UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-K/A
(Amendment No. 1)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
☐
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
:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
,
,
(Address of principal executive offices) (Zip Code)
(
)
(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
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
☐
☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
☐
☒
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.
☒
☐
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).
☒
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
☒
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report.
☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
☐
☒
As of June 30, 2020 the aggregate market value of the common stock held by nonaffiliates was $
Number of shares outstanding at March 11, 2021:
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive Proxy Statement, to be issued in connection with the 2021 Annual Meeting of Stockholders
of the Registrant, are incorporated by reference into Part III of this Annual Report on Form 10-K.
EXPLANATORY NOTE
1
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Page
Report of Independent Registered Public Accounting Firm
2
Balance Sheets
4
Statements of Operations
5
Statements of Stockholders’ Equity
6
Statements of Cash Flows
7
Notes to Financial Statements
8
2
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Orchid Island Capital, Inc.
Vero Beach, Florida
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Orchid Island Capital, Inc. (the “Company”) as of December 31, 2020 and
2019, the related statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the
results of its operations and its cash flows for each of the three years in the period ended December 31, 2020
,
accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in
Internal
Control – Integrated Framework (2013)
and our report dated February 26, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or
fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material
to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication
of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures
to which it relates.
Valuation of Investments in Mortgage-Backed Securities
As described in Notes
1
and
12
to the financial statements, the Company
accounts for its
Level 2
mortgage-backed securities at fair
value, which
totaled
$3.7
billion at December 31, 2020.
The fair value of mortgage-backed securities is
based on independent pricing
sources and/or third-party broker
quotes, when available. Because the price estimates may vary, management must make certain
judgments and assumptions about the appropriate price to use to calculate the fair values based on various techniques including
observing the most recent market for like or identical assets (including security coupon rate, maturity, yield, prepayment speed), market
credit spreads, and model driven approaches.
3
We identified the valuation of mortgage-backed securities
as
a critical audit matter.
The principal considerations for our determination
are: (i)
the potential for bias in how management subjectively selects the price from multiple pricing sources to determine the fair value
of the mortgage-backed securities and (ii)
the audit effort involved, including the use of
valuation
professionals with specialized skill and
knowledge.
The primary procedures we performed to address this critical audit matter included:
●
Testing the
design and operating
effectiveness of
controls
relating to the valuation of mortgaged-backed securities,
including
controls over
management’s
process to select the price from multiple pricing sources.
●
Reviewing
the
range of values used for each investment position,
and
assessing
the price selected
for management bias
by comparing the price
to the high, low and average of the range of pricing sources.
●
Testing the reasonableness of fair values determined by management by comparing the fair value of certain securities to
recent transactions, if applicable.
●
Utilizing
a
third-party valuation specialist
to
develop an independent estimate of the fair value of each investment
position
by considering the stated security coupon rate, yield, maturity, and prepayment speeds, and comparing to the fair
value used by management.
/s/ BDO USA, LLP
Certified Public Accountants
We have served as the Company's auditor since 2011.
West Palm Beach, Florida
February 26, 2021
4
ORCHID ISLAND CAPITAL, INC.
BALANCE SHEETS
($ in thousands, except per share data)
December 31, 2020
December 31, 2019
ASSETS:
Mortgage-backed securities, at fair value
Pledged to counterparties
$
$
Unpledged
Total mortgage -backed securities
Cash and cash equivalents
Restricted cash
Accrued interest receivable
Derivative assets, at fair value
Receivable for securities sold, pledged to counterparties
Other assets
Total Assets
$
$
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements
$
$
Dividends payable
Derivative liabilities, at fair value
Accrued interest payable
Due to affiliates
Other liabilities
Total Liabilities
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $
and outstanding as of December 31, 2020 and December 31, 2019
Common Stock, $
shares issued and outstanding as of December 31, 2020 and
and outstanding as of December 31, 2019
Additional paid-in capital
Accumulated deficit
(17,994 )
(20,122 )
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
$
$
See Notes to Financial Statements
5
ORCHID ISLAND CAPITAL, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2020, 2019 and 2018
($ in thousands, except per share data)
2020
2019
2018
Interest income
$
$
$
Interest expense
(25,056 )
(83,666 )
(70,360 )
Net interest income
Realized losses on mortgage-backed securities
(24,986 )
(10,877 )
(30,289 )
Unrealized gains (losses) on mortgage-backed securities
(110,668 )
(Losses) gains on derivative instruments
(79,092 )
(51,176 )
Net portfolio income (loss)
(32,425 )
Expenses:
Management fees
Allocated overhead
Accrued incentive compensation
Directors' fees and liability insurance
Audit, legal and other professional fees
Direct REIT operating expenses
Other administrative
Total expenses
Net income (loss)
$
$
$
(44,387 )
Basic and diluted net income (loss) per share
$
$
$
(0.85 )
Weighted Average Shares Outstanding
See Notes to Financial Statements
6
ORCHID ISLAND CAPITAL, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2020, 2019 and 2018
(in thousands, except per share data)
Additional
Retained
Common Stock
Paid-in
Earnings
Shares
Par Value
Capital
(Deficit)
Total
Balances, January 1, 2018
$
$
$
$
Net loss
-
(44,387 )
(44,387 )
Cash dividends declared, $1.07 per share
-
(55,814 )
(55,814 )
Stock based compensation
Shares repurchased and retired
(3,979 )
(40 )
(26,383 )
(26,423 )
Balances, December 31, 2018
(44,387 )
Net income
-
Cash dividends declared, $0.96 per share
-
(54,421 )
(54,421 )
Issuance of common stock pursuant to public offerings, net
Stock based compensation
Shares repurchased and retired
(470 )
(5 )
(3,019 )
(3,024 )
Balances, December 31, 2019
(20,122 )
Net income
-
Cash dividends declared, $0.79 per share
-
(53,570 )
(53,570 )
Issuance of common stock pursuant to public offerings, net
Stock based compensation
Shares repurchased and retired
(20 )
(68 )
(68 )
Balances, December 31, 2020
$
$
$
(17,994 )
$
See Notes to Financial Statements
7
ORCHID ISLAND CAPITAL, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2020, 2019 and 2018
($ in thousands)
2020
2019
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
$
$
$
(44,387 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Stock based compensation
Realized and unrealized (gains) losses on mortgage-backed securities
(775 )
(27,168 )
Realized and unrealized losses on interest rate swaptions
Realized and unrealized losses (gains) on interest rate swaps
(1,027 )
Realized and unrealized losses on U.S. Treasury Securities
Realized (gains) losses on forward settling to-be-announced securities
(3,231 )
(4,527 )
Changes in operating assets and liabilities:
Accrued interest receivable
Other assets
(446 )
(3 )
Accrued interest payable
(9,944 )
(71 )
Other liabilities
Due to affiliates
(32 )
(143 )
NET CASH PROVIDED BY OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES:
From mortgage-backed securities investments:
Purchases
(4,859,434 )
(4,241,822 )
(3,893,828 )
Sales
Principal repayments
Payments on U.S. Treasury securities
(139,807 )
Proceeds from U.S. Treasury securities
Net proceeds from reverse repurchase agreements
(Payments on) proceeds from net settlement of to-be-announced securities
(881 )
(8,423 )
Purchase of derivative financial instruments, net of margin cash received
(63,195 )
(20,600 )
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
(199,340 )
(354,806 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements
Principal payments on repurchase agreements
(32,993,145 )
(45,171,956 )
(52,605,026 )
Cash dividends
(53,645 )
(53,307 )
(59,312 )
Proceeds from issuance of common stock, net of issuance costs
Common stock repurchases
(68 )
(3,024 )
(26,423 )
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
(594,469 )
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED
CASH
(120,449 )
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the period
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the period
$
$
$
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest
$
$
$
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Securities sold settled in later period
$
$
$
See Notes to Financial Statements
8
ORCHID ISLAND CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Description
Orchid Island Capital, Inc. (“Orchid” or the “Company”), was incorporated in Maryland on August 17, 2010 for the purpose of creating
and managing a leveraged investment portfolio consisting of residential mortgage-backed securities (“RMBS”). From incorporation to
February 20, 2013 Orchid was a wholly owned subsidiary of Bimini Capital Management, Inc. (“Bimini”). Orchid began operations on
November 24, 2010 (the date of commencement of operations). From incorporation through November 24, 2010, Orchid’s only activity
was the issuance of common stock to Bimini.
On August 2, 2017, Orchid entered into an equity distribution agreement (the “August 2017 Equity Distribution Agreement”) with
two sales agents pursuant to which the Company could offer and sell, from time to time, up to an aggregate amount of $
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
gross proceeds of approximately $
prior
to its termination in July 2019.
On July 30, 2019, Orchid entered into an underwriting agreement (the “2019 Underwriting Agreement”) with Morgan Stanley & Co.
LLC, Citigroup Global Markets Inc. and J.P. Morgan Securities LLC, as representatives of the underwriters named therein, relating to
the offer and sale of
purchased the shares pursuant to the 2019 Underwriting Agreement at a price of $
deduction of underwriting discounts and commissions and other estimated offering expenses.
On January 23, 2020, Orchid entered into an equity distribution agreement (the “January 2020 Equity Distribution Agreement”) with
three sales agents pursuant to which the Company could offer and sell, from time to time, up to an aggregate amount of $
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
gross proceeds of $
in August 2020.
On August 4, 2020, Orchid entered into an equity distribution agreement (the “August 2020 Equity Distribution Agreement”) with
four sales agents pursuant to which the Company may offer and sell, from time to time, up to an aggregate amount of $
shares of the Company’s common stock in transactions that are deemed to be “at the market” offerings and privately negotiated
transactions. Through December 31, 2020, the Company issued a total of
Agreement for aggregate gross proceeds of approximately $
commissions and fees. Subsequent to December 31, 2020 through February 26, 2021, the Company issued a total of
under the August 2020 Equity Distribution Agreement for aggregate gross proceeds of approximately $
COVID-19 Impact
Beginning in mid-March 2020, the global pandemic associated with the novel coronavirus (“COVID-19”) and related economic
conditions began to impact our financial position and results of operations. As a result of the economic, health and market turmoil brought
about by COVID-19, the Agency RMBS market experienced severe dislocations. This resulted in falling prices of our assets and increased
9
margin calls from our repurchase agreement lenders. Further, as interest rates declined, we faced additional margin calls related to our
various hedge positions. In order to maintain sufficient cash and liquidity, reduce risk and satisfy margin calls, we were forced to sell assets
at levels significantly below their carrying values and closed several hedge positions. During this period, we sold approximately $
of Agency RMBS, resulting in losses of approximately $
with an aggregate notional value of $
date of the respective terminations.
The Agency RMBS market largely stabilized after the Federal Reserve announced on March 23, 2020 that it would purchase Agency
RMBS and U.S. Treasuries in the amounts needed to support smooth market functioning. As of December 31, 2020, we had timely
satisfied all margin calls.
Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic
continues, it may continue to have adverse effects on the Company’s results of future operations, financial position, and liquidity in fiscal
year 2021.
In addition, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which has provided
billions of dollars of relief to individuals, businesses, state and local governments, and the health care system suffering the impact of the
pandemic, including mortgage loan forbearance and modification programs to qualifying borrowers who may have difficulty making their
loan payments. As certain time limits imposed in the CARES Act programs began to expire, on December 27, 2020, President Trump
signed into law an additional coronavirus aid package as part of the Consolidated Appropriations Act, 2021, providing for extensions of
many of the CARES Act policies and programs as well as billions of dollars of additional relief. The Company has evaluated the provisions
of the CARES Act and the Consolidated Appropriations Act, 2021 and has determined that it will not have a material effect on the
Company’s business, results of operations and financial condition.
Basis of Presentation and Use of Estimates
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the
United States (“GAAP”).
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates. The significant estimates affecting the accompanying financial statements are the fair values of RMBS and derivatives.
Management believes the estimates and assumptions underlying the financial statements are reasonable based on the information
available as of December 31, 2020; however, uncertainty over the ultimate impact that COVID-19 will have on the global economy
generally, and on Orchid’s business in particular, makes any estimates and assumptions as of December 31, 2020 inherently less certain
than they would be absent the current and potential impacts of COVID-19.
Variable Interest Entities (VIEs)
We obtain interests in VIEs through our investments in mortgage-backed securities. Our interests in these VIEs are passive in
nature and are not expected to result in us obtaining a controlling financial interest in these VIEs in the future. As a result, we do not
consolidate these VIEs and we account for our interest in these VIEs as mortgage-backed securities. See Note 2 for additional
information regarding our investments in mortgage-backed securities. Our maximum exposure to loss for these VIEs is the carrying
value of the mortgage-backed securities.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash on deposit with financial institutions and highly liquid investments with original maturities of
three months or less at the time of purchase. Restricted cash includes cash pledged as collateral for repurchase agreements and other
10
borrowings, and interest rate swaps and other derivative instruments.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial
position that sum to the total of the same such amounts shown in the statement of cash flows.
(in thousands)
December 31, 2020
December 31, 2019
Cash and cash equivalents
$
$
Restricted cash
Total cash, cash equivalents and restricted cash
$
$
The Company maintains cash balances at three banks and excess margin on account with two exchange clearing members. At times,
balances may exceed federally insured limits. The Company has not experienced any losses related to these balances. The Federal
Deposit Insurance Corporation insures eligible accounts up to $250,000 per depositor at each financial institution. Restricted cash
balances are uninsured, but are held in separate customer accounts that are segregated from the general funds of the counterparty. The
Company limits uninsured balances to only large, well-known banks and exchange clearing members and believes that it is not exposed to
any significant credit risk on cash and cash equivalents or restricted cash balances.
Mortgage-Backed Securities
The Company invests primarily in mortgage pass-through residential mortgage backed certificates issued by Freddie Mac, Fannie
Mae or Ginnie Mae (“RMBS”), collateralized mortgage obligations (“CMOs”), interest-only (“IO”) securities and inverse interest-only (“IIO”)
securities representing interest in or obligations backed by pools of RMBS. We refer to RMBS and CMOs as PT RMBS. We refer to IO
and IIO securities as structured RMBS. The Company has elected to account for its investment in RMBS under the fair value
option. Electing the fair value option requires the Company to record changes in fair value in the statement of operations, which, in
management’s view, more appropriately reflects the results of our operations for a particular reporting period and is consistent with the
underlying economics and how the portfolio is managed.
The Company records RMBS transactions on the trade date. Security purchases that have not settled as of the balance sheet date
are included in the RMBS balance with an offsetting liability recorded, whereas securities sold that have not settled as of the balance sheet
date are removed from the RMBS balance with an offsetting receivable recorded.
Fair value is defined as the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction
between market participants at the measurement date. The fair value measurement assumes that the transaction to sell the asset or
transfer the liability either occurs in the principal market for the asset or liability, or in the absence of a principal market, occurs in the most
advantageous market for the asset or liability. Estimated fair values for RMBS are based on independent pricing sources and/or third party
broker quotes, when available.
Income on PT RMBS securities is based on the stated interest rate of the security. Premiums or discounts present at the date of
purchase are not amortized. Premium lost and discount accretion resulting from monthly principal repayments are reflected in unrealized
gains (losses) on RMBS in the statements of operations. For IO securities, the income is accrued based on the carrying value and the
effective yield. The difference between income accrued and the interest received on the security is characterized as a return of investment
and serves to reduce the asset’s carrying value. At each reporting date, the effective yield is adjusted prospectively for future reporting
periods based on the new estimate of prepayments and the contractual terms of the security. For IIO securities, effective yield and income
recognition calculations also take into account the index value applicable to the security. Changes in fair value of RMBS during each
reporting period are recorded in earnings and reported as unrealized gains or losses on mortgage-backed securities in the accompanying
statements of operations.
Derivative Financial Instruments
11
The Company uses derivative and other hedging instruments to manage interest rate risk, facilitate asset/liability strategies and
manage other exposures, and it may continue to do so in the future. The principal instruments that the Company has used to date are
Treasury Note (“T-Note”), Fed Funds and Eurodollar futures contracts, short positions in U.S. Treasury securities, interest rate swaps,
options to enter in interest rate swaps (“interest rate swaptions”) and “to-be-announced” (“TBA”) securities transactions, but the Company
may enter into other derivative and other hedging instruments in the future.
The Company accounts for TBA securities as derivative instruments. Gains and losses associated with TBA securities transactions
are reported in gain (loss) on derivative instruments in the accompanying statements of operations.
Derivative and other hedging instruments are carried at fair value, and changes in fair value are recorded in earnings for each period.
The Company’s derivative financial instruments are not designated as hedge accounting relationships, but rather are used as economic
hedges of its portfolio assets and liabilities.
Holding derivatives creates exposure to credit risk related to the potential for failure on the part of counterparties and exchanges to
honor their commitments. In the event of default by a counterparty, the Company may have difficulty recovering its collateral and may not
receive payments provided for under the terms of the agreement. The Company’s derivative agreements require it to post or receive
collateral to mitigate such risk. In addition, the Company uses only registered central clearing exchanges and well-established commercial
banks as counterparties, monitors positions with individual counterparties and adjusts posted collateral as required.
Financial Instruments
The fair value of financial instruments for which it is practicable to estimate that value is disclosed, either in the body of the financial
statements or in the accompanying notes. RMBS, Eurodollar, Fed Funds and T-Note futures contracts, interest rate swaps, interest rate
swaptions and TBA securities are accounted for at fair value in the balance sheets. The methods and assumptions used to estimate fair
value for these instruments are presented in Note 12 of the financial statements.
The estimated fair value of cash and cash equivalents, restricted cash, accrued interest receivable, receivable for securities sold,
other assets, due to affiliates, repurchase agreements, payable for unsettled securities purchased, accrued interest payable and other
liabilities generally approximates their carrying values as of December 31, 2020 and December 31, 2019 due to the short-term nature of
these financial instruments.
Repurchase Agreements
The Company finances the acquisition of the majority of its RMBS through the use of repurchase agreements under master
repurchase agreements. Repurchase agreements are accounted for as collateralized financing transactions, which are carried at their
contractual amounts, including accrued interest, as specified in the respective agreements.
Reverse Repurchase Agreements and Obligations to Return Securities Borrowed under Reverse Repurchase Agreements
The Company borrows securities to cover short sales of U.S. Treasury securities through reverse repurchase transactions under our
master repurchase agreements. We account for these as securities borrowing transactions and recognize an obligation to return the
borrowed securities at fair value on the balance sheet based on the value of the underlying borrowed securities as of the reporting date.
The securities received as collateral in connection with our reverse repurchase agreements mitigate our credit risk exposure to
counterparties. Our reverse repurchase agreements typically have maturities of 30 days or less.
Manager Compensation
The Company is externally managed by Bimini Advisors, LLC (the “Manager” or “Bimini Advisors”), a Maryland limited liability
company and wholly-owned subsidiary of Bimini. The Company’s management agreement with the Manager provides for payment to the
12
Manager of a management fee and reimbursement of certain operating expenses, which are accrued and expensed during the period for
which they are earned or incurred. Refer to Note 13 for the terms of the management agreement.
Earnings Per Share
Basic earnings per share (“EPS”) is calculated as net income or loss attributable to common stockholders divided by the weighted
average number of shares of common stock outstanding or subscribed during the period. Diluted EPS is calculated using the treasury
stock or two-class method, as applicable, for common stock equivalents, if any. However, the common stock equivalents are not included
in computing diluted EPS if the result is anti-dilutive.
Income Taxes
Orchid has qualified and elected to be taxed as a REIT under the Code. REITs are generally not subject to federal income tax on
their REIT taxable income provided that they distribute to their stockholders at least 90% of their REIT taxable income on an annual
basis. In addition, a REIT must meet other provisions of the Code to retain its tax status.
Orchid assesses the likelihood, based on their technical merit, that uncertain tax positions will be sustained upon examination
based on the facts, circumstances and information available at the end of each period. All of Orchid’s tax positions are categorized as
highly certain. There is no accrual for any tax, interest or penalties related to Orchid’s tax position assessment. The measurement of
uncertain tax positions is adjusted when new information is available, or when an event occurs that requires a change.
Recent Accounting Pronouncements
On January 1, 2020, we adopted Accounting Standards Update (“ASU”) 2016-13,
Financial Instruments – Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments.
ASU 2016-13 requires credit losses on most financial assets measured
at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current
expected credit loss model). The Company’s adoption of this ASU did not have a material effect on its financial statements as its
financial assets were already measured at fair value through earnings.
13
In March 2020, the FASB issued ASU 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate
Reform on Financial Reporting.” ASU 2020-04 provides optional expedients and exceptions to GAAP requirements for modifications
on debt instruments, leases, derivatives, and other contracts, related to the expected market transition from the London Interbank
Offered Rate (“LIBOR”), and certain other floating rate benchmark indices, or collectively, IBORs, to alternative reference rates. ASU
2020-04 generally considers contract modifications related to reference rate reform to be an event that does not require contract
remeasurement at the modification date nor a reassessment of a previous accounting determination. The guidance in ASU 2020-04 is
optional and may be elected over time, through December 31, 2022, as reference rate reform activities occur. The Company does not
believe the adoption of this ASU will have a material impact on its financial statements.
In January 2021, the FASB issued ASU 2021-01 “Reference Rate Reform (Topic 848). ASU 2021-01 expands the scope of ASC
848 to include all affected derivatives and give market participants the ability to apply certain aspects of the contract modification and
hedge accounting expedients to derivative contracts affected by the discounting transition. In addition, ASU 2021-01 adds
implementation guidance to permit a company to apply certain optional expedients to modifications of interest rate indexes used for
margining, discounting or contract price alignment of certain derivatives as a result of reference rate reform initiatives and
extends
optional expedients to account for a derivative contract modified as a continuation of the existing contract and to continue hedge
accounting when certain critical terms of a hedging relationship change to modifications made as part of the discounting transition. The
guidance in ASU 2021-01 is effective immediately and available generally through December 31, 2022, as reference rate reform
activities occur. The Company does not believe the adoption of this ASU will have a material impact on its financial statements.
NOTE 2. MORTGAGE-BACKED SECURITIES
The following table presents the Company’s RMBS portfolio as of December 31, 2020 and December 31, 2019:
(in thousands)
December 31, 2020
December 31, 2019
Pass-Through RMBS Certificates:
Adjustable-rate Mortgages
$
$
Fixed-rate Mortgages
Fixed-rate CMOs
Total Pass-Through Certificates
Structured RMBS Certificates:
Interest-Only Securities
Inverse Interest-Only Securities
Total Structured RMBS Certificates
Total
$
$
NOTE 3. REPURCHASE AGREEMENTS
The Company pledges certain of its RMBS as collateral under repurchase agreements with financial institutions. Interest rates are
generally fixed based on prevailing rates corresponding to the terms of the borrowings, and interest is generally paid at the termination of a
borrowing. If the fair value of the pledged securities declines, lenders will typically require the Company to post additional collateral or pay
down borrowings to re-establish agreed upon collateral requirements, referred to as "margin calls." Similarly, if the fair value of the pledged
securities increases, lenders may release collateral back to the Company. As of December 31, 2020, the Company had met all margin call
requirements.
As of December 31, 2020 and 2019, the Company’s repurchase agreements had remaining maturities as summarized below:
($ in thousands)
OVERNIGHT
BETWEEN 2
BETWEEN 31
GREATER
(1 DAY OR
AND
AND
THAN
14
LESS)
30 DAYS
90 DAYS
90 DAYS
TOTAL
December 31, 2020
Fair market value of securities pledged, including
accrued interest receivable
$
$
$
$
$
Repurchase agreement liabilities associated with
these securities
$
$
$
$
$
Net weighted average borrowing rate
-
December 31, 2019
Fair market value of securities pledged, including
accrued interest receivable
$
$
$
$
$
Repurchase agreement liabilities associated with
these securities
$
$
$
$
$
Net weighted average borrowing rate
In addition, cash pledged to counterparties as collateral for repurchase agreements was approximately $
as of December 31, 2020 and 2019, respectively.
If, during the term of a repurchase agreement, a lender files for bankruptcy, the Company might experience difficulty recovering its
pledged assets, which could result in an unsecured claim against the lender for the difference between the amount loaned to the Company
plus interest due to the counterparty and the fair value of the collateral pledged to such lender, including the accrued interest receivable
and cash posted by the Company as collateral. At December 31, 2020, the Company had an aggregate amount at risk (the difference
between the amount loaned to the Company, including interest payable and securities posted by the counterparty (if any), and the fair
value of securities and cash pledged (if any), including accrued interest on such securities) with all counterparties of approximately $
million. The Company did not have an amount at risk with any individual counterparty greater than 10% of the Company’s equity at
December 31, 2020 and 2019
.
15
NOTE 4. DERIVATIVE AND OTHER HEDGING INSTRUMENTS
The table below summarizes fair value information about our derivative and other hedging instruments assets and liabilities as of
December 31, 2020 and 2019.
(in thousands)
Derivative and Other Hedging Instruments
Balance Sheet Location
December 31, 2020
December 31, 2019
Assets
Interest rate swaps
Derivative assets, at fair value
$
$
Payer swaptions (long positions)
Derivative assets, at fair value
TBA securities
Derivative assets, at fair value
Total derivative assets, at fair value
$
$
Liabilities
Interest rate swaps
Derivative liabilities, at fair value
$
$
Payer swaptions (short positions)
Derivative liabilities, at fair value
TBA securities
Derivative liabilities, at fair value
Total derivative liabilities, at fair value
$
$
Margin Balances Posted to (from) Counterparties
Futures contracts
Restricted cash
$
$
TBA securities
Restricted cash
TBA securities
Other liabilities
(2,520 )
Interest rate swaption contracts
Other liabilities
(3,563 )
Interest rate swap contracts
Restricted cash
Total margin balances on derivative contracts
$
$
Eurodollar, Fed Funds and T-Note futures are cash settled futures contracts on an interest rate, with gains and losses credited or
charged to the Company’s cash accounts on a daily basis. A minimum balance, or “margin”, is required to be maintained in the account on
a daily basis. The tables below present information related to the Company’s Eurodollar and T-Note futures positions at December 31,
2020 and 2019.
($ in thousands)
December 31, 2020
Average
Weighted
Weighted
Contract
Average
Average
Notional
Entry
Effective
Open
Expiration Year
Amount
Rate
Rate
Equity
(1)
Eurodollar Futures Contracts (Short Positions)
2021
$
$
(424 )
U.S. Treasury Note Futures Contracts (Short Position)
(2)
March 2021 5-year T-Note futures
(Mar 2021 - Mar 2026 Hedge Period)
$
$
(186 )
16
($ in thousands)
December 31, 2019
Average
Weighted
Weighted
Contract
Average
Average
Notional
Entry
Effective
Open
Expiration Year
Amount
Rate
Rate
Equity
(1)
Eurodollar Futures Contracts (Short Positions)
2020
$
$
(6,505 )
U.S. Treasury Note Futures Contracts (Short Position)
(2)
March 2020 5 year T-Note futures
(Mar 2020 - Mar 2025 Hedge Period)
$
$
(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 $
the short positions were $
Under our interest rate swap agreements, we typically pay a fixed rate and receive a floating rate based on LIBOR ("payer swaps").
The floating rate we receive under our swap agreements has the effect of offsetting the repricing characteristics of our repurchase
agreements and cash flows on such liabilities. We are typically required to post collateral on our interest rate swap agreements. The table
below presents information related to the Company’s interest rate swap positions at December 31, 2020 and 2019.
($ in thousands)
Average
Net
Fixed
Average
Estimated
Average
Notional
Pay
Receive
Fair
Maturity
Amount
Rate
Rate
Value
(Years)
December 31, 2020
Expiration > 3 to ≤ 5 years
$
$
(23,760 )
Expiration > 5 years
$
$
(944 )
$
$
(24,704 )
December 31, 2019
Expiration > 1 to ≤ 3 years
$
$
(3,680 )
Expiration > 3 to ≤ 5 years
(16,466 )
$
$
(20,146 )
The table below presents information related to the Company’s interest rate swaption positions at December 31, 2020. There were no
open swaption positions at December 31, 2019.
($ in thousands)
Option
Underlying Swap
Weighted
Average
Weighted
Average
Average
Adjustable
Average
Fair
Months to
Notional
Fixed
Rate
Term
Expiration
Cost
Value
Expiration
Amount
Rate
(LIBOR)
(Years)
December 31, 2020
Payer Swaptions (long positions)
≤ 1 year
$
$
> 1 year ≤ 2 years
$
$
$
Payer Swaptions (short positions)
≤ 1 year
$
(4,660 )
$
(7,730 )
$
The following table summarizes our contracts to purchase and sell TBA securities as of December 31, 2020 and 2019.
17
($ in thousands)
Notional
Net
Amount
Cost
Market
Carrying
Long (Short)
(1)
Basis
(2)
Value
(3)
Value
(4)
December 31, 2020
30-Year TBA securities:
2.0%
$
$
$
$
3.0%
(328,000 )
(342,896 )
(343,682 )
(786 )
Total
$
$
$
$
December 31, 2019
30-Year TBA securities:
4.5%
$
(300,000 )
$
(315,426 )
$
(315,938 )
$
(512 )
Total
$
(300,000 )
$
(315,426 )
$
(315,938 )
$
(512 )
(1)
Notional amount represents the par value (or principal balance) of the underlying Agency RMBS.
(2)
Cost basis represents the forward price to be paid (received) for the underlying Agency RMBS.
(3)
Market value represents the current market value of the TBA securities (or of the underlying Agency RMBS) as of period-end.
(4)
Net carrying value represents the difference between the market value and the cost basis of the TBA securities as of period-end and is reported
in derivative assets (liabilities), at fair value in our balance sheets.
Gain (Loss) From Derivative and Other Hedging Instruments, Net
The table below presents the effect of the Company’s derivative and other hedging instruments on the statements of operations for
the years ended December 31, 2020, 2019 and 2018.
(in thousands)
2020
2019
2018
Eurodollar futures contracts (short positions)
$
(8,337 )
$
(13,860 )
$
U.S. Treasury Note futures contracts (short position)
(4,707 )
(5,175 )
Fed Funds futures contracts (short positions)
Interest rate swaps
(66,212 )
(26,582 )
Receiver swaptions
-
-
105
Payer swaptions (long positions)
(1,379 )
(1,607 )
Payer swaptions (short positions)
(3,070 )
TBA securities (short positions)
(6,719 )
(6,264 )
TBA securities (long positions)
U.S. Treasury securities (short positions)
(95 )
Total
$
(79,092 )
$
(51,176 )
$
Credit Risk-Related Contingent Features
The use of derivatives and other hedging instruments creates exposure to credit risk relating to potential losses that could be
recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. We minimize this
risk by limiting our counterparties for instruments which are not centrally cleared on a registered exchange to major financial institutions
with acceptable credit ratings and monitoring positions with individual counterparties. In addition, we may be required to pledge assets
as collateral for our derivatives, whose amounts vary over time based on the market value, notional amount and remaining term of the
derivative contract. In the event of a default by a counterparty, we may not receive payments provided for under the terms of our derivative
agreements, and may have difficulty obtaining our assets pledged as collateral for our derivatives. The cash and cash equivalents pledged
as collateral for our derivative instruments are included in restricted cash on our balance sheets.
18
It is the Company's policy not to offset assets and liabilities associated with open derivative contracts. However, the Chicago
Mercantile Exchange (“CME”) rules characterize variation margin transfers as settlement payments, as opposed to adjustments to
collateral. As a result, derivative assets and liabilities associated with centrally cleared derivatives for which the CME serves as the central
clearing party are presented as if these derivatives had been settled as of the reporting date.
NOTE 5. PLEDGED ASSETS
Assets Pledged to Counterparties
The table below summarizes our assets pledged as collateral under our repurchase agreements and derivative agreements by type,
including securities pledged related to securities sold but not yet settled, as of December 31, 2020 and 2019.
(in thousands)
December 31, 2020
December 31, 2019
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Counterparties
Agreements
Agreements
Total
Agreements
Agreements
Total
PT RMBS - fair value
$
$
$
$
$
$
Structured RMBS - fair value
Accrued interest on pledged securities
Restricted cash
79,363
84,885
Total
$
$
$
$
$
$
Assets Pledged from Counterparties
The table below summarizes our assets pledged to us from counterparties under our repurchase agreements and derivative
agreements as of December 31, 2020 and 2019.
(in thousands)
December 31, 2020
December 31, 2019
Repurchase
Derivative
Repurchase
Derivative
Assets Pledged to Orchid
Agreements
Agreements
Total
Agreements
Agreements
Total
Cash
$
$
$
$
$
$
U.S. Treasury securities - fair value
Total
$
$
$
$
$
$
PT RMBS and U.S. Treasury securities received as margin under our repurchase agreements are not recorded in the balance sheets
because the counterparty retains ownership of the security. Cash received as margin is recognized in cash and cash equivalents with a
corresponding amount recognized as an increase in repurchase agreements or other liabilities in the balance sheets.
NOTE 6. OFFSETTING ASSETS AND LIABILITIES
The Company’s derivative agreements and repurchase agreements are subject to underlying agreements with master netting or
similar arrangements, which provide for the right of offset in the event of default or in the event of bankruptcy of either party to the
transactions. The Company reports its assets and liabilities subject to these arrangements on a gross basis.
The following table presents information regarding those assets and liabilities subject to such arrangements as if the Company had
presented them on a net basis as of December 31, 2020 and 2019.
(in thousands)
19
Offsetting of Assets
Gross Amount Not
Net Amount
Offset in the Balance Sheet
of Assets
Financial
Gross Amount
Gross Amount
Presented
Instruments
Cash
of Recognized
Offset in the
in the
Received as
Received as
Net
Assets
Balance Sheet
Balance Sheet
Collateral
Collateral
Amount
December 31, 2020
Interest rate swaps
$
$
$
$
$
$
Interest rate swaptions
(3,563 )
TBA securities
(2,520 )
$
$
$
$
$
(6,083 )
$
(in thousands)
Offsetting of Liabilities
Gross Amount Not
Net Amount
Offset in the Balance Sheet
of Liabilities
Financial
Gross Amount
Gross Amount
Presented
Instruments
of Recognized
Offset in the
in the
Posted as
Cash Posted
Net
Liabilities
Balance Sheet
Balance Sheet
Collateral
Collateral
Amount
December 31, 2020
Repurchase Agreements
$
$
$
$
(3,536,757 )
$
(58,829 )
$
Interest rate swaps
(19,761 )
Interest rate swaptions
TBA securities
(284 )
$
$
$
$
(3,536,757 )
$
(78,874 )
$
December 31, 2019
Repurchase Agreements
$
$
$
$
(3,382,255 )
$
(65,851 )
$
Interest rate swaps
(17,450 )
TBA securities
(246 )
$
$
$
$
(3,382,255 )
$
(83,547 )
$
The amounts disclosed for collateral received by or posted to the same counterparty up to and not exceeding the net amount of the
asset or liability presented in the balance sheets. The fair value of the actual collateral received by or posted to the same counterparty
typically exceeds the amounts presented. See Note 5 for a discussion of collateral posted or received against or for repurchase obligations
and derivative and other hedging instruments.
NOTE 7. CAPITAL STOCK
Common Stock Issuances
During 2020 and 2019, the Company completed the following public offerings of shares of its common stock.
($ in thousands, except per share amounts)
Weighted
Average
Price
Received
Net
Type of Offering
Period
Per Share
(1)
Shares
Proceeds
(2)
2020
At the Market Offering Program
(3)
First Quarter
$
$
At the Market Offering Program
(3)
Third Quarter
20
At the Market Offering Program
(3)
Fourth Quarter
$
2019
At the Market Offering Program
(3)
First Quarter
$
$
At the Market Offering Program
(3)
Second Quarter
At the Market Offering Program
(3)
Third Quarter
Follow-on Offering
(3)
Third Quarter
$
(1)
Weighted average price received per share is before deducting the underwriters’ discount, if applicable, and other offering costs.
(2)
Net proceeds are net of the underwriters’ discount, if applicable, and other offering costs.
(3)
As of December 31, 2020, the Company had entered into eight equity distribution agreements, seven of which have either been terminated
because all shares were sold or were replaced with a subsequent agreement.
Stock Repurchase Program
On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to
common stock. On February 8, 2018, the Board of Directors approved an increase in the stock repurchase program for up to an
additional
share authorization, the increased authorization brought the total authorization to
outstanding share count. As part of the stock repurchase program, shares may be purchased in open market transactions, block
purchases, through privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule
10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Open market repurchases will be made in
accordance with Exchange Act Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of open market
stock repurchases. The timing, manner, price and amount of any repurchases will be determined by the Company in its discretion and
will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The authorization does
not obligate the Company to acquire any particular amount of common stock and the program may be suspended or discontinued at
the Company’s discretion without prior notice.
From the inception of the stock repurchase program through December 31, 2020, the Company repurchased a total of
shares at an aggregate cost of approximately $
share. During the year ended December 31, 2020, the Company repurchased a total of
approximately $
December 31, 2019, the Company repurchased a total of
commissions and fees, for a weighted average price of $
repurchased a total of
weighted average price of $
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
$
$
2014
2015
2016
2017
21
2018
2019
2020
2021 - YTD
(1)
Totals
$
$
(1)
On January 14, 2021, the Company declared a dividend of $0.065 per share to be paid on February 24, 2021. On February 10, 2021, the
Company declared a dividend of $0.065 per share to be paid on March 29, 2021. The dollar amount of the dividend declared in February 2021
is estimated based on the number of shares outstanding at February 26, 2021. The effect of these dividends are included in the table above,
but are not reflected in the Company’s financial statements as of December 31, 2020.
NOTE 8. STOCK INCENTIVE PLAN
In October 2012, the Company’s Board of Directors adopted and Bimini, then the Company’s sole stockholder, approved, the
Orchid Island Capital, Inc. 2012 Equity Incentive Plan (the “Incentive Plan”) to recruit and retain employees, directors and other service
providers, including employees of the Manager and other affiliates. The Incentive Plan provides for the award of stock options, stock
appreciation rights, stock award, performance units, other equity-based awards (and dividend equivalents with respect to awards of
performance units and other equity-based awards) and incentive awards. The Incentive Plan is administered by the Compensation
Committee of the Company’s Board of Directors except that the Company’s full Board of Directors will administer awards made to
directors who are not employees of the Company or its affiliates. The Incentive Plan provides for awards of up to an aggregate of
%
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
Stock Awards
The Company may in the future issue immediately vested common stock under the Incentive Plan to certain executive officers and
employees of its Manager. Although no such awards were granted in fiscal years 2020 or 2019, such awards have previously been
issued.
Performance Units
The Company has issued, and may in the future issue additional performance units under the Incentive Plan to certain executive
officers and employees of its Manager. “Performance Units” vest after the end of a defined performance period, based on satisfaction
of the performance conditions set forth in the performance unit agreement. When earned, each Performance Unit will be settled by the
issuance of one share of the Company’s common stock, at which time the Performance Unit will be cancelled. The Performance Units
contain dividend equivalent rights, which entitle the Participants to receive distributions declared by the Company on common stock,
but do not include the right to vote the underlying shares of common stock. Performance Units are subject to forfeiture should the
participant no longer serve as an executive officer or employee of the Company. Compensation expense for the Performance Units is
recognized over the remaining vesting period once it becomes probable that the performance conditions will be achieved.
The following table presents information related to Performance Units outstanding during the years ended December 31, 2020 and
2019.
($ in thousands, except per share data)
2020
2019
Weighted
Weighted
Average
Average
Grant Date
Grant Date
Shares
Fair Value
Shares
Fair Value
Unvested, beginning of period
$
$
22
Forfeited
(1,607 )
Vested and issued
(12,860 )
(24,651 )
Unvested, end of period
$
$
Compensation expense during period
$
$
Unrecognized compensation expense, end of period
$
$
Intrinsic value, end of period
$
$
Weighted-average remaining vesting term (in years)
The number of shares of common stock issuable upon the vesting of the remaining outstanding Performance Units was reduced
as a result of the book value impairment event that occurred pursuant to the Company's Long Term Incentive Compensation Plans (the
"Plans"). The book value impairment event occurred when the Company's book value per share declined by more than 15% during the
quarter ended March 31, 2020 and the Company's book value per share decline from January 1, 2020 to June 30, 2020 was more than
10%. The Plans provide that if such a book value impairment event occurs, then the number of outstanding Performance Units that are
outstanding as of the last day of such two-quarter period shall be reduced by 15%.
Deferred Stock Units
Non-employee directors began to receive a portion of their compensation in the form of deferred stock unit awards (“DSUs”)
pursuant to the Incentive Plan beginning with the awards for the second quarter of 2018. Each DSU represents a right to receive one
share of the Company’s common stock. The DSUs are immediately vested and are settled at a future date based on the election of the
individual participant. The DSUs contain dividend equivalent rights, which entitle the participant to receive distributions declared by the
Company on common stock. These distributions will be made in the form of cash or additional DSUs at the participant’s election. The
DSUs do not include the right to vote the underlying shares of common stock.
The following table presents information related to the DSUs outstanding during the years ended December 31, 2020 and 2019.
($ in thousands, except per share data)
2020
2019
Weighted
Weighted
Average
Average
Grant Date
Grant Date
Shares
Fair Value
Shares
Fair Value
Outstanding, beginning of period
$
$
Granted and vested
Outstanding, end of period
$
$
Compensation expense during period
$
$
Intrinsic value, end of period
$
$
NOTE 9. COMMITMENTS AND CONTINGENCIES
From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of
business. Management is not aware of any reported or unreported contingencies at December 31, 2020.
NOTE 10. INCOME TAXES
The Company will generally not be subject to federal income tax on its REIT taxable income to the extent that it distributes its REIT
taxable income to its stockholders and satisfies the ongoing REIT requirements, including meeting certain asset, income and stock
ownership tests. A REIT must generally distribute at least 90% of its REIT taxable income to its stockholders, of which 85% generally
must be distributed within the taxable year, in order to avoid the imposition of an excise tax. The remaining balance may be distributed up
23
to the end of the following taxable year, provided the REIT elects to treat such amount as a prior year distribution and meets certain other
requirements.
REIT taxable income (loss) is computed in accordance with the Code, which is different than the Company’s financial statement net
income (loss) computed in accordance with GAAP. Book to tax differences primarily relate to the recognition of interest income on RMBS,
unrealized gains and losses on RMBS, and the amortization of losses on derivative instruments that are treated as hedges for tax
purposes.
As of December 31, 2020, we had distributed all of our estimated REIT taxable income through fiscal year 2020. Accordingly, no
income tax provision was recorded for 2020, 2019 and 2018.
NOTE 11. EARNINGS PER SHARE (EPS)
The Company had dividend eligible Performance Units and Deferred Stock Units that were outstanding during the years ended
December 31, 2020, 2019 and 2018. The basic and diluted per share computations include these unvested Performance Units and
Deferred Stock Units if there is income available to common stock, as they have dividend participation rights. The unvested Performance
Units and Deferred Stock Units have no contractual obligation to share in losses. Because there is no such obligation, the unvested
Performance Units and Deferred Stock Units are not included in the basic and diluted EPS computations when no income is available to
common stock even though they are considered participating securities.
The table below reconciles the numerator and denominator of EPS for the years ended December 31, 2020, 2019 and 2018.
(in thousands, except per-share information)
2020
2019
2018
Basic and diluted EPS per common share:
Numerator for basic and diluted EPS per share of common stock:
Net income (loss) - Basic and diluted
$
$
$
(44,387 )
Weighted average shares of common stock:
Shares of common stock outstanding at the balance sheet date
Unvested dividend eligible share based compensation
outstanding at the balance sheet date
Effect of weighting
(8,958 )
(6,797 )
Weighted average shares-basic and diluted
Net income (loss) per common share:
Basic and diluted
$
$
$
(0.85 )
Anti-dilutive incentive shares not included in calculation.
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
24
●
Level 3 valuations, where the valuation is generated from model-based techniques that use significant assumptions not
observable in the market, but observable based on Company-specific data. These unobservable assumptions reflect the
Company’s own estimates for assumptions that market participants would use in pricing the asset or liability. Valuation
techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the
use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability.
The Company's RMBS and TBA securities are Level 2 valuations, and such valuations are determined by the Company based on
independent pricing sources and/or third party broker quotes, when available. Because the price estimates may vary, the Company must
make certain judgments and assumptions about the appropriate price to use to calculate the fair values. The Company and the
independent pricing sources use various valuation techniques to determine the price of the Company’s securities. These techniques
include observing the most recent market for like or identical assets (including security coupon, maturity, yield, and prepayment speeds),
spread pricing techniques to determine market credit spreads (option adjusted spread, zero volatility spread, spread to the U.S. Treasury
curve or spread to a benchmark such as a TBA), and model driven approaches (the discounted cash flow method, Black Scholes and
SABR models which rely upon observable market rates such as the term structure of interest rates and volatility). The appropriate spread
pricing method used is based on market convention. The pricing source determines the spread of recently observed trade activity or
observable markets for assets similar to those being priced. The spread is then adjusted based on variances in certain characteristics
between the market observation and the asset being priced. Those characteristics include: type of asset, the expected life of the asset, the
stability and predictability of the expected future cash flows of the asset, whether the coupon of the asset is fixed or adjustable, the
guarantor of the security if applicable, the coupon, the maturity, the issuer, size of the underlying loans, year in which the underlying loans
were originated, loan to value ratio, state in which the underlying loans reside, credit score of the underlying borrowers and other variables
if appropriate. The fair value of the security is determined by using the adjusted spread.
The Company’s futures contracts are Level 1 valuations, as they are exchange-traded instruments and quoted market prices are
readily available. Futures contracts are settled daily. The Company’s interest rate swaps and interest rate swaptions are Level 2
valuations. The fair value of interest rate swaps is determined using a discounted cash flow approach using forward market interest rates
and discount rates, which are observable inputs. The fair value of interest rate swaptions is determined using an option pricing model.
RMBS (based on the fair value option), derivatives and TBA securities were recorded at fair value on a recurring basis during the
years ended December 31, 2020, 2019 and 2018. 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 December 31, 2020 and
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
Assets
Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
December 31, 2020
Mortgage-backed securities
$
$
$
Interest rate swaps
(24,704 )
Interest rate swaptions
TBA securities
December 31, 2019
Mortgage-backed securities
$
$
$
25
Interest rate swaps
(20,146 )
TBA securities
(512 )
During the years ended December 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 the “Manager” pursuant to the terms of a management agreement. The
management agreement has been renewed through
one-year
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 $
million for the years ended December 31, 2020, 2019 and 2018, 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, 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 December 31, 2020, Bimini
owned
3.4
%, of the Company’s common stock.
NOTE 14. QUARTERLY RESULTS (UNAUDITED)
The following is a presentation of the quarterly results of operations for the years ended December 31, 2020 and 2019.
(in thousands, except per share information)
Quarter Ended
March 31, 2020
June 30, 2020
September 30, 2020
December 31, 2020
Interest income
$
$
$
$
Interest expense
(16,523 )
(4,479 )
(2,043 )
(2,011 )
Net interest income
Losses (gains)
(108,206 )
(4,605 )
Net portfolio income (loss)
(89,058 )
26
Expenses:
Management fees and overhead expenses
Other expenses
Total expenses
Net income (loss)
$
(91,199 )
$
$
$
Basic net (loss) income per share
$
(1.41 )
$
$
$
Diluted net (loss) income per share
$
(1.41 )
$
$
$
Weighted Average Shares Outstanding
Dividends declared per share
$
$
$
$
Quarter Ended
March 31, 2019
June 30, 2019
September 30, 2019
December 31, 2019
Interest income
$
$
$
$
Interest expense
(18,892 )
(22,431 )
(22,321 )
(20,022 )
Net interest income
Losses
(748 )
(7,670 )
(19,431 )
Net portfolio income (loss)
(5,845 )
Expenses:
Management fees and overhead expenses
Other expenses
Total expenses
Net income (loss)
$
$
$
(8,477 )
$
Basic and diluted net income (loss) per share
$
$
$
(0.14
$
Weighted Average Shares Outstanding
Dividends declared per share
$
$
$
$
Earnings per share (EPS) in each quarter is computed using the weighted-average number of shares outstanding
during that quarter while EPS for the full year is computed using the weighted-average number of shares outstanding during
the year. The sum of the four quarters’ EPS may not equal the full year EPS.
NOTE 15. SUBSEQUENT EVENTS
January 2021 Stock Offering
On January 20, 2021, Orchid entered into an underwriting agreement (the “2021 Underwriting Agreement”) with J.P. Morgan
Securities LLC (the “Underwriter”), relating to the offer and sale of
purchased the shares of the Company’s common stock from the Company pursuant to the 2021 Underwriting Agreement at $
share. In addition, the Company granted the Underwriter a 30-day option to purchase up to an additional
Company’s common stock on the same terms and conditions, which the Underwriter exercised in full on January 21, 2021. The closing
of the offering of
of approximately $
27
COVID-19 and CARES Act Update
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. On January 29, 2021, the CDC issued guidance extending eviction moratoriums for covered persons through
March 31, 2021. In addition, on February 9, 2021, the FHFA announced that the foreclosure moratorium begun under the CARES Act
for loans backed by Fannie Mae and Freddie Mac and the eviction moratorium for real estate owned by Fannie Mae and Freddie Mac
were extended until March 31, 2021. On February 16, 2021, the U.S. Housing and Urban Development Department announced the
extension of the FHA eviction and foreclosure moratorium to June 30, 2021. The moratoriums on foreclosures and evictions will likely
delay potential defaults on loans that would otherwise be bought out of Agency MBS pools. Depending on the ultimate resolution of the
foreclosure or evictions, when and if it occurs, these loans may be removed from the pool into which they were securitized. If this were
to occur, it would have the effect of delaying a prepayment on the Company’s securities until such time. As the majority of the
Company’s Agency RMBS assets were acquired at a premium to par, this will tend to increase the realized yield on the asset in
question.
28
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
a.
Financial Statements. The financial statements of the Company, together with the report of Independent Registered Public
Accounting Firm thereon, are set forth in Part II-Item 8 of this Form 10-K and are incorporated herein by reference.
The following information is filed as part of this Form 10-K:
Page
Report of Independent Registered Public Accounting Firm
2
Balance Sheets
4
Statements of Operations
5
Statements of Stockholders’ Equity
6
Statements of Cash Flows
7
Notes to Financial Statements
8
b.
Financial Statement Schedules.
Not applicable.
c.
Exhibits.
Exhibit No.
Description
29
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 ****
30
Exhibit 101.PRE
XBRL
Taxonomy Extension Presentation Linkbase Document ****
Exhibit 104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
* Represents a management contract or compensatory plan or arrangement.
** Filed herewith.
*** Furnished herewith.
**** Submitted electronically herewith.
31
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: March 12, 2021
By:
/s/ Robert E. Cauley
Robert E. Cauley
Chief Executive Officer, President and Chairman of the Board
Date: March 12, 2021
By:
/s/ George H. Haas, IV
George H. Haas, IV
Secretary, Chief Financial Officer, Chief Investment Officer and
Director (Principal Financial and Accounting Officer)
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
Orchid Island Capital, Inc.
Vero Beach, Florida
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No.
333-187632) and Forms S-3 (333-236144)
of Orchid Island Capital, Inc. of our reports dated February 26,
2021, relating to the financial statements, and the effectiveness of Orchid Island Capital, Inc.’s internal
control over financial reporting which appear in this Annual Report on Form 10-K/A.
West Palm Beach, Florida
/s/ BDO USA, LLP
March 12, 2021
Certified Public Accountants
Exhibit 31.1
CERTIFICATIONS
I, Robert E. Cauley, certify that:
1.
I have reviewed this annual report on Form 10-K/A of Orchid Island Capital, Inc. (the "registrant");
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b)
designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c)
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing equivalent functions):
a)
all significant deficiencies and material weakness in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting.
Date: March 12, 2021
/s/ Robert E. Cauley
Robert E. Cauley
Chairman of the Board, Chief Executive Officer and
President
Exhibit 31.2
CERTIFICATIONS
I, G. Hunter Haas, certify that:
1.
I have reviewed this annual report on Form 10-K/A of Orchid Island Capital, Inc. (the "registrant");
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b)
designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c)
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing equivalent functions):
a)
all significant deficiencies and material weakness in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting.
Date: March 12, 2021
/s/ G. Hunter Haas, IV
G. Hunter Haas, IV
Chief Financial Officer
Exhibit 32.1
CERTIFICATION
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 10 U.S.C. SECTION 1350
In connection with the annual report on Form 10-K/A of Orchid Island Capital, Inc. (the “Company”) for the period
ended December 31, 2020 to be filed with the Securities and Exchange Commission on or about the date hereof (the
”Report”), I, Robert E. Cauley, Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company at the dates of, and for the periods covered by, the Report.
It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934.
March 12, 2021
/s/ Robert E. Cauley
Robert E. Cauley,
Chairman of the Board and
Chief Executive Officer
Exhibit 32.2
CERTIFICATION
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002, 10 U.S.C. SECTION 1350
In connection with the annual report on Form 10-K/A of Orchid Island Capital, Inc. (the “Company”) for the period
ended December 31, 2020 to be filed with the Securities and Exchange Commission on or about the date hereof (the
”Report”), I, G. Hunter Haas, Chief Financial Officer of the Company, certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company at the dates of, and for the periods covered by, the Report.
It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934.
March 12, 2021
/s/ G. Hunter Haas, IV
G. Hunter Haas, IV
Chief Financial Officer