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

Structured

Three Months Ended

RMBS

Total

RMBS

Total

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

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