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, 2019

☐ 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)



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
¨ (Do not check if a smaller reporting company)
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 Act).  Yes ☐  No ý

Number of shares outstanding at April 26, 2019: 51,370,166

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
25
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
44
ITEM 4. Controls and Procedures
48
   
PART II. OTHER INFORMATION
   
ITEM 1. Legal Proceedings
49
ITEM 1A. Risk Factors
49
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
49
ITEM 3. Defaults upon Senior Securities
49
ITEM 4. Mine Safety Disclosures
49
ITEM 5. Other Information
49
ITEM 6. Exhibits
50
SIGNATURES
51

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ORCHID ISLAND CAPITAL, INC.
  
CONDENSED BALANCE SHEETS
  
($ in thousands, except per share data)
  
   
   
(Unaudited)
        
    
March 31, 2019
    
December 31, 2018
  
ASSETS:
            
Mortgage-backed securities, at fair value
            
Pledged to counterparties
  
$
3,029,117
    
$
2,991,586
  
Unpledged
    
59,397
      
22,917
  
Total mortgage-backed securities
    
3,088,514
      
3,014,503
  
Cash and cash equivalents
    
125,933
      
108,282
  
Restricted cash
    
16,998
      
17,981
  
Accrued interest receivable
    
12,585
      
13,241
  
Derivative assets, at fair value
    
13,199
      
16,885
  
Receivable for securities sold, pledged to counterparties
    
-
      
221,746
  
Other assets
    
518
      
2,993
  
Total Assets
  
$
3,257,747
    
$
3,395,631
  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                
                 
LIABILITIES:
                
Repurchase agreements
  
$
2,866,738
    
$
3,025,052
  
Payable for unsettled securities purchased
    
35,026
      
-
  
Dividends payable
    
3,995
      
3,931
  
Derivative liabilities, at fair value
    
5,346
      
5,947
  
Accrued interest payable
    
5,146
      
6,445
  
Due to affiliates
    
541
      
654
  
Other liabilities
    
541
      
17,523
  
Total Liabilities
    
2,917,333
      
3,059,552
  
                 
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, 2019 and December 31, 2018
    
-
      
-
  
Common Stock, $0.01 par value; 500,000,000 shares authorized, 49,937,700
                
shares issued and outstanding as of March 31, 2019 and 49,132,423 shares issued
                
and outstanding as of December 31, 2018
    
499
      
491
  
Additional paid-in capital
    
373,705
      
379,975
  
Accumulated deficit
    
(33,790
)
    
(44,387
)
Total Stockholders' Equity
    
340,414
      
336,079
  
Total Liabilities and Stockholders' Equity
  
$
3,257,747
    
$
3,395,631
  
See Notes to Financial Statements
  


1

ORCHID ISLAND CAPITAL, INC.
  
CONDENSED STATEMENTS OF OPERATIONS
  
(Unaudited)
  
For the Three Months Ended March 31, 2019 and 2018
  
($ in thousands, except per share data)
  
             
   
2019
    
2018
  
Interest income
  
$
32,433
    
$
39,935
  
Interest expense
    
(18,892
)
    
(15,149
)
Net interest income
    
13,541
      
24,786
  
Realized gains (losses) on mortgage-backed securities
    
243
      
(8,338
)
Unrealized gains (losses) on mortgage-backed securities
    
18,041
      
(71,712
)
(Losses) gains on derivative instruments
    
(19,032
)
    
41,994
  
Net portfolio income (loss)
    
12,793
      
(13,270
)
                 
Expenses:
                
Management fees
    
1,285
      
1,712
  
Allocated overhead
    
323
      
382
  
Accrued incentive compensation
    
(408
)
    
11
  
Directors' fees and liability insurance
    
253
      
252
  
Audit, legal and other professional fees
    
301
      
296
  
Direct REIT operating expenses
    
375
      
403
  
Other administrative
    
67
      
51
  
Total expenses
    
2,196
      
3,107
  
                 
Net income (loss)
  
$
10,597
    
$
(16,377
)
                 
Basic and diluted net income (loss) per share
  
$
0.22
    
$
(0.31
)
                 
Weighted Average Shares Outstanding
    
48,904,587
      
53,065,845
  
                 
Dividends declared per common share
  
$
0.24
    
$
0.31
  
See Notes to Financial Statements
  

2

ORCHID ISLAND CAPITAL, INC.
  
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
  
(Unaudited)
  
For the Three Months Ended March 31, 2019 and 2018
  
($ in thousands, except per share data)
  
                         
         
Additional
    
Retained
        
   
Common
    
Paid-in
    
Earnings
        
   
Stock
    
Capital
    
(Deficit)
    
Total
  
Balances, January 1, 2018
  
$
531
    
$
461,680
    
$
-
    
$
462,211
  
Net loss
    
-
      
-
      
(16,377
)
    
(16,377
)
Cash dividends declared, $0.31 per share
    
-
      
(16,463
)
    
-
      
(16,463
)
Issuance of common stock pursuant to stock based
                                
compensation plan
    
-
      
35
      
-
      
35
  
Amortization of stock based compensation
    
-
      
45
      
-
      
45
  
Balances, March 31, 2018
  
$
531
    
$
445,297
    
$
(16,377
)
  
$
429,451
  
                                 
Balances, January 1, 2019
  
$
491
    
$
379,975
    
$
(44,387
)
  
$
336,079
  
Net income
    
-
      
-
      
10,597
      
10,597
  
Cash dividends declared, $0.24 per share
    
-
      
(11,824
)
    
-
      
(11,824
)
Issuance of common stock pursuant to public offerings, net
    
13
      
8,490
      
-
      
8,503
  
Issuance of common stock pursuant to stock based
                                
compensation plan
    
-
      
41
      
-
      
41
  
Amortization of stock based compensation
    
-
      
42
      
-
      
42
  
Shares repurchased and retired
    
(5
)
    
(3,019
)
    
-
      
(3,024
)
Balances, March 31, 2019
  
$
499
    
$
373,705
    
$
(33,790
)
  
$
340,414
  
See Notes to Financial Statements
  

3
ORCHID ISLAND CAPITAL, INC.
  
CONDENSED STATEMENTS OF CASH FLOWS
  
(Unaudited)
  
For the Three Months Ended March 31, 2019 and 2018
  
($ in thousands)
  
             
   
2019
    
2018
  
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net income (loss)
  
$
10,597
    
$
(16,377
)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
                
Stock based compensation
    
83
      
80
  
Realized and unrealized (gains) losses on mortgage-backed securities
    
(18,284
)
    
80,050
  
Realized and unrealized losses (gains) on interest rate swaptions
    
378
      
(1,717
)
Realized and unrealized losses (gains) on interest rate swaps
    
2,522
      
(11,576
)
Realized losses (gains) on forward settling to-be-announced securities
    
4,641
      
(8,407
)
Changes in operating assets and liabilities:
                
Accrued interest receivable
    
696
      
(1,105
)
Other assets
    
(339
)
    
(251
)
Accrued interest payable
    
(1,299
)
    
636
  
Other liabilities
    
(477
)
    
218
  
Due from affiliates
    
(113
)
    
(1
)
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
    
(1,595
)
    
41,550
  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                
From mortgage-backed securities investments:
                
Purchases
    
(547,417
)
    
(517,829
)
Sales
    
655,359
      
228,691
  
Principal repayments
    
94,785
      
78,720
  
(Payments on) proceeds from net settlement of to-be-announced securities
    
(11,146
)
    
9,161
  
Purchase of derivative financial instruments, net of margin cash received
    
(8,723
)
    
10,622
  
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
    
182,858
      
(190,635
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Proceeds from repurchase agreements
    
11,573,937
      
13,098,449
  
Principal payments on repurchase agreements
    
(11,732,251
)
    
(13,012,955
)
Cash dividends
    
(11,760
)
    
(19,116
)
Proceeds from issuance of common stock, net of issuance costs
    
8,503
      
-
  
Common stock repurchases
    
(3,024
)
    
-
  
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
    
(164,595
)
    
66,378
  
                 
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
    
16,668
      
(82,707
)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of the period
    
126,263
      
246,712
  
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of the period
  
$
142,931
    
$
164,005
  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
                
Cash paid during the period for:
                
Interest
  
$
20,190
    
$
14,513
  
                 
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
                
Securities acquired settled in later period
  
$
35,026
    
$
32,054
  
Securities sold settled in later period
    
-
      
159,300
  
See Notes to Financial Statements
  
4
ORCHID ISLAND CAPITAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
MARCH 31, 2019

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 may 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 are deemed to be “at the market” offerings and privately negotiated transactions.  Through March 31, 2019, the Company issued a total of 9,013,946 shares under the August 2017 Equity Distribution Agreement for aggregate gross proceeds of approximately $84.6 million, and net proceeds of approximately $83.3 million, net of commissions and fees. Subsequent to March 31, 2019, the Company issued an additional 1,432,466 shares under the August 2017 Equity Distribution Agreement for aggregate gross proceeds of approximately $9.6 million, and net proceeds of approximately $9.5 million, net of commissions and fees.

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, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

The balance sheet at December 31, 2018 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, 2018.

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.

Statement of Comprehensive Income (Loss)

In accordance with the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) Topic 220, Comprehensive Income, a statement of comprehensive income (loss) has not been included as the Company has no items of other comprehensive income (loss). Comprehensive income (loss) is the same as net income (loss) for the periods presented.

5
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, 2019
  
December 31, 2018
  
Cash and cash equivalents
  
$
125,933
    
$
108,282
  
Restricted cash
    
16,998
      
17,981
  
Total cash, cash equivalents and restricted cash
  
$
142,931
    
$
126,263
  

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. At March 31, 2019, the Company’s cash deposits exceeded federally insured limits by approximately $123.5 million. 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 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.

6

The fair value of the Company’s investments in RMBS is governed by FASB ASC 820, Fair Value Measurement. The definition of fair value in FASB ASC 820 focuses on 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”) 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 derivatives in the future.

The Company accounts for TBA securities as derivative instruments if either the TBA securities do not settle in the shortest period of time possible or if the Company cannot assert that it is probable at inception of the TBA transaction, or throughout its term, that it will take physical delivery of the Agency RMBS for a long position, or make delivery of the Agency RMBS for a short position, upon settlement of the trade. Gains and losses associated with TBA securities transactions are reported in gain (loss) on derivative instruments in the accompanying statements of operations.

The Company has elected not to treat any of its derivative financial instruments as hedges in order to align the accounting treatment of its derivative instruments with the treatment of its portfolio assets under the fair value option election. FASB ASC Topic 815, Derivatives and Hedging, requires that all derivative instruments be carried at fair value.  Changes in fair value are recorded in earnings for each period.

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

FASB ASC 825, Financial Instruments, requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value, either in the body of the financial statements or in the accompanying notes. RMBS, Eurodollar 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.

7
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, 2019 and December 31, 2018 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. Pursuant to ASC Topic 860, Transfers and Servicing, the Company accounts for repurchase transactions 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

The Company follows the provisions of FASB ASC 260, 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 measures, recognizes and presents its uncertain tax positions in accordance with FASB ASC 740, Income Taxes.  Under that guidance, Orchid assesses the likelihood, based on their technical merit, that 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 November 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows – (Topic 230): Restricted Cash. ASU 2016-18 requires that restricted cash and restricted cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. ASU 2016-18 is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2017.  Early application is permitted.  The Company early adopted the ASU beginning with the first quarter of 2017.

8

In June 2016, the FASB issued 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.  Early application is permitted for fiscal periods beginning after December 15, 2018.  The Company does not expect that the adoption of this ASU will have a significant effect on its financial statements.

NOTE 2.   MORTGAGE-BACKED SECURITIES

The following table presents the Company’s RMBS portfolio as of March 31, 2019 and December 31, 2018:

(in thousands)
            
    
March 31, 2019
    
December 31, 2018
  
Pass-Through RMBS Certificates:
            
Adjustable-rate Mortgages
  
$
1,217
    
$
1,437
  
Fixed-rate Mortgages
    
2,245,280
      
2,130,974
  
Fixed-rate CMOs
    
717,995
      
741,926
  
Total Pass-Through Certificates
    
2,964,492
      
2,874,337
  
Structured RMBS Certificates:
                
Interest-Only Securities
    
99,804
      
116,415
  
Inverse Interest-Only Securities
    
24,218
      
23,751
  
Total Structured RMBS Certificates
    
124,022
      
140,166
  
Total
  
$
3,088,514
    
$
3,014,503
  

The following table summarizes the Company’s RMBS portfolio as of March 31, 2019 and December 31, 2018, according to the contractual maturities of the securities in the portfolio. Actual maturities of RMBS investments are generally shorter than stated contractual maturities and are affected by the contractual lives of the underlying mortgages, periodic payments of principal, and prepayments of principal.

(in thousands)
            
 
March 31, 2019
  
December 31, 2018
  
Greater than five years and less than ten years
  
$
2,681
    
$
5,696
  
Greater than or equal to ten years
    
3,085,833
      
3,008,807
  
Total
  
$
3,088,514
    
$
3,014,503
  

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, 2019, the Company had met all margin call requirements.

As of March 31, 2019, the Company had outstanding repurchase obligations of approximately $2,866.7 million with a net weighted average borrowing rate of 2.70%.  These agreements were collateralized by RMBS with a fair value, including accrued interest and securities pledged related to securities sold but not yet settled, of approximately $3,041.4 million, and cash pledged to the counterparties of approximately $6.8 million.  As of December 31, 2018, the Company had outstanding repurchase obligations of approximately $3,025.1 million with a net weighted average borrowing rate of 2.65%.  These agreements were collateralized by RMBS with a fair value, including accrued interest, of approximately $3,214.4 million, and cash pledged to the counterparties of approximately $7.0 million.

9
As of March 31, 2019 and 2018, 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, 2019
  
Fair market value of securities pledged, including
                              
accrued interest receivable
  
$
85,828
    
$
1,109,913
    
$
1,845,628
    
$
-
    
$
3,041,369
  
Repurchase agreement liabilities associated with
                                        
these securities
  
$
82,642
    
$
1,038,199
    
$
1,745,897
    
$
-
    
$
2,866,738
  
Net weighted average borrowing rate
    
2.85
%
    
2.73
%
    
2.67
%
    
-
      
2.70
%
December 31, 2018
  
Fair market value of securities pledged, including
                                        
accrued interest receivable
  
$
-
    
$
1,720,804
    
$
1,493,565
    
$
-
    
$
3,214,369
  
Repurchase agreement liabilities associated with
                                        
these securities
  
$
-
    
$
1,611,185
    
$
1,413,867
    
$
-
    
$
3,025,052
  
Net weighted average borrowing rate
    
-
      
2.72
%
    
2.57
%
    
-
      
2.65
%

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, 2019, the Company had an aggregate amount at risk (the difference between the amount loaned to the Company, including interest payable and securities posted by the counterparty (if any), and the fair value of securities and cash pledged (if any), including accrued interest on such securities) with all counterparties of approximately $176.3 million.  The Company did not have an amount at risk with any individual counterparty greater than 10% of the Company’s equity at March 31, 2019 and December 31, 2018.

NOTE 4. DERIVATIVE FINANCIAL INSTRUMENTS

In connection with its interest rate risk management strategy, the Company economically hedges a portion of the cost of its repurchase agreement funding by entering into derivatives and other hedging contracts.  To date, the Company has entered into Eurodollar and T-Note futures contracts, interest rate swaps, and interest rate swaptions, but may enter into other contracts in the future. The Company has not elected hedging treatment under GAAP, and as such all gains or losses (realized and unrealized) on these instruments are reflected in earnings for all periods presented.

In addition, the Company utilizes TBA securities as a means of investing in and financing PT RMBS or as a means of reducing its exposure to PT RMBS. The Company accounts for TBA securities as derivative instruments if either the TBA securities do not settle in the shortest period of time possible or if the Company cannot assert that it is probable at inception and throughout the term of the TBA securities that it will take physical delivery of the Agency RMBS for a long position, or make delivery of the Agency RMBS for a short position, upon settlement of the trade.

10

Derivative Assets (Liabilities), at Fair Value

The table below summarizes fair value information about our derivative assets and liabilities as of March 31, 2019 and December 31, 2018.

(in thousands)
              
Derivative Instruments and Related Accounts
Balance Sheet Location
  
March 31, 2019
    
December 31, 2018
  
Assets
              
Interest rate swaps
Derivative assets, at fair value
  
$
13,146
    
$
16,762
  
Payer swaptions
Derivative assets, at fair value
    
53
      
123
  
Total derivative assets, at fair value
    
$
13,199
    
$
16,885
  
                   
Liabilities
                  
Interest rate swaps
Derivative liabilities, at fair value
  
$
1,111
    
$
2,205
  
TBA securities
Derivative liabilities, at fair value
    
4,235
      
3,742
  
Total derivative liabilities, at fair value
    
$
5,346
    
$
5,947
  
                   
Margin Balances Posted to (from) Counterparties
                  
Futures contracts
Restricted cash
  
$
2,347
    
$
4,711
  
TBA securities
Restricted cash
    
3,064
      
6,236
  
Interest rate swaption contracts
Other liabilities
    
-
      
(268
)
Interest rate swap contracts
Restricted cash
    
4,812
      
-
  
Interest rate swap contracts
Other liabilities
    
-
      
(14,308
)
Total margin balances on derivative contracts
    
$
10,223
    
$
(3,629
)

Eurodollar 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, 2019 and December 31, 2018.

($ in thousands)
                        
   
March 31, 2019
  
   
Average
    
Weighted
    
Weighted
        
   
Contract
    
Average
    
Average
        
   
Notional
    
Entry
    
Effective
    
Open
  
Expiration Year
  
Amount
    
Rate
    
Rate
    
Equity(1)
  
Eurodollar Futures Contracts (Short Positions)
                        
2019
  
$
400,000
      
2.76
%
    
2.46
%
  
$
(909
)
2020
    
500,000
      
2.97
%
    
2.21
%
    
(3,799
)
Total / Weighted Average
  
$
457,143
      
2.89
%
    
2.31
%
  
$
(4,708
)
                                 
Treasury Note Futures Contracts (Short Position)(2)
                                
June 2019 5-year T-Note futures
                                
(Jun 2019 - Dec 2024 Hedge Period)
  
$
165,000
      
2.86
%
    
2.62
%
  
$
(1,789
)

11

($ in thousands)
                        
   
December 31, 2018
  
   
Average
    
Weighted
    
Weighted
        
   
Contract
    
Average
    
Average
        
   
Notional
    
Entry
    
Effective
    
Open
  
Expiration Year
  
Amount
    
Rate
    
Rate
    
Equity(1)
  
Eurodollar Futures Contracts (Short Positions)
                        
2019
  
$
1,650,000
      
2.25
%
    
2.64
%
  
$
7,036
  
2020
    
1,800,000
      
2.74
%
    
2.45
%
    
(4,503
)
Total / Weighted Average
  
$
1,725,000
      
2.51
%
    
2.54
%
  
$
2,533
  
                                 
Treasury Note Futures Contracts (Short Position)(2)
                                
March 2019 5 year T-Note futures
                                
(Mar 2019 - Mar 2024 Hedge Period)
  
$
165,000
      
3.22
%
    
2.83
%
  
$
(3,185
)

(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 $115.83 at March 31, 2019 and $114.69 at December 31, 2018.  The notional contract values of the short positions were $191.1 million and $185.6 million at March 31, 2019 and December 31, 2018, 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, 2019 and December 31, 2018.

($ in thousands)
                              
         
Average
          
Net
        
         
Fixed
    
Average
    
Estimated
    
Average
  
   
Notional
    
Pay
    
Receive
    
Fair
    
Maturity
  
   
Amount
    
Rate
    
Rate
    
Value
    
(Years)
  
March 31, 2019
                              
Expiration > 1 to ≤ 3 years
  
$
1,100,000
      
1.67
%
    
2.69
%
  
$
8,757
      
1.3
  
Expiration > 3 to ≤ 5 years
    
660,000
      
2.15
%
    
2.63
%
    
3,278
      
4.6
  
   
$
1,760,000
      
1.85
%
    
2.66
%
  
$
12,035
      
2.5
  
December 31, 2018
                                        
Expiration > 1 to ≤ 3 years
  
$
1,000,000
      
1.62
%
    
2.63
%
  
$
10,365
      
1.4
  
Expiration > 3 to ≤ 5 years
    
260,000
      
2.01
%
    
2.68
%
    
4,192
      
3.4
  
   
$
1,260,000
      
1.70
%
    
2.64
%
  
$
14,557
      
1.8
  

12

The table below presents information related to the Company’s interest rate swaption positions at March 31, 2019 and December 31, 2018.

($ 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, 2019
                              
≤ 1 year
                              
 
Payer Swaptions
$
308
$
53
  
2.3
  
$
100,000
  
2.71%
  
3 Month
  
7.0
December 31, 2018
                              
≤ 1 year
                              
 
Payer Swaptions
$
7,805
$
123
  
1.4
  
$
700,000
  
3.20%
  
3 Month
  
9.0

The following table summarizes our contracts to purchase and sell TBA securities as of March 31, 2019 and December 31, 2018.

($ in thousands)
                          
     
Notional
                
Net
  
     
Amount
    
Cost
    
Market
    
Carrying
  
     
Long (Short)(1)
    
Basis(2)
    
Value(3)
    
Value(4)
  
March 31, 2019
                          
30-Year TBA securities:
                          
   
3.0
%
  
$
(200,000
)
  
$
(194,896
)
  
$
(199,131
)
  
$
(4,235
)
Total
    
$
(200,000
)
  
$
(194,896
)
  
$
(199,131
)
  
$
(4,235
)
December 31, 2018
                                  
30-Year TBA securities:
                                  
   
3.0
%
  
$
(250,000
)
  
$
(240,164
)
  
$
(243,906
)
  
$
(3,742
)
Total
    
$
(250,000
)
  
$
(240,164
)
  
$
(243,906
)
  
$
(3,742
)

(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, 2019 and 2018.

(in thousands)
            
   
2019
    
2018
  
Eurodollar futures contracts (short positions)
  
$
(10,041
)
  
$
14,541
  
T-Note futures contracts (short position)
    
(1,677
)
    
6,821
  
Interest rate swaps
    
(2,295
)
    
10,508
  
Receiver swaptions
    
-
      
(349
)
Payer swaptions
    
(378
)
    
2,066
  
Net TBA securities
    
(4,641
)
    
8,407
  
Total
  
$
(19,032
)
  
$
41,994
  

13

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.

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, 2019 and December 31, 2018.

(in thousands)
                                    
 
March 31, 2019
  
December 31, 2018
  
 
Repurchase
  
Derivative
      
Repurchase
  
Derivative
      
Assets Pledged to Counterparties
Agreements
  
Agreements
  
Total
  
Agreements
  
Agreements
  
Total
  
PT RMBS - fair value
  
$
2,918,623
    
$
-
    
$
2,918,623
    
$
2,854,540
    
$
10,776
    
$
2,865,316
  
Structured RMBS - fair value
    
110,494
      
-
      
110,494
      
126,270
      
-
      
126,270
  
Accrued interest on pledged securities
    
12,253
      
-
      
12,253
      
12,904
      
35
      
12,939
  
Receivable for securities sold
    
-
      
-
      
-
      
220,654
      
-
      
220,654
  
Restricted cash
    
6,775
      
10,223
      
16,998
      
7,034
      
10,947
      
17,981
  
Total
  
$
3,048,145
    
$
10,223
    
$
3,058,368
    
$
3,221,402
    
$
21,758
    
$
3,243,160
  

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, 2019 and December 31, 2018.

(in thousands)
                                    
 
March 31, 2019
    
December 31, 2018
  
 
Repurchase
  
Derivative
      
Repurchase
  
Derivative
      
Assets Pledged to Orchid
Agreements
  
Agreements
  
Total
  
Agreements
  
Agreements
  
Total
  
Cash
  
$
4,201
    
$
-
    
$
4,201
    
$
3,852
    
$
14,576
    
$
18,428
  
PT RMBS - fair value
    
-
      
-
      
-
      
1,557
      
-
      
1,557
  
U.S. Treasury securities - fair value
    
954
      
-
      
954
      
180
      
-
      
180
  
Total
  
$
5,155
    
$
-
    
$
5,155
    
$
5,589
    
$
14,576
    
$
20,165
  

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.

14

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, 2019 and December 31, 2018.

(in thousands)
                                    
Offsetting of Assets
  
             
Gross Amount Not
      
         
Net Amount
  
Offset in the Balance Sheet
      
         
of Assets
  
Financial
          
 
Gross Amount
  
Gross Amount
  
Presented
  
Instruments
  
Cash
      
 
of Recognized
  
Offset in the
  
in the
  
Received as
  
Received as
  
Net
  
 
Assets
  
Balance Sheet
  
Balance Sheet
  
Collateral
  
Collateral
  
Amount
  
March 31, 2019
                                    
Interest rate swaps
  
$
13,146
    
$
-
    
$
13,146
    
$
-
    
$
-
    
$
13,146
  
Interest rate swaptions
    
53
      
-
      
53
      
-
      
-
      
53
  
   
$
13,199
    
$
-
    
$
13,199
    
$
-
    
$
-
    
$
13,199
  
December 31, 2018
                                                
Interest rate swaps
  
$
16,762
    
$
-
    
$
16,762
    
$
-
    
$
(14,308
)
  
$
2,454
  
Interest rate swaptions
    
123
      
-
      
123
      
-
      
(123
)
    
-
  
   
$
16,885
    
$
-
    
$
16,885
    
$
-
    
$
(14,431
)
  
$
2,454
  

(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
  
March 31, 2019
                                    
Repurchase Agreements
  
$
2,866,738
    
$
-
    
$
2,866,738
    
$
(2,859,963
)
  
$
(6,775
)
  
$
-
  
Interest rate swaps
    
1,111
      
-
      
1,111
      
-
      
(1,111
)
    
-
  
TBA securities
    
4,235
      
-
      
4,235
      
-
      
(3,064
)
    
1,171
  
   
$
2,872,084
    
$
-
    
$
2,872,084
    
$
(2,859,963
)
  
$
(10,950
)
  
$
1,171
  
December 31, 2018
                                                
Repurchase Agreements
  
$
3,025,052
    
$
-
    
$
3,025,052
    
$
(3,018,018
)
  
$
(7,034
)
  
$
-
  
Interest rate swaps
    
2,205
      
-
      
2,205
      
-
      
-
      
2,205
  
TBA securities
    
3,742
      
-
      
3,742
      
-
      
(3,742
)
    
-
  
   
$
3,030,999
    
$
-
    
$
3,030,999
    
$
(3,018,018
)
  
$
(10,776
)
  
$
2,205
  

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.

15

NOTE 7.  CAPITAL STOCK

Common Stock Issuances

During the three months ended March 31, 2019, the Company completed the following public offerings of shares of its common stock.  There were no common stock issuances through public offerings during 2018.

($ in thousands, except per share amounts)
                  
     
Weighted
              
     
Average
              
     
Price
              
     
Received
          
Net
  
Type of Offering
Period
  
Per Share(1)
    
Shares
    
Proceeds(2)
  
2019
                    
At the Market Offering Program(3)
First Quarter
  
$
6.84
      
1,267,894
    
$
8,503
  
At the Market Offering Program(3)(4)
Second Quarter
    
6.74
      
1,432,466
      
9,504
  
Total
              
2,700,360
    
$
18,007
  

(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 six equity distribution agreements, five of which have either been terminated because all shares were sold or were replaced with a subsequent agreement.
(4)
Shares issued in the second quarter of 2019 are not reflected in the Company's financial statements as of March 31, 2019.

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. 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, 2019, 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 remaining authorization under the repurchase program as of March 31, 2019 was 857,202 shares.

16

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 - YTD(1)
    
0.320
      
15,824
  
Totals
  
$
10.225
    
$
249,796
  

(1)
On April 17, 2019, the Company declared a dividend of $0.08 per share to be paid on May 31, 2019.  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, 2019.

NOTE 8.  STOCK INCENTIVE PLAN

In October 2012, the Company’s Board of Directors adopted and Bimini, then the Company’s sole stockholder, approved, the Orchid Island Capital, Inc. 2012 Equity Incentive Plan (the “Incentive Plan”) to recruit and retain employees, directors and other service providers, including employees of the Manager and other affiliates. The Incentive Plan provides for the award of stock options, stock appreciation rights, stock award, performance units, other equity-based awards (and dividend equivalents with respect to awards of performance units and other equity-based awards) and incentive awards.  The Incentive Plan is administered by the Compensation Committee of the Company’s Board of Directors except that the Company’s full Board of Directors will administer awards made to directors who are not employees of the Company or its affiliates.  The Incentive Plan provides for awards of up to an aggregate of 10% of the issued and outstanding shares of our common stock (on a fully diluted basis) at the time of the awards, subject to a maximum aggregate 4,000,000 shares of the Company’s common stock that may be issued under the Incentive Plan.

Stock Awards

The Company has issued, and may in the future issue additional, immediately vested common stock under the Incentive Plan to certain executive officers and employees of its Manager. The Company’s non-employee directors received grants of immediately vested common stock for their service to the Company during the first quarter of 2018. The following table presents information related to fully vested common stock issued during the three months ended March 31, 2019 and 2018.

($ in thousands, except per share data)
            
   
Three Months Ended March 31,
  
   
2019
    
2018
  
Fully vested shares granted
    
-
      
3,886
  
Weighted average grant date price per share
  
$
-
    
$
9.28
  
Compensation expense related to fully vested shares of common stock awards
  
$
-
    
$
36
  

17

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, 2019 and 2018.

($ in thousands, except per share data)
                        
   
Three Months Ended March 31,
  
   
2019
    
2018
  
         
Weighted
          
Weighted
  
         
Average
          
Average
  
         
Grant Date
          
Grant Date
  
   
Shares
    
Fair Value
    
Shares
    
Fair Value
  
Unvested, beginning of period
    
43,672
    
$
8.34
      
41,693
    
$
9.95
  
Vested and issued
    
(8,173
)
    
9.08
      
(6,406
)
    
10.28
  
Unvested, end of period
    
35,499
    
$
8.17
      
35,287
    
$
9.89
  
                                 
Compensation expense during period
          
$
42
            
$
45
  
Unrecognized compensation expense, end of period
          
$
115
            
$
121
  
Intrinsic value, end of period
          
$
234
            
$
260
  
Weighted-average remaining vesting term (in years)
            
1.0
              
0.9
  

Deferred Stock Units

Beginning with the second quarter of 2018, non-employee directors received a portion of their compensation in the form of deferred stock unit awards (“DSUs”) pursuant to the Incentive Plan.  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.

18

The following table presents information related to the DSUs outstanding during the three months ended March 31, 2019.

($ in thousands, except per share data)
                        
   
Three Months Ended March 31,
  
   
2019
    
2018
  
         
Weighted
          
Weighted
  
         
Average
          
Average
  
         
Grant Date
          
Grant Date
  
   
Shares
    
Fair Value
    
Shares
    
Fair Value
  
Outstanding, beginning of period
    
12,434
    
$
-
      
-
    
$
-
  
Granted and vested
    
7,350
      
6.41
      
-
      
-
  
Issued
    
-
      
-
      
-
      
-
  
Outstanding, end of period
    
19,784
    
$
7.01
      
-
    
$
-
  
                                 
Compensation expense during period
          
$
45
            
$
-
  
Intrinsic value, end of period
          
$
130
            
$
-
  

There were no DSUs issued during the three months ended March 31, 2018.

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, 2019.

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 that were outstanding during the three months ended March 31, 2019 and 2018. The basic and diluted per share computations include these unvested Performance Units if there is income available to common stock, as they have dividend participation rights. The Performance Units have no contractual obligation to share in losses. Because there is no such obligation, the Performance 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.

19

The table below reconciles the numerator and denominator of EPS for the three months ended March 31, 2019 and 2018.

(in thousands, except per-share information)
            
   
Three Months Ended March 31,
  
   
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
  
$
10,597
    
$
(16,377
)
Weighted average shares of common stock:
                
Shares of common stock outstanding at the balance sheet date
    
49,938
      
53,072
  
Unvested dividend eligible share based compensation
                
outstanding at the balance sheet date
    
55
      
-
  
Effect of weighting
    
(1,088
)
    
(6
)
Weighted average shares-basic and diluted
    
48,905
      
53,066
  
Net income (loss) per common share:
                
Basic and diluted
  
$
0.22
    
$
(0.31
)
Anti-dilutive incentive shares not included in calculation.
    
-
      
42
  

NOTE 12.   FAIR VALUE

Authoritative accounting literature establishes a framework for using fair value to measure assets and liabilities and defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) as opposed to the price that would be paid to acquire the asset or received to assume the liability (an entry 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.

20

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, 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 March 31, 2019 and December 31, 2018. 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