interest Expense				Average Cost of Funds
	Balance of		GAAP		Economic		GAAP			Economic
Three Months Ended	Borrowings		Basis		Basis		Basis			Basis
March 31, 2020	$	3,129,178	$	16,523	$	21,423		2.11	%		2.74	%
December 31, 2019		3,631,042		20,022		16,199		2.21	%		1.78	%
September 30, 2019		3,571,752		22,321		21,077		2.50	%		2.36	%
June 30, 2019		3,098,133		22,431		20,967		2.90	%		2.71	%
March 31, 2019		2,945,895		18,892		16,465		2.57	%		2.24	%

							Average GAAP Cost of Funds						Average Economic Cost of Funds
							Relative to Average						Relative to Average
	Average LIBOR						One-Month			Six-Month			One-Month			Six-Month
	One-Month			Six-Month			LIBOR			LIBOR			LIBOR			LIBOR
Three Months Ended
March 31, 2020		1.34	%		1.43	%		0.77	%		0.68	%		1.40	%		1.31	%
December 31, 2019		1.90	%		1.98	%		0.31	%		0.23	%		(0.12	)%		(0.20	)%
September 30, 2019		2.22	%		2.18	%		0.28	%		0.32	%		0.14	%		0.18	%
June 30, 2019		2.45	%		2.49	%		0.45	%		0.41	%		0.26	%		0.22	%
March 31, 2019		2.51	%		2.77	%		0.06	%		(0.20	)%		(0.27	)%		(0.53	)%

Gains or Losses

The table below presents our gains or losses for the three months ended March 31, 2020 and 2019.

(in thousands)
	2020			2019			Change
Realized (losses) gains on sales of RMBS	$	(28,380	)	$	243		$	(28,623	)
Unrealized gains on RMBS		3,032			18,041			(15,009	)
Total (losses) gains on RMBS		(25,348	)		18,284			(43,632	)
Losses on interest rate futures		(12,556	)		(11,718	)		(838	)
Losses on interest rate swaps		(60,623	)		(2,295	)		(58,328	)
Losses on payer swaptions		(2,589	)		(378	)		(2,211	)
Losses on TBA securities		(7,090	)		(4,641	)		(2,449	)
Total	$	(108,206	)	$	(748	)	$	(107,458	)

We invest in RMBS with the intent to earn net income from the realized yield on those assets over their related funding and hedging costs, and not for the purpose of making short term gains from sales. However, we have sold, and may continue to sell, existing assets to acquire new assets, which our management believes might have higher risk-adjusted returns in light of current or anticipated interest rates, federal government programs or general economic conditions or to manage our balance sheet as part of our asset/liability management strategy. During the three months ended March 31, 2020 and 2019, we received proceeds of $1,808.9 million and $655.4 million, respectively, from the sales of RMBS. Most of these sales in the first quarter of 2020 occurred during the second half of March 2020 as we sold assets in order to maintain sufficient cash and liquidity and reduce risk associated with the market turmoil brought about by COVID-19.

Realized and unrealized gains and losses on RMBS are driven in part by changes in yields and interest rates, which affect the pricing of the securities in our portfolio. Gains and losses on interest rate futures contracts are affected by changes in implied forward rates during the reporting period. The table below presents historical interest rate data for each quarter end during 2020 to date and 2019.

	5 Year			10 Year			15 Year			30 Year			Three
	U.S. Treasury			U.S. Treasury			Fixed-Rate			Fixed-Rate			Month
	Rate⁽¹⁾			Rate⁽¹⁾			Mortgage Rate⁽²⁾			Mortgage Rate⁽²⁾			LIBOR⁽³⁾
March 31, 2020		0.38	%		0.70	%		2.89	%		3.45	%		1.10	%
December 31, 2019		1.69	%		1.92	%		3.18	%		3.72	%		1.91	%
September 30, 2019		1.55	%		1.68	%		3.12	%		3.61	%		2.13	%
June 30, 2019		1.76	%		2.00	%		3.24	%		3.80	%		2.40	%
March 31, 2019		2.24	%		2.41	%		3.72	%		4.27	%		2.61	%

(1)	Historical 5 and 10 Year U.S. Treasury Rates are obtained from quoted end of day prices on the Chicago Board Options Exchange.

(2)	Historical 30 Year and 15 Year Fixed Rate Mortgage Rates are obtained from Freddie Mac’s Primary Mortgage Market Survey.

(3)	Historical LIBOR is obtained from the Intercontinental Exchange Benchmark Administration Ltd.

Expenses

Total operating expenses were approximately $2.1 million and $2.2 million for the three months ended March 31, 2020 and 2019, respectively. The table below presents a breakdown of operating expenses for the three months ended March 31, 2020 and 2019.

(in thousands)
	2020			2019			Change
Management fees	$	1,377		$	1,285		$	92
Overhead allocation		347			323			24
Accrued incentive compensation		(436	)		(408	)		(28	)
Directors fees and liability insurance		260			253			7
Audit, legal and other professional fees		255			301			(46	)
Other direct REIT operating expenses		206			375			(169	)
Other expenses		132			67			65
Total expenses	$	2,141		$	2,196		$	(55	)

We are externally managed and advised by Bimini Advisors, LLC (the “Manager”) pursuant to the terms of a management agreement. The management agreement has been renewed through February 20, 2021 and provides for automatic one-year extension options thereafter and is subject to certain termination rights. Under the terms of the management agreement, the Manager is responsible for administering the business activities and day-to-day operations of the Company. The Manager receives a monthly management fee in the amount of:

•	One-twelfth of 1.5% of the first $250 million of the Company’s month end equity, as defined in the management agreement,

•	One-twelfth of 1.25% of the Company’s month end equity that is greater than $250 million and less than or equal to $500 million, and

•	One-twelfth of 1.00% of the Company’s month end equity that is greater than $500 million.

The following table summarizes the management fee and overhead allocation expenses for each quarter in 2020 to date and 2019.

($ in thousands)
	Average		Average		Advisory Services
	Orchid		Orchid		Management		Overhead
Three Months Ended	MBS		Equity		Fee		Allocation		Total
March 31, 2020	$	3,269,859	$	356,685	$	1,377	$	347	$	1,724
December 31, 2019		3,705,920		414,018		1,477		379		1,856
September 30, 2019		3,674,087		394,788		1,440		351		1,791
June 30, 2019		3,307,885		363,961		1,326		327		1,653
March 31, 2019		3,051,509		363,204		1,285		323		1,608

Financial Condition:

Mortgage-Backed Securities

As of March 31, 2020, our RMBS portfolio consisted of $2,948.8 million of Agency RMBS at fair value and had a weighted average coupon on assets of 3.90%. During the three months ended March 31, 2020, we received principal repayments of $142.3 million compared to $94.8 million for the three months ended March 31, 2019. The average prepayment speeds for the quarters ended March 31, 2020 and 2019 were 11.9% and 9.2%, respectively.

The following table presents the 3-month constant prepayment rate (“CPR”) experienced on our structured and PT RMBS sub-portfolios, on an annualized basis, for the quarterly periods presented. CPR is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. Specifically, the CPR in the chart below represents the three month prepayment rate of the securities in the respective asset category. Assets that were not owned for the entire quarter have been excluded from the calculation. The exclusion of certain assets during periods of high trading activity can create a very high, and often volatile, reliance on a small sample of underlying loans.

			Structured
	PT RMBS		RMBS		Total
Three Months Ended	Portfolio (%)		Portfolio (%)		Portfolio (%)
March 31, 2020		9.8		22.9		11.9
December 31, 2019		14.3		23.4		16.0
September 30, 2019		15.5		19.3		16.4
June 30, 2019		10.9		12.7		11.4
March 31, 2019		9.5		8.4		9.2

The following tables summarize certain characteristics of the Company’s PT RMBS and structured RMBS as of March 31, 2020 and December 31, 2019:

($ in thousands)
					Weighted
			Percentage		Average
			of	Weighted	Maturity
		Fair	Entire	Average	in	Longest
Asset Category		Value	Portfolio	Coupon	Months	Maturity
March 31, 2020
Adjustable Rate RMBS	$	984	0.0%	4.51%	173	1-Sep-35
Fixed Rate RMBS		2,734,310	92.7%	3.88%	338	1-Mar-50
Fixed Rate CMOs		173,409	5.9%	4.00%	323	15-Dec-42
Total Mortgage-backed Pass-through		2,908,703	98.6%	3.89%	337	1-Mar-50
Interest-Only Securities		40,094	1.4%	4.00%	278	25-Jul-48
Total Structured RMBS		40,094	1.4%	4.00%	278	25-Jul-48
Total Mortgage Assets	$	2,948,797	100.0%	3.90%	330	1-Mar-50
December 31, 2019
Adjustable Rate RMBS	$	1,014	0.0%	4.51%	176	1-Sep-35
Fixed Rate RMBS		3,206,013	89.3%	3.90%	342	1-Dec-49
Fixed Rate CMOs		299,205	8.3%	4.20%	331	15-Oct-44
Total Mortgage-backed Pass-through		3,506,232	97.6%	3.92%	341	1-Dec-49
Interest-Only Securities		60,986	1.7%	3.99%	280	25-Jul-48
Inverse Interest-Only Securities		23,703	0.7%	3.34%	285	15-Jul-47
Total Structured RMBS		84,689	2.4%	3.79%	281	25-Jul-48
Total Mortgage Assets	$	3,590,921	100.0%	3.90%	331	1-Dec-49

($ in thousands)
	March 31, 2020					December 31, 2019
			Percentage of					Percentage of
Agency	Fair Value		Entire Portfolio			Fair Value		Entire Portfolio
Fannie Mae	$	2,194,582		74.4	%	$	2,170,668		60.4	%
Freddie Mac		754,215		25.6	%		1,420,253		39.6	%
Total Portfolio	$	2,948,797		100.0	%	$	3,590,921		100.0	%

	March 31, 2020		December 31, 2019
Weighted Average Pass-through Purchase Price	$	106.54	$	105.16
Weighted Average Structured Purchase Price	$	20.14	$	18.15
Weighted Average Pass-through Current Price	$	108.38	$	106.26
Weighted Average Structured Current Price	$	10.39	$	13.85
Effective Duration ⁽¹⁾		2.200		2.780

(1)

Effective duration is the approximate percentage change in price for a 100 bps change in rates. An effective duration of 2.200 indicates that an interest rate increase of 1.0% would be expected to cause a 2.200% decrease in the value of the RMBS in the Company’s investment portfolio at March 31, 2020. An effective duration of 2.780 indicates that an interest rate increase of 1.0% would be expected to cause a 2.780% decrease in the value of the RMBS in the Company’s investment portfolio at December 31, 2019. These figures include the structured securities in the portfolio, but do not include the effect of the Company’s funding cost hedges. Effective duration quotes for individual investments are obtained from The Yield Book, Inc.

The following table presents a summary of portfolio assets acquired during the three months ended March 31, 2020 and 2019, including securities purchased during the period that settled after the end of the period, if any.

($ in thousands)
	2020								2019
		Total Cost		Average Price		Weighted Average Yield				Total Cost		Average Price		Weighted Average Yield
Pass-through RMBS		$	1,334,350	$	107.18		2.28	%		$	582,403	$	105.37		3.51	%

Borrowings

As of March 31, 2020, we had established borrowing facilities in the repurchase agreement market with a number of commercial banks and other financial institutions and had borrowings in place with 19 of these counterparties. None of these lenders are affiliated with the Company. These borrowings are secured by the Company’s RMBS and cash, and bear interest at prevailing market rates. We believe our established repurchase agreement borrowing facilities provide borrowing capacity in excess of our needs.

As of March 31, 2020, we had obligations outstanding under the repurchase agreements of approximately $2,810.2 million with a net weighted average borrowing cost of 1.35%. The remaining maturity of our outstanding repurchase agreement obligations ranged from 2 to 58 days, with a weighted average remaining maturity of 24 days. Securing the repurchase agreement obligations as of March 31, 2020 are RMBS with an estimated fair value, including accrued interest, of approximately $2,947.6 million and a weighted average maturity of 339 months, and cash pledged to counterparties of approximately $22.2 million. Through May 1, 2020, we have been able to maintain our repurchase facilities with comparable terms to those that existed at March 31, 2020 with maturities through July 22, 2020.

The table below presents information about our period end, maximum and average balances of borrowings for each quarter in 2020 to date and 2019.

($ in thousands)
							Difference Between Ending
	Ending		Maximum		Average		Borrowings and
	Balance of		Balance of		Balance of		Average Borrowings
Three Months Ended	Borrowings		Borrowings		Borrowings		Amount			Percent
March 31, 2020	$	2,810,250	$	4,297,621	$	3,129,178	$	(318,928	)		(10.19	)%⁽¹⁾
December 31, 2019		3,448,106		3,986,919		3,631,042		(182,936	)		(5.04	)%
September 30, 2019		3,813,977		3,847,417		3,571,752		242,225			6.78	%
June 30, 2019		3,329,527		3,730,460		3,098,133		231,394			7.47	%
March 31, 2019		2,866,738		3,022,771		2,945,895		(79,157	)		(2.69	)%

(1)

The lower ending balance relative to the average balance during the quarter ended March 31, 2020 reflects the disposal of RMBS pledged as collateral in order to maintain cash and liquidity in response to the dislocations in the financial and mortgage markets resulting from the economic impacts of COVID-19. During the quarter ended March 31, 2020, the Company’s investment in RMBS decreased $642.1 million.

Liquidity and Capital Resources

Liquidity is our ability to turn non-cash assets into cash, purchase additional investments, repay principal and interest on borrowings, fund overhead, fulfill margin calls and pay dividends. Our principal immediate sources of liquidity include cash balances, unencumbered assets and borrowings under repurchase agreements. Our borrowing capacity will vary over time as the market value of our interest earning assets varies. Our balance sheet also generates liquidity on an on-going basis through payments of principal and interest we receive on our RMBS portfolio. Despite the recent dislocations in the financial and mortgage markets and the economic impacts resulting from COVID-19, management believes that we currently have sufficient liquidity and capital resources available for (a) the acquisition of additional investments consistent with the size and nature of our existing RMBS portfolio, (b) the repayments on borrowings and (c) the payment of dividends to the extent required for our continued qualification as a REIT. We may also generate liquidity from time to time by selling our equity or debt securities in public offerings or private placements.

Because our PT RMBS portfolio consists entirely of government and agency securities, we do not anticipate having difficulty converting our assets to cash should our liquidity needs ever exceed our immediately available sources of cash. Our structured RMBS portfolio also consists entirely of governmental agency securities, although they typically do not trade with comparable bid / ask spreads as PT RMBS. However, we anticipate that we would be able to liquidate such securities readily, even in distressed markets, although we would likely do so at prices below where such securities could be sold in a more stable market. To enhance our liquidity even further, we may pledge a portion of our structured RMBS as part of a repurchase agreement funding, but retain the cash in lieu of acquiring additional assets. In this way we can, at a modest cost, retain higher levels of cash on hand and decrease the likelihood we will have to sell assets in a distressed market in order to raise cash.

Our strategy for hedging our funding costs typically involves taking short positions in interest rate futures, treasury futures, interest rate swaps, interest rate swaptions or other instruments. When the market causes these short positions to decline in value we are required to meet margin calls with cash. This can reduce our liquidity position to the extent other securities in our portfolio move in price in such a way that we do not receive enough cash via margin calls to offset the derivative related margin calls. If this were to occur in sufficient magnitude, the loss of liquidity might force us to reduce the size of the levered portfolio, pledge additional structured securities to raise funds or risk operating the portfolio with less liquidity.

Our master repurchase agreements have no stated expiration, but can be terminated at any time at our option or at the option of the counterparty. However, once a definitive repurchase agreement under a master repurchase agreement has been entered into, it generally may not be terminated by either party. A negotiated termination can occur, but may involve a fee to be paid by the party seeking to terminate the repurchase agreement transaction, as it did during the three months ended March 31, 2020.

Under our repurchase agreement funding arrangements, we are required to post margin at the initiation of the borrowing. The margin posted represents the haircut, which is a percentage of the market value of the collateral pledged. To the extent the market value of the asset collateralizing the financing transaction declines, the market value of our posted margin will be insufficient and we will be required to post additional collateral. Conversely, if the market value of the asset pledged increases in value, we would be over collateralized and we would be entitled to have excess margin returned to us by the counterparty. Our lenders typically value our pledged securities daily to ensure the adequacy of our margin and make margin calls as needed, as do we. Typically, but not always, the parties agree to a minimum threshold amount for margin calls so as to avoid the need for nuisance margin calls on a daily basis. Our master repurchase agreements do not specify the haircut; rather haircuts are determined on an individual repurchase transaction basis. Throughout the three months ended March 31, 2020, haircuts on our pledged collateral remained stable and as of March 31, 2020, our weighted average haircut was approximately 4.9% of the value of our collateral.

As discussed earlier, we invest a portion of our capital in structured Agency RMBS. We generally do not apply leverage to this portion of our portfolio. The leverage inherent in structured securities replaces the leverage obtained by acquiring PT securities and funding them in the repurchase market. This structured RMBS strategy has been a core element of the Company’s overall investment strategy since inception. However, we have and may continue to pledge a portion of our structured RMBS in order to raise our cash levels, but generally will not pledge these securities in order to acquire additional assets.

The following table summarizes the effect on our liquidity and cash flows from contractual obligations for repurchase agreements and interest expense on repurchase agreements.

(in thousands)
	Obligations Maturing
	Within One Year		One to Three Years		Three to Five Years		More than Five Years		Total
Repurchase agreements	$	2,810,250	$	-	$	-	$	-	$	2,810,250
Interest expense on repurchase agreements⁽¹⁾		6,625		-		-		-		6,625
Totals	$	2,816,875	$	-	$	-	$	-	$	2,816,875

(1)	Interest expense on repurchase agreements is based on current interest rates as of March 31, 2020 and the remaining term of the liabilities existing at that date.

In future periods, we expect to continue to finance our activities in a manner that is consistent with our current operations through repurchase agreements. As of March 31, 2020, we had cash and cash equivalents of $162.7 million. We generated cash flows of $179.7 million from principal and interest payments on our RMBS and had average repurchase agreements outstanding of $3,129.2 million during the three months ended March 31, 2020.

Stockholders’ Equity

Outlook

During the fourth quarter of 2019 a coronavirus emerged in China that was found to cause a potentially severe respiratory condition, which is known as COVID-19. While initially confined to China, the readily contagious coronavirus quickly spread around the globe and ultimately became a global pandemic. The effects of the pandemic really took hold in the U.S. in mid-March of 2020. The virus made its way to the United States, and as it spread businesses and all levels of government, federal, state and local, took steps to contain its spread. As the scope and magnitude of the steps that were needed to contain the virus came into focus, it was also clear the impact on the economy would be extremely severe. Most non-essential businesses, either because they were forced to by government decree or they did so in order to conserve cash in the face of revenues plummeting towards zero, began to shut down and furlough all or most of their employees. All economic activity outside of critical industries ground to a halt. Initial claims for unemployment insurance surpassed 30 million for the six-week period from March 20, 2020 through April 25, 2020. The number of jobs lost through the end of April of 2020 in the U.S. exceeded the number of jobs added since the end of the 2008 financial crisis. Examples of the magnitude of the contraction in economic activity are too many to mention and equal or exceed the contraction of the Great Depression of the last century. All of this occurred in a matter of weeks. Individuals and businesses of all sizes began to hoard cash in anticipation of an extended period without compensation or revenue. These steps resulted in financial markets seizing as parties were either unable to trade securities at all or did so with exceptionally high bid/ask spreads and poor liquidity.

The rush to raise cash and monetize financial assets led to wide-spread selling. The resulting downward pressure on prices triggered margin call activity for levered investors. As is typical, investors, faced with either margin calls in the case of levered investors and/or redemptions in the case of others, looked to sell the most liquid assets or those that were in a gain position (or smaller losses). The Company, which invests exclusively in Agency RMBS assets, was caught up in these events as the Agency RMBS market was one of the first asset classes to experience wider-spread selling. As the selling became pervasive and margin calls followed, the markets began to seize and the typical frictionless, deep liquidity that was the prior norm no longer existed. The mortgage REIT sector was one of the sectors most severely impacted by the selling, and many REITs were unable to meet all margin calls, resulting in many entering into forbearance agreements with lenders and/or subject to repurchase agreement lenders selling assets to liquidate positions. As the market became dysfunctional, the Fed intervened on Sunday, March 15th when it announced a $700 billion asset purchase program. At the same time, the Fed lowered the range on the Fed Funds rate to 0.0% – 0.25%, after already lowering the range 50 basis points on March 3rd. The asset purchase program consisted of $500 billion of U.S. Treasury securities and $200 billion of Agency RMBS. By Friday, March 20th it was clear this would not be enough to settle the markets, so the Fed announced on the morning of Monday, March 23rd a program to purchase U.S. Treasury and Agency RMBS in the amounts needed to support smooth market functioning. This program quickly settled the Agency RMBS market and assets prices began to recover. Over the course of the next few weeks the Fed announced several additional steps to settle other markets and, ultimately, to provide direct financing to business entities (see below for additional disclosure under Recent Regulatory Developments). Interest rates in the U.S. reached all-time low levels across the curve, with the 10-year U.S. Treasury closing at 0.543% on March 9, 2020 after trading above 1.80% in January while the 30-year U.S. Treasury bond closed at a yield below 1.00% for the first time ever, also on March 9th, closing at 0.997%. Domestic and global stock markets quickly entered bear market territory – indicative of a 20% or greater decline – in the shortest period of time ever of only a few weeks.

The Federal government also acted to support the economy when the CARES Act was passed on March 27, 2020. The CARES Act provided many forms of direct support to individuals and small businesses in order to stem the steep decline in economic activity. Since the CARES Act was signed into law the federal government has continued to take steps to offset the impact of the pandemic on the economy and households.

At this time the economy remains entrenched in a steep contraction and, despite assertions by both the Fed and the Trump administration that they will do whatever it takes to stabilize the economy and markets, there is no assurance that they will be able to do enough. There remains too much uncertainty at this point to predict when the economy will recover, or to what extent it will recover. Further, it’s possible there may be future adverse consequences of the actions taken to date and in the future by the Fed and the federal government such as excessive inflation or unsustainable federal budget deficits.

The Agency RMBS market performed very well on a relative basis during the first quarter of 2020 and in particular during the early weeks of the COVID-19 crisis. The Agency RMBS market total return for the quarter was 2.8% and -0.9% versus equivalent duration swaps and LIBOR (per data published by Bank of America Merrill Lynch/ICE Data Indices). This return ranks third on a total return basis versus all other major fixed income sectors and major domestic equity index returns, trailing only U.S. Treasuries and Agency CMBS. In fact, these three sectors were the only three to post positive returns for the quarter. On an excess return versus equivalent duration swaps and LIBOR, Agency RMBS ranked second behind only U.S. Treasuries.

With interest rates declining to all-time low levels, prepayment activity accelerated and is expected to continue to remain high. What remains to be seen is the impact of the severe economic contraction and restrictions on activity of all types across the country on the ability of borrowers to refinance their mortgage or remain current on their monthly payments. The CARES Act is expected to lead to many borrowers seeking forbearance on their mortgages for periods of up to 6 months, and with the consent of the GSEs for up to 12 months. On April 21, 2020 the FHFA released guidance on the servicing of loans collateralizing Agency RMBS securities that ensures the market that loans entering into forbearance will remain in their respective pools for at least the duration of the forbearance period and that scheduled principal and interest will continue to be remitted through this period, either by the servicer or the respective GSEs.

The spread of the current-coupon 30-year mortgage to the 10-year U.S. Treasury reached 157.47 bps on March 19, 2020, the highest spread since the financial crisis. Within the Agency RMBS sector returns were generally correlated with the duration of the various coupons and maturities as lower coupon securities generated higher returns on an absolute basis, but lower returns versus equivalent duration U.S. Treasuries or swaps/LIBOR. Specified pools were severely impacted by the forced selling that occurred as investors de-leveraged or sold assets to meet redemptions. Premiums of such securities declined materially, if not entirely, beginning in mid-March, although they have recovered to levels approximately 50% – 75% of the levels observed in early March, before the crisis in the fixed income markets began to unfold in mid-March.

Recent Legislative and Regulatory Developments

The Fed has been conducting large scale overnight repo operations since late 2019 to address disruptions in the U.S. Treasury, Agency debt and Agency MBS financing markets. These operations have been increased substantially due to the funding disruptions resulting from the economic crisis and market dislocations resulting from the COVID-19 pandemic.

The Fed has taken a number of other actions to stabilize markets as a result of the impacts of the COVID-19 pandemic. On Sunday, March 15, 2020, the Fed announced a $700 billion asset purchase program to provide liquidity to the U.S. Treasury and Agency MBS markets. Specifically, the Fed announced that it would purchase at least $500 billion of U.S. Treasuries and at least $200 billion of Agency MBS. The Fed also lowered the Fed Funds rate to a range of 0.0% – 0.25%, after having already lowered the Fed Funds rate by 50 bps on March 3, 2020.

The markets for U.S. Treasuries, Agency MBS and other mortgage and fixed income markets continued to deteriorate following this announcement as investors liquidated investments in response to the economic crisis resulting from the actions to contain and minimize the impacts of the COVID-19 pandemic. Many of these markets experienced severe dislocations during the week following March 15, 2020, which resulted in forced selling of assets to satisfy margin calls. To address these issues in the fixed income and funding markets, on the morning of Monday, March 23, 2020, the Fed announced a program to acquire U.S. Treasuries and Agency MBS in the amounts needed to support smooth market functioning. Since that date, the Fed and the FHFA have taken various other steps to support certain other fixed income markets, to support mortgage servicers and to implement various portions of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The FHFA has instructed the GSEs on how they will handle servicer advances for loans that back Agency RMBS that enter into forbearance, which should limit prepayments during the forbearance period that could have resulted otherwise.

Congress and President Trump have adopted several pieces of legislation in response to the public health and economic impacts resulting from the COVID 19 pandemic. The first two pieces of legislation provided, among other things, emergency funding to develop a vaccine for COVID 19, medical supplies, grants for public health agencies, small business loans, assistance for health systems in other countries, expanded coronavirus testing, paid leave, enhanced unemployment insurance, expanded food security initiatives and increased federal Medicaid funding.

The CARES Act was passed by Congress and signed into law by President Trump on March 27, 2020. The CARES Act provides many forms of direct support to individuals and small businesses in order to stem the steep decline in economic activity. This over $2 trillion COVID-19 relief bill, among other things, provided for direct payments to each American making up to $75,000 a year, increased unemployment benefits for up to four months (on top of state benefits), provided funding to hospitals and health providers, provided loans and investments to businesses, states and municipalities and provided grants to the airline industry. On April 24, 2020, President Trump signed an additional funding bill into law that provides an additional $484 billion of funding to individuals, small businesses, hospitals, health care providers and additional coronavirus testing efforts.

In January 2019, the Trump administration made statements of its plans to work with Congress to overhaul Fannie Mae and Freddie Mac and expectations to announce a framework for the development of a policy for comprehensive housing finance reform soon. On September 30, 2019, the FHFA announced that Fannie Mae and Freddie Mac were allowed to increase their capital buffers to $25 billion and $20 billion, respectively, from the prior limit of $3 billion each. This step could ultimately lead to Fannie Mae and Freddie Mac being privatized and represents the first concrete step on the road to GSE reform. At this time, however, no decisions have been made on any additional steps to be taken as part of the GSE reform plan. Although the Trump administration has made statements of its intentions to reform housing finance and tax policy, many of these potential policy changes will require congressional action.

In 2017, policymakers announced that LIBOR will be replaced by 2021. The directive was spurred by the fact that banks are uncomfortable contributing to the LIBOR panel given the shortage of underlying transactions on which to base levels and the liability associated with submitting an unfounded level. LIBOR will be replaced with a new SOFR, a rate based on U.S. repo trading. The new benchmark rate will be based on overnight Treasury General Collateral repo rates. The rate-setting process will be managed and published by the Fed and the Treasury’s Office of Financial Research. Many banks believe that it may take four to five years to complete the transition to SOFR, despite the 2021 deadline. We will monitor the emergence of this new rate carefully as it will likely become the new benchmark for hedges and a range of interest rate investments.

The scope and nature of the actions the U.S. government or the Fed will ultimately undertake are unknown and will continue to evolve, especially in light of the COVID-19 pandemic and the upcoming presidential and Congressional elections in the United States. There can be no assurance as to how, in the long term, these and other actions by the U.S. government will affect the efficiency, liquidity and stability of the financial and mortgage markets.

Effect on Us

Regulatory developments, movements in interest rates and prepayment rates affect us in many ways, including the following:

Effects on our Assets

A change in or elimination of the guarantee structure of Agency RMBS may increase our costs (if, for example, guarantee fees increase) or require us to change our investment strategy altogether. For example, the elimination of the guarantee structure of Agency RMBS may cause us to change our investment strategy to focus on non-Agency RMBS, which in turn would require us to significantly increase our monitoring of the credit risks of our investments in addition to interest rate and prepayment risks.

Lower long-term interest rates can affect the value of our Agency RMBS in a number of ways. If prepayment rates are relatively low (due, in part, to the refinancing problems described above), lower long-term interest rates can increase the value of higher-coupon Agency RMBS. This is because investors typically place a premium on assets with yields that are higher than market yields. Although lower long-term interest rates may increase asset values in our portfolio, we may not be able to invest new funds in similarly-yielding assets.

If prepayment levels increase, the value of our Agency RMBS affected by such prepayments may decline. This is because a principal prepayment accelerates the effective term of an Agency RMBS, which would shorten the period during which an investor would receive above-market returns (assuming the yield on the prepaid asset is higher than market yields). Also, prepayment proceeds may not be able to be reinvested in similar-yielding assets. Agency RMBS backed by mortgages with high interest rates are more susceptible to prepayment risk because holders of those mortgages are most likely to refinance to a lower rate. IOs and IIOs, however, may be the types of Agency RMBS most sensitive to increased prepayment rates. Because the holder of an IO or IIO receives no principal payments, the values of IOs and IIOs are entirely dependent on the existence of a principal balance on the underlying mortgages. If the principal balance is eliminated due to prepayment, IOs and IIOs essentially become worthless. Although increased prepayment rates can negatively affect the value of our IOs and IIOs, they have the opposite effect on POs. Because POs act like zero-coupon bonds, meaning they are purchased at a discount to their par value and have an effective interest rate based on the discount and the term of the underlying loan, an increase in prepayment rates would reduce the effective term of our POs and accelerate the yields earned on those assets, which would increase our net income.

Higher long-term rates can also affect the value of our Agency RMBS. As long-term rates rise, rates available to borrowers also rise. This tends to cause prepayment activity to slow and extend the expected average life of mortgage cash flows. As the expected average life of the mortgage cash flows increases, coupled with higher discount rates, the value of Agency RMBS declines. Some of the instruments the Company uses to hedge our Agency RMBS assets, such as interest rate futures, swaps and swaptions, are stable average life instruments. This means that to the extent we use such instruments to hedge our Agency RMBS assets, our hedges may not adequately protect us from price declines, and therefore may negatively impact our book value. It is for this reason we use interest only securities in our portfolio. As interest rates rise, the expected average life of these securities increases, causing generally positive price movements as the number and size of the cash flows increase the longer the underlying mortgages remain outstanding. This makes interest only securities desirable hedge instruments for pass-through Agency RMBS.

As described above, the Agency RMBS market began to experience severe dislocations in mid-March 2020 as a result of the economic, health and market turmoil brought about by COVID-19. On March 23, 2020, the Fed announced that it would purchase Agency RMBS and U.S. Treasuries in the amounts needed to support smooth market functioning, which largely stabilized the Agency RMBS market. If the Fed modifies, reduces or suspends its purchases of Agency RMBS, our investment portfolio could be negatively impacted. The guidance issued by the FHFA on April 21, 2020 on the servicing of loans collateralizing Agency RMBS securities, as described above, should help ensure that loans entering into forbearance will remain in their respective pools for at least the duration of the forbearance period and that scheduled principal and interest will continue to be remitted through this period, either by the servicer or the respective GSEs. This should limit prepayments during the forbearance period that could have resulted otherwise. If the GSEs do not handle servicer advances for loans entering into forbearance in this way, or if the GSEs modify their guidance, prepayment activity may increase, which may negatively impact the value of our Agency RMBS.

Because we base our investment decisions on risk management principles rather than anticipated movements in interest rates, in a volatile interest rate environment we may allocate more capital to structured Agency RMBS with shorter durations. We believe these securities have a lower sensitivity to changes in long-term interest rates than other asset classes. We may attempt to mitigate our exposure to changes in long-term interest rates by investing in IOs and IIOs, which typically have different sensitivities to changes in long-term interest rates than PT RMBS, particularly PT RMBS backed by fixed-rate mortgages.

Effects on our borrowing costs

We leverage our PT RMBS portfolio and a portion of our structured Agency RMBS with principal balances through the use of short-term repurchase agreement transactions. The interest rates on our debt are determined by the short term interest rate markets. An increase in the Fed Funds rate or LIBOR would increase our borrowing costs, which could affect our interest rate spread if there is no corresponding increase in the interest we earn on our assets. This would be most prevalent with respect to our Agency RMBS backed by fixed rate mortgage loans because the interest rate on a fixed-rate mortgage loan does not change even though market rates may change.

In order to protect our net interest margin against increases in short-term interest rates, we may enter into interest rate swaps, which economically convert our floating-rate repurchase agreement debt to fixed-rate debt, or utilize other hedging instruments such as Eurodollar, Fed Funds and T-Note futures contracts or interest rate swaptions.

Summary

The trajectory of the global and domestic economy changed dramatically during the late stages of the first quarter of 2020. The global pandemic caused by the coronavirus spread quickly and forced businesses and governments to take steps that nearly shut the economy down outside of the most essential services. The initial impact was felt in the financial markets, starting with the equity market which entered bear market conditions in the shortest period ever (measured as the time the market needed to reach a 20% decline). Interest rates followed as yields across the curve reached record low levels and the Fed lowered the target range for the Fed Funds rate to 0-0.25%. As it became clear economic activity was on the verge of collapse, business and investors moved to raise cash as quickly as possible. The resulting selling of financial assets led to de-leveraging by levered investors as margin calls driven by price declines became numerous. The most liquid markets or assets in a gain position were the first to be sold. The Agency RMBS market, the sole market the Company invests in, was one such market that witnessed the first wave of selling (in addition to U.S. Treasuries). The Company was forced to sell assets to meet margin calls and retain adequate liquidity levels. The mortgage REIT sector was one of the sectors most severely impacted by the selling and many REITs were unable to meet all margin calls, resulting in many entering into forbearance agreements with lenders and/or subject to repurchase agreement lenders selling assets to liquidate positions. Given the importance of the mortgage market to the U.S. economy, particularly the Agency RMBS market, the breakdown of the market prompted the Fed to intervene by, among other things, purchasing more U.S. Treasuries and Agency RMBS in an effort to stabilize the market. While the Fed’s initial steps proved inadequate, eventually, on March 23, 2020, the Fed announced an essentially unlimited asset purchase program for U.S. Treasuries and Agency RMBS. The Fed went on to introduce many other facilities to support additional markets over the following days and weeks. However, the action on March 23rd stabilized the Agency RMBS market and asset prices quickly began to recover. The Company, which does not invest outside of the Agency RMBS market, was able to withstand the disruption to its sole market, although it did realize substantial losses on the assets sold and book value was reduced by approximately 25.8%. At this time, the Company has stabilized and expects to largely continue to operate with a portfolio reduced by approximately 17.9% going forward. The Company has since declared a cash dividend for the month of April and intends to continue to pay monthly dividends going forward.

The Agency RMBS market performed very well on a relative basis during the first quarter of 2020 and in particular, during the early weeks of the COVID-19 crisis. The Agency RMBS market total return for the quarter was 2.8% and -0.9% versus equivalent duration swaps and LIBOR (per data published by Bank of America Merrill Lynch/ICE Data Indices). This return ranks third on a total return basis versus all other major fixed income sectors and major domestic equity index returns, trailing only U.S. Treasuries and Agency CMBS. In fact, these three sectors where the only three to post positive returns for the quarter. On an excess return versus equivalent duration swaps and LIBOR, Agency RMBS ranked second behind only U.S. Treasuries.

With respect to the outlook for the economy and financial markets, the economy remains entrenched in a steep contraction and, despite assertions by both the Fed and the Trump administration that they will do whatever it takes to stabilize the economy and markets, there is no assurance that they will be able to do enough. As of the date of this report, the Company has not had to utilize any of the funding provided by the CARES Act or by any other legislation adopted by Congress. There remains too much uncertainty at this point to predict when the economy will recover, or to what extent it will recover. Further, it’s possible there may be future adverse consequences of the actions taken to date and in the immediate future by the Fed and the federal government such as excessive inflation or unsustainable federal budget deficits.

Critical Accounting Estimates

Our condensed financial statements are prepared in accordance with GAAP. GAAP requires our management to make some complex and subjective decisions and assessments. Our most critical accounting estimates involve decisions and assessments which could significantly affect reported assets, liabilities, revenues and expenses. There have been no changes to our critical accounting estimates as discussed in our annual report on Form 10-K for the year ended December 31, 2019.

Capital Expenditures

At March 31, 2020, we had no material commitments for capital expenditures.

Off-Balance Sheet Arrangements

At March 31, 2020, we did not have any off-balance sheet arrangements.

Dividends

In addition to other requirements that must be satisfied to qualify as a REIT, we must pay annual dividends to our stockholders of at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains. REIT taxable income (loss) is computed in accordance with the Code, and can be greater than or less than our financial statement net income (loss) computed in accordance with GAAP. These 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 funding hedges for tax purposes.

We intend to pay regular monthly dividends to our stockholders and have declared the following dividends since the completion of our IPO.

(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 - YTD⁽¹⁾		0.295		19,322
Totals	$	11.160	$	307,715

(1)	On April 8, 2020, the Company declared a dividend of $0.055 per share to be paid on May 27, 2020. 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, 2020.

Inflation

Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with GAAP and our distributions will be determined by our Board of Directors consistent with our obligation to distribute to our stockholders at least 90% of our REIT taxable income on an annual basis in order to maintain our REIT qualification; in each case, our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the exposure to loss resulting from changes in market factors such as interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risks that we are exposed to are interest rate risk, prepayment risk, spread risk, liquidity risk, extension risk and counterparty credit risk.

Interest Rate Risk

Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.

Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income earned on interest-earning assets and the interest expense incurred in connection with our interest-bearing liabilities, by affecting the spread between our interest-earning assets and interest-bearing liabilities. Changes in the level of interest rates can also affect the rate of prepayments of our securities and the value of the RMBS that constitute our investment portfolio, which affects our net income, ability to realize gains from the sale of these assets and ability to borrow, and the amount that we can borrow against these securities.

We may utilize a variety of financial instruments in order to limit the effects of changes in interest rates on our operations. The principal instruments that we use are futures contracts, interest rate swaps and swaptions. These instruments are intended to serve as an economic hedge against future interest rate increases on our repurchase agreement borrowings. Hedging techniques are partly based on assumed levels of prepayments of our Agency RMBS. If prepayments are slower or faster than assumed, the life of the Agency RMBS will be longer or shorter, which would reduce the effectiveness of any hedging strategies we may use and may cause losses on such transactions. Hedging strategies involving the use of derivative securities are highly complex and may produce volatile returns. Hedging techniques are also limited by the rules relating to REIT qualification. In order to preserve our REIT status, we may be forced to terminate a hedging transaction at a time when the transaction is most needed.

Our profitability and the value of our investment portfolio (including derivatives used for hedging purposes) may be adversely affected during any period as a result of changing interest rates, including changes in the forward yield curve.

Our portfolio of PT RMBS is typically comprised of adjustable-rate RMBS (“ARMs”), fixed-rate RMBS and hybrid adjustable-rate RMBS. We generally seek to acquire low duration assets that offer high levels of protection from mortgage prepayments provided that they are reasonably priced by the market. Although the duration of an individual asset can change as a result of changes in interest rates, we strive to maintain a hedged PT RMBS portfolio with an effective duration of less than 2.0. The stated contractual final maturity of the mortgage loans underlying our portfolio of PT RMBS generally ranges up to 30 years. However, the effect of prepayments of the underlying mortgage loans tends to shorten the resulting cash flows from our investments substantially. Prepayments occur for various reasons, including refinancing of underlying mortgages and loan payoffs in connection with home sales, and borrowers paying more than their scheduled loan payments, which accelerates the amortization of the loans.

The duration of our IO and IIO portfolios will vary greatly depending on the structural features of the securities. While prepayment activity will always affect the cash flows associated with the securities, the interest only nature of IOs may cause their durations to become extremely negative when prepayments are high, and less negative when prepayments are low. Prepayments affect the durations of IIOs similarly, but the floating rate nature of the coupon of IIOs (which is inversely related to the level of one month LIBOR) causes their price movements, and model duration, to be affected by changes in both prepayments and one month LIBOR, both current and anticipated levels. As a result, the duration of IIO securities will also vary greatly.

Prepayments on the loans underlying our RMBS can alter the timing of the cash flows from the underlying loans to us. As a result, we gauge the interest rate sensitivity of our assets by measuring their effective duration. While modified duration measures the price sensitivity of a bond to movements in interest rates, effective duration captures both the movement in interest rates and the fact that cash flows to a mortgage related security are altered when interest rates move. Accordingly, when the contract interest rate on a mortgage loan is substantially above prevailing interest rates in the market, the effective duration of securities collateralized by such loans can be quite low because of expected prepayments.

We face the risk that the market value of our PT RMBS assets will increase or decrease at different rates than that of our structured RMBS or liabilities, including our hedging instruments. Accordingly, we assess our interest rate risk by estimating the duration of our assets and the duration of our liabilities. We generally calculate duration using various third party models. However, empirical results and various third party models may produce different duration numbers for the same securities.

The following sensitivity analysis shows the estimated impact on the fair value of our interest rate-sensitive investments and hedge positions as of March 31, 2020 and December 31, 2019, assuming rates instantaneously fall 200 bps, fall 100 bps, fall 50 bps, rise 50 bps, rise 100 bps and rise 200 bps, adjusted to reflect the impact of convexity, which is the measure of the sensitivity of our hedge positions and Agency RMBS’ effective duration to movements in interest rates.

All changes in value in the table below are measured as percentage changes from the investment portfolio value and net asset value at the base interest rate scenario. The base interest rate scenario assumes interest rates and prepayment projections as of March 31, 2020 and December 31, 2019.

Actual results could differ materially from estimates, especially in the current market environment. To the extent that these estimates or other assumptions do not hold true, which is likely in a period of high price volatility, actual results will likely differ materially from projections and could be larger or smaller than the estimates in the table below. Moreover, if different models were employed in the analysis, materially different projections could result. Lastly, while the table below reflects the estimated impact of interest rate increases and decreases on a static portfolio, we may from time to time sell any of our agency securities as a part of the overall management of our investment portfolio.

Interest Rate Sensitivity⁽¹⁾
	Portfolio
	Market			Book
Change in Interest Rate	Value⁽²⁾⁽³⁾			Value⁽²⁾⁽⁴⁾
As of March 31, 2020
-200 Basis Points		1.22	%		11.63	%
-100 Basis Points		0.70	%		6.66	%
-50 Basis Points		0.42	%		4.04	%
+50 Basis Points		(0.54	)%		(5.18	)%
+100 Basis Points		(1.32	)%		(12.63	)%
+200 Basis Points		(3.92	)%		(37.47	)%
As of December 31, 2019
-200 Basis Points		(0.07	)%		(0.63	)%
-100 Basis Points		0.27	%		2.43	%
-50 Basis Points		0.27	%		2.49	%
+50 Basis Points		(0.74	)%		(6.73	)%
+100 Basis Points		(1.88	)%		(17.09	)%
+200 Basis Points		(5.14	)%		(46.66	)%

(1)	Interest rate sensitivity is derived from models that are dependent on inputs and assumptions provided by third parties as well as by our Manager, and assumes there are no changes in mortgage spreads and assumes a static portfolio. Actual results could differ materially from these estimates.

(2)	Includes the effect of derivatives and other securities used for hedging purposes.

(3)	Estimated dollar change in investment portfolio value expressed as a percent of the total fair value of our investment portfolio as of such date.

(4)	Estimated dollar change in portfolio value expressed as a percent of stockholders' equity as of such date.

In addition to changes in interest rates, other factors impact the fair value of our interest rate-sensitive investments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, in the event of changes in actual interest rates, the change in the fair value of our assets would likely differ from that shown above and such difference might be material and adverse to our stockholders.

Prepayment Risk

Because residential borrowers have the option to prepay their mortgage loans at par at any time, we face the risk that we will experience a return of principal on our investments faster than anticipated. Various factors affect the rate at which mortgage prepayments occur, including changes in the level of and directional trends in housing prices, interest rates, general economic conditions, loan age and size, loan-to-value ratio, the location of the property and social and demographic conditions. Additionally, changes to government sponsored entity underwriting practices or other governmental programs could also significantly impact prepayment rates or expectations. Generally, prepayments on Agency RMBS increase during periods of falling mortgage interest rates and decrease during periods of rising mortgage interest rates. However, this may not always be the case. We may reinvest principal repayments at a yield that is lower or higher than the yield on the repaid investment, thus affecting our net interest income by altering the average yield on our assets.

Spread Risk

When the market spread widens between the yield on our Agency RMBS and benchmark interest rates, our net book value could decline if the value of our Agency RMBS falls by more than the offsetting fair value increases on our hedging instruments tied to the underlying benchmark interest rates. We refer to this as "spread risk" or "basis risk." The spread risk associated with our mortgage assets and the resulting fluctuations in fair value of these securities can occur independent of changes in benchmark interest rates and may relate to other factors impacting the mortgage and fixed income markets, such as actual or anticipated monetary policy actions by the Fed, market liquidity, or changes in required rates of return on different assets. Consequently, while we use futures contracts and interest rate swaps and swaptions to attempt to protect against moves in interest rates, such instruments typically will not protect our net book value against spread risk.

Liquidity Risk

The primary liquidity risk for us arises from financing long-term assets with shorter-term borrowings through repurchase agreements. Our assets that are pledged to secure repurchase agreements are Agency RMBS and cash. As of March 31, 2020, we had unrestricted cash and cash equivalents of $162.7 million and unpledged securities of approximately $11.0 million (not including securities pledged to us) available to meet margin calls on our repurchase agreements and derivative contracts, and for other corporate purposes. However, should the value of our Agency RMBS pledged as collateral or the value of our derivative instruments suddenly decrease, margin calls relating to our repurchase and derivative agreements could increase, causing an adverse change in our liquidity position. Further, there is no assurance that we will always be able to renew (or roll) our repurchase agreements. In addition, our counterparties have the option to increase our haircuts (margin requirements) on the assets we pledge against repurchase agreements, thereby reducing the amount that can be borrowed against an asset even if they agree to renew or roll the repurchase agreement. Significantly higher haircuts can reduce our ability to leverage our portfolio or even force us to sell assets, especially if correlated with asset price declines or faster prepayment rates on our assets.

Extension Risk

The projected weighted average life and the duration (or interest rate sensitivity) of our investments is based on our Manager's assumptions regarding the rate at which the borrowers will prepay the underlying mortgage loans. In general, we use futures contracts and interest rate swaps and swaptions to help manage our funding cost on our investments in the event that interest rates rise. These hedging instruments allow us to reduce our funding exposure on the notional amount of the instrument for a specified period of time.

However, if prepayment rates decrease in a rising interest rate environment, the average life or duration of our fixed-rate assets or the fixed-rate portion of the ARMs or other assets generally extends. This could have a negative impact on our results from operations, as our hedging instrument expirations are fixed and will, therefore, cover a smaller percentage of our funding exposure on our mortgage assets to the extent that their average lives increase due to slower prepayments. This situation may also cause the market value of our Agency RMBS and CMOs collateralized by fixed rate mortgages or hybrid ARMs to decline by more than otherwise would be the case while most of our hedging instruments would not receive any incremental offsetting gains. In extreme situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur realized losses.

Counterparty Credit Risk

We are exposed to counterparty credit risk relating to potential losses that could be recognized in the event that the counterparties to our repurchase agreements and derivative contracts fail to perform their obligations under such agreements. The amount of assets we pledge as collateral in accordance with our agreements varies over time based on the market value and notional amount of such assets as well as the value of our derivative contracts. In the event of a default by a counterparty, we may not receive payments provided for under the terms of our agreements and may have difficulty obtaining our assets pledged as collateral under such agreements. Our credit risk related to certain derivative transactions is largely mitigated through daily adjustments to collateral pledged based on changes in market value and we limit our counterparties to major financial institutions with acceptable credit ratings. However, there is no guarantee our efforts to manage counterparty credit risk will be successful and we could suffer significant losses if unsuccessful.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report (the “evaluation date”), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act. Based on this evaluation, the CEO and CFO concluded our disclosure controls and procedures, as designed and implemented, were effective as of the evaluation date (1) in ensuring that information regarding the Company is accumulated and communicated to our management, including our CEO and CFO, by our employees, as appropriate to allow timely decisions regarding required disclosure and (2) in providing reasonable assurance that information we must disclose in our periodic reports under the Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by the SEC’s rules and forms.

Changes in Internal Controls over Financial Reporting

There were no significant changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are not party to any material pending legal proceedings as described in Item 103 of Regulation S-K.

ITEM 1A. RISK FACTORS

The following risk factors should be read in conjunction with the risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 21, 2020.

The market and economic disruptions caused by COVID-19 have negatively impacted our business.

The novel coronavirus (“COVID-19”) pandemic is causing significant disruptions to the U.S. and global economies and has contributed to volatility, illiquidity and dislocations in the financial markets. The COVID-19 outbreak has led governments and other authorities around the world to impose measures intended to control its spread, including restrictions on freedom of movement and business operations such as travel bans, border closings, closing non-essential businesses, quarantines and shelter-in-place orders. The market and economic disruptions caused by COVID-19 have negatively impacted and could further negatively impact our business.

Since mid-March 2020, Agency RMBS markets have experienced significant volatility and sharp declines in liquidity, which have negatively impacted our portfolio. Our portfolio was pledged as collateral under daily mark-to-market repurchase agreements. Fluctuations in the value of our Agency RMBS resulted in margin calls, requiring us to post additional collateral with our lenders under these repurchase agreements. These fluctuations and requirements to post additional collateral were material. In order to meet these margin calls and to maintain sufficient liquidity, we sold a substantial portion of our portfolio in March 2020. We recorded realized losses from these sales of approximately $31.4 million. The Agency RMBS market largely stabilized after the Fed announced on March 23, 2020 that it would purchase Agency RMBS and U.S. Treasuries in the amounts needed to support smooth market functioning.

In light of the deteriorating economic environment related to the COVID-19 outbreak, the Agency RMBS market may experience significant volatility, illiquidity and dislocations in the future, which may adversely affect our results of operations and financial condition.

Our inability to access funding or the terms on which such funding is available could have a material adverse effect on our financial condition, particularly in light of ongoing market dislocations resulting from the COVID-19 pandemic.

Our ability to fund our operations, meet financial obligations and finance asset acquisitions is dependent upon our ability to secure and maintain our repurchase agreements with our counterparties. Because repurchase agreements are short-term commitments of capital, lenders may respond to market conditions in ways that make it more difficult for us to renew or replace on a continuous basis our maturing short-term borrowings and have imposed and may continue to impose more onerous terms when rolling such financings. If we are not able to renew our existing repurchase agreements or arrange for new financing on terms acceptable to us, or if we are required to post more collateral or face larger haircuts, we may have to curtail our asset acquisition activities and/or dispose of assets.

Issues related to financing are exacerbated in times of significant dislocation in the financial markets, such as those being experienced now related to the COVID-19 pandemic. It is possible our lenders will become unwilling or unable to provide us with financing, and we could be forced to sell our assets at an inopportune time when prices are depressed. In addition, if the regulatory capital requirements imposed on our lenders change, they may be required to significantly increase the cost of the financing that they provide to us. Our lenders also have revised and may continue to revise the terms of such financings, including haircuts and requiring additional collateral in the form of cash, based on, among other factors, the regulatory environment and their management of actual and perceived risk. Moreover, the amount of financing we receive under our repurchase agreements will be directly related to our lenders’ valuation of our assets that collateralize the outstanding borrowings. Typically, repurchase agreements grant the lender the absolute right to reevaluate the fair market value of the assets that cover outstanding borrowings at any time. If a lender determines in its sole discretion that the value of the assets has decreased, the lender has the right to initiate a margin call. These valuations may be different than the values that we ascribe to these assets and may be influenced by recent asset sales at distressed levels by forced sellers. A margin call requires us to transfer additional assets to a lender without any advance of funds from the lender for such transfer or to repay a portion of the outstanding borrowings. Significant margin calls could have a material adverse effect on our results of operations, financial condition, business, liquidity and ability to make distributions to our stockholders, and could cause the value of our common stock to decline. In addition, we have also experienced an increase in haircuts on financings we have rolled. As haircuts are increased, we will be required to post additional collateral. We may also be forced to sell assets at significantly depressed prices to meet such margin calls and to maintain adequate liquidity. As a result of the ongoing COVID-19 pandemic, we have experienced margins calls well beyond historical norms. These trends, if continued, will have a negative adverse impact on our liquidity.

We cannot predict the effect that government policies, laws and plans adopted in response to the COVID-19 pandemic and the global recessionary economic conditions will have on us.

Governments have adopted, and we expect will continue to adopt, policies, laws and plans intended to address the COVID-19 pandemic and adverse developments in the economy and continued functioning of the financial markets. We cannot assure you that these programs will be effective, sufficient or will otherwise have a positive impact on our business.

During the first quarter of 2020, the Fed announced its commitment to purchase unlimited amounts of U.S. Treasuries and Agency RMBS and reduced short-term interest rates. The Federal Reserve also announced programs to support other asset classes during the first quarter. In addition, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which will provide 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. The GSEs also issued guidance on how they will handle servicer advances for loans that back Agency RMBS that enter into forbearance, which should limit prepayments during the forbearance period that could have resulted otherwise. The results of these measures are likely to suppress refinancing activity during the forbearance period, but potentially increase refinancing activity once the forbearance period ended as delinquent loans are repurchased by the GSEs. There can be no assurance as to how, in the long term, these and other actions by the U.S. government will affect the efficiency, liquidity and stability of the financial and mortgage markets or prepayments on Agency RMBS. To the extent the financial or mortgage markets do not respond favorably to any of these actions, such actions do not function as intended, or prepayments increase materially as a result of these actions, our business, results of operations and financial condition may continue to be materially adversely affected.

Measures intended to prevent the spread of COVID-19 have disrupted our ability to operate our business.

In response to the outbreak of COVID-19 and the federal and state mandates implemented to control its spread, all of our Manager’s employees are working remotely. If our Manager’s employees are unable to work effectively as a result of COVID-19, including because of illness, quarantines, office closures, ineffective remote work arrangements or technology failures or limitations, our operations would be adversely impacted. Further, remote work arrangements may increase the risk of cybersecurity incidents, data breaches or cyber-attacks, which could have a material adverse effect on our business and results of operations, due to, among other things, the loss of proprietary data, interruptions or delays in the operation of our business and damage to our reputation.

The declaration, amount and payment of future cash dividends on our common stock are subject to uncertainty due to current market conditions.

All dividends will be declared at the discretion of our Board of Directors and will depend on our earnings, our financial condition, REIT distribution requirements, and other factors as our Board of Directors may deem relevant from time to time. The economic impacts resulting from the COVID-19 pandemic could adversely affect our ability to pay dividends. Our Board of Directors is under no obligation or requirement to declare a dividend distribution and will continue to assess our common stock dividend rate on an ongoing basis, as market conditions and our financial position continue to evolve. We cannot assure you that we will achieve results that will allow us to pay dividends on our common stock or that the level of dividends will be maintained to increased.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The table below presents the Company’s share repurchase activity for the three months ended March 31, 2020.

					Shares Purchased		Maximum Number
	Total Number		Weighted-Average		as Part of Publicly		of Shares That May Yet
	of Shares		Price Paid		Announced		Be Repurchased Under
	Repurchased⁽¹⁾		Per Share		Programs⁽²⁾		the Authorization⁽²⁾
January 1, 2020 - January 31, 2020		-	$	-		-		1,327,177
February 1, 2020 - February 29, 2020		-		-		-		1,327,177
March 1, 2020 - March 31, 2020		20		2.95		-		1,327,177
Totals / Weighted Average		20	$	2.95		-		1,327,177

(1)

Includes shares of the Company’s common stock acquired by the Company in connection with the satisfaction of tax withholding obligations on vested employment-related awards under equity incentive plans. These repurchases do not reduce the number of shares available under the stock repurchase program authorization.

(2)

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. Unless modified or revoked by the Board, the authorization does not expire.

The Company did not have any unregistered sales of its equity securities during the three months ended March 31, 2020.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit No.

3.1	Articles of Amendment and Restatement of Orchid Island Capital, Inc. (filed as Exhibit 3.1 to the Company’s Registration Statement on Amendment No. 1 to Form S-11 (File No. 333-184538) filed on November 28, 2012 and incorporated herein by reference).
3.2	Certificate of Correction of Orchid Island Capital, Inc. (filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-K filed on February 22, 2019 and incorporated herein by reference).
3.3	Amended and Restated Bylaws of Orchid Island Capital, Inc. (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on March 19, 2019 and incorporated herein by reference).
4.1	Specimen Certificate of common stock of Orchid Island Capital, Inc. (filed as Exhibit 4.1 to the Company’s Registration Statement on Amendment No. 1 to Form S-11 (File No.333-184538) filed on November 28, 2012 and incorporated herein by reference).
10.1	2020 Long Term Incentive Compensation Plan.*†
31.1	Certification of Robert E. Cauley, Chief Executive Officer and President of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2	Certification of George H. Haas, IV, Chief Financial Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1	Certification of Robert E. Cauley, Chief Executive Officer and President of the Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
32.2	Certification of George H. Haas, IV, Chief Financial Officer of the Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

Exhibit 101.INS XBRL	Instance Document ***
Exhibit 101.SCH XBRL	Taxonomy Extension Schema Document ***
Exhibit 101.CAL XBRL	Taxonomy Extension Calculation Linkbase Document***
Exhibit 101.DEF XBRL	Additional Taxonomy Extension Definition Linkbase Document Created***
Exhibit 101.LAB XBRL	Taxonomy Extension Label Linkbase Document ***
Exhibit 101.PRE XBRL	Taxonomy Extension Presentation Linkbase Document ***

*	Filed herewith.

**	Furnished herewith.

***	Submitted electronically herewith.

†	Management contract or compensatory plan.

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		Orchid Island Capital, Inc.
		Registrant


Date: May 1, 2020	By:	/s/ Robert E. Cauley
		Robert E. Cauley Chief Executive Officer, President and Chairman of the Board

Date: May 1, 2020	By:	/s/ George H. Haas, IV
		George H. Haas, IV Secretary, Chief Financial Officer, Chief Investment Officer and Director (Principal Financial and Accounting Officer)

Orchid Island Capital, Inc. - FORM 10-Q - May 1, 2020

Attached files

Orchid Island Capital, Inc. Reports