ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2020

Accounting Policies [Abstract]

Organization and Significant Accounting Policies

Organization and Business Description

Orchid Island Capital, Inc. (“Orchid” or the “Company”), was incorporated in Maryland on August 17, 2010 for the purpose of creating

and managing a leveraged investment portfolio consisting of residential mortgage-backed securities (“RMBS”). From incorporation to

February 20, 2013, Orchid was a wholly owned subsidiary of Bimini Capital Management, Inc. (“Bimini”). Orchid began operations on

November 24, 2010 (the date of commencement of operations). From incorporation through November 24, 2010, Orchid’s only activity

was the issuance of common stock to Bimini.

On August 2, 2017, Orchid entered into an equity distribution agreement (the “August 2017 Equity Distribution Agreement”) with

two sales agents pursuant to which the Company could offer and sell, from time to time, up to an aggregate amount of $

125,000,000

 of

shares of the Company’s common stock in transactions that were deemed to be “at the market” offerings and privately negotiated

transactions. The Company issued a total of

15,123,178

 shares under the August 2017 Equity Distribution Agreement for aggregate

gross proceeds of approximately $

125.0

 million, and net proceeds of approximately $

123.1

 million, net of commissions and fees, prior

to its termination in July 2019.

On July 30, 2019, Orchid entered into an underwriting agreement (the “Underwriting Agreement”) with Morgan Stanley & Co. LLC,

Citigroup Global Markets Inc. and J.P. Morgan Securities LLC, as representatives of the underwriters named therein, relating to the

offer and sale of

7,000,000

 shares of the Company’s common stock at a price to the public of $

6.55

 per share. The underwriters

purchased the shares pursuant to the Underwriting Agreement at a price of $

6.3535

 per share. The closing of the offering of

7,000,000

shares of common stock occurred on August 2, 2019, with net proceeds to the Company of approximately $

44.2

 million after deduction

of underwriting discounts and commissions and other estimated offering expenses.

On January 23, 2020, Orchid entered into an equity distribution agreement (the “January 2020 Equity Distribution Agreement”) with

three sales agents pursuant to which the Company could offer and sell, from time to time, up to an aggregate amount of $

200,000,000

of shares of the Company’s common stock in transactions that were deemed to be “at the market” offerings and privately negotiated

transactions. The Company issued a total of

3,170,727

 shares under the January 2020 Equity Distribution Agreement for aggregate

gross proceeds of

approximately $

19.8

 million, and net proceeds of approximately $

19.4

 million, net of commissions and fees, prior to

its termination in August 2020.

On August 4, 2020, Orchid entered into an equity distribution agreement (the “August 2020 Equity Distribution Agreement”) with

four sales agents pursuant to which the Company may offer and sell, from time to time, up to an aggregate amount of $

150,000,000

 of

shares of the Company’s common stock in transactions that are deemed to be “at the market” offerings and privately negotiated

transactions. Through September 30, 2020, the Company issued a total of

3,073,326

 shares under the August 2020 Equity Distribution

Agreement for aggregate gross proceeds of

approximately $

15.8

 million, and net proceeds of approximately $

15.6

 million, net of

commissions and fees.

COVID-19 Impact

Beginning in mid-March 2020, the global pandemic associated with the novel coronavirus COVID-19 (“COVID-19”) and related

economic conditions began to impact our financial position and results of operations. As a result of the economic, health and market

turmoil brought about by COVID-19, the Agency RMBS market experienced severe dislocations. This resulted in falling prices of our

assets and increased margin calls from our repurchase agreement lenders. 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. 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 September 30, 2020, we had timely satisfied all

margin calls. The following summarizes the impact COVID-19 has had on our financial position and results of operations through

September 30, 2020. 

●

We sold approximately $

2.7

 billion of RMBS during the nine months ended September 30, 2020, realizing losses of approximately

$

24.5

 million. Approximately $

1.1

 billion of these sales were executed on March 19th and March 20th and resulted in losses of

approximately $

31.4

 million. The losses sustained on these two days were a direct result of the adverse RMBS market conditions

associated with COVID-19. 

●

We terminated interest rate swap positions with an aggregate notional value of $

1.2

 billion and incurred approximately $

54.5

million in mark to market losses on the positions through the date of the respective terminations. Approximately $

45.0

 million of

these losses occurred during the three months ended March 31, 2020.

●

Our RMBS portfolio had a fair market value of approximately $

3.5

 billion as of September 30, 2020, compared to $

3.6

 billion as of

December 31, 2019. The September 30, 2020 balance represents an increase from the $

3.3

 billion balance as of June 30, 2020

and the $

2.9

 billion balance as of March 31, 2020. 

●

Our outstanding balances under our repurchase agreement borrowings as of September 30, 2020 were approximately $

3.3

 billion,

compared to $

3.4

 billion as of December 31, 2019, $

2.8

 billion as of March 31, 2020 and $

3.2

 billion as of June 30, 2020. 

●

Our stockholders’ equity was $

376.7

 million as of September 30, 2020, compared to $

395.5

 million as of December 31, 2019,

$

308.1

 million as of March 31, 2020 and $

346.0

 million as of June 30, 2020. 

In response to the Shelter in Place order issued in Florida in March 2020, our Manager (as defined below) invoked its Disaster

Recovery Plan and its employees are working remotely. Prior planning resulted in the successful implementation of this plan and key

operational team members maintain daily communication. 

Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic

continues, it may continue to have adverse effects on the Company’s results of future operations, financial position, and liquidity in

fiscal year 2020 and beyond.

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. The Company has evaluated the provisions of the CARES Act and has determined that it will not have a material

effect on the Company’s business, results of operations and financial condition. The Federal Housing Financing Agency (the “FHFA”)

has instructed the GSEs on how they will handle servicer advances for loans that back Agency RMBS that enter into forbearance,

which should limit prepayments during the forbearance period that could have resulted otherwise. There can be no assurance as to

how, in the long term, these and other actions by the U.S. government will affect the efficiency, liquidity and stability of the financial and

mortgage markets. To the extent the financial or mortgage markets do not respond favorably to any of these actions, or such actions do

not function as intended, our business, results of operations and financial condition may continue to be materially adversely affected. 

Basis of Presentation and Use of Estimates

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted

in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. 

Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of

management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. 

Operating results for the nine and three month period ended September 30, 2020 are not necessarily indicative of the results that may be

expected for the year ending December 31, 2020.

The balance sheet at December 31, 2019 has been derived from the audited financial statements at that date but does not include all

of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the financial

statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect

the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and

the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The

significant estimates affecting the accompanying financial statements are the fair values of RMBS and derivatives. Management believes

the estimates and assumptions underlying the financial statements are reasonable based on the information available as of September 30,

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 September 30, 2020 inherently less certain than they would be absent the current

and potential impacts of COVID-19.

Variable Interest Entities (“VIEs”)

We obtain interests in VIEs through our investments in mortgage-backed securities. Our interests in these VIEs are passive in

nature and are not expected to result in us obtaining a controlling financial interest in these VIEs in the future. As a result, we do not

consolidate these VIEs and we account for our interest in these VIEs as mortgage-backed securities. See Note 2 for additional

information regarding our investments in mortgage-backed securities. Our maximum exposure to loss for these VIEs is the carrying

value of the mortgage-backed securities.

Cash and Cash Equivalents and Restricted Cash

Cash and cash equivalents include cash on deposit with financial institutions and highly liquid investments with original maturities of

three months or less at the time of purchase. Restricted cash includes cash pledged as collateral for repurchase agreements and other

borrowings, and interest rate swaps and other derivative instruments.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial

position that sum to the total of the same such amounts shown in the statement of cash flows.

(in thousands)

September 30, 2020

December 31, 2019

Cash and cash equivalents

$

199,805

$

193,770

Restricted cash

47,541

84,885

Total cash, cash equivalents and restricted cash

$

247,346

$

278,655

The Company maintains cash balances at three banks and excess margin on account with two exchange clearing members. At times,

balances may exceed federally insured limits. The Company has not experienced any losses related to these balances. The Federal

Deposit Insurance Corporation insures eligible accounts up to $250,000 per depositor at each financial institution. Restricted cash

balances are uninsured, but are held in separate customer accounts that are segregated from the general funds of the counterparty. The

Company limits uninsured balances to only large, well-known banks and exchange clearing members and believes that it is not exposed to

any significant credit risk on cash and cash equivalents or restricted cash balances.

Mortgage-Backed Securities

The Company invests primarily in mortgage pass-through (“PT”) residential mortgage backed certificates issued by Freddie Mac,

Fannie Mae or Ginnie Mae (“RMBS”), collateralized mortgage obligations (“CMOs”), interest-only (“IO”) securities and inverse interest-only

(“IIO”) securities representing interest in or obligations backed by pools of RMBS. We refer to RMBS and CMOs as PT RMBS. We refer

to IO and IIO securities as structured RMBS. The Company has elected to account for its investment in RMBS under the fair value

option. Electing the fair value option requires the Company to record changes in fair value in the statement of operations, which, in

management’s view, more appropriately reflects the results of our operations for a particular reporting period and is consistent with the

underlying economics and how the portfolio is managed.

The Company records RMBS transactions on the trade date. Security purchases that have not settled as of the balance sheet date

are included in the RMBS balance with an offsetting liability recorded, whereas securities sold that have not settled as of the balance sheet

date are removed from the RMBS balance with an offsetting receivable recorded.

Fair value is defined as the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction

between market participants at the measurement date. The fair value measurement assumes that the transaction to sell the asset or

transfer the liability either occurs in the principal market for the asset or liability, or in the absence of a principal market, occurs in the most

advantageous market for the asset or liability. Estimated fair values for RMBS are based on independent pricing sources and/or third party

broker quotes, when available. 

Income on PT RMBS securities is based on the stated interest rate of the security. Premiums or discounts present at the date of

purchase are not amortized. Premium lost and discount accretion resulting from monthly principal repayments are reflected in unrealized

gains (losses) on RMBS in the statements of operations. For IO securities, the income is accrued based on the carrying value and the

effective yield. The difference between income accrued and the interest received on the security is characterized as a return of investment

and serves to reduce the asset’s carrying value. At each reporting date, the effective yield is adjusted prospectively for future reporting

periods based on the new estimate of prepayments and the contractual terms of the security. For IIO securities, effective yield and income

recognition calculations also take into account the index value applicable to the security. Changes in fair value of RMBS during each

reporting period are recorded in earnings and reported as unrealized gains or losses on mortgage-backed securities in the accompanying

statements of operations.

Derivative and Other Hedging Instruments

The Company uses derivative and other hedging instruments to manage interest rate risk, facilitate asset/liability strategies and

manage other exposures, and it may continue to do so in the future. The principal instruments that the Company has used to date are

Treasury Note (“T-Note”), Fed Funds and Eurodollar futures contracts, short positions in U.S. Treasury securities, interest rate swaps,

options to enter in interest rate swaps (“interest rate swaptions”) and “to-be-announced” (“TBA”) securities transactions, but the Company

may enter into other derivative instruments in the future. 

The Company accounts for TBA securities as derivative instruments. Gains and losses associated with TBA securities transactions

are reported in gain (loss) on derivative instruments in the accompanying statements of operations.

Derivative instruments are carried at fair value, and changes in fair value are recorded in earnings for each period. The Company’s

derivative financial instruments are not designated as hedge accounting relationships, but rather are used as economic hedges of its

portfolio assets and liabilities.

Holding derivatives creates exposure to credit risk related to the potential for failure on the part of counterparties and exchanges to

honor their commitments. In addition, the Company may be required to post collateral based on any declines in the market value of the

derivatives. In the event of default by a counterparty, the Company may have difficulty recovering its collateral and may not receive

payments provided for under the terms of the agreement. To mitigate this risk, the Company uses only well-established commercial banks

and exchanges as counterparties.

Financial Instruments

The fair value of financial instruments for which it is practicable to estimate that value is disclosed either in the body of the financial

statements or in the accompanying notes. RMBS, Eurodollar, Fed Funds and T-Note futures contracts, interest rate swaps, interest rate

swaptions and TBA securities are accounted for at fair value in the balance sheets. The methods and assumptions used to estimate fair

value for these instruments are presented in Note 12 of the financial statements.

The estimated fair value of cash and cash equivalents, restricted cash, accrued interest receivable, receivable for securities sold,

other assets, due to affiliates, repurchase agreements, payable for unsettled securities purchased, accrued interest payable and other

liabilities generally approximates their carrying values as of September 30, 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

Manager of a management fee and reimbursement of certain operating expenses, which are accrued and expensed during the period for

which they are earned or incurred. Refer to Note 13 for the terms of the management agreement.

Earnings Per Share

Basic earnings per share (“EPS”) is calculated as net income or loss attributable to common stockholders divided by the weighted

average number of shares of common stock outstanding or subscribed during the period. Diluted EPS is calculated using the treasury

stock or two-class method, as applicable, for common stock equivalents, if any. However, the common stock equivalents are not included

in computing diluted EPS if the result is anti-dilutive.

Income Taxes

Orchid has qualified and elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986,

as amended (the “Code”). REITs are generally not subject to federal income tax on their REIT taxable income provided that they

distribute to their stockholders at least 90% of their REIT taxable income on an annual basis. In addition, a REIT must meet other

provisions of the Code to retain its tax status.

Orchid assesses the likelihood, based on their technical merit, that uncertain tax positions will be sustained upon examination

based on the facts, circumstances and information available at the end of each period. All of Orchid’s tax positions are categorized as

highly certain. There is no accrual for any tax, interest or penalties related to Orchid’s tax position assessment. The measurement of

uncertain tax positions is adjusted when new information is available, or when an event occurs that requires a change.

Recent Accounting Pronouncements

On January 1, 2020, we adopted Accounting Standards Update (“ASU”) 2016-13,

Financial Instruments – Credit Losses (Topic

326): Measurement of Credit Losses on Financial Instruments.

ASU 2016-13 requires credit losses on most financial assets measured

at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current

expected credit loss model). The Company’s adoption of this ASU did not have a material effect on its financial statements as its

financial assets were already measured at fair value through earnings.

In March 2020, the FASB issued ASU 2020-04 “

Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate

Reform on Financial Reporting.

” ASU 2020-04 provides optional expedients and exceptions to GAAP requirements for modifications

on debt instruments, leases, derivatives, and other contracts, related to the expected market transition from the London Interbank

Offered Rate (“LIBOR”), and certain other floating rate benchmark indices, or collectively, IBORs, to alternative reference rates. ASU

2020-04 generally considers contract modifications related to reference rate reform to be an event that does not require contract

remeasurement at the modification date nor a reassessment of a previous accounting determination. The guidance in ASU 2020-04 is

optional and may be elected over time, through December 31, 2022, as reference rate reform activities occur. The Company does not

believe the adoption of this ASU will have a material impact on its consolidated financial statements.