ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2021

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 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, after 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 could 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 were deemed to be “at the market” offerings and privately negotiated

transactions. The Company issued a total of

27,493,650

 shares under the August 2020 Equity Distribution Agreement for aggregate

gross proceeds of

approximately $

150.0

 million, and net proceeds of approximately $

147.4

 million, after commissions and fees, prior to

its termination in June 2021.

On January 20, 2021, Orchid entered into an underwriting agreement (the “January 2021 Underwriting Agreement”) with J.P.

Morgan Securities LLC (“J.P. Morgan”), relating to the offer and sale of

7,600,000

 shares of the Company’s common stock. J.P.

Morgan purchased the shares of the Company’s common stock from the Company pursuant to the January 2021 Underwriting

Agreement at $

5.20

 per share. In addition, the Company granted J.P. Morgan a 30-day option to purchase up to an additional

1,140,000

 shares of the Company’s common stock on the same terms and conditions, which J.P. Morgan exercised in full on January

21, 2021. The closing of the offering of

8,740,000

 shares of the Company’s common stock occurred on January 25, 2021, with

proceeds to the Company of approximately $

45.2

 million, net of offering expenses.

On March 2, 2021, Orchid entered into an underwriting agreement (the “March 2021 Underwriting Agreement”) with J.P. Morgan,

relating to the offer and sale of

8,000,000

 shares of the Company’s common stock. J.P. Morgan purchased the shares of the

Company’s common stock from the Company pursuant to the March 2021 Underwriting Agreement at $

5.45

 per share. In addition, the

Company granted J.P. Morgan a 30-day option to purchase up to an additional

1,200,000

 shares of the Company’s common stock on

the same terms and conditions, which J.P. Morgan exercised in full on March 3, 2021. The closing of the offering of

9,200,000

 shares

of the Company’s common stock occurred on March 5, 2021, with proceeds to the Company of approximately $

50.0

 million, net of

offering expenses.

On June 22, 2021, Orchid entered into an equity distribution agreement (the “June 2021 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 $

250,000,000

 of

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

transactions. Through June 30, 2021, the Company issued a total of

5,750,000

 shares under the June 2021 Equity Distribution

Agreement for aggregate gross proceeds of approximately $

31.1

 million, and net proceeds of approximately $

30.6

 million, after

commissions and fees. Subsequent to June 30, 2021 and through July 30, 2021, the Company issued a total of

5,560,000

 shares

under the June 2021 Equity Distribution Agreement for aggregate gross proceeds of approximately $

28.6

 million, and net proceeds of

approximately $

28.2

 million, after commissions and fees.

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

margin calls from our repurchase agreement lenders, resulting in material adverse effects on our results of operations and to our financial

condition.

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 June 30, 2021, we have timely satisfied all

margin calls. The RMBS market continues to react to the pandemic and the various measures put in place to stabilize the market. 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. Although the Company cannot

estimate the length or gravity of the impact of the COVID-19 pandemic at this time, it may have a material adverse effect on the

Company’s results of future operations, financial position, and liquidity during 2021. 

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 six and three month period ended June 30, 2021 are not necessarily indicative of the results that may be

expected for the year ending December 31, 2021.

The balance sheet at December 31, 2020 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, 2020.

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 June 30, 2021.

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)

June 30, 2021

December 31, 2020

Cash and cash equivalents

$

272,842

$

220,143

Restricted cash

106,876

79,363

Total cash, cash equivalents and restricted cash

$

379,718

$

299,506

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 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 June 30, 2021 and December 31, 2020 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

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.

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.